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Strategic
Management
BUSINESS
the art of making
irrevocable decisions
based on
insufficient knowledge
STRATEGY
Insight into
how to
create value
STRATEGIC
MANAGEMENT
managerial decisions and
actions that determine the
long-run performance of a
corporation
Emphasizes monitoring and evaluating
environment (external)
HISTORICAL PHASES OF
STRATEGIC PLANNING
 Basic
Financial Planning
 Forecast-Based
Planning
 Externally-Oriented
Planning
(Strategic Planning)
 Strategic
Management
STRATEGIC
MANAGEMENT MODEL
Environmental Scanning
Strategy Formulation
Strategy Implementation
Evaluation and Control
Environmental
Scanning
Ex
Exter
ter na
na ll
Societal
Societal
E nviro nmental
General Forces
TTask
ask
E nvironment
Indu stry A nalysis
Strategy
Formation
Strategy
Implementation
M is sion
Reason for
existence
O bjectives
W hat resu lts
to
accomplish
b y when
Strategies
Plan to
achieve th e
mission &
o bjectives
In
Intern
ternaa ll
Po licies
Broad
gu idelin es
for d ecision
making
Stru
Structu
cturr ee
Chain of Command
We will not be
doing much in this
area in this course.
What you have
been doing in most
other courses.
Programs
Activ ities
n eeded to
accomplish a
p lan
Cu
Cultu
lturr ee
Beliefs,
E xp ectatio ns,
Valu es
Evaluation
and Control
Process to
monitor
performance
and take
corrective
actio n
Budgets
Costs of the
programs
Procedures
Res
Resou
ourr ces
ces
As sets, Sk ills,
Competencies ,
Kn owled ge
Sequence of
steps needed
to do the job
Feedback/Learning
Performance
STRATEGIC DECISION
MAKING PROCESS
Scan and
Assess
External
Environment
* Societal
* Task
Evaluate
Current
Performance
Results
Examine and
Evaluate the
Current:
* Mission
* Objectives
* Strategies
* Policies
Review
Corporate
Governance
* Board of
Directors
* Top Management
Analyze
External
Factors:
* Opportunities
* Threats
Select
Strategic
Factors
(SWOT)
in light of
Current
Situation
Scan and
Assess
Internal
Environment
* Structure
* Culture
* Resources
Analyze
Internal
Factors:
* Strengths
* Weaknesses
Review and
Revise as
Necessary:
* Mission
* Objectives
Generate
and
Evaluate
Strategic
Alternatives
Select
and
Recommend
Best
Alternative
Implement
Strategies:
* Programs
* Budgets
* Proceedures
Evaluate
and
Control
STRATEGY
Insight into
how to
create value
Corporate Governance
Separation of Ownership and
Managerial Control

Basis of the modern corporation
–
–
–

shareholders reduce risk by holding diversified
portfolios
shareholders purchase stock, becoming residual
claimants
professional managers are contracted to provide
decision-making
Modern public corporation form leads to efficient
specialization of tasks
–
–
risk bearing by shareholders
strategy development and decision-making by managers
Corporate Governance
Refers to the relationship among
the board of directors, top
management, and shareholders in
determining the direction and
performance of the corporation.
Corporate Governance
Refers to the relationship among
the board of directors, top
management, and shareholders in
determining the direction and
performance of the corporation.
Corporate Governance
•Own company
Shareholders •Elect Board of Directors
•Received residual profits
Corporate Governance
•Setting corporate strategy,
overall direction, mission or vision
Board of
Directors
•Hiring and firing the CEO and top
management
•Controlling, monitoring, or
supervising top management
•Reviewing and approving the
use of resources
•Caring for shareholder interests
Corporate Governance
CEO
•Manage Organization
Planning
Leading
Organizing
Controlling
Board of Directors
Organization of the Board
 Size
Determined by charter and bylaws
– Average for publicly-held, large
firm is 11 directors
– Average for small/medium private
firms is 7 to 8 directors
–
Board of Directors
Nominations & Elections
Traditional Approach:
– CEO
invites members to serve
– Shareholders approve in annual
proxy statement
– All nominees are usually elected
Board of Directors
(Survey, 1999)
 75%
of boards have at least 1 female
director
 25% of boards have two female directors
 60% of boards have at least one minority
member
Board of Directors
Members:
Inside directors
“Management directors”
– Officers or executives employed by
corporation
–
Outside directors
“Non-management directors”
– May be executives of other firms but not
employed by board’s corporation
–
Board of Directors
“Outsider” overly simplistic term -Some outsiders are not truly objective
and could be considered insiders.
Examples:



Affiliated Directors
Retired Directors
Family Directors
Agency Relationship:
Owners and Managers
Shareholders
(Principals)
• Firm owners
Agency Relationship: Owners and
Managers
Shareholders
(Principals)
• Firm owners
• Decision makers
Managers
(Agents)
Agency Relationship: Owners and
Managers
Shareholders
(Principals)
• Firm owners
• Decision makers
Managers
(Agents)
• Risk bearing specialist (principal)
pays compensation to
• A managerial decision-making
specialist (agent)
An Agency
Relationships
Agency Theory Problem
 The
–
agency problem occurs when:
the desires or goals of the principal and agent
conflict and it is difficult or expensive for the
principal to verify that the agent has behaved
appropriately
 Solution:
–
–
–
principals engage in incentive-based
performance contracts
monitoring mechanisms such as the board of
directors
enforcement mechanisms such as the
managerial labor market to mitigate the agency
problem
Stewardship Theory
Executives tend to be more motivated to
act in the best interest of the corporation
than their own self-interests.
Theory argues that over time, senior
executives tend to view the corporation
as an extension of themselves.
Board of Directors
Codetermination
– The inclusion of a corporation’s
workers on its board of
directors.
Board of Directors
Interlocking Directorates
Direct Interlocking Directorate –
– When two firms share a director or when
an executive of one firm sits on the
board of a second firm.
Indirect Interlocking Directorate –
– When two corporations have directors
who also serve on the board of a third
firm.
Board of Directors
No consistent link between board
membership, leadership, structure, and
financial performance of firm
 Investors pay more for a firm’s stock when
positive toward good corporate
governance—
Belief that

•
•
•
Good governance leads to better performance
over time
Reduces risk of company finding itself in trouble
Governance is a major strategic issue
Governance Mechanisms
Ownership
Concentration
• Large block shareholders
have a strong incentive to
monitor management closely
• Their large stakes make it
worth their while to spend
time, effort and expense to
monitor closely
• They may also obtain Board
seats which enhances their
ability to monitor effectively
(although financial
institutions are legally
forbidden from directly
holding board seats)
Governance Mechanisms
Ownership
Concentration
Boards of
Directors
Recommendations for more
effective Board Governance:
• Increase diversity of board
members’ backgrounds
• Strengthen internal
management and
accounting control systems
• Establish formal processes
for evaluation of the
board’s performance
Governance Mechanisms
Ownership
Concentration
Boards of
Directors
Executive
Compensation
• Salary, bonuses, long term
incentive compensation
• Executive decisions are
complex and non-routine
• Many factors intervene
making it difficult to establish
how managerial decisions are
directly responsible for
outcomes
Governance Mechanisms
Ownership
Concentration
Boards of
Directors
Executive
Compensation
• Stock ownership (long-term
incentive compensation)
makes managers more
susceptible to market
changes which are partially
beyond their control
• Incentive systems do not
guarantee that managers
make the “right” decisions,
but do increase the
likelihood that managers will
do the things for which they
are rewarded
Governance Mechanisms
Ownership
Concentration
Boards of
Directors
Executive
Compensation
Market for
Corporate Control
• Firms face the risk of
takeover when they are
operated inefficiently
• Many firms begin to operate
more efficiently as a result of
the “threat” of takeover, even
though the actual incidence
of hostile takeovers is
relatively small
• Changes in regulations have
made hostile takeovers
difficult
• Acts as an important source
of discipline over managerial
incompetence and waste
Board of Directors
Trends in Corporate Governance
Boards more involved in reviewing,
evaluating, and shaping strategy
 Institutional investors active on boards;
pressure on CEO for firm performance
 Shareholders demand directors own more
than token amounts of the firm’s stock
 Non-affiliated outside directors increasing

Board of Directors
Trends in Corporate Governance
Boards becoming smaller
 Boards taking more control of board functions
 Corporations becoming more global;
international experience needed
 Societal expectations that boards balance
profitability and social responsibility
 Diversity of board members

Board of Directors
Nominations & Elections
Staggered Board Approach:
Corporations whose directors serve
terms of more than one year, divide the
board into classes, and stagger
elections so that only a portion of the
board stands for election each year.
Corporate Governance
Role of the Board in strategic management
–
Monitor
Developments inside and outside the
corporation
–
Evaluate & Influence
Review proposals, advise, provide suggestions
and alternatives
–
Initiate & Determine
Delineate corporation’s mission and specify
strategic options
Corporate Governance
Responsibilities of Top Management:
• Provide executive leadership and a strategic
vision
• Manage the strategic planning process
International Corporate
Governance:
Germany
 Owner
and manager are often the same
in private firms
 Public firms often have a dominant
shareholder, frequently a bank
 Frequently there is less emphasis on
shareholder value than in U.S. firms,
although this may be changing
International Corporate
Governance:
Germany
 Medium
to large firms have a two-tiered
board
vorstand monitors and controls managerial
decisions
– aufsichtsrat selects the Vorstand
– employees, union members and
shareholders appoint members to the
Aufsichtsrat
–
International Corporate
Governance:
Japan
 Obligation,
“family” and consensus are
important factors
 Banks (especially “main bank”) are highly
influential with firm’s managers
 Keiretsus are strongly interrelated groups of
firms tied together by cross-shareholdings
International Corporate
Governance:
Japan
 Other
–
–
–
–
characteristics:
powerful government intervention
close relationships between firms and
government sectors
passive and stable shareholders who exert
little control
virtual absence of external market for
corporate control
STRATEGY
Insight into
how to
create value
Strategic
Management
STRATEGIC
MANAGEMENT MODEL
Environmental Scanning
Strategy Formulation
Strategy Implementation
Evaluation and Control
STRATEGIC DECISION
MAKING PROCESS
Scan and
Assess
External
Environment
* Societal
* Task
Evaluate
Current
Performance
Results
Examine and
Evaluate the
Current:
* Mission
* Objectives
* Strategies
* Policies
Review
Corporate
Governance
* Board of
Directors
* Top Management
Analyze
External
Factors:
* Opportunities
* Threats
Select
Strategic
Factors
(SWOT)
in light of
Current
Situation
Scan and
Assess
Internal
Environment
* Structure
* Culture
* Resources
Analyze
Internal
Factors:
* Strengths
* Weaknesses
Review and
Revise as
Necessary:
* Mission
* Objectives
Generate
and
Evaluate
Strategic
Alternatives
Select
and
Recommend
Best
Alternative
Implement
Strategies:
* Programs
* Budgets
* Proceedures
Evaluate
and
Control
Scan and
Assess
External
Environment
* Societal
* Task
Evaluate
Current
Performance
Results
Examine and
Evaluate the
Current:
* Mission
* Objectives
* Strategies
* Policies
Review
Corporate
Governance
* Board of
Directors
* Top Management
Analyze
External
Factors:
* Opportunities
* Threats
Select
Strategic
Factors
(SWOT)
in light of
Current
Situation
Scan and
Assess
Internal
Environment
* Structure
* Culture
* Resources
Analyze
Internal
Factors:
* Strengths
* Weaknesses
Societal Environment
Task/Industry
Environment
The layer of the
Sociocultural
Economic
external
environmentShareholders
Suppliers
The
layer
of the external
that affects the
environment
that directly
Governments
organization
Internal
Employees/
Labor
Unions
influences
the
indirectly.
Environment
Special
Interest
Structureorganization’s operations
Groups
and performance.
Competitors
Culture
Customers
Political-Legal
Resources
Trade Associations
Creditors
Communities
Technological
SWOT
Analysis
Evaluate
Current
Performance
Results
Examine and
Evaluate the
Current:
* Mission
* Objectives
* Strategies
* Policies
Scan and
Assess
External
Environment
* Societal
* Task
Review
Corporate
Governance
* Board of
Directors
* Top Management
Analyze
External
Factors:
* Opportunities
* Threats
Select
Strategic
Factors
(SWOT)
in light of
Current
Situation
Scan and
Assess
Internal
Environment
* Structure
* Culture
* Resources
Analyze
Internal
Factors:
* Strengths
* Weaknesses
SWOT ANALYSIS
STRENGTHS
WEAKNESSES
4-6 of
each
OPPROTUNITIES
THREATS
are within the organization
itself and not usually within
the short run control of
management
are outside the organization,
general factors and trends in
the societal environmental
and specific factors in the
task/industry environment
ENVIORNMENTAL ANALYSIS
TREND ANALYSIS
Societal Forces
Task
Elements
Comm un it ies
Com petitors
Cre ditors
Cust om ers
Em ployees/ Un ions
Govern men ts
S pecial-in terest grou ps
Sh areh ol ders
Su ppliers
Tra de associ at ions
Economics
1
2
3
Technological
1
2
3
Political -Legal
1
2
3
Sociocul tural
1
2
3
TASK/INDUSTRY ANALYSIS
FORCES DRIVING INDUSTRY
P orter
POTENTIAL
ENTRANTS
Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost independent of size
Government policy
RIVALRY
Number of competitors
Rate of industry growth
Product characteristics
Amount of fixed costs
Capacity
Height of exit barriers
Diversity of rivals
SUBSTITUTES
BUYERS
STAKEHOLDERS
SUPPLIERS
ENVIORNMENTAL ANALYSIS
VALUE CHAIN ANALYSIS
p. 87
Firm Infrastruct ure
(general management, accounting, finance, strategic planning
Human Resource Manage me nt
(Recruiting, training, developing)
Tec hnology Developme nt
(R&D, product and process i mprovement)
Procure me nt
(Purchasing of raw materials, machines, supplies
Inbound
Operations
Logistics
Outbound
Marketing
Logistics
and Sales
Service
(raw materials
(machining,
(warehousing and
(advertising,
(installation,
handling and
assembling,
distribution of
pro motion,
repair, parts,
warehousing)
testing)
finished product)
pricing, channel
relations)
STRATEGIC
MANAGEMENT MODEL
Environmental Scanning
Strategy Formulation
Strategy Implementation
Evaluation and Control
STRATEGIC
MANAGEMENT MODEL
Environmental Scanning
Strategy Formulation
Strategy Implementation
Evaluation and Control
Levels of Strategy
What business should
we be in?
Corporate
Corporation’s overall direction and the
management of its businesses
Business How will we compete?
Emphasizes improving the competitive
position of a corporation’s products or
units
Prentice Hall, 2000
Chapter 1
80
Formulating
Corporate Strategy
What Business
Should We Be IN?
GENERIC CORPORATE
STRATEGIES
GROWTH
STABILITY
RETRENCHMENT
GENERIC CORPORATE
STRATEGIES
GROWTH
(p. 134)
Vertical Integration
Geographic locations
Horizontal Integration Increasing
Range of products
Related Diversification (Concentric)
Related industries
Unrelated Diversification (Conglomerate)
Unrelated
GENERIC CORPORATE
STRATEGIES
STABILITY
(p.143)
Pause/ Proceed with Caution
No Change
RETRENCHMENT
Turnaround
Divestment
Liquidation
(p. 185-188)
MODELS OF CORPORATE STRATEGIES
Business Strengths/Competitiv e Position
Str ong
A
t
t
r
a
c
t
i
v
e
n
e
s
s
High
1
X
Growth
Concentric via
Vertical Integr ation
Med
4
Stability
Pause or Proceed
with caution
Low
X
7
Growth
Concentric
Diversification
Average
2
Growth
Concentr ation via
Hor izontal Integr ation
5 Growth
Concentr ation via
Hor izontal Integr ation
- ---- ----- ---- ---- ----- --Stability
No Change or
Profit Str ategy
8
Growth
Conglomer ation
Diversification
Weak
3
Retrenchment
Turnaround
6
Retrenchment
Captive Company
or Selling out
9
Retrenchment
Bankruptcy or
Liquidation
Formulating
Business Strategy
How Will We Compete?
Porter's Competitive Strategies
Differentiation Unique/different
Components of
value chain
Cost
Leadership
Focus
Competitive/market
segment
STRATEGIC
MANAGEMENT MODEL
p. 8
Environmental Scanning
Strategy Formulation
Strategy Implementation
Evaluation and Control
STRATEGIC
MANAGEMENT MODEL
Strategy Implementation
Programs
Budgets
Procedures
Evaluation and Control
Performance
Societal Environment
P. 11
Task/Industry
Environment
Sociocultural
Shareholders
Governments
Special
Interest
Groups
Suppliers
Internal
Environment
Employees/
Labor Unions
Structure
Culture
Customers
Political-Legal
Economic
Competitors
Resources
Trade Associations
Creditors
Communities
Technological
GENERIC CORPORATE
STRATEGIES
GROWTH
STABILITY
RETRENCHMENT
STRATEGY
Insight into
how to
create value
Think
Strategically
how to
create value