Senior Seminar in Business Administration BUS 499Corporate.docx

Senior Seminar in Business Administration
BUS 499
Corporate Governance
Welcome to Senior Seminar in Business Administration.
In this lesson we will discuss Corporate Governance.
Please go to the next slide.
Objectives
Upon completion of this lesson, you will be able to:
Describe how corporate governance affects strategic decisions
Describe how corporate governance affects strategic decisions.
Supporting Topics
Separation of Ownership and Managerial Control
Ownership Concentration
Board of Directors
Market for Corporate Control
International Corporate Governance
Governance Mechanisms and Ethical Behavior

In order to achieve these objectives, the following supporting
topics will be covered:
Separation of ownership and managerial control;
Ownership concentration;
Board of directors;
Market for corporate control;
International corporate governance; and
Governance mechanisms and ethical behavior.
What is Corporate Governance
Shareholders
Purchase stock
Managing of their investment risk
Agency Relationships
Problems
Different interests and goals
Managerial Opportunism
Agency Costs
To start off the lesson, corporate governance is defined as a set
of mechanisms used to manage the relationship among
stakeholders and to determine and control the strategic direction
and performance of organizations. Corporate governance is
concerned with identifying ways to ensure that decisions are

made effectively and that they facilitate strategic
competitiveness. Another way to think of governance is to
establish and maintain harmony between parties.
Traditionally, U. S. firms were managed by founder- owners and
their descendants. As firms became larger the managerial
revolution led to a separation of ownership and control in most
large corporations. This control of the firm shifted from
entrepreneurs to professional managers while ownership became
dispersed among unorganized stockholders. Due to these
changes modern public corporation was created and was based
on the efficient separation of ownership and managerial control.
The separation of ownership and managerial control allows
shareholders to purchase stock. This in turn entitles them to
income from the firm’s operations after paying expenses. This
requires that shareholders take a risk that the firm’s expenses
may exceed its revenues.
Shareholders specialize in managing their investment risk.
Those managing small firms also own a significant percentage
of the firm and there is often less separation between ownership
and managerial control. Meanwhile, in a large number of family
owned firms, ownership and managerial control are not
separated at all. The primary purpose of most large family firms
is to increase the family’s wealth.
The separation between owners and managers creates an agency
relationship. An agency relationship exists when one or more
persons hire another person or persons as decision- making
specialists to perform a service. As a result an agency
relationship exists when one party delegates decision- making
responsibility to a second party for compensation. Other
examples of agency relationships are consultants and clients and
insured and insurer. An agency relationship can also exist
between managers and their employees, as well as between top-

level managers and the firm’s owners.
The separation between ownership and managerial control can
be problematic. Research has shown a variety of agency
problems in the modern corporation. Problems can surface
because the principal and the agent have different interests and
goals. Problems also surface when an agent makes decisions
that result in pursuing goals that conflict with those of the
principals.
Managerial opportunism is the seeking of self- interest with
guile. Opportunism is both an attitude and a set of behaviors.
Principals do not know beforehand which agents will or will not
act opportunistically. As a result, principals establish
governance and control mechanisms to prevent agents from
acting opportunistically. The agency relationship suggests that
any time principals delegate decision- making responsibilities to
agents; the opportunity for conflicts of interest exists.
The potential conflict between shareholders and top- level
managers shown along with the fact that principals cannot
easily predict which managers might act opportunistically,
demonstrates why principals establish governance mechanisms.
However, the firm incurs costs when it uses one or more
governance mechanisms. Agency costs are the sum of incentive
costs, monitoring costs, enforcement costs, and individual
financial losses incurred by principals.
4
What is Ownership Concentration
Large block shareholders
The total percentage of the firm’s shares they own

Replaced by institutional owners
Institutional Owners
Mutual funds
Pension funds
Ownership concentration is defined by the number of large-
block shareholders and the total percentage of the firm’s shares
they own. Large- block shareholders typically own at least five
percent of a company’s issued shares. However, in recent years,
the number of individuals who are large- block shareholders has
declined. Institutional owners have replaced individuals as
large- block shareholders.
Ownership of many modern corporations is now concentrated in
the hands of institutional investors rather than individual
shareholders. Institutional owners are financial institutions such
as mutual funds and pension funds that control large- block
shareholder positions. Due to these prominent owner-ship
positions, institutional owners, as large- block shareholders,
have the potential to be a powerful governance mechanism.
Research has shown that institutional and other large- block
shareholders are becoming more active in their efforts to
influence a corporation’s strategic decisions. This is unless they
have a business relationship with the firm.
5
Board of Directors
Elected by shareholders
Responsibilities
Monitoring and controlling top level managers
Provide resources to firms served
How They Are Grouped

Insiders
Related outsiders
Outsiders
Making Changes for Greater Accountability and Performance
Shareholders elect the members of a firm’s board of directors.
The board of directors is a group of elected individuals whose
primary responsibility is to act in the owners’ best interests by
formally monitoring and controlling the firm’s top- level
managers. Those elected to a firm’s board of directors are
expected to oversee managers and ensure that the corporation
operates in ways that will best serve the stakeholders’ and
owners’ interests. Evidence has shown however that boards
have not been highly effective in monitoring and controlling
top- level managers’ decisions and subsequent actions.
In addition to their monitoring role, board members increasingly
are expected to provide resources to the firms they serve. These
resources might include personal knowledge, expertise or
relationships with a wide variety of organizations. Generally,
board members are classified into one of three groups. Insiders
are active top- level managers in the company who are elected
to the board because they are a source of information about the
firm’s day- to-day operations. Related outsiders have some
relationship with the firm that may create questions about their
independence. However, these individuals are not involved with
the corporation’s day- to- day activities. Outsiders provide
independent counsel to the firm and may hold top- level
managerial positions in other companies or may have been
elected to the board prior to the beginning of the current CEO’s
tenure.
A situation in which an individual holds both the CEO and chair
of the board title is called CEO duality. Yet, having a board that
actively monitors top- level managers’ decisions and actions

does not ensure high performance. The value that the directors
bring to the company also influences the outcomes. Having a
large number of outside board members can also create some
problems. Outsiders can, however, obtain valuable information
through frequent interactions with inside board members and
during board meetings to enhance their understanding of
managers and their decisions. Because they work with and lead
the firm daily, insiders have access to information that
facilitates forming and implementing appropriate strategies.
Evidence shows that boards with a critical mass of insiders
typically are better informed about intended strategic
initiatives, the reasons for the initiatives, and the outcomes
expected from pursuing them.
Because of the importance of boards of directors in corporate
governance and as a result of increased scrutiny from
shareholders, the performances of individual board members
and of entire boards are being evaluated more formally and with
greater intensity. The demand for greater accountability and
improved performance is stimulating many boards to voluntarily
make changes. Some of these changes in clued the following:
Increase in the diversity of the backgrounds of board members;
Strengthening of internal management and accounting control
systems;
Establishing and consistently using formal processes to evaluate
the board’s performance;
Modifying the compensation of directors; and
Creating the lead director role.

6
Board of Directors, continued
Executive Compensation
Seeks to align interests of managers and owners
Salaries, bonuses, and long term incentives
Complicated
Long-Term Incentive Plans
Links managerial compensation to wealth of common
shareholders
Potential Issues
The compensation of top- level managers, and especially of
CEOs, generates a great deal of interest and strongly held
opinions. Some believe that top- management team members
and certainly CEOs have a great deal of responsibility for a
firm’s performance and that they should be rewarded
accordingly. On the other hand some think that these
individuals are greatly overpaid and that their compensation is
not as strongly related to firm performance. There are three
internal governance mechanisms that seek to deal with these
issues. Executive -compensation is a governance mechanism
that seeks to align the interests of managers and owners through
salaries, bonuses, and long- term incentives. Long- term
incentive plans are an increasingly important part of
compensation packages for top- level managers, especially those
leading U. S. firms. Using long- term incentives facilitates the
firm’s efforts to avoid potential agency problems by linking
managerial compensation to the wealth of common
shareholders. Effectively designed long- term incentive plans
have the potential to prevent large- block stockholders from
pressing for changes in the composition of the board of
directors and the top- management team. Effectively using
executive compensation as a governance mechanism is

particularly challenging for firms implementing international
strategies.
As an internal governance mechanism, executive compensation
is complicated. The strategic decisions top- level managers
make are complex and nonroutine, meaning that direct
supervision is likely to be ineffective as a means of judging the
quality of their decisions. The result is a tendency to link top-
level managers’ compensation to outcomes the board can easily
evaluate. Another issue is that the effects of top- level man-
agers’ decisions are stronger on the firm’s long- term than its
short- term performance. This makes it hard to assess the effects
of their decisions on a regular basis. Lastly, a number of other
factors affect a firm’s performance besides top- level
managerial decisions and behavior. Unpredictable changes in
segments in the firm’s general environment can make it difficult
to separate out the effects of top- level managers’ decisions and
the effects of changes in the firm’s performance. Properly
designed and used incentive compensation plans for top- level
managers may increase the value of a firm in line with
shareholder expectations, but such plans are subject to
managerial manipulation.
7
External Governance Mechanism
Active when internal governance mechanisms fail
Hedge Fund
Activist Pension Funds
Activist Hedge Funds
Which One is Better

The market for corporate control is an external governance
mechanism that is active when a firm’s internal governance
mechanisms fail. The market for corporate control is composed
of individuals and firms that buy ownership positions. They may
also purchase potentially undervalued corporations for the
purpose of forming new divisions in established companies or
merging two separate firms. An effective market for corporate
control ensures that ineffective or opportunistic top- level
managers are disciplined.
A hedge fund is a fund that can pursue many different
investment strategies such as the following:
Taking long and short positions;
Using arbitrage; and
Buying and selling undervalued securities for the purpose of
maximizing investors’ returns.
Activist pension funds, on the other hand, are reactive in nature,
taking actions when they conclude that a firm is
underperforming. In contrast, activist hedge funds are proactive,
identifying a firm whose performance could be improved and
then investing in it. You could say that hedge funds are better at
identifying undervalued companies, locating potential acquirers
for them, and removing opposition to a takeover.
8
Market for Corporate Control, continuedDefense
StrategyCategoryPopularity among firmsEffectiveness as a
defenseStockholder wealth effectsPoison

pillPreventiveHighHighPositiveCorporate charter
amendmentPreventiveMediumVery lowNegativeGolden
parachutePreventiveMediumLowNegligibleLitigationReactiveM
ediumLowPositiveGreenmailReactiveVery
lowMediumNegativeStandstill
agreementReactiveLowLowNegativeCapital structure
changeReactiveMediumMediumInconclusive
Hostile takeovers are the major activity in the market for
corporate governance mechanism. Not all hostile takeovers are
prompted by poorly performing targets, and firms targeted for
hostile takeovers may use multiple defense tactics to fend off
the takeover attempt. Historically, the increased use of the
market for corporate control has enhanced the sophistication
and variety of managerial defense tactics that are used to reduce
the influence of this governance mechanism.
The table on the slide lists a number of defense strategies.
How Globalization Factors In
Germany
Single shareholder dominate
Two tiered board structure
Japan
Obligation, family, and consensus
Main bank has closest relationship
Bank-based financial and corporate structure
China
Large, socialist, and marketed economy
Moving toward Western model
Stock market is still young

Corporate governance is an increasingly important issue in
economies around the world, including emerging economies.
The globalization of trade, investments, and equity markets
increases the potential value of firms using similar mechanisms
to govern corporate activities. Because of globalization, major
companies want to attract foreign investment. This occurs when
foreign investors are confident that adequate corporate
governance mechanisms are in place to protect their
investments. Recognizing and understanding differences in
various countries’ governance systems along with noting
changes taking place within those systems improves the chances
that a firm will be able to compete successfully in the
international markets.
In many private German firms, the owner and manager may be
the same individual. In these instances, agency problems are not
present. Even in publicly traded German corporations, a single
shareholder is often dominant. Traditionally banks occupied the
center of the German corporate governance system. This is the
case in other European countries as well. German firms with
more than two thousand employees are required to have a two-
tiered board structure that places the responsibility for
monitoring and controlling managerial decisions and actions in
the hands of a separate group. All the functions of strategy and
management are the responsibility of the management board;
however, appointment to the board is the responsibility of the
supervisory tier. Corporate governance practices used in
Germany are changing. A manifestation of these changes is that
a number of German firms are beginning to gravitate toward U.
S. governance mechanisms. German firms with listings on U. S.
stock exchanges have increasingly adopted executive stock
option compensation as a long- term incentive pay policy.

The concepts of obligation, family, and consensus affect
attitudes toward corporate governance in Japan. In Japan, an
obligation may be to return a service for one rendered or it may
derive from a more general relationship. As part of a company
family, individuals are members of a unit that envelops their
lives. Many critics however believe that relationships like this
slow decision making. Consensus, another important influence
in Japanese corporate governance, calls for the expenditure of
significant amounts of energy to win the hearts and minds of
people whenever possible. Consensus is highly valued, even
when it results in a slow and cumbersome decision- making
process. Like in Germany, banks in Japan have an important
role in financing and monitoring large public firms. The main
bank has the closest relationship with a firm’s top-level
managers because it owns the largest share of stocks and holds
the largest amount of debt. The main bank provides financial
advice to the firm and also closely monitors managers. Due to
this, Japan has a bank- based financial and corporate
governance structure whereas the United States has a market-
based financial and governance structure.
China has a unique and large, socialist, market- oriented
economy. The government has done much to improve the
corporate governance of listed companies. The corporate
governance practices in China are changing and the country is
experiencing increasing privatization of businesses and the
development of equity markets. However, the stock markets in
China remain young and underdeveloped. There has been a
gradual decline in China in the equity held in state owned
enterprises. However the number and percentage of private
firms has grown, but the state still relies on direct and/ or
indirect controls to influence firms. Some research has
suggested that corporate governance in China may be moving
toward the Western model. Corporate governance in Chinese
companies will continue to evolve and interact to form
governance mechanisms that are best for their nation, business

firms, and citizens.
10
Agents of Firm
Want to serve best interest of all stakeholders
Shareholders most significant stakeholders
Board of Directors Influence
Decisions and actions
Effective deterrent to unethical behaviors
Act as an internal governance mechanism
The three internal and single external governance mechanisms
are designed to ensure that the agents of the firm’s owners make
strategic decisions that best serve the interests of all
stakeholders. In the United States, shareholders are commonly
recognized as the company’s most significant stakeholders.
Top- level managers however are expected to lead their firms in
ways that will also serve the needs of product market
stakeholders and organizational stakeholders. As a result, the
firm’s actions and the outcomes should result in at least
minimal satisfaction of the interests of all stakeholders. Without
achieving a minimal satisfaction of its interests, an unsatisfied
stakeholder will withdraw their support from the firm and
provide it to another.
The decisions and actions of the board of directors can be an
effective deterrent to unethical behaviors by top- level
managers. Research suggests that the most effective boards set
boundaries for their firms’ business ethics and values. Once the
boundaries for ethical behavior are determined the board’s

ethics- based expectations must be clearly communicated to the
firm’s top- level managers and to other stakeholders. As agents
of the firm’s owners, top- level managers must understand that
the board, acting as an internal governance mechanism, will
hold them fully accountable for developing and supporting an
organizational culture in which ethical behaviors are permitted.
Through effective governance, top- level managers are able to
help their firm select and use strategies with a high probability
of resulting in strategic competitiveness and earning above-
average returns.
Please go to the next slide
11
Check Your Understanding
12
Summary
Board of Directors
We have reached the end of this lesson. Let’s take a look at
what we have covered.

First, we discussed separation of ownership and managerial
control. We defined corporate governance as a set of
mechanisms used to manage the relationship among
stakeholders and to determine and control the strategic direction
and performance of organizations. We learned that originally U.
S. firms were managed by founder- owners and their
descendants. It wasn’t until firms became larger that the
managerial revolution led to a separation of ownership and
control in most large corporations. We saw that the separation
of ownership and managerial control allows shareholders to
purchase stock. We later discussed the importance of managing
investment risk and agency relationships. We also took a closer
look at some issues that may arise from the separation between
ownership and managerial control.
Next, we went over ownership concentration. We saw that
ownership concentration is defined by the number of large-
block shareholders and the total percentage of the firm’s shares
they own. We noted that large- block shareholders typically own
at least five percent of a company’s issued shares. We also
learned that the ownership of many modern corporations are
now concentrated in the hands of institutional investors rather
than individual shareholders.
Then we looked at the board of directors. We saw that
shareholders elect the members of a firm’s board of directors.
The board of directors has the responsibility to act in the
owners’ best interests by formally monitoring and controlling
the firm’s top- level managers. In addition to their monitoring
role, board members increasingly are expected to provide
resources to the firms they serve. We went over some various
types of resources and three group classifications of board
members. We then talked about changes that are trying to be
implemented to enhance board member accountability as well as
compensation of top-level managers and CEOs.

Later we focused our attention on the market for corporate
control. We saw that the market for corporate control is an
external governance mechanism that is active when a firm’s
internal governance mechanisms fail. We noted that the market
for corporate control is composed of individuals and firms that
buy ownership positions. We later talked about different types
of funds such as a hedge fund. We also discussed the occurrence
of hostile takeovers and defense strategies.
We then discussed international corporate governance. We
looked at German, Japanese, and Chinese corporation structure
along with how they function. We noted different characteristics
of each and gained a better understanding of how each country
completes its business.
Finally to conclude the lesson we looked at governance
mechanisms and ethical behavior. We learned about three
internal and one external governance mechanisms that are
designed to ensure that the agents of the firm’s owners make
strategic decisions that best serve the interests of all
stakeholders.
This completes this lesson.
PROPERTIES
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BUS 499

Strategic Leadership
In this lesson we will discuss Strategic Leadership.
Objectives
Analyze strategic leadership
Analyze strategic leadership.
Supporting Topics
Strategic Leadership and Style
The Role of Top-Level Managers
Managerial Succession
Key Strategic Leadership Actions
In order to achieve this objective, the following supporting
Strategic leadership and style;
The role of top-level managers;
Managerial succession; and
Key strategic leadership actions.

Involves
Managing through others
Managing an entire enterprise
Coping with change
Influence human behavior
Ability to attract and manage human capital
Strategic leadership is the ability to anticipate, envision,
maintain flexibility, and empower others to create strategic
change as necessary. Multifunctional in nature, strategic
leadership involves managing through others, managing an
entire enterprise rather than a functional subunit, and coping
with change that continues to increase in the global economy.
Because of the global economy’s complexity, strategic leaders
must learn how to effectively influence human behavior, often
in uncertain environments. By word or by personal example,
and through their ability to envision the future, effective
strategic leaders meaningfully influence the behaviors,
thoughts, and feelings of those with whom they work.
The ability to attract and then manage human capital may be the
most critical of the strategic leader’s skills, especially in light
of the fact that not being able to fill key positions with talented
human capital constrains firm growth.
Leadership Styles
Transformational Leadership

Most effective
Motivating followers to exceed expectations
Enrich capabilities
Place interests of organization above their own
Develop and communicate a vision
The styles used to provide leadership often affect the
productivity of those being led. Transformational leadership is
the most effective strategic leadership style. This style entails
motivating followers to exceed the expectations other have of
them, to continuously enrich their capabilities, and to place the
interests of the organization above their own.
Transformational leaders develop and communicate a vision for
the organization and formulate a strategy to achieve the vision.
They make followers aware of the need to achieve valued
organizational outcomes. And they encourage followers to
continuously strive for higher levels of achievement. These
types of leaders have a high degree of integrity and character.
The Role of Top-level Managers
Roles
Make certain that their firm is able to effectively formulate and
implement strategies
Develop firm’s organizational structure and reward system
Primary Factors That Determine the Amount of Decision-
Making Discretion
External environmental sources
Characteristics of the organization
Characteristics of the manager
A team of executives require strategic leadership

Top-level managers are charged to make certain that their firm
is able to effectively formulate and implement strategies.
Managers use their discretion when making strategic decisions.
The primary factors that determine the amount of decision-
making discretion held by a managers are:
External environmental sources;
Characteristics of the organization;
Characteristics of the manger;
In addition, top-level managers develop firm’s organizational
structure and reward system. They also have a major effect on a
firm’s culture.
In most firms, the complexity of challenges and the need for
substantial amounts of information and knowledge require
strategic leadership by a team of executives.
6
Leadership Screening Systems
Internal managerial labor market
Firm’s opportunity for managerial positions
Qualified employees within the firm
External managerial labor market
Collection of managerial career opportunities
Benefits of Using an Internal Labor Market
Many organizations use leadership screening systems to identify
individual with managerial and strategic leadership potential.

These individuals are selected from two types of markets:
internal and external. An internal managerial labor market
consists of a firm’s opportunity for managerial positions and the
qualified employees within the firm. An external managerial
labor market is the collection of managerial career opportunity
and the qualified people who are external to the organization in
which the opportunities exist.
There are several benefits when internal labor market is used.
Insiders are familiar with the company and also internal hiring
produce lower turnover among existing personnel. In addition,
hiring from inside keeps the important knowledge necessary to
sustain performance. On the other side, long tenure with a firm
may reduce strategic leaders’ to firm success.
7
Effective Strategic Leadership
Determining Strategic Direction
Effectively Managing the Firm’s Resource Portfolio
Sustaining an Effective Organizational Culture
Establishing Balanced Organizational Controls

Emphasizing Ethical Practices
Certain actions characterize strategic leadership; the most
important ones are shown on the figure on the slide.
Determining the strategic directions involves specifying the
image and character the firm seeks to develop over time. The
strategic direction is framed within the context of the conditions
strategic leaders expect their firm to face in roughly the next
three to five years.
Effectively managing the firm’s portfolio of resources may be
the most important strategic leadership task. The firm’s
resources are categorized as financial capital, human capital,
social capital, and organizational capital.
Organizational culture is a complex set of ideologies, symbols,
and core values that are shared throughout the firm and
influence the way business is conducted. Because the
organizational culture influences how the firm conducts its
business and helps regulate and control employees’ behavior, it
can be a source of competitive advantage and is a critical factor
in promoting innovation.
The effectiveness of processes used to implement the firm’s
strategies increases when they are based on ethical practices.
Ethical companies encourage and enable people at all
organizational levels to act ethically when doing what is
necessary to implement strategies.
The challenge strategic leaders face is to verify their firm is
emphasizing financial and strategic controls so that firm
performance improves. The Balance Scoreboard is a tool that
helps strategic leaders assess the effectiveness of the controls.
The balanced scorecard is a framework firms can use to verify

that they have established both strategic and financial controls
to assess their performance.
9
Summary
Strategic Leadership and Style
The Role of Top-Level Managers
First, we discussed strategic leadership. Strategic leadership is
the ability to anticipate, envision, maintain flexibility, and
empower others to create strategic change as necessary.
Multifunctional in nature, strategic leadership involves
managing through others, managing an entire enterprise rather
than a functional subunit, and coping with change that continues
to increase in the global economy.
Next, we went over leadership styles. The styles used to provide
leadership often affect the productivity of those being led.

Transformational leadership is the most effective strategic
leadership style.
Finally to conclude the lesson we talked about strategic
leadership actions. These include determining strategic
direction, establishing balanced organizational controls,
managing the firm’s resource portfolio, sustaining an effective
organizational culture, and emphasizing ethical practices.
10
PROPERTIES
BUS 499
Organizational Structure and Controls
In this lesson we will discuss Organizational Structure and
Controls.
Objectives

Describe the relationship between strategy and organizational
structure
structure.
Supporting Topics
Relationships Between Strategy and Structure
Evolutionary Patterns of Strategy and Organizational Structure
Implementing Business-Level Cooperative Strategies
Implementing Corporate-Level Cooperative Strategies
Implementing International Cooperative Strategies
Organizational structure and controls;
Relationships between strategy and structure;
Evolutionary patterns of strategy and organizational structure;
Implementing business-level cooperative strategies;
Implementing corporate-level cooperative strategies; and
Implementing international cooperative strategies.

What is Organizational Structure
Specifications
Formal reporting relationships
Procedures
Controls
Authority and decision-making processes
Firm’s Structure
Specifies the work to be done and how to do it
Organizational structure specifies the firm’s formal reporting
relationships, procedures, controls, and authority and decision-
making processes. Developing an organizational structure that
effectively supports the firm’s strategy is difficult, especially
because of the uncertainty about cause-effect relationships in
the global economy’s rapidly changing and dynamic competitive
environments. When a structure’s elements are properly aligned
with one another, the structure is a critical component of
effective strategy implementation processes.
A firm’s structure specifies the work to be done and how to do
it, given the firm’s strategy or strategies. Thus, organizational
structure influences how managers work and the decisions
resulting from that work. Supporting the implementation of
strategies, structure is concerned with processes used to
complete organizational tasks.
4
Organizational Structure and Controls, continued

What are Organizational Controls
Guide the use of strategy
Indicate how to compare actual results with expected results
Suggests corrective actions when difference is unacceptable
Strategic Controls
Financial Controls
Organizational controls are an important aspect of structure.
Organizational controls guide the use of strategy, indicate how
to compare actual results with expected results, and suggest
corrective actions to take when the difference is unacceptable.
When fewer differences separate actual from expected
outcomes, the organization’s controls are more effective.
It is difficult for the company to successfully exploit its
competitive advantages without effective organizational
controls. Properly designed organizational controls provide
clear insights regarding behaviors that enhance firm
performance. Firms use both strategic controls and financial
controls to support using their strategies.
Strategic controls are largely subjective criteria intended to
verify that the firm is using appropriate strategies for the
conditions in the external environment and the company’s
competitive advantages.
Financial controls are largely objective criteria used to measure
the firm’s performance against previously established
quantitative standards.
5

Strategy and Structure
Reciprocal relationship
Highlights interconnectedness between strategy formulation and
implementation
Can influence current and future strategic actions
Stability is important
Flexibility for future advantages
Strategy and structure have a reciprocal relationship. This
relationship highlights the interconnectedness between strategy
formulation and strategy implementation. Once in place though,
structure can influence current strategic actions and future
strategies. Research that strategy has a much more important
influence on structure than the reverse. Regardless of the
strength of the reciprocal relationships between strategy and
structure, those choosing the firm’s strategy and structure
should be committed to matching each strategy with a structure
that provides the stability needed to use current competitive
advantages. We also want to make sure that there is flexibility
to develop future advantages. As a result of this a firm should
simultaneously consider the structure that will be needed to
support use of the new strategy. By properly matching strategy
and structure can create a competitive advantage.
Next slide.
6
Three Types of Organizational Structures
Simple
Functional
Multidivisional
Simple Structure
Owner makes all major decisions
Functional Structure

Chief executive officer and limited corporate staff
Multidivisional Structure
Operating divisions that represent separate businesses
Firms choose from among three major types of organizational
structures:
Simple;
Functional; and
Multidivisional.
Across time, successful firms move from the simple to the
functional to the multidivisional structure to support changes in
their growth strategies.
The simple structure is a structure in which the owner-manager
makes all major decisions and monitors all activities while the
staff serves as an extension of the manager’s supervisory
authority.
The functional structure consists of a chief executive officer
and a limited corporate staff with functional line managers in
dominant organizational areas such as production, accounting,
marketing, resource and development, engineering, and human
resources. This structure allows for functional specialization,
thereby facilitating active sharing of knowledge within each
functional area.
The multidivisional structure consists of operating divisions,
each representing a separate business or profit center in which
the top corporate officer delegates responsibilities for day-to-
day operations and business-unit strategy to division managers.

7
Evolutionary Patterns of Strategy and Organizational Structure,
continued
Three Structural Characteristics
Specialization
Centralization
Formalization
Cost Leadership Strategy
Differentiation Strategy
Continuous product innovation
Firms use different forms of the functional organizational
structure to support implementing the cost leadership,
differentiation, and integrated cost leadership/ differentiation
strategies. The differences in these forms are accounted for
primarily by different uses of three important structural
characteristics which include:
Specialization;
Centralization; and
Formalization.
Firms using the cost leadership strategy sell large quantities of
standardized products to an industry’s typical customer. Firms
using this strategy need a structure and capabilities that allow
them to achieve efficiencies and produce their goods at costs
lower than those of competitors. In terms of centralization,
decision- making authority is centralized in a staff function to
maintain a cost- reducing emphasis within each organizational
function. While encouraging continuous cost reductions, the
centralized staff also verifies that further cuts in costs in one
function won’t adversely affect the productivity levels in other
functions. Jobs are highly specialized in the cost leadership
functional structure; work is divided into homogeneous

subgroups. Organizational functions are the most common
subgroup, although work is sometimes batched on the basis of
products produced or clients served. Specializing in their work
allows employees to increase their efficiency, resulting in
reduced costs. Guiding individuals’ work in this structure are
highly formalized rules and procedures, which often emanate
from the centralized staff.
Firms using the differentiation strategy produce products that
customers hopefully perceive as being different in ways that
create value for them. With this strategy, the firm wants to sell
nonstandardized products to customers with unique needs.
From this structure emerges a development- oriented culture in
which employees try to find ways to further differentiate current
products and to develop new, highly differentiated products.
Continuous product innovation demands that people throughout
the firm interpret and take action based on information that is
often incomplete or uncertain. Following a strong focus on the
external environment to identify new opportunities, employees
often gather this information from people outside the firm.
Commonly, rapid responses to the possibilities indicated by the
collected information are necessary, suggesting the need for
decentralized decision-making responsibility and authority. It
also requires building a strong technological capability and
strategic flexibility, which allow the organization to take
advantage of opportunities created by changes in the market. To
support the creativity needed and the continuous pursuit of new
sources of differentiation and new products, jobs in this
structure are not highly specialized. This lack of specialization
means that workers have a relatively large number of tasks in
their job descriptions. Few formal rules and procedures also
characterize this structure.
8

continued
Integrated Cost Leadership/Differentiation Strategy
Products create value
Relatively low cost
Reasonable sources of differentiation
Level of Diversification
Decision function
Number and type of businesses it compete with
How it will manage the business
Changes
Firms using the integrated cost leadership/ differentiation
strategy sell products that create value because of their
relatively low cost and reasonable sources of differentiation.
The cost of these products is low relative to the cost leader’s
prices while their differentiation is reasonable when compared
with the clearly unique features of the differentiator’s products.
Although challenging to implement, the integrated cost
leadership/ differentiation strategy is used frequently in the
global economy. The challenge of using this strategy is due
largely to the fact that different primary and support activities
are emphasized when using the cost leadership and
differentiation strategies. To achieve the cost leadership
position, production and process engineering need to be
emphasized, with infrequent product changes.
The firm’s level of diversification is a function of decisions
about the number and type of businesses in which it will
compete as well as how it will manage the businesses. Using a
diversification strategy requires the firm to change from the
functional structure to the multidivisional structure to develop
an appropriate strategy/ structure match. Corporate- level

strategies have different degrees of product and market
diversification. The demands created by different levels of
diversification highlight the need for a unique organizational
structure to effectively implement each strategy.
9
continued
Cooperative Form
M-form structure
Liaison Roles
Temporary teams or task forces
Matrix Organization
Dual structure combining functional specialization and business
product
Can lead to improved coordination
Strategic Controls Importance
The cooperative form is an M- form structure in which
horizontal integration is used to bring about interdivisional
cooperation. Divisions in a firm using the related constrained
diversification strategy commonly are formed around products,
markets, or both. Research suggests that informal ties may be
even more important than formal coordination devices in
achieving cooperation. Sharing divisional competencies
facilitates the corporation’s efforts to develop economies of
scope. Economies of scope are linked with successful use of the
related constrained strategy. Interdivisional sharing of
competencies depends on cooperation, suggesting the use of the
cooperative form of the multidivisional structure.

Sometimes, liaison roles are established in each division to
reduce the time division managers spend integrating and
coordinating their unit’s work with the work occurring in other
divisions. Temporary teams or task forces may be formed
around projects whose success depends on sharing competencies
that are embedded within several divisions. Ultimately, a matrix
organization may evolve in firms implementing the related con-
strained strategy. A matrix organization is an organizational
structure in which there is a dual structure combining both
functional specialization and business product or project
specialization. Although complicated, an effective matrix
structure can lead to improved coordination among a firm’s
divisions. The success of the cooperative multidivisional
structure is significantly affected by how well divisions process
information. However, because cooperation among divisions
implies a loss of managerial autonomy, division managers may
not readily commit themselves to the type of integrative
information- processing activities that this structure demands.
Strategic controls are important because divisional managers’
performance can be evaluated at least partly on the basis of how
well they have facilitated interdivisional cooperative efforts. In
addition, using reward systems that emphasize overall company
performance helps overcome problems associated with the
cooperative form. Still, the costs of coordination and inertia in
organizations limit the amount of related diversification
attempted.
10
continued
Related Linked Diversification Strategy
Strategic Business Unit

M-form structure
Three Levels
Corporate headquarters
Strategic business units
SBU divisions
Using SBU Structures
Firms with fewer links or less constrained links among their
divisions use the related linked diversification strategy. The
strategic business unit form of the multidivisional structure
supports implementation of this strategy. The strategic business
unit or SBU form is an M- form structure consisting of three
levels which include:
Corporate headquarters;
Strategic business units; and
SBU divisions.
The SBU structure is used by large firms and can be complex,
given associated organization size and product and market
diversity. The divisions within each SBU are related in terms of
shared products or markets or both, but the divisions of one
SBU have little in common with the divisions of the other
SBUs. Divisions within each SBU share product or market
competencies to develop economies of scope and possibly
economies of scale. In this structure, each SBU is a profit center
that is controlled and evaluated by the headquarters office.
Although both financial and strategic controls are important,
financial controls are vital to headquarters’ evaluation of each
SBU. Strategic controls on the other hand are critical when the
heads of SBUs evaluate their divisions’ performances. Strategic
controls are also critical to the headquarters’ efforts to
determine whether the company has formed an effective.
The SBU structure is difficult to implement. Sharing

competencies among units within an SBU is an important
characteristic of the SBU form of the multidivisional structure.
A drawback to the SBU structure is that multifaceted businesses
often have difficulties in communicating this complex business
model to stockholders. Furthermore, if coordination between
SBUs is needed, problems can arise because the SBU structure
does not readily foster cooperation across SBUs.
11
continued
Unrelated Diversification Strategy
Creation of value through efficient internal capital allocations
Supported by competitive form of the multidivisional structure
Three Benefits of Internal Competition
Creates flexibility
Challenges the status quo and inertia
Motivates effort in competing against internal peers
Firms using the unrelated diversification strategy want to create
value through efficient internal capital allocations or by
restructuring, buying, and selling businesses. The competitive
form of the multidivisional structure supports implementation of
this strategy. The competitive form is an M- form structure
characterized by complete independence among the firm’s
divisions which compete for corporate resources. Unlike the
divisions included in the cooperative structure, divisions that
are part of the competitive structure do not share common
corporate strengths. Because strengths are not shared,
integrating devices are not developed for use by the divisions
included in the competitive structure. The efficient internal

capital market that is the foundation for using the unrelated
diversification strategy requires organizational arrangements
emphasizing divisional competition rather than cooperation.
Three benefits are expected from the internal competition and
they include:
Internal competition creates flexibility;
Internal competition challenges the status quo and inertia; and
Internal competition motivates effort in the challenge of
competing against internal peers.
12
continued
Importance of International Strategies
Multidomestic Strategy
Decentralizes the firm’s strategic and operating decisions
Worldwide Geographic Area Structure
Requires little coordination between different country markets
Disadvantage
Inability to create strong global efficiency
As explained previously, international strategies are becoming
increasingly important for long- term competitive success in
what continues to become an increasingly border-less global
economy. Among other benefits, international strategies allow
the firm to search for new markets, resources, core
competencies, and technologies as part of its efforts to
outperform competitors. As with business- level and corporate-

level strategies, unique organizational structures are necessary
to successfully implement the different international strategies.
Forming proper matches between international strategies and
organizational structures facilitates the firm’s efforts to
effectively coordinate and control its global operations.
The multidomestic strategy decentralizes the firm’s strategic
and operating decisions to business units in each country so that
product characteristics can be tailored to local preferences.
Firms using this strategy try to isolate themselves from global
competitive forces by establishing protected market positions or
by competing in industry segments that are most affected by
differences among local countries. The worldwide geographic
area structure is used to implement this strategy. The worldwide
geographic area structure emphasizes national interests and
facilitates the firm’s efforts to satisfy local differences.
Using the multidomestic strategy requires little coordination
between different country markets, meaning that integrating
mechanisms among divisions around the world are not needed.
Coordination among units in a firm’s worldwide geographic
area structure is often informal. A key disadvantage of the
multidomestic strategy/ worldwide geographic area structure
match is the inability to create strong global efficiency.
With the corporation’s home office dictating competitive
strategy, the global strategy is one through which the firm
offers standardized products across country markets. The firm’s
success depends on its ability to develop economies of scope
and economies of scale on a global level. The worldwide
product divisional structure supports use of the global strategy.
In the worldwide product divisional structure, decision- making
authority is centralized in the worldwide division headquarters
to coordinate and integrate decisions and actions among
divisional business units. This structure is often used in rapidly
growing firms seeking to manage their diversified product lines

effectively.
13
continued
Transnational Strategy
Combining of multidomestic strategy local responsiveness with
global strategy efficiency
Implemented through global matrix structure and hybrid global
design
Global Matrix Design
Brings local market and product expertise into teams
Promotes flexibility in designing products and responding to
customer needs
Requirements Needed to Implement the Transnational Strategy
The transnational strategy calls for the firm to combine the
multidomestic strategy’s local responsiveness with the global
strategy’s efficiency. Firms using this strategy are trying to gain
the advantages of both local responsiveness and global
efficiency. The combination structure is used to implement the
transnational strategy. The combination structure is a structure
drawing characteristics and mechanisms from both the world-
wide geographic area structure and the worldwide product
divisional structure. The transnational strategy is often
implemented through two possible combination structures which
include a global matrix structure and a hybrid global design.
The global matrix design brings together both local market and
product expertise into teams that develop and respond to the
global marketplace. The global matrix design also promotes
flexibility in designing products and responding to customer

needs. However, it has severe limitations in that it places
employees in a position of being accountable to more than one
manager. At any given time, an employee may be a member of
several functional or product group teams. Relationships that
evolve from multiple memberships can make it difficult for
employees to be simultaneously loyal to all of them. Although
the matrix places authority in the hands of managers who are
most able to use it, it creates problems in regard to corporate
reporting relationships.
The fit between the multidomestic strategy, worldwide
geographic area structure, global strategy, and the worldwide
product divisional structure is apparent. However, when a firm
wants to implement the multidomestic and global strategies
simultaneously through a combination structure, the appropriate
integrating mechanisms are less obvious. The structure used to
implement the transnational strategy must do the following:
Simultaneously be centralized and decentralized;
Integrated and nonintegrated; and
Formalized and nonformalized.
14
continued
Network Strategies
Forming of alliances to improve performance of the alliance
networks
Corporate endeavors
Strategic Networks
Group of firms formed to create value
Participation in multiple cooperative arrangements

Facilitates discovering opportunities
Can be a source of competitive advantage
Usage
A network strategy exists when partners form several alliances
in order to improve the performance of the alliance network
itself through cooperative endeavors. The greater levels of
environmental complexity and uncertainty facing companies in
today’s competitive environment are causing more firms to use
cooperative strategies such as strategic alliances and joint
ventures. The breadth and scope of firms’ operations in the
global economy create many opportunities for firms to
cooperate. A firm can develop cooperative relation-ships with
many of its stakeholders, including customers, suppliers, and
competitors. When a firm becomes involved with combinations
of cooperative relationships, it is part of a strategic network, or
an alliance constellation or portfolio.
A strategic network is a group of firms that has been formed to
create value by participating in multiple cooperative
arrangements. An effective strategic network facilitates
discovering opportunities beyond those identified by individual
network participants. A strategic network can be a source of
competitive advantage for its members when its operations
create value that is difficult for competitors to duplicate.
Strategic networks are used to implement business- level,
corporate- level, and international cooperative strategies.
At the core or center of the strategic network, the strategic
center firm is the one around which the network’s cooperative
relationships revolve. Due to its central position, the strategic
center firm is the foundation for the strategic network’s
structure. Concerned with various aspects of organizational
structure, the strategic center firm manages what are often
complex, cooperative interactions among network partners.

The strategic center firm is engaged in four primary tasks as it
manages the strategic network and controls its operations. These
tasks include the following:
Strategic outsourcing;
Competencies;
Technology; and
Race to learn.
15
16
Cooperative Strategies
Business-level
Vertical
Horizontal
Corporate-level
International
The two types of business-level complementary alliances are
vertical and horizontal. Firms with competencies in different
stages of the value chain form a vertical alliance to
cooperatively integrate their different, but complementary,
skills. Firms combining their competencies to create value in

the same stage of the value in the same stage of the value chain
are using a horizontal alliance. Vertical complementary
strategic alliances are formed more frequently than horizontal
alliances.
Corporate-level cooperative strategies are used to facilitate
product and market diversification. As a cooperative strategy,
franchising allows the firms to use its competencies to extend or
diversify its product or market reach, but without completing a
merger or an acquisition.
Strategic networks formed to implement international
cooperative strategies result in firms competing in several
countries. Differences among countries’ regulatory
environments increase the challenge of managing international
networks and verifying that at a minimum, the network’s
operations comply with all legal requirements.
Summary
Implementing Business-Level Cooperative Strategies
Implementing Corporate-Level Cooperative Strategies
Implementing International Cooperative Strategies
First, we went over organizational structure. Organizational
structure specifies the firm’s formal reporting relationships,

procedures, controls, and authority and decision-making
processes.
We then talked about organizational controls. Organizational
controls guide the use of strategy, indicate how to compare
actual results with expected results, and suggest corrective
actions to take when the difference is unacceptable.
Next, we went over types of structure. Types of structure
include simple, functional, and multidivisional. We also went
over several different types of strategies and structures.
We concluded the lesson with a discussion on cooperative
strategies. These include business-level cooperatives, corporate-
level cooperatives, and international cooperatives.
18
PROPERTIES
BUS 499
Cooperative Strategy
Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (2009). BUS499:
Strategic management: Competitiveness and globalization,
concepts and cases: 2009 custom edition (8th ed.). Mason, OH:

South-Western Cengage Learning.
In this lesson we will discuss Cooperative Strategy.
ObjectivesUpon completion of this lesson, you will be able
to:Identify various levels and types of strategy in a firm
Identify various levels and types of strategy in a firm.
Supporting TopicsStrategic alliancesCooperative
strategiesCompetitive risks
Strategic alliances;
Cooperative strategies; and
Competitive risks.

Strategic AlliancesCooperative strategyStrategic
allianceCombination of resources and capabilitiesExchange and
sharing of resourcesFirms leverage existing
resourcesCornerstone of many firms’ competitive strategy
Recognized as a viable engine of firm growth, cooperative
strategy is a strategy in which firms work together to achieve a
shared objective. Thus, cooperating with other firms is another
strategy firms use to create value for a customer that exceeds
the cost of providing that value and to establish a favorable
position relative to competition.
A strategic alliance is a cooperative strategy in which firms
combine some of their resources and capabilities to create a
competitive advantage. Thus, strategic alliances involve firms
with some degree of exchange and sharing of resources and
capabilities to co-develop, sell, and service goods or services.
Strategic alliances allow firms to leverage their existing
resources and capabilities while working with partners to
develop additional resources and capabilities as the foundation
for new competitive advantages. To be certain, the reality today
is that strategic alliances have become a cornerstone of many
firms’ competitive strategy.
Strategic Alliances, continuedJoint ventureEquity strategic
allianceNonequity strategic alliance
The three major types of strategic alliances include joint

venture, equity strategic alliance, and nonequity strategic
alliance.
A joint venture is a strategic alliance in which two or more
firms create a legally independent company to share some of
their resources and capabilities to develop a competitive
advantage. Joint ventures, which are often formed to improve
firms’ abilities to compete in uncertain competitive
environments, are effective in establishing long-term
relationships and in transferring tacit knowledge. Because it
can’t be codified, tacit, or implied, knowledge is learned
through experiences such as those taking place when people
from partner firms work together in a joint venture.
An equity strategic alliance is an alliance is an alliance in
which two or more firms own different percentages of the
company they have formed by combining some of their
resources and capabilities to create a competitive advantage.
Many foreign direct investments, such as those made by
Japanese and U.S. companies in China, are completed through
equity strategic alliances.
A nonequity strategic alliance is an alliance in which two or
more firms develop a contractual relationship to share some of
their unique resources and capabilities to create a competitive
advantage. In this type of alliance, firms do not establish a
separate independent company and therefore do not take equity
positions. For this reason, nonequity strategic alliances are less
formal and demand fewer partner commitments than do joint
ventures and equity strategic alliances.

2.unknown
Business-Level Cooperative StrategyGrow and improve
performance in individual product marketsCompetitive
advantages it can’t create itselfFour strategies
A firm uses a business-level cooperative strategy to grow and
improve its performance in individual product markets.
Business-level strategy details what the firm intends to do to
gain a competitive advantage in specific product markets. Thus,
the firm forms a business-level cooperative strategy when it
believes that combining its resources and capabilities with those
of one or more partners will create competitive advantages that
it can’t create by itself and that will lead to success in a specific
product market.
The four business-level cooperative strategies are:
Complementary strategic alliances;
Competition response strategy;
Uncertainty-reducing strategy; and
Competition-reducing strategy.
Please go to the
Business-Level Cooperative Strategy, continuedComplementary
strategic alliancesVerticalHorizontalCompetition response
strategyUncertainty-reducing strategyCompetition-reducing

strategyExplicit collusionTacit collusion
Complementary strategic alliances are business-level alliances
in which firms share some of their resources and capabilities in
complementary ways to develop competitive advantages.
Vertical and horizontal are the two types of complementary
strategic alliances. In a vertical complementary strategic
alliance, firms share their resources and capabilities from
different stages of the value chain to create a competitive
advantage. A horizontal complementary strategic alliance is an
alliance in which firms share some of their resources and
capabilities from the same stage of the value chain to create a
competitive advantage.
Competitors initiate competitive actions to attack rivals and
launch competitive responses to their competitor’s actions.
Strategic alliances can be used at the business level to respond
to competitor’s attacks. Because they can be difficult to reverse
and expensive to operate, strategic alliances are primarily
formed to take strategic rather than tactical actions and to
respond to competitors’ actions in a like manner.
Some firms use business-level strategic alliances to hedge
against risk and uncertainty, especially in fast-cycle markets.
Also, they are used where uncertainty exists, such as in entering
new product markets or emerging economies. In other instances,
firms form business-level strategic alliances to reduce the
uncertainty associated with developing new products or
establishing a technology standard.
Used to reduce competition, collusive strategies differ from
strategic alliances in that collusive strategies are often an
illegal type of cooperative strategy. Two types of collusive
strategies are explicit collusion and tacit collusion. When two
or more firms negotiate directly with the intention of jointly

agreeing about the amount to produce and the price of the
products that are produced, explicit collusion exists. Tacit
collusion exists when several firms in an industry indirectly
coordinate their production and pricing decisions by observing
each other’s competitive actions and responses.
Please to the next slide.
Corporate-Level Cooperative StrategyDiversifying strategic
allianceSynergistic strategic allianceFranchising
A firm uses a corporate-level cooperative strategy to help it
diversify in terms of products offered or markets served, or
both. Diversifying alliances, synergistic alliances, and
franchising are the most commonly used corporate-level
cooperative strategies.
A diversifying strategic alliance is a corporate-level cooperative
strategy in which firms share some of their resources and
capabilities to diversify into new product or market areas.
A synergistic strategic alliance is a corporate-level cooperative
strategy in which firms share some of their resources and
capabilities to create economies of scope. Similar to the
business-level horizontal complementary strategic alliance,
synergistic strategic alliances create synergy across multiple
functions or multiple businesses between partner firms.
Franchising is a corporate-level cooperative strategy in which a
firm uses a franchise as a contractual relationship to describe
and control the sharing of its resources and capabilities with
partners.

International Cooperative StrategyHeadquarters in different
nationsContinues to increaseComplex and hard to
manageOutperform domestic-only competitors
A cross-border strategic alliance is an international cooperative
strategy in which firms with headquarters in different nations
decide to combine some of their resources and capabilities to
create a competitive advantage.
Taking place in virtually all industries, the number of cross-
border alliances continues to increase. These alliances too are
sometimes formed instead of mergers and acquisitions.
Even though cross-border alliances can themselves be complex
and hard to manage, they have the potential to help firms use
their resources and capabilities to create value in locations
outside their home market.
In general, cross-border alliances are more complex and risky
than domestic strategic alliances. However, the fact that firms
competing internationally tend to outperform domestic-only
competitors suggests the importance of learning how to
diversify into international markets.
Network Cooperative StrategyForm multiple
partnershipsGeographically clustered firms

Increasingly, firms use several cooperative strategies. In
addition to forming their own alliances with individual
companies, a growing number of firms are joining forces in
multiple networks. A network cooperative strategy is a
cooperative strategy wherein several firms agree to form
multiple partnerships to achieve shared objectives.
A network cooperative strategy is particularly effective when it
is formed by geographically clustered firms.
Competitive RisksMany cooperative strategies failOpportunistic
behaviorsCompetence misrepresentationFailure of available
resources and capabilitiesOne firm making investments while its
partner does not
Stated simply, many cooperative strategies fail. In fact,
evidence shows that two-thirds of cooperative strategies have
serious problems in their first two years and that as many as
seventy percent of them fail.
One cooperative strategy risk is that a partner may act
opportunistically. Opportunistic behaviors surface either when
formal contracts fail to prevent them or when an alliance is
based on a false perception of partner trustworthiness.
Some cooperative strategies fail when it is discovered that a
firm has misrepresented the competencies it can bring to the
partnership. The risk of competence misrepresentation is more
common when the partner’s contribution is grounded in some of
its intangible assets.

Another risk is a firm failing to make available to its partners
the resources and capabilities that it committed to the
cooperative strategy. This risk surfaces most commonly when
firms form an international cooperative strategy.
A final risk is that one firm may make investments that are
specific to the alliance while its partner does not.
SummaryStrategic alliancesCooperative strategiesCompetitive
risks
First, we discussed strategic alliances. The three major types of
strategic alliances include joint venture, equity strategic
alliance, and nonequity strategic alliance.
Next, we went over cooperative strategies. These include
business-level cooperative strategy, corporate-level cooperative
strategy, international cooperative strategy, and network
cooperative strategy.
We concluded the lesson with a discussion on competitive risks.
These include opportunistic behaviors, competence
misrepresentation, failing to make available resources and
capabilities, and one firm making investments while its partner
does not.

BUS 499
International Strategy
Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (2009). BUS499:
Strategic management: Competitiveness and globalization,
concepts and cases: 2009 custom edition (8th ed.). Mason, OH:
South-Western Cengage Learning.
In this lesson we will discuss International Strategy.
ObjectivesUpon completion of this lesson, you will be able
to:Identify various levels and types of strategy in a firm
Identify various levels and types of strategy in a firm.
Supporting TopicsIdentifying international opportunities:

incentives to use an international strategyInternational
strategiesEnvironmental trendsChoice of international entry
modeStrategic competitive outcomesRisks in an international
environment
Identifying international opportunities: incentives to use an
international strategy;
International strategies;
Environmental trends;
Choice of international entry mode;
Strategic competitive outcomes; and
Risks in an international environment.
OverviewInternational strategyDemand develops in other
countriesSecure needed resources
An international strategy is a strategy through which the firm
sells its goods or services outside its domestic market. One of
the primary reasons for implementing an international strategy
is that international markets yield potential new opportunities.
Typically, a firm discovers an innovation in its home-country
market, especially in an advanced economy such as that of the
United States. Often demand for the product then develops in
other countries, and exports are provided by domestic
operations. Increased demand in foreign countries justifies
making investments in foreign operations, especially to fend off

foreign competitors.
Another traditional motive for firms to become multinational is
to secure needed resources. Key supplies of raw material,
especially minerals and energy, are important in some
industries. Other industries, such as clothing, electronics, watch
making, and many others, have moved portions of their
operations to foreign locations in pursuit of lower production
costs.
Overview, continuedIncreased market sizeReturn on
investmentEconomies of scale and learningLocation advantages
When international strategies are successful, firms can derive
four basic benefits:
Increased market size;
Greater returns on major capital investments or on investments
in new products and processes;
Greater economies of scale, scope, or learning; and
A competitive advantage through location.
Firms can expand the size of their potential market by moving
into international markets.
The primary reason for investing in international markets is to
generate above-average returns on investments. Still, firms from
different countries have different expectations and use different
criteria to decide whether to invest in international markets.
By expanding their markets, firms may be able to enjoy
economies of scale, particularly in their manufacturing

operations. To the extent that a firm can standardize its products
across country borders and use the same or similar production
facilities, thereby coordinating critical resource functions, it is
more likely to achieve optimal economies of scale.
Firms may locate facilities in other countries to lower the basic
costs of the goods or services they provide. These facilities may
provide easier access to lower-cost labor, energy, and other
natural resources. Other location advantages include access
critical supplies and to customers. Once positioned favorably
with an attractive location, firms must manage their facilities
effectively to gain the full benefit of a location advantage.
International StrategyBusiness-levelCost
leadershipDifferentiationFocused cost leadershipIntegrated cost
leadership/differentiationCorporate-
levelMultidomesticGlobalTransnational
Firms choose to use one or both of two basic types of
international strategies: business-level international strategy
and corporate-level international strategy.
At the business level, firms follow generic strategies:
Cost leadership;
Differentiation:
Focused cost leadership;
Focused differentiation; or
Integrated cost leadership/differentiation.
The three corporate-level international strategies are
multidomestic, global, or transnational. To create competitive

advantage, each strategy must utilize a core competence based
on difficult-to-imitate resources and capabilities.
Environmental TrendsLiability of foreignnessRegionalization
*
Types of EntryExportingLicensingStrategic
alliancesAcquisitionsNew wholly owned subsidiary
International expansion is accomplished by exporting products,
participating in licensing arrangements, forming strategic
alliances, making acquisitions, and establishing new wholly
owned subsidiaries. Each means of market entry has its
advantages and disadvantages. Thus, choosing the appropriate
mode or path to enter international markets affects the firm’s
performance in those markets.
Many industrial firms begin their international expansion by
exporting goods or services to other countries. Exporting does
not require the expense of establishing operations in the host
countries, but exporters must establish some means of
marketing and distributing their products. Usually, exporting
firms develop contractual arrangements with host country firms.
The disadvantages of exporting include the often high costs of
transportation and tariffs placed on some incoming goods.

Licensing is an increasingly common form of organizational
network, particularly among smaller firms. A licensing
arrangement allows a foreign company to purchase the right to
manufacture and sell the firm’s products within a host country
or set of countries. The licensor is normally paid a royalty on
each unit produced and sold. The license takes the risks and
makes the monetary investments in facilities for manufacturing,
marketing, and distributing the goods or services. As a result,
licensing is possibly the least costly form of international
expansion.
In recent years, strategic alliances have become popular means
of international expansion. Strategic alliances allow firms to
share the risks and the resources required to enter international
markets. Moreover, strategic alliances can facilitate the
development of new core competencies that contribute to the
firm’s future strategic competitiveness.
As free trade has continued to expand in global markets, cross-
border acquisitions have also been increasing significantly.
Acquisitions can provide quick access to a new market. In fact,
acquisitions often provide the fastest and the largest initial
international expansion of any of the alternatives. Thus, entry is
much quicker than by other modes.
The establishment of a new wholly owned subsidiary is referred
to as a greenfield venture. The process of creating such ventures
is often complex and potentially costly, but it affords maximum
control to the firm and has the most potential to provide above-
average returns.
Strategic Competitive OutcomesInternational diversification and

returnsInternational diversification and innovationComplexity
of manging
Firms have numerous reasons to diversify internationally.
International diversification is a strategy through which a firm
expands the sales of its goods or services across the borders of
global regions and countries into different geographic locations
or markets. Because of its potential advantages, international
diversification should be related positively to firms’ returns.
Research has shown that, as international diversification
increases, firms’ returns decrease initially but then increase
quickly as firms learn to manage international expansion. In
fact, the stock market is particularly sensitive to investments in
international markets. Firms that are broadly diversified into
multiple international markets usually achieve the most positive
stock returns, especially when they diversify geographically
into core business areas.
Many factors contribute to the positive effects of international
diversification, such as potential economies of scale and
experience, location advantages, increased market size, and the
opportunity to stabilize returns. The stabilization of returns
helps reduce a firm’s overall risk. All of these outcomes can be
achieved by smaller and newer ventures, as well as by larger
and established firms.
International Risks`Political risksEconomic risks
International diversification carries multiple risks. Because of

these risks, international expansion is difficult to implement
and manage. The chief risks are political and economic.
Political risks are related to instability in national governments
and to war, both civil and international. Instability in a national
government creates numerous problems, including:
Economic risks and uncertainty created by government
regulation;
The existence of many, possibly conflicting, legal authorities or
corruption; and
The potential nationalization of private assets.
Economic risks are interdependent with political risks. If firms
cannot protect their intellectual property, they are highly
unlikely to make foreign direct investments. Countries therefore
need to create and sustain strong intellectual property rights and
enforce them in order to attract desired foreign direct
investment. Another economic risk is the security risk posed by
terrorists.
2.unknown
SummaryReturn on investmentEconomies of scale and
learningInternational strategyTypes of entryInternational
diversificationInternational risks

First, we discussed return on investment. The primary reason
for investing in international markets is to generate above-
average returns on investments.
Next, we went over economies of scale and learning. By
expanding their markets, firms may be able to enjoy economies
of scale, particularly in their manufacturing operations.
We then discussed international strategy. Firms choose to use
one or both of two basic types of international strategies:
business-level international strategy and corporate-level
international strategy.
Next, we talked about types on entry into the international
market. These include exporting, licensing, strategic alliances,
acquisitions, and new wholly owned subsidiaries.
We then discussed international diversification. International
diversification is a strategy through which a firm expands the
sales of its goods or services across the borders of global
regions and countries into different geographic locations or
markets.
We concluded the lesson with a discussion on international
risks. International diversification carries multiple risks.
Because of these risks, international expansion is difficult to
implement and manage. The chief risks are political and
economic.

Week 7 Discussion
Top of Form
Before starting this activity, review the Week 7 LEARN (e-
Activity) (there are several) and read Chapters 8 & 9 in the
course text book. Doing this will give you the “why” to include
in your response to the following:
"International Opportunities" Please respond to One (1) of the
following:
1. Determine why, given the advantages of international
diversification, some firms choose not to expand
internationally. Provide specific examples to support your
response. Use current readings and lecture material to support
your response.
OR
1. As firms attempt to internationalize, they may be tempted to
locate their facilities where business regulation laws are lax.
Discuss the advantages and potential risks of such an approach,
using specific examples to support your response. Use current
readings and lecture material to support your response.
Bottom of Form
Week 8 Discussion
Top of Form
"Corporate Governance" Please respond to the following:
Before starting this activity, review the Week 8 LEARN (e-
Activity) and read Chapter 10 in the course text book. Doing
this will give you the why to include in your response to the
following:
Read Case Study 4 "Finding the Best Buy" (page 57)
· Corporate governance has become a hot issue in the U.S. over
the past two decades. From your analysis of the case study,
determine two possible corporate governance challenges that
might be faced by Best Buy as a result of its rapid growth and
why they could become corporate governance issues.
· Make recommendations for how Best Buy can overcome these
challenges. Provide specific examples to support your response.
Case Study can be found online at

https://prezi.com/dkxxc7hqged3/finding-the-best-buy/Bottom of
Form
Week 9 Discussion
Top of Form
"Domino's Pizza" Please respond to the following:
· Determine whether the current organizational structure at
Domino’s is a good match for its corporate strategies. Explain
your rationale.
· Evaluate alternative structures to determine which one would
be most appropriate for Domino's to consider and discuss likely
benefits Domino’s would realize from adopting that structure.
Provide specific examples to support your response.
Bottom of Form
BUS 499, Week 9, Part 2: Strategic Leadership
Slide #
Topic
Narration
1
Introduction
In this lesson we will discuss Strategic Leadership.
2
Objectives
Analyze strategic leadership.

3
Supporting Topics
Strategic leadership and style;
The role of top-level managers;
Managerial succession; and
Key strategic leadership actions.
4
Strategic leadership is the ability to anticipate, envision,
maintain flexibility, and empower others to create strategic
change as necessary. Multifunctional in nature, strategic
leadership involves managing through others, managing an
entire enterprise rather than a functional subunit, and coping
with change that continues to increase in the global economy.
Because of the global economy’s complexity, strategic leaders
must learn how to effectively influence human behavior, often
in uncertain environments. By word or by personal example,
and through their ability to envision the future, effective
strategic leaders meaningfully influence the behaviors,
thoughts, and feelings of those with whom they work.
The ability to attract and then manage human capital may be the
most critical of the strategic leader’s skills, especially in light
of the fact that not being able to fill key positions with talented
human capital constrains firm growth.
5
Leadership Styles
The styles used to provide leadership often affect the

productivity of those being led. Transformational leadership is
the most effective strategic leadership style. This style entails
motivating followers to exceed the expectations other have of
them, to continuously enrich their capabilities, and to place the
interests of the organization above their own.
Transformational leaders develop and communicate a vision for
the organization and formulate a strategy to achieve the vision.
They make followers aware of the need to achieve valued
organizational outcomes. And they encourage followers to
continuously strive for higher levels of achievement. These
types of leaders have a high degree of integrity and character.
6
The Role of Top-level Managers;
Top-level managers are charged to make certain that their firm
is able to effectively formulate and implement strategies.
Managers use their discretion when making strategic decisions.
The primary factors that determine the amount of decision-
making discretion held by a managers are:
External environmental sources;
Characteristics of the organization;
Characteristics of the manger;
In addition, top-level managers develop firm’s organizational
structure and reward system. They also have a major effect on a
firm’s culture.
In most firms, the complexity of challenges and the need for
substantial amounts of information and knowledge require
strategic leadership by a team of executives.
7

Many organizations use leadership screening systems to identify
individual with managerial and strategic leadership potential.
These individuals are selected from two types of markets:
internal and external. An internal managerial labor market
consists of a firm’s opportunity for managerial positions and the
qualified employees within the firm. An external managerial
labor market is the collection of managerial career opportunity
and the qualified people who are external to the organization in
which the opportunities exist.
There are several benefits when internal labor market is used.
Insiders are familiar with the company and also internal hiring
produce lower turnover among existing personnel. In addition,
hiring from inside keeps the important knowledge necessary to
sustain performance. On the other side, long tenure with a firm
may reduce strategic leaders’ to firm success.
8
Certain actions characterize strategic leadership; the most
important ones are shown on the figure on the slide.
Determining the strategic directions involves specifying the
image and character the firm seeks to develop over time. The
strategic direction is framed within the context of the conditions
strategic leaders expect their firm to face in roughly the next
three to five years.
Effectively managing the firm’s portfolio of resources may be
the most important strategic leadership task. The firm’s
resources are categorized as financial capital, human capital,
social capital, and organizational capital.

Organizational culture is a complex set of ideologies, symbols,
and core values that are shared throughout the firm and
influence the way business is conducted. Because the
organizational culture influences how the firm conducts its
business and helps regulate and control employees’ behavior, it
can be a source of competitive advantage and is a critical factor
in promoting innovation.
The effectiveness of processes used to implement the firm’s
strategies increases when they are based on ethical practices.
Ethical companies encourage and enable people at all
organizational levels to act ethically when doing what is
necessary to implement strategies.
The challenge strategic leaders face is to verify their firm is
emphasizing financial and strategic controls so that firm
performance improves. The Balance Scoreboard is a tool that
helps strategic leaders assess the effectiveness of the controls.
The balanced scorecard is a framework firms can use to verify
that they have established both strategic and financial controls
to assess their performance.
9
10
Summary
First, we discussed strategic leadership. Strategic leadership is
the ability to anticipate, envision, maintain flexibility, and
empower others to create strategic change as necessary.

Multifunctional in nature, strategic leadership involves
managing through others, managing an entire enterprise rather
than a functional subunit, and coping with change that continues
to increase in the global economy.
Next, we went over leadership styles. The styles used to provide
leadership often affect the productivity of those being led.
Transformational leadership is the most effective strategic
leadership style.
Finally to conclude the lesson we talked about strategic
leadership actions. These include determining strategic
direction, establishing balanced organizational controls,
managing the firm’s resource portfolio, sustaining an effective
organizational culture, and emphasizing ethical practices.
BUS 499, Week 9, Part 1: Organizational Structure and Controls
Slide #
Topic
Narration
1
Introduction
In this lesson we will discuss Organizational Structure and
Controls.
2
Objectives

structure.
3
Supporting Topics
Organizational structure and controls;
Relationships between strategy and structure;
Evolutionary patterns of strategy and organizational structure;
Implementing business-level cooperative strategies;
Implementing corporate-level cooperative strategies; and
Implementing international cooperative strategies.
4
Organizational structure specifies the firm’s formal reporting
relationships, procedures, controls, and authority and decision-
making processes. Developing an organizational structure that
effectively supports the firm’s strategy is difficult, especially
because of the uncertainty about cause-effect relationships in
the global economy’s rapidly changing and dynamic competitive
environments. When a structure’s elements are properly aligned
with one another, the structure is a critical component of
effective strategy implementation processes.
A firm’s structure specifies the work to be done and how to do
it, given the firm’s strategy or strategies. Thus, organizational
structure influences how managers work and the decisions
resulting from that work. Supporting the implementation of
strategies, structure is concerned with processes used to
complete organizational tasks.

5
Organizational Structure and Controls, continued
Organizational controls are an important aspect of structure.
Organizational controls guide the use of strategy, indicate how
to compare actual results with expected results, and suggest
corrective actions to take when the difference is unacceptable.
When fewer differences separate actual from expected
outcomes, the organization’s controls are more effective.
It is difficult for the company to successfully exploit its
competitive advantages without effective organizational
controls. Properly designed organizational controls provide
clear insights regarding behaviors that enhance firm
performance. Firms use both strategic controls and financial
controls to support using their strategies.
Strategic controls are largely subjective criteria intended to
verify that the firm is using appropriate strategies for the
conditions in the external environment and the company’s
competitive advantages.
Financial controls are largely objective criteria used to measure
the firm’s performance against previously established
quantitative standards.
6
Strategy and structure have a reciprocal relationship. This
relationship highlights the interconnectedness between strategy
formulation and strategy implementation. Once in place though,
structure can influence current strategic actions and future
strategies. Research that strategy has a much more important
influence on structure than the reverse. Regardless of the
strength of the reciprocal relationships between strategy and
structure, those choosing the firm’s strategy and structure

should be committed to matching each strategy with a structure
that provides the stability needed to use current competitive
advantages. We also want to make sure that there is flexibility
to develop future advantages. As a result of this a firm should
simultaneously consider the structure that will be needed to
support use of the new strategy. By properly matching strategy
and structure can create a competitive advantage.
7
Firms choose from among three major types of organizational
structures:
Simple;
Functional; and
Multidivisional.
Across time, successful firms move from the simple to the
functional to the multidivisional structure to support changes in
their growth strategies.
The simple structure is a structure in which the owner-manager
makes all major decisions and monitors all activities while the
staff serves as an extension of the manager’s supervisory
authority.
The functional structure consists of a chief executive officer
and a limited corporate staff with functional line managers in
dominant organizational areas such as production, accounting,
marketing, resource and development, engineering, and human
resources. This structure allows for functional specialization,
thereby facilitating active sharing of knowledge within each
functional area.
The multidivisional structure consists of operating divisions,
each representing a separate business or profit center in which

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