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Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
20-2 The Role of Strategy
This article presents a careful look at the role of local culture in the desirability of different management control systems. Local culture is defined
in terms of Hofstede’s research paradigm, including the measures: individualism, uncertainty avoidance, power distance, masculinity, and
Confucianism. The culture of several major countries (including the U.S., U.K., Japan, Germany, and others) is considered and suggestions are
provided for designing the management controls system for foreign SBUs. Companies should include both the firm’s strategy and the culture of
the foreign country in determining the most effective form of SBU and how it is to be implemented.
Discussion Questions
1. Identify and explain the meaning of each of the cultural factors (or “dimensions”) used in Hofstede’s research of cultures in various countries.
There are five dimensions:
1. Power distance: indicates the extent a society accepts an unequal distribution of power
2. Uncertainty avoidance: indicates the society’s preference for risk-free, unambiguous situations.
3. Individualism vs Collectivism: represents the degree that members of a society perceive themselves as individuals rather than as
members of a group.
4. Masculinity vs femininity: indicates the extent that the “masculine” values of assertiveness, ambition, independence, competitiveness,
and male dominance are revered over the feminine values of nurturing, interdependence, service motivation, quality of life, and equality between
sexes.
5. Confucian dynamism: reflects the relative importance of persistence, perseverance, ordered status, and thrift; differences in attention to
these values are often considered key differences between eastern and western cultures.
2. How should each of the cultural factors be used in developing effective SBU control systems?
The cultural factors can assist top management in designing the appropriate management control system. For example, an SBU in a
3. For which countries do you think it would be most difficult to develop an effective management control system, and why?
4. For which countries do you think it would be easiest to develop an effective management control system, and why?
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Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
which countries have relatively extreme scores on the five dimensions. For example, Greece and Guatemala score relatively low on individualism
and relatively high on uncertainty avoidance, while the U.S. and Canada are the reverse. Having SBUs in such different countries would require
some adjustments in the management control system between the countries.
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Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
20-3 Preserving Performance Pay
The article discusses the ways in which executive compensation can be changed to more directly align managers’ interests with those of
shareholders.
Discussion Questions
The authors argue that stock-based compensation should be restructured in two key ways. Describe each of the two ways and explain
why each is important.
(1) Short vesting periods. The authors argue the majority of stock options prior to 2004 had very short vesting periods. The
vesting period is the time the executive must wait before the executive can exercise the options. Vesting periods were as short
accounting practices that would increase earnings in the short term) rather than to focus on long term profitability and
shareholder value.
(2) Stock-based compensation was often tied to corporate success, as measured by the firm’s stock price. In effect, the executive
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Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
20-4 When Strategy and Valuation Meet: Five Lessons from Return Driven Strategy
1. Explain briefly the difference between the skills need for a business strategy expert and the skills of a business valuation expert.
The authors make the point that a successful business strategy expert must be a very competent business valuation expert, and vice versa, and
2. Explain why a great product seldom ensures a great business.
The authors cite their research and include example companies to show that a great product does not necessarily produce a great, valuable
company. The key is the competitive environment and the customer needs. There may be competitors that supply the same great product but
features.
3. Explain why being “different” is not central to strategy.
4. Explain the difference between a great company and a great stock.
The explanation here follows from the above. A great product does not mean a great company and a great company does not mean a great
stock. A great stock is one for which investors see a relatively certain and positive direction in earnings and, particularly, cash flows.
Investors may see for example the same level of cash flows in Company A as in Company B in the current year, but have different
5. Explain when and why growth is not necessarily a good thing.
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Chapter 20 – Management Compensation, Business Analysis, and Business Valuation
Substantial growth can lead to financial difficulties, as can be seen in the poor financial performance of many financial and construction
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