MBA Programme 2012
Period 3 – January/February 2012
Strategy, Structure and Incentives
Professor: Douglas Frank
SSI.mailbox@insead.edu
Office: EW 1.05, Ext 83035
Assistant: Jessica Verin
SSI.mailbox@insead.edu
Office: EW 1.15, Ext 83427
Course Objectives
A skilled architect can look at a building’s blueprint and know instantly whether the building will
stand or collapse. A skilled manager must be able to look at a company’s “blueprint”—its
organisational structure and incentive systems—and know instantly whether the company will
succeed or struggle in executing its strategy.
In this course, you will learn a framework and tools for rapidly diagnosing an organisation’s key
strengths and vulnerabilities. We focus on the organisation’s formal structures and systems—the
“hard wiring”—and how they shape employees’ incentives to work toward the organisation’s
strategic goals. We develop our framework around the three essential questions that top managers
must answer when organising for performance and growth:
Question
Strategy: What business should we
be in?
Structure: Who should make key
decisions?
Incentives: How should we measure
and reward performance?
Sample Topics Covered
Vertical Integration
Horizontal Expansion
Coherent Organisation Design
Prototypical Organisation Structures
Individual Reward Systems
Group Reward Systems
Our framework, based on cutting-edge research from organisational economics, synthesizes and
deepens concepts from across the core curriculum, from courses as diverse as Prices & Markets,
Leading Organisations, Financial Markets & Valuation, and Uncertainty, Data & Judgment. You
will learn, for example:
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The basic elements common to all incentive systems, and why they often fail;
The one thing that all organisation structures try to accomplish but never do (and why);
What “synergies” really are and why they should drive your organisational design.
Along with Industry & Competitive Analysis (ICA), Strategy, Structure and Incentives (SSI) is part
of a two-course strategy sequence that explores in depth how firms create and capture value. SSI’s
focus is internal (organisational “architecture”); ICA’s is external (market competition). Note that
neither course is a prerequisite for the other; students may take them in any order.
Who Should Take This Course?
This course is ideal for students seeking careers in general management or management consulting.
Students pursuing financial careers (e.g., valuation of business strategies) may also find it useful.
Summary of Course Content
What is the purpose of an organisation? Simply put, it is to encourage employees to make
coordinated decisions that create maximum value for the firm’s owners. We explore the
implications of this idea in three parts:
1. Incentives: We discuss the main ways organisations hold employees and business units
accountable for their decisions. We examine in depth the pros and cons of using Key
Performance Indicators (KPIs) as the basis for an incentive system. We explore other levers
firms can use to motivate performance.
2. Internal Structure: We discuss the real meaning of synergy and how this drives the need for
coherence in the organisation’s activities. We present the main ways of structuring activities
in organisations and explain how decisions about structure and incentives are related.
3. Scope of Operation: We take a critical look at common justifications for changing the
firm’s scope of activity. We consider how issues of internal structure and incentives affect
the scope decision. We examine how the firm can create value through informal
partnerships.
IMPORTANT TO KNOW!!!!
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Attendance at the first session is mandatory. There are no exceptions. Make sure that
you schedule your travel plans accordingly.
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There is an assignment due for Session 1. This assignment is required. It will be posted
on the course web page (http://faculty.insead.edu/frank/ssi/index.html) at least one week in
advance.
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This is a course about organisations, but it is not an OB course! This course introduces
you to a new way of thinking about organisations that complements—but is quite different
from—the traditional OB approach.
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I regret that I cannot admit auditors to this course.
Required or Recommended Textbook(s)
There is no required textbook. However, I highly recommend one book. The Modern Firm, by John
Roberts, is an excellent treatment of this subject aimed at the educated layperson. In selecting it as
the best book about business in 2004, The Economist hailed it as a book that “deserves to be a
classic.” If you are serious about this subject, it is a book you should own.
Description of Other Readings
Readings consist of case studies and articles. Most of these are in the course packet, although I may
occasionally distribute some in class. Readings are required unless otherwise noted. To help you use
your reading time efficiently and focus on the most important issues, each reading assignment is
accompanied by a set of “Guided Reading” questions. I expect you to be ready to discuss both the
readings and the preparation questions when you come to class. After each session, I will post links
to further readings and resources related to the day’s topic. These are for the benefit of interested
students and are purely optional.
The Grading Scheme
Your final grade will be weighted as follows:
Class Participation
E-Book Contribution
Group Project
Group Assignments
40%
10%
30%
20%
Description of Grade Components
Class Participation: Your class participation grade is based on how much you contribute to
your classmates’ learning. You can contribute in many ways: through your preparation
(readings, preparation questions, pre-class surveys), pertinent questions or comments in
class, and observance of the INSEAD code of conduct (see below). All of these are factored
into your grade.
E-Book Contribution: For one session, you will contribute a short essay about an
organization from (a) your own work experience; or (b) a news article you have read. The
essay should discuss how the organization illustrates one or more key takeaways from the
session. I will compile all the contributions and distribute them as a PDF book at the end of
the course.
Group Project: I will assign a case that describes an organisation facing a strategic threat or
opportunity. Your job is to create a plan to match the organisation’s strategy and structure to
its environment. You will work in groups of four or five. We will discuss the projects in
Session 16.
Group Assignments: There are two group assignments, one short and one a bit longer.
These are designed to reinforce concepts introduced in class and to give some practice in
applying them to realistic business situations.
INSEAD Code of Conduct
The INSEAD MBA Code of Conduct applies in our class, with some modifications (noted in
italics):
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Attend all sessions of every course, in the section assigned to you. (Attendance at session 1
is required. More than 3 absences may result in failure. Section swaps are allowed in
exceptional circumstances only; requests should be sent to the course mailbox at least 24
hours in advance.)
Sit according to the seating chart provided. (You will choose your seat in session 1.)
Arrive on time and remain in class until the end of the session.
Only use mobile devices (laptops, phones, etc.) when directly relevant to class. (These
should be switched off and put away at all times.)
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Dress and behave appropriately (no disruptive activities, no food or drink). (Food and drink
are acceptable during classes that meet over the lunch hour. Please remove all trash.)
Behave tolerantly and with respect towards peers and faculty. Participate actively without
being offensive.
Outline of Class Sessions
Notes:
• All readings are required unless otherwise indicated.
• An asterisk (*) next to the session number indicates a required poll for that session.
Session 1*
Introduction: Strategy and Organisation
Readings
• Besanko, David, David Dranove, Mark Shanley and Scott Schaefer, “Introduction: Strategy
and Economics,” in Economics of Strategy, pp. 1-8.
Guided Reading Questions
1. On p. 1, the authors give several definitions of strategy. Which of these definitions do you
think was in use at your last firm? Based on your experience, why is it hard for firms to
achieve their strategic goals?
2. In the section titled “A Need for Principles,” the authors explain why they think the study of
strategy should be based on principles rather than “best practices.” Do you agree? How does
their view match with your own objectives for taking this course?
Part I: Incentives
Session 2*
Case
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Performance-Based Reward Systems
Performance Pay at Safelite Auto Glass (A), HBS Case 9-800-291.
Performance Pay at Safelite Auto Glass (B), HBS Case 9-800-292. (Distributed in class)
Readings
• Besanko, David, David Dranove, Mark Shanley and Scott Schaefer, “The Principal/Agent
Framework,” in Economics of Strategy, pp. 455-464.
Guided Reading Questions
1. (Case) Why was the productivity of Safelite installers so low?
2. (Case) Does the proposed plan address the problems described in question 1?
3. (Case) If you were in charge at Safelite, what would you do: (a) implement PPP with the
reduced guarantee; (b) implement PPP with no reduction in the guarantee; (c) not implement
PPP?
4. (Besanko et al.) What examples of a principal/agent relationship can you think of from your
own experience? What are the sources of hidden action and/or information that affected the
relationship?
5. (Besanko et al.) On p. 458, the authors mention the distinction between (a) hours worked
and (b) hours during which the employee puts forth high effort. Thinking of your own
previous job, how difficult was it for your supervisor to tell the difference between the two?
Session 3*
Case
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Application: Incentives in a Professional Services Firm
Family Feud: Andersen vs. Andersen (A), HBS Case 9-800-064.
Guided Reading Questions
1. Why did Andersen go into consulting? (Do not write “to make money.” I want to know why
Andersen thought it could make economic profits in this market.)
2. What problems did the firm suffer from prior to the 1989 reorganisation?
3. What were the elements of the 1989 reorganisation (the Dallas and Florida Accords)? How
well did these changes address the difficulties present? What new problems were created?
Session 4
Limitations of Performance-Based Reward Systems: Risk
Readings
• Kohn, Alfie, “Why Incentive Plans Cannot Work,” Harvard Business Review, SeptemberOctober, 1993.
Guided Reading Questions
1. Why does Kohn think incentive plans can’t work?
2. What do you think of his reasons?
Session 5*
Case
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Limitations of Performance-Based Reward Systems: Multitasking
Managing Knowledge and Learning at NASA and JPL, HBS Case 9-603-062.
Readings
• “3M + GE = ?” Fortune, July 21, 2002.
• “Milwaukee Firm Fined $20,000 in Two Pap Smear Deaths,” Chicago Tribune, February
23, 1996.
Guided Reading Questions
1. (Case) What are the signs that NASA and JPL have a knowledge management problem?
2. (Case) What are the NASA/JPL knowledge management initiatives? Which one do you
think will have the greatest positive impact and why?
3. (Case) Jeanne Holm says that NASA needs to change its knowledge sharing culture. If you
were a consultant to NASA, how would you recommend that it do this?
4. (Fortune) What is the 30% rule at 3M? What is it supposed to do, and how well was it
working at the time?
5. (Chicago Tribune) How did June Fricano’s incentive system contribute to the problems
discussed in the article? How might you have designed her incentives differently to avoid
these problems?
Session 6*
Case
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Subjective and Team-Based Systems
Continental Airlines: The Go Forward Plan, INSEAD Case 10/2009-5565.
Readings
• “Incentive Confrontation,” CFO Magazine, January 1, 2003.
• Baron, James N. and David M. Kreps, “Reciprocity and Reputation in Repeated
Interactions,” in Strategic Human Resources: Frameworks for General Managers, pp. 548565. (Note: This material should be familiar to you from your Prices & Markets course. This
reading is provided as a convenient review in case you need it. If you do need it, read just
the section titled “Theory,” which ends on p. 559.)
Guided Reading Questions
1. (Case) If you were an hourly employee at Continental, how would you respond to the ontime bonus the company is offering? How would you expect your fellow hourly employees
to respond?
2. (Case) If you were a Continental shareholder, would you think that the bonus is a good use
of your money? Why or why not?
3. (CFO Magazine) What is the source of the problems between Corey White and Idea
Integration Corp.?
4. (Baron and Kreps) Describe in your own words the concept of a Nash equilibrium. How is it
different from the concept of a dominant strategy?
5. (Baron and Kreps) On pages 551-552, the authors compare the expected payoffs to COL of
always cooperating versus finking in the first round, given the strategy described for ROW
in the middle of page 551. If the probability of going on to the next round is only 0.2, which
strategy yields higher payoffs for COL? Interpret this result. (Hint: What is the benefit to
COL of finking in the first round? What is the cost? How does the probability of
continuation affect this tradeoff?)
6. (Baron and Kreps) In the section beginning on page 555, the authors demonstrate how A can
sustain cooperation through repeated interactions, even if B is a different person each time.
Extend this logic to a firm and its employees. Can you think of any reasons why this
simplified model of firm-employee interactions is not realistic?
Session 7
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Incentives and the Cultural Environment
No reading
Part II: Internal Structure
Session 8*
Case
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Coherent Organisation
Lincoln Electric Co., HBS Case o9-376-028. (Note: You have probably seen this company
in your core courses. Don’t worry, we will look at it from a different perspective.)
Guided Reading Questions
1. What are the key components of Lincoln’s compensation system? How are they supported
by other Lincoln policies/practices?
2. If you were a competitor to Lincoln, what strategy would you adopt? Where does the case
indicate that Lincoln is vulnerable?
3. Suppose that Lincoln decides to pre-empt this competitor by adopting the same strategy you
just described. Imagine that you are now the CEO of Lincoln. Would your organization
change? If so, how?
Session 9
Hierarchical Organisation Forms
Readings
• Rogers, Paul and Marcia Blenko, “Who Has the D? How Clear Decision Roles Enhance
Organisational Performance,” Harvard Business Review, January 1, 2006, pp. 1-11.
• “The Un-Carly,” Forbes, March 12, 2007. (Note: Focus on the discussion of HP’s
organisational change beginning on p. 86.)
• “Discounts for Biggest Users are Aimed at Keeping Software Rivals at Bay: Microsoft
Sticks with Tough Tactics,” International Herald Tribune, May 15, 2003.
Guided Reading Questions
1. (Rogers and Blenko) The authors describe four decision-making “bottlenecks” in
organisations. What are they, and what examples do they give for each? Can you think of
examples of each from your own experience?
2. (Rogers and Blenko) The authors propose a specific solution to these bottlenecks. Imagine
that you have hired them as consultants. What questions might you ask before signing off on
their solution?
3. (Forbes) What did Hewlett-Packard’s organisation look like under Carly Fiorina? Why did
she set it up the way she did?
4. (Forbes) What did HP’s organisation look like after Mark Hurd took over? Why did he set it
up the way he did?
5. (IHT) Why might Microsoft be willing to incur losses to “defeat” Linux in a particular
country or region?
6. (IHT) If pricing decisions are delegated to country or region sales managers, explain how
the fund described in the third paragraph might increase Microsoft’s overall profits.
Session 10*
Case
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Distributed Organisation Forms
Executive Decision Making at General Motors, HBS Case 9-305-026.
Readings
• “The Man Who Caused Chaos,” The Times (London), May 7, 1998.
Guided Reading Questions
1. (Case) How have GM’s strategy, structure, and decision-making processes evolved over
time? How well aligned were they in each of the three major eras?
2. (Case) What are the challenges of managing a matrix organisation like GM’s
“basketweave”? How does GM address these challenges?
3. (Case) What is your evaluation of the ASB’s decision to centralize responsibility for product
development and engineering budgets?
4. (The Times) How would you describe Oticon’s organisational structure under Lars Kolind?
Functional form? Multidivisional form? Matrix?
5. (The Times) Do you think that Oticon’s “spaghetti” would work at your old organisation?
Session 11*
Case
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Application: Redesigning a Multinational Organisation
Jacobs Suchard: Reorganising for 1992, HBS Case 9-489-106.
Guided Reading Questions
1. What are the benefits of coordination for Jacobs Suchard? What are the benefits of
entrepreneurship? How are these changed by the integration of the European market?
2. The case mentions two proposals for Suchard’s new organisation: one from the Issenmann
Task Force and one from the Harvard Managing Change Team. As a shareholder, which one
would you prefer and why? As a Suchard country manager, which one would you prefer and
why?
3. Can you think of an organisation that is better than either of the two proposals mentioned in
question 2? What would it look like?
Part III: Scope of the Organisation
Session 12
Horizontal Scope: What Businesses Are We In?
Readings
• “Behind GE's Interest in Vivendi: A Changing Media Landscape,” The Wall Street Journal,
August 29, 2003.
• “Revamp Still Intrigues Analysts – Case Study Bayer,” Financial Times, September 21,
2005.
Guided Reading Questions
1. (WSJ) Why would acquiring Vivendi create value for GE’s shareholders?
2. (FT) Why would spinning off Lanxess create value for Bayer shareholders?
Session 13*
Case
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Application: Diversified Conglomerates – Value Destroyers?
Tyco International (A), HBS Case 9-798-061.
Readings
• Franko, Lawrence G., “The Death of Diversification? The Focusing of the World's Industrial
Firms, 1980-2000,” Business Horizons, 47/4 July-August 2004, pp. 41-50.
Guided Reading Questions
1. (Case) How does Tyco evaluate potential acquisition targets? What makes a “good” target,
according to Tyco's standards?
2. (Case) At the time of the case, Tyco had 300 individual profit centers. Why is the company
better off as a single firm rather than 300 independent firms?
3. (Case) The firm also had six operating divisions. Why is the company better as one firm
rather than six independent firms?
4. (Franko) What is the “conglomerate discount,” and where does it come from?
5. (Franko) The author suggests that Tyco is destroying value as a conglomerate. Do you
agree? Why or why not?
Session 14
Vertical Scope: The Make vs. Buy Decision
Readings
• Stuckey, John and David White, “When and When Not to Vertically Integrate,” Sloan
Management Review, Spring, 1993, pp. 71-83.
Guided Reading Questions
1. What, according to the authors, are valid and invalid reasons for vertically integrating?
2. What is asset specificity? Give an example of a specific asset from your own work
experience. How does asset specificity relate to the vertical integration decision?
3. Relate the authors’ discussion of “Defending against Market Power” (p. 75) to topics we
discussed in Session 12.
4. Relate the authors’ discussion of “Quasi-Integration Strategies” (p. 78) to topics we
discussed in Session 12.
Session 15*
Case
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Hybrid Organisational Forms: Alternatives to Make vs. Buy
Crown Equipment Corporation: Design Services Strategy, Design Management Institute
Case 9-991-031.
Guided Reading Questions
1. Why did Crown initially decide to outsource design?
2. How important is the design function to Crown's competitive positioning? Does the
“importance” of the input matter for outsourcing decisions? If so, why?
3. How are Fitch's interests different from those of the previous RS owners? Should this matter
to Crown?
4. Although Crown is vertically “disintegrated” with respect to design, it is highly integrated
with respect to manufacturing. Does each of these scope choices make sense for Crown?
Session 16
Group Project Discussion