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Strategic
Management
BUSINESS
the art of making
irrevocable decisions
based on
insufficient knowledge
STRATEGY
Insight into
how to
create value
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)
Strategic Inputs
The Strategic
Management
Process
Chapter 2
The External
Environment
Strategic Intent
Strategic Mission
Chapter 3
The Internal
Environment
Strategy Implementation
Strategic Outcomes
Strategic Actions
Strategy Formulation
Chapter 5
Chapter 4
Competitive Rivalry
Business-Level
and Competitive
Strategy
Dynamics
Chapter 7
Acquisition and
Restructuring
Strategies
Chapter 8
International
Strategy
Chapter 6
CorporateLevel Strategy
Chapter 10
Corporate
Governance
Chapter 11
Organizational
Structure and
Controls
Chapter 9
Cooperative
Strategy
Chapter 12
Strategic
Leadership
Chapter 13
Strategic
Entrepreneurship
Strategic
Competitiveness
Above-Average
Returns
Feedback
Important Definitions
Strategic Competitiveness
Achieved when a firm successfully formulates
and implements a value-creating strategy
Sustained Competitive Advantage
Occurs when a firm develops a strategy that
competitors are not simultaneously implementing
Provides benefits which current and potential
competitors are unable to duplicate
Above-Average Returns
Returns in excess of what an investor expects to
earn from other investments with similar risk
What a Difference a Century Can Make
Contrasting views of the corporation:
CHARACTERISTIC
20TH CENTURY
ORGANIZATION
FOCUS
STYLE
SOURCE OF STRENGHT
STRUCTURE
RESOUCES
OPERATIONS
PRODUCTS
REACH
The Pyramid
The Web or Network
Internal
External
Structured
Flexible
Stability
Change
Self-sufficiency
Interdependencies
Atoms-physical assetsBits-information
Vertical integration Virtual integration
Mass production
Mass customization
Domestic
Global
DATA: BUSINESS WEEK
21ST CENTURY
What a Difference a Century Can Make
Contrasting views of the corporation:
CHARACTERISTIC
20TH CENTURY
21ST CENTURY
FININCIALS
INVENTORIES
STRATEGY
LEADERSHIP
WORKERS
JOB EXPECTIONS
MOTIVATION
IMPROVEMENTS
QYALITY
Quarterly
Months
Top-down
Dogmatic
Employees
Security
To compete
Incremental
Affordable best
Real time
Hours
Bottom-up
Inspirational
Employees/free agents
Personal growth
To build
Revolutionary
No compromise
DATA: BUSINESS WEEK
21st Century Competitive
Landscape
Fundamental nature of
competition is changing
•Rapid technological changes
•Rapid technology diffusions
Dramatic changes in
information and
communication technologies
•Increasing importance of
knowledge
The pace of change
is relentless....
and increasing
Traditional industry
boundaries are
blurring, such as...
• Computers
• Telecommunications
Competitive Landscape
Dynamics of strategic
maneuvering among
global and innovative
combatants
Price-quality positioning,
new know-how,
first mover
Hypercompetitive
environments
Fundamental nature of
competition is changing
Protect or invade
established product or
geographic markets
Competitive Landscape
Emergence of
global economy
Hypercompetitive
environments
Fundamental nature of
competition is changing
Goods, services, people,
skills, and ideas move
freely across geographic
borders.
Spread of economic
innovations around the
world.
Political and cultural
adjustments are
required.
Competitive Landscape
Emergence of
global economy
Increasing rate of
technological change
and diffusion
Rapid technological
change
The information age
Hypercompetitive
environments
Increasing
knowledge intensity
Fundamental nature of
competition is changing
I/O Model
The Industrial Organization
model suggests that above-average
returns for any firm are largely
determined by characteristics
outside the firm.
This model largely focuses on
industry structure or attractiveness
of the external environment rather
than internal characteristics of the
firm.
I/O Model of Above-Average Returns
External Environments
General
Global
Industry
Environment
Competitor
Environment
Technological
1.Strategy dictated by the
external environments
of the firm (what
opportunities exist in
these environments?)
2.Firm develops internal
skills required by
external environment
(what can the firm do
about the
opportunities?)
Resource-Based Model
The Resource-Based model suggests
that above-average returns for any
firm are largely determined by
characteristics inside the firm.
This model focuses on developing or
obtaining valuable resources and
capabilities which are difficult or
impossible for rivals to imitate.
Resource-based Model of Above Average
Returns
1. Firm’s Resources
1.Strategy dictated by
unique resources and
capabilities of the firm
(what can the firm do
best?)
2.Find an environment in
which to exploit these
assets (where are the
best opportunities?)
Four Attributes of Resources and
Capabilities (Competitive Advantage)
Rare
Costly to
imitate
Nonsubstitutable
Resources and Capabilities
Valuable
allow the firm to exploit
opportunities or neutralize threats
in its external environment
possessed by few, if any, current
and potential competitors
when other firms cannot obtain
them or must obtain them at a
much higher cost
other products can not
accomplish the same function
Resources and capabilities that meet
these four criteria become a source of:
Strategic
competitiveness
Rare
Costly to imitate
Nonsubstitutable
Resources and Capabilities
Valuable
Competitive
advantage
Core Competencies
Ability to earn
above-average
returns
The Firm and Its Stakeholders
Stakeholders
Groupsfirm
who are
affected by a
The
must
firm’s performance and who
maintain
performance
have claims on
its wealth
at an adequate level in
order to retain the
participation of key
stakeholders
The Firm and Its Stakeholders
Stakeholders
Shareholders
Capital Market Stakeholders
Major suppliers of
capital
•Banks
•Private lenders
•Venture capitalists
The Firm and Its Stakeholders
Stakeholders
Capital Market Stakeholders
Primary customers
Product Market Stakeholders
Suppliers
Host communities
Unions
The Firm and Its Stakeholders
Stakeholders
Capital Market Stakeholders
Product Market Stakeholders
Employees
Organizational Stakeholders
Managers
Nonmanagers
Stakeholder Involvement
Two issues affect the extent of
stakeholder involvement in the firm
1 How do you divide the
returns to keep
stakeholders involved?
2 How do you
increase the returns
so everyone has
more to share?
Capital
Market
Product
Market
Purpose of Strategy
Value Creation
use core competence and
synergy to provide
increased benefits with
lower costs paid.
Purpose of Strategy
CORE COMPETENCE: something
the organization does especially well
in comparison to its competitors
SYNERGY: when organizational
parts interact to produce a joint effect
that is greater than the sum of its parts
acting alone.
STRATEGY
Insight into
how to
create value
Strategic
Management
Environmental Analysis
Scan External
Environment
Evaluate
Current:
•Mission
•Goals
•Strategies
Scan Internal
Environment
Identify
Strategic
Factors:
•Opportunities
•Threats
Define New:
•Mission
•Goals
Identify
Strategic
Factors:
•Strengths
•Weaknesses
Formulate
Strategy:
•Corporate
•Business
Implement
Strategy via
Changes in:
•Leadership
•Culture
•Human
Resources
•Information
and Control
Systems
Strategic Management Process
Evaluate
Current:
•Mission
•Goals
•Strategies
How are they doing?
Are they reflective?
Are they aspirational?
Are they relevant?
•Scan External
•Environment
Evaluate
Current:
•Mission
•Goals
•Strategies
External Environmental Analysis
A continuous process which includes




Scanning: Identifying early signals of environmental
changes and trends
Monitoring: Detecting meaning through ongoing observations
of environmental changes and trends
Forecasting: Developing projections of anticipated outcomes
based on monitored changes and trends
Assessing: Determining the timing and importance of
environmental changes and trends for firms’ strategies and
their management
The External Environment
General
Global
Technological
The External Environment
General
Global
The layer of
the external
environment
that affects
the
organization
indirectly.
Technological
General Environment







Sociocultural segment
Women in the workplace
Workforce diversity
Attitudes about quality of worklife
Concerns about environment
Shifts in work and career preferences
Shifts in product and service preferences
General Environment

Economic segment


Inflation rates
Interest rates
 Trade deficits or surpluses
 Budget deficits or surpluses
 Personal savings rate
 Business savings rates
 Gross domestic product
General Environment






Political/Legal Segment
Antitrust laws
Taxation laws
Deregulation philosophies
Labor training laws
Educational philosophies and policies
General Environment

Technological Segment




Product innovations
Applications of knowledge
Focus of private and government-supported
R&D expenditures
New communication technologies
General Environment





Global Segment
Important political events
Critical global markets
Newly industrialize countries
Different cultural and institutional attributes
General Environment

Demographic Segment





Population size
Age structure
Geographic
distribution
Ethnic mix
Income distribution
The External Environment
General
Global
Technological
The External Environment
General
The layer of
the external
environment
that affects
the
organization
Global
Industry
Environment
Competitor
Environment
directly.
Technological
Industry Environment
 A set
of factors that directly influences a
company and its competitive actions and
responses.
 Interaction among these factors
determine an industry’s profit potential.
Five Forces Model of Competition
Five Forces of
Competition
Bargaining Power of
Buyers
Threat of New Entrants

Barriers to entry








Economies of scale
Product differentiation
Capital requirements
Switching costs
Access to distribution channels
Cost disadvantages independent of scale
Government policy
Expected retaliation
Bargaining Power of Suppliers







A supplier group is powerful when:
it is dominated by a few large companies
satisfactory substitute products are not available to industry
firms
industry firms are not a significant customer for the
supplier group
suppliers’ goods are critical to buyers’ marketplace success
effectiveness of suppliers’ products has created high
switching costs
suppliers are a credible threat to integrate forward into the
buyers’ industry
Bargaining Power of Buyers





Buyers (customers) are powerful when:
they purchase a large portion of an industry’s total output
the sales of the product being purchased account for a
significant portion of the seller’s annual revenues
they could easily switch to another product
the industry’s products are undifferentiated or
standardized, and buyers pose a credible threat if they
were to integrate backward into the seller’s industry
Threat of Substitute Products




Product substitutes are strong threat when:
customers face few switching costs
substitute product’s price is lower
substitute product’s quality and performance capabilities
are equal to or greater than those of the competing product
Intensity of Rivalry







Intensity of rivalry is stronger when
competitors:
are numerous or equally balanced
experience slow industry growth
have high fixed costs or high storage costs
lack differentiation or low switching costs
experience high strategic stakes
have high exit barriers
High Exit Barriers






Common exit barriers include:
specialized assets (assets with values linked to a
particular business or location)
fixed costs of exit such as labor agreements
strategic interrelationships (relationships of mutual
dependence between one business and other parts of a
company’s operation, such as shared facilities and access
to financial markets)
emotional barriers (career concerns, loyalty to employees,
etc.)
government and social restrictions
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
Competitor Environment
Competitor intelligence is the ethical
gathering of needed information and data
about competitors’ objectives, strategies,
assumptions, and capabilities
what drives the competitor as shown by its future
objectives
 what the competitor is doing and can do as revealed
by its current strategy
 What the competitor believes about itself and the
industry, as shown by its assumptions
 What the the competitor may be able to do, as
shown by its capabilities

STRATEGY
Insight into
how to
create value
•Scan External
•Environment
Evaluate
Current:
•Mission
•Goals
•Strategies
Scan Internal
Environment
Identify
Strategic
Factors:
Internal Analyses
By studying the
internal environment,
firms identify what
they can do
Unique resources,
capabilities, and
core competencies
(sustainable
competitive
advantage)
Key Questions for Managers
in Internal Analysis
 How
do we assemble bundles of
resources, capabilities and core
competencies to create value for
customers?
 How do we effectively manage current
core competencies while simultaneously
developing new ones?
 How do we learn to change rapidly?
Components of
Internal Analysis
Core
Competencies
Discovering Core
Competencies
Strategic
Competitiveness
Competitive
Advantage
Capabilities
Four Criteria
of Sustainable
Advantages
Resources
• Tangible
• Intangible
•
•
•
•
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Value
Chain
Analysis
• Outsource
Tangible
Resources
• Financial
• Physical
• Human resources
• Organizational
Discovering Core
Competencies
Resources
• Tangible
• Intangible
Resources are what a
firm has to work with-its assets--including
its people and the
value of its brand
name
Intangible
Resources
• Technological
• Innovation
• Reputation
Resources represent inputs
into a firm’s production
process... such as capital
equipment, skills of
employees, brand names,
finances and talented
managers
Discovering Core
Competencies
Capabilities are what a firm does, and represent
the firm’s capacity or ability to integrate
individual firm resources to achieve a desired
objective
Capabilities
Capabilities become important when they are
combined in unique combinations which create
core competencies which have strategic value
and can lead to competitive advantage
Discovering Core
Competencies
Core
Competencies
Core competencies are resources and capabilities
that serve as a source of competitive advantage over
rivals
Core competencies distinguish a company
competitively and make it distinctive
McKinsey and Co. recommends using three to four
competencies when framing strategic actions
Discovering Core
Competencies
Valuable: Capabilities
that help a firm
neutralize threats or
exploit opportunities
Nonsubstitutable:
• Invisible to competitors
• Firm specific knowledge
• Trust-based working
relationships
Four Criteria
of Sustainable
Advantages
•
•
•
•
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Rare: Capabilities that
are not possessed by
many others
Costly to imitate: other
firms cannot develop
easily,
• Unique historical
conditions
• Causal ambiguity
• Social complexity
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Inbound
Logistics
Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Operations
Inbound
Logistics
Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Primary Activities
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Support
Activities
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Firm Infrastructure
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Firm Infrastructure
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
Firm Infrastructure
Human Resource Management
Human Resource Management
Firms often purchase a
Technological Development
portion of their valueProcurement
creating activities from
Procurement
specialty external
suppliers whoService
can
perform these functions
Outbound
Marketing
Logistics
Operations
Inbound
more
efficiently
& Sales
Logistics
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Technological Development
Inbound
Logistics
Support
Activities
Core Competencies--Cautions and Reminders
Never take for granted that core competencies will
continue to provide a source of competitive advantage
All core competencies have the potential to become
Core Rigidities
Core Rigidities are former core competencies that sow
the seeds of organizational inertia and prevent the firm
from responding appropriately to changes in the
external environment
Strategic myopia and inflexibility can strangle the firm’s
ability to grow and adapt to environmental change or
competitive threats
•Scan External
•Environment
Identify
Strategic
Factors:
•Opportunities
•Threats
Evaluate
Current:
•Mission
•Goals
•Strategies
Scan Internal
Environment
Identify
Strategic
Factors:
•Strengths
•Weaknesses
General & Task
Environment
SWOT
Analysis
Internal
Environment
SWOT ANALYSIS
STRENGTHS
WEAKNESSES
are within the organization itself
and not usually within the short run
control of management
SWOT ANALYSIS
STRENGTHS
WEAKNESSES
are within the organization itself
and not usually within the short run
control of management
SWOT ANALYSIS
STRENGTHS
WEAKNESSES
are within the organization itself
and not usually within the short run
control of management
OPPROTUNITIES
THREATS
are outside the organization,
general factors and trends in the
societal environmental
and specific factors in the
task/industry environment
SWOT ANALYSIS
STRENGTHS
WEAKNESSES
are within the organization itself
and not usually within the short run
control of management
OPPROTUNITIES
THREATS
are outside the organization,
general factors and trends in the
societal environmental
and specific factors in the
task/industry environment
4-6 of each
Remember, Opportunities are
presented by the External
Environment, not company actions
Strategic
Management
Strategy Formulation
Corporate
Business
Scan External
Environment
Evaluate
Current:
•Mission
•Goals
•Strategies
Scan Internal
Environment
Identify
Strategic
Factors:
•Opportunities
•Threats
Refine New:
•Mission
•Goals
Identify
Strategic
Factors:
•Strengths
•Weaknesses
Formulate
Strategy:
•Corporate
•Business
Strategy Formulation
The process of developing long-range plans to
deal effectively with environmental
opportunities and threats in light of corporate
strengths and weaknesses
Composed of
Mission
Objectives
Strategic Plan
Policies
Mission
The purpose or reason for the corporation’s
existence. It may be narrow or broad in
scope.
Narrow
Railroad
Insurance
Broad
Transportation
Financial Services
Objectives
The end results of planned activity. They
state WHAT is to be accomplished by
WHEN. They should be quantified, if
possible.
Two Levels of Strategy
1. Corporate-Level Strategy (Company-wide Strategy)
How to create value for the corporation as a whole
Corporation’s overall direction and the management
of its businesses
2. Business-Level Strategy (Competitive Strategy)
How to create competitive advantage in each
business in which the company competes
Emphasizes improving the competitive
position of a corporation’s products or units
Formulating Corporate
Strategy
What Business Should
We Be In?
GENERIC CORPORATE
STRATEGIES
GROWTH
STABILITY
RETRENCHMENT
GENERIC CORPORATE
STRATEGIES
GROWTH
Vertical Integration
Geographic locations
Horizontal Integration Increasing
Range of products
Concentric (Related) Diversification
Similar industries
Conglomerate (Unrelated) Diversification
Adding Value by Diversification
Diversification most effectively adds value by either
of two mechanisms:
–
Economies of scope: cost savings attributed to
transferring the capabilities and competencies developed
in one business to a new business
–
Market power: when a firm is able to sell its products
above the existing competitive level or reduce the costs of
its primary and support activities below the competitive
level, or both
GENERIC CORPORATE
STRATEGIES
STABILITY
Pause/ Proceed with Caution
No Change
RETRENCHMENT
Turnaround
Divestment
Liquidation
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?
Business-Level Strategy
An integrated and coordinated set of commitments
and actions the firm uses to gain a competitive
advantage by exploiting core competencies in
specific product markets
External Environment
What the Firm Might Do
Sustainable
Competitive
Advantage
Internal Environment
What the Firm Can Do
The Central Role of Customers
In selecting a business-level
strategy, the firm determines
who it will serve
what needs those target customers
have that it will satisfy
how those needs will be satisfied
Types of Business-Level Strategies

Business-level strategies are intended to
create differences between the firm’s
position relative to those of its rivals

To position itself, the firm must decide
whether it intends to perform activities
differently or to perform different activities
as compared to its rivals
Competitive Strategies
Unique/different
Differentiation Components of
value chain
Cost
Leadership
Focus
Competitive/market
segment
Cost Leadership Strategy
An integrated set of actions designed to
produce or deliver goods or services at the
lowest cost, relative to competitors with
features that are acceptable to customers
– relatively standardized products
– features acceptable to many customers
– lowest competitive price
Factors That Drive Costs


Economies of scale
Asset utilization
 Capacity utilization
pattern
• Seasonal, cyclical
 Interrelationships
 Order processing
and distribution
 Value chain linkages
• Advertising & sales
• Logistics &
operations


Product features
Performance
 Mix & variety of
products
 Service levels
 Small vs. large buyers
 Process technology
 Wage levels
 Product features
 Hiring, training,
motivation
Major Risks of Cost Leadership
Strategy
 Dramatic
technological change could
take away your cost advantage
 Competitors may learn how to
imitate value chain
 Focus on efficiency could cause cost
leader to overlook changes in
customer preferences
Differentiation Strategy
An integrated set of actions designed by a firm to
produce or deliver goods or services (at an
acceptable cost) that customers perceive as
being different in ways that are important to
them
–
–
–
price for product can exceed what the firm’s target
customers are willing to pay
nonstandardized products
customers value differentiated features more than
they value low cost
Major Risks of Differentiation
Strategy
 Customers
may decide that the
price differential between the
differentiated product and the cost
leader’s product is too large
 Means of differentiation may cease
to provide value for which
customers are willing to pay
Major Risks of Differentiation
Strategy
 Experience
may narrow customer’s
perceptions of the value of
differentiated features of the firm’s
products
 Makers of counterfeit goods may
attempt to replicate differentiated
features of the firm’s products
Focused Business-Level Strategies
A focus strategy must exploit a narrow
target’s differences from the balance of
the industry by:
– isolating a particular buyer group
– isolating a unique segment of a product
line
– concentrating on a particular
geographic market
– finding their “niche”
Factors That May Drive Focused
Strategies
Large firms may overlook small niches
 Firm may lack resources to compete in the
broader market
 May be able to serve a narrow market segment
more effectively than can larger industry-wide
competitors
 Focus may allow the firm to direct resources
to certain value chain activities to build
competitive advantage

Market Segmentation: Consumer Markets
Demographic factors
Per.
Dem.
Consumer
Con.
Soc.
Markets
Psy.
Geo.
Socioeconomic factors
Geographic factors
Psychological factors
Consumption patterns
Perceptual factors
Market Segmentation: Industrial Markets
End-use segments
Product segments
Geographic segments
Common buying factor
segments
Customer size segments
End
Size
Industrial
Buy.Markets Pro.
Geo.
Major Risks of Focused Strategies
 Firm
may be “outfocused” by
competitors
 Large competitor may set its sights
on your niche market
 Preferences of niche market may
change to match those of broad
market
Advantages of Integrated Strategy
A firm that successfully uses an integrated
cost leadership/differentiation strategy
should be in a better position to:
– adapt quickly to environmental changes
– learn new skills and technologies more
quickly
– effectively leverage its core competencies
while competing against its rivals
Benefits of Integrated Strategy
 Successful
firms using this strategy
have above-average returns
 Firm offers two types of values to
customers
– some differentiated features (but less
than a true differentiated firm)
– relatively low cost (but now as low
as the cost leader’s price)
Major Risks of Integrated Strategy
 An
integrated cost/differentiation
business level strategy often involves
compromises (neither the lowest cost nor
the most differentiated firm)
 The firm may become “stuck in the
middle” lacking the strong commitment
and expertise that accompanies firms
following either a cost leadership or a
differentiated strategy
Five Generic Strategies
Competitive Advantage
Broad
target
Cost
Leadership
Uniqueness
Differentiation
Integrated Cost
Leadership/
Differentiation
Narrow
target
Competitive Scope
Cost
Focused
Cost
Leadership
Focused
Differentiation
Think
Strategically
how to
create value
Strategic
Management
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
•Management 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
Think
Strategically
how to
create value