Rothaermel Exercise 3
David L. Lo
BUSI 690-D05: Policy and Strategy in Global Competition
Rothaermel Exercise 3
Discussion Question 11.1
The relationship between strategy and structure is dynamic. Rothaermel (2017) wrote, “To gain and sustain competitive advantage, not only must structure follow strategy, but also the chosen organizational form must match the firm’s business strategy” (p. 393). Having alignment between strategy and structure would allow firms to “thrive no matter how market and competitive conditions change” (Bryan & Joyce, 2007, p. 22).
Different stages of growth would require different organizational structures ranging from simple to functional to multidivisional to matrix. A new business would not require much structure, but as it grows it would require increased organization to best respond for the need of more personnel required to meet market demand. Small firms generally adopts a simple structure with low organizational complexity and low degree of formalization and specialization. All decisions are typically made by founders of the firm. As firms grow, they would generally adopt a functional structure with distinct stages in the value chain. These firms have a higher degree of formalization and specialization that groups employees into distinct functional areas based on their expertise. Through higher specialization, greater division of labor could be achieved resulting in higher productivity. Rothaermel (2017) asserted that a functional structure is best utilized when a firm has a fairly narrow focus in terms of product/service offerings and a small geographical footprint. Cost leadership, differentiation, and blue ocean business strategies could be implemented to create a competitive advantage. A firm with a cost leadership business strategy would typically adopt a functional structure with a mechanistic organization structure that is centralized, with well-defined command and control authority, with core competencies in efficient manufacturing and logistics, fosters process innovation to drive down cost, and focuses on economies of scale (Rothaermel, 2017). Next, a firm seeking a differentiation business strategy would adopt a functional structure of an organic organization structure characterized by decentralization, flexibility and mutual adjustment, core competencies in R&D, innovation, and marketing, product innovation, and focus on economies of scope (Rothaermel, 2017). Lastly, a firm pursuing a blue ocean business strategy would adopt a functional structure of an ambidextrous organization characterized with balancing centralization with decentralization, multiple core competencies along the value chain required, process and product innovations, and focus on economies of scale and scope (Rothaermel, 2017).
However, with higher specialization, there might be lack of communication between departments. Cross-functional teams could be instituted to address this issue. As a firm continues to grow and increases its level of diversification, it might want to consider evolving to adopt a multidivisional or matrix structure. Firms with a multidivisional structure are consisted of several distinct strategic business units (SBUs), each set up as an autonomous business in its own right. Functional structure could be used to support single business and dominant business strategies. Firms using the multidivisional organizational structure to support a related-diversification corporate strategy tend to have centralized decision making, high level of integration at corporate headquarters, and co-opetition among SBUs (Rothaermel, 2017). Firms using the multidivisional organizational structure to support an unrelated-diversification corporate strategy tend to have decentralized decision making, low level of integration at corporate headquarters, and competition among SBUs for resources (Rothaermel, 2017). Nevertheless, the increased level of corporate hierarchy and bureaucracy might prove disadvantageous for some firms.
The matrix structure combines both the benefits of functional and multidivisional structures. Firms with international strategy might do best utilizing a functional organizational structure. Firms with a multidomestic strategy would best benefit from adopting a multidivisional structure due to operations in different geographic areas requiring a decentralized decision making to maximize local responsiveness (Rothaermel, 2017). Similarly, firms with a global-standardization strategy might fare better when implementing a multidivisional organizational structure to focus on driving down costs through economies of scale (Rothaermel, 2017). A global matrix structure would best serve firms with transnational strategies by balancing the need of centralized and decentralized decision making and by providing more control to coordinate both geographic areas and product divisions (Rothaermel, 2017).
Firms must evolve as they grow and mature. Through organizational structure a firm could better create strategy with a sustainable competitive advantage with high returns for less capital and with less risk (Bryan & Joyce, 2007).
Discussion Question 11.2
I previously worked as an employee of a non-profit entity with a 120 year plus history. The firm was divided into several distinct SBU’s that operate globally. Each SBU reported to the firm’s president and CEO. While there were some autonomy in the day-to-day operations in each SBU, most of the major decisions were still made at the corporate headquarter level. Top-down strategic planning dominated in the highly centralized company which favored multidivisional organizational structure in its global standardization strategy.
This company highly valued uniformity from staff appearance down to signage. The company emphasized heavily on symbols to influence public perception. While mid and upper management had access to his/her own office, the remainder of staff typically had one office area or breakroom with shared access to computers, phones, etc. needed in most cases to perform their duties. Space and resources were at a premium. The company recognized this fact but offered no solution but instead expected everyone to make do with what was given. This became a norm for most staff who were also expected to convey to clients no negative image of the company. Anyone who expressed dissatisfaction even through the normal open door and/or human resources policy were at risk for separation. Motivating through fear also became the norm for the company.
From the outside looking in, the company’s values were outstanding. Its mission and vision as communicated to the public or potential employees were wonderful. It proudly boasted a triple bottom line goal through integration of employee talent and creativity. Unfortunately, the values conveyed hardly matched the reality. The company sought only to protect its image in order to secure more funding and public support. It touches little of conservation and societal concerns but mostly focused on its financial bottom line. Employees were expected to value the preservation of their jobs.
As large as the company was and having a dedicated multi-personnel human resources department, training and development were severely lacking. New employees would approximately one or two hours in signing required paperwork before being sent to their home base. Employees were expected to read the employee handbook to learn about the company’s values. Socialization happened only through daily interactions with other staff members. The lack of training and personal development highly contributed to staff’s negative image of the company. Employees were expected to work as directed by management. Employee engagement, though seemingly promoted, were not valued. Only opinions of those at the top management were esteemed, even though they were very distantly removed from the daily operations of each SBUs. However, the reasoning behind all of the top-down decisions were hardly communicated to staff, therefore increasing employee dissatisfaction. This negative aspect of the organizational culture was the only thing new employees leaned through socialization.
From a former employee’s perspective, the real organizational culture of the company did not contribute to the firm’s competitive advantage. For the public, however, the perceived culture did. Due to its history and ties to the community, the firm was seen as valuable, rare, and difficult to imitate within the areas of service. It also seemed organized to capture the value created. Thus, it had a competitive advantage and did not see the need to change from a shareholder perspective. The switching costs for customer were high for consumers and there no substitutes other than the other SBUs within the company. The company has maintained its competitive advantage by doing little to improve its organizational culture.
Discussion Question 12.1
To lower the chances of key managers (agents) pursuing their own self-interests, a firm must design work tasks, incentives, and employment contracts among other control mechanisms that align incentives between them and their principals. According to Rothaermel (2017), these mechanisms must overcome adverse selection and moral hazard. Firms could use both financial (commissions, profit sharing, etc.) and non-financial incentives (work-life balance, performance measurement, threat of termination, etc.) to align agents interests with the company’s.
For stakeholders, the board of directors is one key mechanism to minimize opportunism by agents. Rothaermel (2017) wrote, “Given that board members are directly responsible to shareholders, they have an incentive to ensure that the shareholders’ interests are pursued” (p. 410). The board of directors manages control by selecting, evaluating, and compensation the CEO and also by ensuring the firm’s compliance to all legal and financial aspects of the firm. Employment contract is another control mechanism to align employee performance and the compensation for that performance. Stock options as a part of the executive compensation package would better align incentives between shareholders and management. Should the firm’s board of directors fail in their duties, the market for corporate control could be used to align incentives.
To align key managers’ interests with those of the employees, the firm could enact full and complete transparency so that the rules and reasons behind business decisions are fair and clear to all. Also, implementation of a 360 review would allow for a balanced view on the skills and contributions that these managers make. Finally, auditor, government regulators, and industry analysts could be employed as other control mechanisms to ensure alignment with all stakeholders. Having a checks-and-balances system in place could reduce mistakes or prevent improper behavior. By separating the duties of various stakeholders into clearly defined roles, firms could better reduce chances of opportunism with the intervention of other stakeholders.
Discussion Question 12.3
Rothaermel (2017) defined the shared value creation framework as “a model proposing that managers have a dual focus on shareholder value creation and value creation for society” (p. 405). Companies adopting this dual point of view might gain and sustain a competitive advantage while also the health of the communities around them. The rationale for investing in social responsibility include differentiation from competition, understanding of social pressures and opportunities, building a bank of goodwill to offset potential criticism, and making employees more motivated and loyal (Kotler ; Keller, 2016). According to Michael Porter in order to meet both economic and societal needs managers should expand the customer base to bring in nonconsumers, expand traditional internal firm value chains to include more nontraditional partners, and focus on creating new regional clusters (Rothaermel, 2017).
By creating products at more affordable pricing points, Nike could expand its customer base while also serving those at the bottom of the pyramid. The Nike brand is commonly associated with being at the peak of excellence. Top athletes are used to promote products and the brand itself. Each athlete represents the best in his/her arena. The same sentiment is conveyed to the average consumer in that by wearing Nike footwear and gear, anyone has the prospect to achieve greatness. This empowerment is especially important in emerging markets where there are usually large gaps in socioeconomic groups. Providing product options at different price points could help in minimizing the divide.
Nike is also known for its sponsorships and sponsorships events with the NFL and other professional and collegiate athletic teams. Through these more traditional partners, the company has been able to dominate its industry. Expanding such efforts to include nontraditional partners with a particular cause in the public interest could address some societal needs in different markets. Nike should investigate the value in sponsoring local competitions, youth sports teams, etc. outside of the professional or collegiate spheres. Other opportunities could be gained by partnering with organizations beyond the sports realm in areas such as adoption of green practices to reduce environmental impacts of production and in ethical human factor management in its large supply chain and distribution network. Doing so could convey the message of it being a global brand that cares for the people while at the same time would create new devotees to the brand.
Nike has always been focused on creating regional clusters that support its operations. In 2017, there were approximately 127 footwear factories in 15 countries and 363 apparel factories in 37 countries that manufactured goods for the company (Nike, Inc., 2017). Nike does not own or operate its own manufacturing facilities but utilizes licensing forms of entry into global markets. Creation of low-cost-manufacturing clusters (especially in developing countries) allows Nike to utilize low-cost labor but also geographical proximity to clients. The majority of product design is concentrated in the U.S. and Europe. Limiting such activities within this cluster allows the company to protect its intellectual property rights against third-party theft and infringement which could potentially diminish both revenue, marketplace leadership, and the brand itself.
Bryan, L.L. ; Joyce, C. I. (2007). Better strategy through organizational design. The McKinsley Quarterly, 2, 21–29. Retrieved from http://ezproxy.liberty.edu/login?url=http://www.michaelsamonas.gr/images/Mixalhs/resources/Better_Strategy.pdf
Kotler, P. T., ; Keller, K. L. (2016). Marketing management (Custom 15th ed.). Upper Saddle River, NJ: Pearson, Inc.
NIKE, Inc. (2017). Form 10-K. Retrieved from http://ezproxy.liberty.edu/login?url=https://s1.q4cdn.com/806093406/files/doc_financials/2017/ar/docs/nike-2017-form-10K.pdf
Rothaermel, F. T. (2017). Strategic management concepts (Custom 3rd ed.) New York, NY: McGraw-Hill.