Transcript Chapter 5 Strategies in Action

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Instructor:
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In the News – Fixed Costs
How Much Does It Cost?
 In April, University of California San Francisco researchers set
out to find out how much an appendectomy cost among 19,000
patients in California. An appendectomy varied in price from
$1,529 to $182,955, the researchers wrote in the study published
in the journal Archives of Internal Medicine.
 For some reasons that are probably quite legitimate, they pad
these prices to cover what economists might call fixed costs,"
McBride said (Timothy McBride, a professor and health policy
analyst at Washington University in St. Louis). These include
such items as uncompensated care and staff costs, he said.
Hospital prices can therefore vary depending on whether the
hospital is a teaching hospital, sees more patients with chronic
disease or offers only basic care.
 Patients shouldn't be afraid to ask questions, and -- if necessary - ask for a price reduction. "It's kind of like an opening bid if you
went into an auto store," McBride said of hospital billing. "Very
few people now pay the sticker price."
ABC News 1-1-14
A Company Founded in 1761
 Faber-Castell is the largest maker of wood-encased pencils in the world
 About half the company’s German production is exported, mostly to other
countries in the euro zone
 Faber-Castell illustrates how midsize companies, which account for about
60 percent of Germany’s jobs, are able to stay competitive in the global
marketplace
 It has focused on design and engineering, learned how to turn everyday
products into luxury goods, and keeps key production in Germany
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Faber-Castell and many other German companies make a point of keeping
manufacturing in Germany. They see it as central to preserving the link between
design, engineering and the factory floor
They also keep the know-how in Germany. Faber-Castell will not “give the know-how
for their best pencils away to China, for example. “
 Faber-Castell has survived technology shifts
 They were founded in 1761 when graphite pencils were a novelty
 When Count Anton took over the business in 1978, after the death of his
father, Count Roland von Faber-Castell, the company was a leading maker
of slide rules.
 That was soon laid to waste by the electronic calculator.
 Then, in the 1980s, the advent of computer-assisted design soon gutted the
market for its mechanical drawing products.
Source: NY Times 3 Dec 13
Turning Points
 The point about paradigm shifts, as Thomas Kuhn pointed out in “The Structure
of Scientific Revolutions,” is that they don’t happen often
 Paradigm: philosophical or theoretical framework
 Paradigm shift: fundamental change in an individual's or a society's view of how
things work in the world
 Major changes are slow, because even when a new insight is right (dazzlingly right
in hindsight) vested interests and inertia resist its adoption.
 There are six slow-acting drivers of historical change in our time, as in most of
recorded history. A common error is to focus on only one. They are:
 1. Technological innovation;
 2. The spread of ideas and institutions;
 3. The tendency of even good political systems to degenerate;
 4. Demographics;
 5. Supplies of essential commodities;
 6. Climate change.
 One simple way of thinking about the world is to say that wealth, and with it
power, are shifting from the West. In that sense, the real turning point was not
Nov. 9, 1989 (end of the Cold War ), but 1979, the year Deng Xiaoping visited the
United States and China’s economic reforms began in earnest.
 Wars change history’s direction most decisively.
November 30, 2012 Turning Points By NIALL FERGUSON
Niall Ferguson’s View of the Near Future
Political Systems and Demographics
 More than 300 million Chinese adults have wealth between $10,000 and $100,000, and nearly
20 million have wealth above $100,000.
 These people are discovering that property needs to be protected by the rule of law, and that
the biggest threat to that is a corruption.
 Nearly always overlooked by political scientists is the tendency of systems to degenerate as
rent-seeking special interests grow and civic virtue yields.
 Rent seeking: Rent-seeking behavior would include lobbying government for tax, spending or
regulatory policies that bring monetary benefits or other advantages at the expense of
taxpayers, consumers or others in economic competition with the rent seeker.
 Rent seeking tends to hurt innovative activities more than production.*
 In many Western countries there has been a decline in the rule of law. In the United States,
the World Bank reports declines since 2000 in the control of corruption, regulatory quality,
accountability and government effectiveness.
 Much of the developed world today reminds me of what Adam Smith said about China in
“The Wealth of Nations” (1776): It has reached a “stationary” state in which growth is near
zero and prosperity is enjoyed only by a corrupt bureaucratic elite.
 Because of immigration, fertility and inefficient health care, the United States is aging much
less quickly than countries like Japan and Germany.
 By 2050 more than a third of Japanese will be 65 or over. For Germany the figure will be 31
percent. In China, more than a quarter of the population will be older than 64. But for the
United States, the figure will be just 21 percent.
 China’s labor force will start to shrink in the 2020s. That will not happen in the United
States.
*http://www.economics.harvard.edu/faculty/shleifer/files/rent_seeking.pdf
http://www.nytimes.com/2012/11/30/opinion/global/niall-ferguson-turning-points.html?pagewanted=all
http://www.theatlantic.com/business/archive/2011/10/where-human-workers-can-still-beat-robots-at-least-for-now/247259/
Reasons for Wage Divergence
 In Figure 3.5: US wage divergence accelerated in the digital era (computer mass
marketing began in the early 1980s).
 The increase in the relative demand for skilled labor is closely correlated with advances in
technology, particularly digital technologies.
 Some technologies (like robotics, numerically controlled machines, computerized
inventory control, and automatic transcription) have been substituting for routine tasks,
displacing those workers.
 Other technologies (like data visualization, analytics, high-speed communications, and
rapid prototyping) have amplified the contributions of more abstract and data-driven
reasoning, increasing the value of those jobs.
 Technology changes the share of total income for the skilled vs. unskilled, for superstars
vs. the rest, and for capital vs. labor.
 Digital technologies increase the size and scope of media and other markets.
 These technologies replicate not only information (such as music) business processes as
well.
 The talents, insights, or decisions of a single person can now dominate a national or even
global market.
 Good, but not great, local competitors are crowded out of their markets.
 A few superstars in each field can now earn much more than they did in earlier decades.
 Consumers are often willing to pay a premium for the very best. If technology exists for a
single seller to cheaply replicate his or her services, then the top-quality provider can
capture most of the market.
 The next-best provider might be almost as good yet get only a tiny fraction of the revenue.
http://www.theatlantic.com/business/archive/2011/10/where-human-workers-can-still-beat-robots-at-least-for-now/247259
How Technology Changed Incomes in the Music
Industry
 Before the era of recorded music, the very best singer might
have filled a large concert hall but would only be able to
reach thousands of listeners over the course of a year at
most.
 Each city might have its own local stars, with a few top
performers touring nationally.
 Even the best singer in a large nation could reach only a
relatively small fraction of the potential listening audience.
 After music could be recorded and distributed at a very low
marginal cost, a few top performers could capture much of
the revenue in every market.
 With digital technologies, entrepreneurs, top executives,
entertainment stars, and financial executives have been
able to distribute their talents across global markets.
http://www.theatlantic.com/business/archive/2011/10/why-workers-are-losing-the-war-against-machines/247278/
Historic Trends in Automation
 The 20th century was marked by accelerating mechanization of
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agriculture and of factory work.
The most productive firms reinvented and reorganized decision
rights, incentives systems, information flows, hiring systems,
and other aspects of the firm to get the most from technology.
This required different skill levels in the workforce.
Whole production processes, and even industries, were
reengineered to exploit new information technologies.
Each dollar of computer hardware was often the catalyst for more
than $10 of investment in organizational capital to take
advantage of the information technologies.
Low factory wages in China have not insulated those workers
from being undercut by new machinery and the resulting
organizational and institutional changes.
Foxconn, announced they plan to purchase 1 million robots over
the next three years to replace much of their workforce. Robots
will take routine jobs like painting, welding, and basic assembly.
Adjusting to Changes in the Economy
 Over time, a well-functioning economy should be able to adjust to the new
reallocations of income.
 For instance, about 90% of Americans worked in agriculture in 1800; by 1900 it
was 41%, and by 2000 it was just 2%.
 As workers left farms over the course of two centuries, other sectors created new
jobs.
 Whole new industries sprang up to employed former farm workers.
 Shift in income from labor to capital or from many to a few with high skills
leads to a reduction in overall demand.
 The wealthy tend to save more of each marginal dollar than laborers. In the
short run this reduces consumption.
 Corporate profits as a share of US GDP are at 50-year highs.
 Compensation to labor in all forms, including wages and benefits, is at a 50-year
low
 The ratio of CEO pay to average worker pay has increased from 70 in 1990 to
300 in 2005, and much of this growth is linked to the greater use of IT.
 Aided by digital technologies, entrepreneurs, CEOs, entertainment stars, and
financial executives have been able to leverage their talents across global
markets and gain enormous financial rewards.
http://www.theatlantic.com/business/archive/2011/10/why-the-massive-wealth-of-the-1-could-ruin-the-economy/247277/
Divergence between Wages and Profit
http://www.theatlantic.com/business/archive/2011/10/where-human-workers-can-still-beat-robots-at-least-for-now/247259
Wholly Owned Subsidiaries
 Benefits:
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Greatest control and higher profits
Host market perceives strong commitment to the local
market by the company
Allows the investor to manage and control marketing,
production, and sourcing decisions
Often faster to set up than a joint venture
 Risks:
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Risks of full ownership, such as absorbing all losses
Developing a foreign presence without the support of a
third party
Risks of currency devaluation, nationalization or
expropriation
Issues of cultural and economic sovereignty of the host
country (reduce this risk by local hiring, sourcing)
Copyright (c) 2007 John Wiley & Sons, Inc.
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Contract Manufacturing (Outsourcing)
 Companies specialize in manufacturing for other companies
 Benefits:
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Labor cost advantages
Tax, energy, raw materials, and overhead savings
Lower political and economic risk
Focus on core competencies (such as product design, marketing)
Access to manufacturing expertise
Quicker access to markets (no need to build factories)
 Risks:
Contract manufacturer may become a future competitor
Conflicts of interest if the manufacturer has similar products
May lack flexibility (contractor often has other commitments)
Backlash from the company’s home-market employees regarding HR and labor
issues
 Issues of quality and production standards
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 Reducing the risks
 Keep proprietary design item manufacture in-house
 Have contingency plans for changes in demand
Many students quoted this slide on the midterm exam. KKUIC students can do better.
Project Purple 2
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From 2005-2007 Apple had been working on a project code-named Purple 2
 How do you completely re-imagine the cell-phone?
 How do you design it at the highest quality, with a glass screen, while mass producing
quickly and cheaply enough to earn a significant profit?
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Apple executives decided to assemble in China
 The Chinese government had agreed to subsidies for a glass-cutting factory needed by
Apple
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The factory had a warehouse filled with glass samples available to Apple, free of charge.
The owners made engineers available at almost no cost.
They had built on-site dormitories so employees would be available 24 hours a day.
 Now the entire supply chain is in China – an ecosystem has evolved in support
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iPhones contain hundreds of parts, 90 percent of which are manufactured outside the
USA.
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Advanced semiconductors come from Germany and Taiwan
Memory from Korea and Japan,
Display panels and circuitry from Korea and Taiwan,
Chipsets from Europe
Rare metals from Africa and Asia.
All of an iPhone it is put together in China, usually by Foxconn, a Taiwanese company
 For technology companies, the cost of labor is small compared with the expense of buying
parts and managing complex supply chains
 Apple executives believe American workers do not have the engineering skills the
company needs or factories with sufficient speed and flexibility
 Companies that work with Apple, like Corning, also go abroad
New York Times 21 January, 2012
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Why does Apple choose to assemble iPhones in China?
◦ Scale of operations
◦ Supply chains
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Skilled technical workforce, including engineers
Clusters of excellence
Response times
Think of how 2011 floods in Thailand affected other manufacturers
◦ Labor is not a big component of the total cost
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Apple employs 47,000 (35,000 in retail and customer support) in the
USA. Apple’s contractors employ 700,000 outside the USA
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Apple’s profits accrue to shareholders across the world
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Apple is a true global company
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Sales span the globe
Software created in USA
Marketing created and managed in USA
Supply chains span the globe
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iPhones assembled in China by a Taiwanese company
Some components made in USA by S. Korean company (Samsung)
Glass made in Japanese factories by an American company (Corning)
http://www.nytimes.com/2012/01/22/business/apple-america-and-asqueezed-middle-class.html?pagewanted=print
Factory Working Conditions
 Foxconn is China’s largest private employer (1,400,000 employees).
 In March 2012, a critical meeting occurred between Foxconn’s top executives and a highranking Apple official. The companies committed themselves wide-ranging reforms.
 It promised to reduce work hours and significantly increase wages.
 The reforms could create a ripple that benefits tens of millions of workers across the
electronics industry.
 Apple, last year has tripled its corporate social responsibility staff, and has re-evaluated how
it works with manufacturers, and has reached out to worker advocacy groups it once rebuffed.
 Shifts under way in China may prove transformative to global manufacturing say officials at
over a dozen electronics companies.
 No one inside Intel “wants to end up in a factory that treats people badly, that ends up on the
front page.”
 Nike has convened public meetings of labor, human rights, environmental and business
leaders to discuss how to improve overseas factories. Gap Inc. has invited outside
organizations to critique its purchasing practices. Patagonia shares its factory audits with
competitors and has been a supporter of a an audit report clearinghouse.
 But Hewlett-Packard hopes that by improving living conditions, turnover and training costs
will fall. “If the people turn over every three months, think what that does to your quality,”
said a Hewlett-Packard executive.
 Often, the quality-of-life improvements requested by Western executives reduce a supplier’s
profit. Within Apple, executives often believe improvements should be financed by suppliers,
whereas suppliers say changes are not feasible unless Apple pays more.
 Employees complained in March when Foxconn announced that workers’ hours would be
reduced to China’s legal limits. Some companies raise wages to compensate for lost overtime.
http://www.nytimes.com/2012/12/27/business/signs-of-changes-taking-hold-in-electronics-factories-inchina.html?pagewanted=1&_r=1&nl=todaysheadlines&emc=edit_th_20121227&adxnnlx=1356656440PZLVTmAyNdxhOwHiwzXD4g&
Foxconn challenged as global reach grows
Financial Times, 3 January, 2013
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Contract manufacturer Foxconn has embarked on an ambitious expansion plan in Brazil, which could reach
$12bn of investment.
Many of the plants make Apple products to help avoid import taxes on electronic goods sent from China.
The new factories in Brazil, where unions are historically strong, have faced challenges.
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Working outside of China helps Foxconn’s customers get quicker turnaround and avoid some import taxes.
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The regimented style of management has sometimes caused conflicts when applied to cultures far different
from the Chinese factory floors.
The autocratic style has led to clashes even in China, where workers are gradually gaining power.
The company recently made investments in Brazil, Mexico and Turkey, and has said it is planning projects
in the US, Indonesia and Malaysia.
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It has also created a new set of challenges for the company.
Foxconn employs more than 1m people worldwide .
Foxconn often enters new geographical markets by taking over old factories once owned by its customers.
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Workers there have staged protests over everything from overcrowded transport to working hours and lack of
career planning offered to employees.
“Strikes really aren’t that normal around here – it seems to be a problem just with Foxconn,” said one local
official.
“Many similar companies are starting to move from a global manufacturing strategy to a more regional
strategy,” said a professor at Massachusetts Institute of Technology. “That’s a completely different strategy from
what we saw companies using 10-15 years ago.”
For customers, Foxconn’s factories outside China allow them to cut transportation costs, avoid many
import taxes, and get quick turnaround on orders.
“We are here to service customers, and that is why we do final assembly, internationally” says one current
Foxconn executive in Europe.
Older operations in the US and Europe started when Foxconn took over factories from customers such as
Sony or Hewlett-Packard that wanted to cut costs by doing less of their own manufacturing.
Foxconn’s overseas operations have generally managed to avoid the violent conflicts experienced in China.
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Cultural differences are muted slightly as the majority of overseas managers are locals.
Foxconn localizes production line workers and senior management, to have a good understanding of
local culture.”
Luring Factories to Relocate - 1
 Brazilian politicians used subsidies and the threat of
continued high tariffs on imports to persuade Foxconn,
which makes electronic devices in Asia for dozens of
technology companies, to start producing iPhones, iPads
and other devices near Sao Paulo.
 A developing country like Brazil can adopt trade policies
that would be difficult for the United States to do. Taking a
hard line to reduce imports of technology goods and
encourage domestic manufacturing could violate
international trade agreements and set off a trade
confrontation.
 Protectionism is bad policy, many economists argue.
Everyone benefits if countries focus on what they do best.
 Trade barriers harm consumers by driving up prices.
 Trade barriers undermine competitiveness by shielding
industries from the market forces that stimulate innovation.
 The debate is not just economic. Increasingly, it is political.
http://www.nytimes.com/2012/08/05/business/the-ieconomy-nissans-move-to-us-offers-lessons-for-tech-industry.html
Luring Factories to Relocate - 2
 The resurgence of American auto manufacturing in the 1980s is
an example of how one industry created tens of thousands of
good jobs.
 Since June 16, 1983, Nissan has produced more than seven
million vehicles in the United States. It now employs 15,000
people in the USA. The Tennessee factory makes more than a
half-million vehicles including the new all-electric Nissan Leaf.
 Other foreign carmakers built factories in America — Honda,
Toyota, Hyundai, BMW, Mercedes-Benz and, most recently,
Volkswagen. The Nissan engine plant in TN, for instance, exports
engines to Japan.
 Pressures were growing in 1979 for Nissan to break out of
manufacturing in Japan.
 Currency fluctuations made exporting more expensive.
 Political pressure came from American anger as imports grabbed
one-fourth of the United States market.
 In May 1981, Japan agreed to limit exports to America with a 7
percent reduction from 1980 while the United States imposed a 25
percent tax on imported pickup trucks.
http://www.nytimes.com/2012/08/05/business/the-ieconomy-nissans-move-to-us-offers-lessons-for-tech-industry.html
Luring Factories to Relocate - 3
 To train its new American engineers, Nissan flew
workers to its Zama factory in eastern Japan.
 There the Nissan officials, assisted by English-speaking
Japanese workers taught the intricacies of the company’s
production techniques to the Americans.
 At first, Nissan guarded against quality concerns by
shipping components from Japan or buying from
Japanese companies that set up operations nearby.
 Gradually, American parts makers were allowed to bid
on supply contracts. The US Congress, passed a law in
1992 requiring auto makers to inform consumers of the
percentage of parts in United States-made cars that
came from North America, Asia or elsewhere.
 Nissan’s Japanese suppliers were encouraged to locate
production in the USA.
http://www.nytimes.com/2012/08/05/business/the-ieconomy-nissans-move-to-us-offers-lessons-for-tech-industry.html
Factory Innovation
 Companies with their research and manufacturing employees close together might be
more innovative than businesses that develop a design and send it overseas for low-wage
workers to make.
 Clusters of manufacturers, where workers and ideas can naturally flow between
companies, may be more productive and innovative than if they were spread.
 Instead of a sequential process where you look at product design and then how to
manufacture it, there is a simultaneous process.
 Experts are researching whether such strategies offer the same benefits for most
businesses — and examining how this might show up in national data on innovation,
productivity and growth.
 Companies with products early in their life cycle seemed to benefit more than those with
products on the market for years.
 Companies making especially complicated or advanced goods, from new medicines to new
machines also benefit. Economists said that while the link between making and
innovating within individual businesses was not yet well established, the link between
making and innovating between different companies was.
 In a “spillover” effect: manufacturing companies near one another create a kind of
commons.
 Workers exchange ideas when they socialize or when they switch jobs, taking their
knowledge with them.
 Factories draw other companies, who compete to offer them goods and services.
 An MIT economist analyzed what happened to towns after large manufacturing plants,
like a BMW factory, moved in.
 Other factories in the town became more productive.
 Wages rose, too.
http://www.nytimes.com/2012/12/14/business/companies-see-high-tech-factories-as-fonts-of-ideas.html?nl=todaysheadlines&emc=edit_th_20121214&pagewanted=print
Hutchinson MN, population 14,000
Short Production Runs
 In 2011 Hutchinson Technologies moved component manufacturing from
Minnesota, USA to Ayutthaya, Thailand
 Hutchinson produces disk drive components by the hundreds of millions annually
 The world’s biggest disk drive assembly operation is in Khorat
 Relocation to Thailand put them close to the major user
 600 workers in Minnesota got layoff notices
 http://www.glassdoor.com/Reviews/Hutchinson-Technology-Reviews-E1498.htm
 Baklund R&D LLC in Hutchinson, Minnesota is one of hundreds of small shops in
the U.S. using new technology to meet demand for low volume, highlycustomizable products
 The technology allows three-dimensional designs created on computers to be sent to
industrial machines, which put down layers of materials to create parts or products
 Low volume typically means runs of products of more than 1,000, and less than
10,000, which is usually the minimum to get work done overseas at a factory in China
 As technology such as 3-D printing gets less expensive, it can also supplant
manufacturers that don’t adapt
 Growth in low-volume, high-variability production is catching the
attention of companies such as Wal-Mart Stores Inc., said Wally Hopp, a
professor at the University of Michigan’s Ross School of Business who has
worked with the world’s largest retailer to study U.S. manufacturing trends.
 “You’re seeing these mom-and-pop operations picking up manufacturing, doing it in
a highly flexible, highly local kind of way,” Hopp said in an interview.
 “This is something that’s going to affect the whole manufacturing economy.
Bloomberg 7 November 2013
Ch 5 -23
Samsung's headquarters in Suwon,
South Korea, is known as Digital
City. The R&D building features
tighter security than most airports,
with security guards at metal
detectors to search for USB sticks.
Cnet: Shara Tibken December 9, 2013
Workers at Samsung's phone
manufacturing plant in Gumi go to
lunch in the free cafeteria. Many phone
assembly workers are high schooleducated women in their 20s. All wear
uniforms of polo shirts and khakis or
black pants during their shifts. Many
live in subsidized apartments nearby.
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Samsung’s product life cycles are very short
◦ In the year it takes Apple to release a new iPhone,
Samsung typically unveils three or four "flagship"
products, adding up to several dozens in all
◦ Samsung is nimble because it does almost everything
within the company
 Samsung employs 62,000 engineers
 Building the parts (some of which it supplies to Apple)
 Assembling the devices (while Apple outsources)
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Company executive’s biggest fear is complacency
◦ At Digital City in Suwon the buildings all have signs in
English that say "Create," "Challenge," and "Innovate"
◦ People inside Samsung describe the atmosphere as a
state of "perpetual crisis," fostered by a persistent and
underlying fear that the company might lose everything at
any moment
◦ Many products had flaws when they were first introduced
(early versions of the phones were bulldozed into a field)
Cnet: by Shara Tibken December 9, 2013
Cnet: by Shara Tibken December 9, 2013
Adapting to Rapid Change
 Before 2007, Samsung workers put together devices in standard, assembly
line fashion with each worker responsible for one task
 The company switched to a cellular system, in which each worker puts
together an entire phone
 The approach has made Samsung faster at making multiple products, and
 It has made demand based production adjustments easier.
 Samsung seeks partners to develop technology - with software as a priority
 More than half of the 62,000 Korea based engineers work on software
 It tries to cut reliance on Google by developing an operating system (due in
2014)
 Samsung's Media Solutions Center software and services unit recently had their
first developer conference in San Francisco, attended by 1,300 developers
 And about a year ago, it created the Open Innovation Center, a group focused
on working with software and services startups and it opened development
accelerators in California and New York
 “Innovation has tended to happen when you have a small group of people
with no legacy anything, just trying to solve big problems," said David Eun,
Samsung executive vice president and OIC leader
 Groups of Samsung executives frequently visit important players in Silicon
Valley to better understand trends in the industry (such as VC firm
Andreessen Horowitz)
Cnet: by Shara Tibken December 9, 2013
Strategy Implementation (David chapter 7)
 Strategy implementation requires shifting responsibility to lower
levels of an organization
 Problems arise when decisions come as a surprise
 Must involve lower levels of an organization in strategy formulation
 Managers and employees are motivated by self interest more than
organizational interests
 Importance of staff development objectives
 Development and promotion often against a manager’s narrow interest
 Rationale for objectives and strategies must be understood
 Competitor information
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Benchmarks against best in class competitors (or other industries)
Competitor plans and performance
 External opportunities and threats
 Annual objectives are necessary for strategy implementation
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Basis for resource allocation
Are used for evaluation of staff (and form a basis for incentives)
Used for monitoring progress toward LTOs
Establish priorities at different levels of the organization
Resource Allocation
 Resource allocation should be based on priorities
established by annual objectives
 Allocation based on personal or political factors harms an
organization
 Types of resources:
 Financial resources
 Physical resources
 Human resources
 Technological resources
 Employees rarely think systematically about resource
allocation or strategy
 Effective allocation often prevented by:
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Politics
Reluctance to take risks
Overprotection of resources
Lack of knowledge
Management Issues Central to Strategy
Implementation
•
•
•
•
Establish annual objectives
Devise policies
Allocate resources
Alter existing organizational
structure
• Restructure & reengineer
• Revise reward & incentive
plans
• Minimize resistance to
change
• Match managers to strategy
• Develop a strategy-supportive
culture
• Adapt production/operations
processes
• Develop an effective human
resources function
• Downsize & furlough as needed
• Link performance & pay to
strategies
Copyright © 2011 Pearson Education,
Inc.
Publishing as Prentice Hall
Table 7 -1
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
Structure dictates how objectives and policies
will be established
Structure dictates how resources will be
allocated
◦ Structure based on function requires resources be
allocated along functional lines
◦ A geographic structure will have geographic
resource allocation

Changes in strategy often lead to changes in
organizational structure
◦ Consumer companies often have division
structure
◦ Small firms are often organized by function
◦ Medium size firms may use division structure
◦ Large firms tend to use SBU or matrix structure
◦ As firms grow, they tend to become complex
Copyright © 2011 Pearson
Education, Inc.
Publishing as Prentice Hall
Ch 7 -32
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
Functional Structure
Divisional Structure
Strategic Business Unit Structure (SBU)
Matrix Structure
Key considerations include:




How many levels of management?
Span of control (how many people report to a
manager?)
Complexity (too many meetings with too many
people – many small organizations fail as their
informal structures hinder communication)
Conflicts between parts of the organization
Functional Structure
• Group tasks and activities by business
function, such as R&D, Marketing,
Operations, Finance
• The most common structure among
small firms, but few large firms use this
structure
Copyright © 2011 Pearson
Education, Inc.
Publishing as Prentice Hall
Ch 7 -34
Functional Structure
Copyright © 2011 Pearson
Education, Inc.
Publishing as Prentice Hall
Ch 7 -35
Divisional Structure
• Can be organized in one of four ways:
–By geographic area
–By product or service
–By customer
–By process
• Second most common among US
companies
Copyright © 2011 Pearson
Education, Inc.
Publishing as Prentice Hall
Ch 7 -36
Divisional Structure
Copyright © 2011 Pearson
Education, Inc.
Publishing as Prentice Hall
Ch 7 -37
Strategic Business Unit Structure (SBU)
 Over time a company may have too many products or
divisions for a division structure (span of control problem)
 A solution is to group the divisions into strategic business
units
 Delegate authority and responsibility for each unit to an
executive
 The head of an SBU report to a COO or CEO
 Basically a multi-level division form (HQ->SBU->Division)
 Citigroup grew out of the idea of a financial supermarket and
evolved into an SBU structure
 Requires an additional layer of highly compensated
management
 Some parent companies do little more than provide capital and
guide units (SBUs or Divisions) to a coordinated strategy.
Ch 7 -38
The Costs of Complexity
 To settle a barrage of government legal actions over the last year,

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

JPMorgan Chase has agreed to penalties that now total $20 billion, a
sum that could cover the annual education budget of New York City.
Some experts say companies like JPMorgan are so large and complex
that it might be almost impossible to keep all employees in line.
“With respect to the big banks, it is not so much a culture problem but
a complexity problem,” said Kurt N. Schacht, a managing director at
the CFA Institute, an organization that promotes ethics and standards
at financial firms. “We think these firms are so large that they are
always going to be plagued by rogue operators.”
As a result, breaking up the banks to make them smaller might
improve their cultures, some bank specialists contend.
“I think JPMorgan is too big to manage and it should be broken up,”
said Paul Miller, a bank analyst at FBR Capital Markets. The London
whale incident, he said, showed that some employees at large banks
may still try to maximize their compensation at the expense of the
firm. “There is too much of an incentive for an individual to cut
corners.”
Quoted from http://dealbook.nytimes.com/2014/01/07/steep-penalties-taken-in-stride-by-jpmorganchase/?nl=todaysheadlines&emc=edit_th_20140108
Matrix Structure
 The most complex design, it enables resource sharing.
 Has both vertical and horizontal flows of authority and
communication (functional elements and product or
division elements)
 Suitable for rapidly changing environments
 Often used in project oriented organizations, with differing
levels of authority vested in project managers

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Construction
Research and Development
Defense
Healthcare
 Complex firms may use elements of several structural types
 GE has an SBU structure with four product related segments
 GE country units usually have a matrix structure, where local
business heads report directly to their counterparts at headquarters
(HQ), with a 'dotted line' connection to the country head.
 The new structure in India has everyone report to the country head.
Matrix Structure
Copyright © 2011 Pearson
Education, Inc.
Publishing as Prentice Hall
Ch 7 -41
Starbucks 2011Restructuring
Starbucks combines division and functional elements in a matrix organization.
 In late 2011 the company announced a new corporate structure to accelerate its
growth strategy.
 Starbucks said it will create a three-region organizational structure

 China and Asia Pacific
 The Americas
 EMEA (Europe, U.K., Middle East, Russia and Africa)
A president for each region will oversee the company-operated retail business.
 Seattle Best Coffee will operate as an independent business unit under Jeff
Hansberry. He will be SBC's president in addition to his current role as president of
Global Consumer Products and Foodservice

Starbucks Organization Chart 2005
A Matrix Structure
Starbucks combines division and function in a matrix organization.
Starbucks Long-Term Plans *
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Starbucks Corporation recently announced its long-term objectives for each of its segments; its
entry into the tea industry and its initiatives to boost consumer relations. The company plans to take
the following steps to ensure growth in the upcoming fiscal years.:
Segment Specific Plans
 The Americas business has witnessed a substantial turnaround since the last couple of years.
The segment witnessed 9% growth in net sales to $2.5 billion in the fourth quarter of 2012, driven
by 7% growth in same-store sales and new store openings. The company intends to open more
than 3,000 new stores and remodel many more in the next five years in order to capitalize on the
strong demand for Starbucks products in America.
 Starbucks has also been witnessing strong performance in the China-Asia-Pacific segment. Net
revenue grew 28% in the fourth quarter of 2012, driven by a 10% rise in same-store sales and new
store openings. China, Thailand, Singapore and Australia all posted strong performances. The
company believes China will become its second-largest market by 2014, surpassing Canada. The
segment will have 4,000 stores by the end of 2013, of which 1,000 will be in Mainland China,
1,000 in Japan and 500 in Korea. China is one of the most important markets for Starbucks and
the company plans to have 1,500 stores in 70 cities in 2015. Starbucks has opened its first three
stores in India and plans to open a fourth store in early 2013. The company also intends to open
its first store in Vietnam.
 Europe, Middle East and Africa segment witnessed a 2% decline in net revenue to $283.7
million in the fourth quarter of 2012, hurt by flat traffic and currency headwinds. However,
revenue and profit is expected to improve significantly over the next five years. Also, the
company intends to focus on brand building, generating more revenue from the existing stores
and increasing licensing agreements.
 The Consumer Packaged Goods (CPG) segment includes the U.S. Foodservice business and
also sells whole bean and ground coffees, premium Tazo teas, ready-to-drink beverages,
Starbucks VIA Ready Brew, coffee and tea K-Cup packs, and Starbucks ice creams. This highmargin, high return on capital business reported 32% revenue growth in the fourth quarter of
2012.
On November 14, 2012, Starbucks agreed to acquire Atlanta-based tea store chain Teavana Holdings,
Inc. for $620 million in cash. The acquisition will bring together Starbucks’ expertise in real estate,
style and store management and Teavana’s competencies in global tea industry.
http://www.zacks.com/commentary_print.php?article_id=88173&type=BLOG
Despite the Depreciating Yen, Sony Struggles
 “We see no sign of change in the company’s failure to adjust its
organizational structure and business strategy rapidly enough to
deal with the current business climate,” said an analyst at
Deutsche Bank.
 “Sony continues to struggle without an exit strategy from
electronics,” Atul Goyal of Jefferies LLC wrote Jan. 21, 2014
 Japan’s biggest electronics exporter is hurting in the camera and
camcorder businesses, as sophisticated mobile devices from
Samsung and Apple Inc. eat into demand for the Sony devices.
 Sony’s share of global TV sales fell to 7.5 percent in the third quarter
last year from 8.1 percent the previous quarter. Sony has less share
than Samsung Electronics Co. and LG Electronics Inc.
 Panasonic Corp. is Sony’s closest Japanese peer. The company
last year suspended consumer smartphone operations, stopped
making plasma TVs and sold a majority stake in its health-care
business as Panasonic’s CEO accelerates reform.
Bloomberg 24 January 2014
Final Examination
 Thursday February 20th in room 926
 Paper dictionaries allowed
 30% of the course grade
 Format similar to the midterm exam
 Focus on material we have covered since November
 May include some questions from early in the term


Scale economies
Agency problems
Ch 5 -46
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Likely Project Topics
 Thai silk
 Thai rubber and rubber products
 Thai rice
 Thai shrimp
 Thai cassava
 Thai tourist industry
Choose a topic and a partner by 3-December
Advise 10-15 minute presentation form, papers
accepted
Look at the business using the Five Forces framework
Suggest and support a strategy
Due 28 January for presentations (changed to 4 Feb)