business policy and strategic management notes

M B A
(DISTANCE MODE)
DBA 1703
STRATEGIC MANAGEMENT
III SEMESTER
COURSE MATERIAL
Centre for Distance Education
Anna University Chennai
Chennai – 600 025

ii
Author
Mr.R.Magesh
Senior Lecturer
Department of Managment Studies
Chennai - 600 025
Reviewer
Ms.Yasmeen Haider
Senior Lecturer
Department of Managment Studies
BSA Cresent Engineering College, Vandallur
Chennai - 600 048
Dr.T.V.Geetha
Professor
Department of Computer Science and Engineering
Chennai - 600 025
Dr.H.Peeru Mohamed
Professor
Department of Management Studies
Chennai - 600 025
Dr.C. Chellappan
Professor
Chennai - 600 025
Dr.A.Kannan
Professor
Chennai - 600 025
Copyrights Reserved
(For Private Circulation only)
Editorial Board

ACKNOWLEDGEMENT
The author has drawn inputs from several sources for the preparation of this course material, to meet the
requirementsofthesyllabus.Theauthorgratefullyacknowledgesthefollowingsources:
• CharlesW.l.Hill&GarethR.Jones–StrategicManagementTheory,Anintegrated approach’–Houghton
MiflinCompany,PrincetonNewJersey,AllIndiaPublisherandDistributors,Chennai,1998.
• Thomas l. Wheelen, J.David Hunger –‘Strategic Management’Addison Wesley Longman Singapore
Pvt. Ltd., 6th edition, 2000.
• Arnoldo C.Hax, Nicholas S.Majluf – ‘The strategy concept and process’–APragmaticApproach –
PearsonEducationPublishingCompany,SecondEdition,2005.
• Azharkazmi–‘BusinessPolicy&StrategicManagement’TataMcGrawHillPublishingcompanyLtd.,
New Delhi- Second Edition, 1998.
• Harvard Business Review –‘Business Policy’ –parts I & II Harvard Business School.
• Saloner, Shepard, Podolny –‘Strategic Management ‘ –JohnWiley 2001.
• LawrenceG.Hrebiniak,’Makingstrategywork’,PersonPublishingCompany, 2005.
• Gupta,Gollakota&Srinivasan–businessPolicyandstrategic Management–ConceptsandApplication
‘ Prentice Hall of India, 2005.
Inspite of at most care taken to prepare the list of references any omission in the list is only accidental and
notpurposeful.
Mr.R.Magesh
Author
v

DBA 1703 STRATEGIC MANAGEMENT
UNIT I –STRATEGIC AND PROCESS
Conceptual framework for strategic management, the concept of strategy and strategy formation process –A
formalStrategicplanningprocess,corporategovernanceandsocialresponsibility.
UNIT II –COMPETITIVE ADVANTAGE
External environment –Porter’s five forces model-Strategic groups competitive changes
during industry evolution – globalization and industry structure-National context and
competitive advantage resources –Capabilities and competencies- core competencies –
Low cost and differentiation generic, buildings blocks of competitive advantage –Distinctive
competencies-Resources and capabilities durability of competitive advantage –avoiding
failures and sustaining competitive advantage.
UNIT III – STRATEGIES
Buildingcompetitiveadvantagethroughfunctionallevelstrategies–Businesslevelstrategy-strategyintheglobal
environment –Corporate strategy –Vertical integration –Diversification and strategic alliances –Building and
restructuring the corporation –Choice of strategies –Balance score Card.
UNIT IV – STRATEGY IMPLEMENTATION & EVALUATION
Designingorganizationalstructure–Designingstrategiccontrolsystems–Matchingstructureandcontroltostrategy
–Implementingstrategicchangepolitics-Powerandconflict–Techniquesofstrategicevaluation&control.
UNIT V –OTHER STRATEGIC ISSUES
Managingtechnologyandinnovation–Entrepreneurialventuresandsmallbusinessstrategicissuesfornon-profit
organizations.Casesinstrategicmanagement
REFERENCES
1. CharlesW.l.Hill&GarethR.Jones–StrategicManagementTheory,Anintegrated approach’–Houghton
MiflinCompany,PrincetonNewJersey,AllIndiaPublisherandDistributors,Chennai,1998.
2. Thomas l. Wheelen, J.David Hunger –‘Strategic Management’Addison Wesley Longman Singapore
Pvt. Ltd., 6th edition, 2000.
3. Arnoldo C.Hax, Nicholas S.Majluf – ‘The strategy concept and process’–APragmaticApproach –
PearsonEducationPublishingCompany,SecondEdition,2005.
4. Azharkazmi–‘BusinessPolicy&StrategicManagement’TataMcGrawHillPublishingcompanyLtd.,
New Delhi- Second Edition, 1998.
5. Harvard Business Review –‘Business Policy’ –parts I & II Harvard Business School.
6. Saloner, Shepard, Podolny –‘Strategic Management ‘ –JohnWiley 2001.
7. LawrenceG.Hrebiniak,’Makingstrategywork’,PersonPublishingCompany, 2005.
8. Gupta,Gollakota&Srinivasan–businessPolicyandstrategic Management–ConceptsandApplication
‘ Prentice Hall of India, 2005.
vii

CONTENTS
UNIT I
STRATEGY AND PROCESS
1.1 CONCEPTUALFRAMEWORK FOR STRATEGIC
MANAGEMENT 1
1.2 THE CONCEPT OF STRATEGIC MANANGEMENT 2
1.3 BIRTH OF STRATEGIC MANAGEMENT 3
1.4 STRATEGICANALYSIS 4
1.5 BENEFITS OF STRATEGIC MANAGEMENT 6
1.6 VARIOUSAPPROACHES OF STRATEGIC MANAGEMENT 8
1.7 STRATEGYAND STRATEGYFORMATION PROCESS 9
1.7.1 Strategic Management Processes 9
1.7.2 TopManagementDecisionsonStrategic Issues 11
1.7.3 Strategic Issues Likely to Have LongTermImpact 11
1.8 STRATEGYPLANNING PROCESS 12
1.8.1 StrategicPlanningModel 12
1.8.2 StrategicManagementModels 14
1.8.3 WorkingModelofStrategicManagement 14
1.9 MINTZBERG’S MODES OF STRATEGIC DECISION MAKING 18
1.10 CORPORATE GOVERNANCE & SOCIALRESPONSIBILITY 18
1.10.1 DefinitionofCorporateGovernance 19
1.10.2 History of Corporate Governance 20
1.10.3 Impact of Corporate Governance 22
1.10.4 Parties to corporate governance 24
1.10.5 Principles of Corporate Governance 25
1.10.6 Mechanismsandcontrols 27
1.10.7 Systemic problems of corporate governance 28
ix

1.10.8 Corporate governance models around the world 31
1.10.9 Corporategovernanceandfirmperformance 35
1.10.10InitiativeofIndianGovernmentofCorporategovernance 37
UNIT II
COMPETITIVE ADVANTAGE
2.1 EXTERNALENVIRONMENT 42
2.2 MICHAELPORTER FIVE FORCES MODEL 44
2.3 DYNAMIC NATURE OF INDUSTRYRIVALRY 54
2.3.1 A Combination of Generic Strategies — Stuck in the Middle? 54
2.4 GLOBALIZATIONAND INDUSTRYSTRUCTURE 57
2.5 PORTER’SGENERICSTRATEGIES 60
2.6 CAPABILITIESAND COMPETENCIES 70
2.6.1 Capabilities–theBasisofYourCompetitive Advantage 70
2.6.2 CreatingaCultureforInnovation 71
2.6.3 BuildingCapabilitythroughLeadershipAttributes 72
2.7 CORE COMPETENCIESAND DISTINCTIVE COMPETENCIES 73
2.7.1 Core Competencies to End Products 73
2.7.2 DevelopingCoreCompetencies 74
2.8 GENERIC STRATEGIESANDTHE INTERNET 77
2.9 MICHAELPORTER COMPETITIVEADVANTAGE 78
UNIT III
STRATEGIES
3.1 BUILDING COMPETITIVEADVANTAGETHROUGH
FUNCTIONALLEVELSTRATEGIES 84
3.1.1 Functionallevelstrategies 84
3.2 BUSINESS-LEVELSTRATEGIES 88
3.3 STRATEGYINTHE GLOBALENVIRONMENT 92
x

3.3.1 PortfolioPlanningexperiencesinGlobalEnvironment 94
3.4 CORPORATE-LEVELSTRATEGY 97
3.4.1 CorporatePortfolioAnalysis 99
3.4.2 Corporate Grand Strategies 103
3.5 DIVERSIFICATIONAND STRATEGICALLIANCES 105
3.5.1 DiversificationStrategy 105
3.5.2 Strategicalliancesandpartnerships 106
3.6 STRATEGIC CHOICE 106
3.6.1 Importanceofchoiceinthestrategyformulationprocess 106
3.6.2 Structureofstrategicchoice 108
3.6.3 Options for markets and products/services 109
3.6.4 Optionsforbuildingresources,capabilities,andcompetence 110
3.6.5 Optionsinmethodsofimplementation 111
3.6.6 Contractualarrangements 112
3.7 GROUPING OPTIONS INTO STRATEGIC OPTIONS 113
3.7.1 General tests of strategic options 114
3.7.2 Whoshouldbeinvolvedwiththechoice? 114
3.7.3 Theoreticalframeworksforassistingstrategicchoice 115
3.7.4 Strategic choices in the case examples 117
3.8 BALANCE SCORE CARD 117
3.8.1 TheLearning&GrowthPerspective 119
3.8.2 The Balanced Scorecard and Measurement-Based Management 120
3.8.3 Management by Fact 121
UNIT IV
STRATEGY IMPLEMENTATION
& EVALUATION
4.1 DESIGNING ORGANIZATIONALSTRUCTURE 131
4.1.1 TheEssentialschecklistsoforganizationstructuredesign 135
xi

4.2 DESIGNING STRATEGIC CONTROLSYSTEMS 142
4.2.1 Characteristics of a Strategic Control system 145
4.3 MATCHING STRUCTUREAND CONTROLTO STRATEGY 146
4.4 STRATEGYIMPLEMENTATIONS 149
4.4.1 FourthTaskofStrategicManagementinStrategy Implementation 150
4.4.2 StrategicImplementationandEvaluatingPerformance 150
4.5 POLITICS, POWER AND CONFLICT INFLUENCES IN
STRATEGICIMPLEMENTATION 152
4.6 TECHNIQUES OF STRATEGYEVALUATIONAND CONTROL 168
4.6.1 FinancialPerformanceControl 168
4.6.2 SocialPerformanceControl 177
4.6.3 SocialCost-BenefitAnalysis 178
UNIT V
OTHER STRATEGIC ISSUES
5.1 MANAGING TECHNOLOGYAND INNOVATION 184
5.1.1 ManagingTowardSuccess 184
5.1.2 Choosing a Partner 185
5.1.3 Negotiating theAlliance 186
5.1.4 Managing Toward Collaboration 189
5.1.5 Managing Innovation 190
5.2 ENTREPRENEURIALVENTURES&
SMALLBUSINESS STRATEGIC ISSUES 194
5.2.1 Entrepreneurship 194
5.2.2 Entrepreneurshipvs.SmallBusiness 200
5.3 STRATEGIC ISSUE OF NON- PROFIT ORGANIZATION 206
5.4 CASES IN STRATEGIC MANAGEMENT 213
xii

STRATEGICMANAGEMENT
NOTES
1 ANNAUNIVERSITYCHENNAI
UNIT I
STRATEGYAND PROCESS
INTRODUCTION
Strategy word derives from the greek word stratçgos, which derives from two
words:stratos(army)andago (ancientgreekforleading).Stratçgosreferredtoa‘military
commander’duringtheageofAthenianDemocracy.
Strategy-originallyamilitaryterm,inabusinessplanningcontextstrategy/strategic
means/pertainsto whyandhowtheplanwillwork,inrelationtoallfactorsofinfluence
uponthebusinessentityandactivity,particularlyincludingcompetitors(thustheuseofa
militarycombativeterm),customersanddemographics,technologyandcommunications
LEARNING OBJECTIVES
Afterlearningthisunityoumustbeableto:
• Understandtheconceptsofstrategicmanagement
• Analyzethestrategicformationprocess
• Explainthestrategicplanningprocess
• Describe the role of corporate governance
• Knowthecorporategovernanceresponsibilitiesforsociety
1.1 CONCEPTUALFRAMEWORK FOR STRATEGIC MANAGEMENT
Definition of strategy
Johnson and Scholes (Exploring Corporate Strategy) define strategy as follows:
“Strategyisthe directionandscopeofanorganizationoverthelong-term:which
achieves advantage for the organization through its configuration of resources within a

DBA 1703
NOTES
challenging environment, to meet the needs of markets and to fullfil stakeholder
expectations”.
In other words, strategy is about:
∗ Where is the business trying to get to in the long-term (direction)
∗ Whichmarketsshouldabusinesscompeteinandwhatkindofactivitiesisinvolved
in such markets? (markets; scope)
∗ How can the business perform better than the competition in those markets?
(Advantage)?
∗ What resources (skills, assets, finance, relationships, technical competence, and
facilities) are required in order to be able to compete? (Resources)?
∗ What external, environmental factors affect the businesses’ ability to compete?
(Environment)?
∗ What are the values and expectations of those who have power in and around the
business? (stakeholders)
1.2 THE CONCEPT OFSTRATEGIC MANAGEMENT
Strategic management is the art and science of formulating, implementing and
evaluatingcross-functionaldecisionsthatwillenableanorganizationtoachieveitsobjectives.
Itistheprocessofspecifyingtheorganization’sobjectives,developingpoliciesandplans
toachievetheseobjectives,andallocatingresourcestoimplementthepoliciesandplansto
achieve the organization’s objectives. Strategic management, therefore, combines the
activitiesofthevariousfunctionalareasofabusinesstoachieveorganizationalobjectives.
Itisthehighestlevelofmanagerialactivity,usuallyformulatedbytheBoardofDirectors
andperformedbytheorganization’sChiefExecutiveOfficer(CEO)andexecutiveteam.
Strategicmanagementprovidesoveralldirectiontotheenterpriseandiscloselyrelatedto
thefieldoforganizationStudies.
“Strategic management is an ongoing process that assesses the business and the
industries in which the company is involved; assesses its competitors and sets goals and
strategiestomeetallexistingandpotentialcompetitors;andthenreassesseseachstrategy
annuallyorquarterly[i.e.regularly]todeterminehowithasbeenimplementedandwhether
ithassucceededorneedsreplacementbyanewstrategytomeetchangedcircumstances,

STRATEGICMANAGEMENT
NOTES
newtechnology,newcompetitors,aneweconomicenvironment.,oranewsocial,financial,
orpoliticalenvironment.”(Lamb,1984:ix)
1.3 BIRTH OFSTRATEGIC MANAGEMENT
Strategic management as a discipline originated in the 1950s and 60s.Although
therewerenumerousearlycontributorstotheliterature,themostinfluentialpioneerswere
Alfred D. Chandler,Jr., Philip Selznick, IgorAnsoff, and Peter Drucker.
AlfredChandler recognizedtheimportanceofcoordinatingthevariousaspects
ofmanagementunderoneall-encompassingstrategy.Priortothistimethevariousfunctions
of management were separate with little overall coordination or strategy. Interactions
betweenfunctionsorbetweendepartmentsweretypicallyhandledbyaboundaryposition,
that is, there were one or two managers that relayed information back and forth between
twodepartments.Chandleralsostressedtheimportanceoftakingalongtermperspective
when looking to the future. In his 1962 groundbreaking work Strategy and Structure,
Chandlershowedthatalong-termcoordinatedstrategywasnecessarytogiveacompany
structure,direction,andfocus.Hesaysitconcisely,“structurefollowsstrategy.”
In1957,PhilipSelznickintroducedtheideaofmatchingtheorganization’sinternal
factors with external environmental circumstances. This core idea was developed into
whatwenowcallSWOTanlysisbyLearned,Andrews,andothersattheHarvardBusiness
School General Management Group. Strengths and weaknesses of the firm are assessed
inlightoftheopportunitiesandthreatsfromthebusinessenvironment.
IgorAnsoff builtonChandler’sworkbyaddingarangeofstrategicconceptsand
inventing a whole new vocabulary. He developed a strategy grid that compared market
penetrationstrategies,productdevelopmentstrategies,marketdevelopmentstrategiesand
horizontalandverticalintegrationanddiversificationstrategies.Hefeltthatmanagement
couldusethesestrategiestosystematicallyprepareforfutureopportunitiesandchallenges.
In his 1965 classic Corporate Strategy, he developed the gap analysis still used today in
which we must understand the gap between where we are currently and where we would
like to be, then develop what he called “gap reducing actions”.
Peter Drucker was a prolific strategy theorist, author of dozens of management
books, with a career spanning five decades. His contributions to strategic management

DBA 1703
NOTES
were many but two are most important. Firstly, he stressed the importance of objectives.
An organization without clear objectives is like a ship without a rudder.As early as 1954
he was developing a theory of management based on objectives. This evolved into his
theory of management by objectives (MBO).According to Drucker,the procedure of
settingobjectivesandmonitoringyourprogresstowardsthemshouldpermeatetheentire
organization,toptobottom.Hisotherseminalcontributionwasinpredictingtheimportance
ofwhattodaywewouldcallintellectualcapital.Hepredictedtheriseofwhathecalledthe
“knowledge worker” and explained the consequences of this for management. He said
that knowledge work is non-hierarchical. Work would be carried out in teams with the
person most knowledgeable in the task at hand being the temporary leader.
In1985, Ellen-Earle Chaffee summarized what she thought were the main
elementsofstrategicmanagementtheorybythe1970s:
• Strategic management involves. adapting the organization to its business
environment.
• StrategicmanagementisfluidandcomplexChangecreatesnovelcombinationsof
circumstancesrequiringunstructurednon-repetitiveresponses.
• Strategicmanagementaffectstheentireorganizationbyprovidingdirection.
• Strategicmanagementinvolvesbothstrategyformation(shecalleditcontent)and
alsostrategyimplementation(shecalleditprocess).
• Strategicmanagementispartiallyplannedandpartiallyunplanned.
• Strategic management is done at several levels: overall corporate strategy, and
individualbusinessstrategies.
• Strategicmanagementinvolvesbothconceptualandanalyticalthoughtprocesses.
1.4 STRATEGICANALYSIS
Thisisallabouttheanalyzingthestrengthofbusinesses’positionandunderstanding
the important external factors that may influence that position. The process of Strategic
Analysiscanbeassistedbyanumberoftools,including:

STRATEGICMANAGEMENT
NOTES
PESTAnalysis - a technique for understanding the “environment” in which a business
operates
Scenario Planning - a technique that builds various plausible views of possible futures
forabusiness
Five Forces Analysis - a technique for identifying the forces which affect the level of
competitioninanindustry
Market Segmentation - a technique which seeks to identify similarities and differences
between groups of customers or users
Directional Policy Matrix - a technique which summarizes the competitive strength of a
businessesoperationsinspecificmarkets
CompetitorAnalysis - a wide range of techniques and analysis that seeks to summaries
abusinesses’overallcompetitiveposition
CriticalSuccessFactorAnalysis-atechniquetoidentifythoseareasinwhichabusiness
must outperform the competition in order to succeed
SWOTAnalysis-ausefulsummarytechniqueforsummarizingthekeyissuesarisingfrom
anassessmentofabusinesses“internal”positionand“external”environmentalinfluences.

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NOTES
1.5 BENEFITS OFSTRATEGIC MANAGEMENT
Studieshaverevealedthatorganizationsfollowingstrategicmanagementhaveout
performed those that do not. Strategic planning ensures a rational allocation of resources
andimprovesco-ordinationbetweenvariousdivisionsoftheorganization.Ithelpsmanagers
tothinkaheadandanticipateproblemsbeforetheyoccur.Themainbenefitoftheplanning
processisacontinuousdialogueabouttheorganisation’s future between the hierarchical
levelsintheorganization.Inshort,themosthighlyratedbenefitsofstrategicmanagement
are:
• Clarityofstrategicvisionfortheorganization
• Focusonwhatisstrategicallyimportanttotheorganization
• Betterunderstandingoftherapidlychangingbusinessenvironment.
Strategicmanagementneednotalwaysbeaformalprocess.Itcanbeginwithansweringa
fewsimplequestions:
1. Where are we now?
2. In no changes are made, where will we be in the next one year? Next two years?
Next three years? Next five years?
Aretheanswersacceptable,iftheanswersarenotacceptable,whatactionsshould
thetopmanagementtakewithwhatresultsandpayoffs. Today,asyouknowthatbusiness
isbecomingmorecomplexduetorapidchangesinenvironment.Itisbecomingincreasingly
difficulttopredicttheenvironmentaccurately.Theinternalandexternalenvironmentsof
organizationsarenowdrivenbymultitudesofforcesthatwerehithertononexistent.Earlier
the changes in technology were not so rapid but today the information from all over the
globeispouringinthroughthecomputers.Theworldinfacthasshrunk.Thishascreated
fierce competition as the customers and stakeholders have become more aware of their
rights. Think of yourself as a consumer who has got several alternatives to choose from
you as a customer look for real value for your money.You have become aware of quality
and cost ratios and then diligently select the products.You are now more demanding for
better service in the least possible time. This has brought in new rules of business that
companies all over the world are evolving through their experience. The obsolence has
become so rapid that the time when you are in the process of buying a computer it might

STRATEGICMANAGEMENT
NOTES
havealreadybecomeobsoleteinsomepartoftheglobe.Thenumberofeventsthataffect
domestic and world market are now far too many and too often.
Over reliance on experience in such situations may really work out to be very
costly for companies. (e.g) Reliance has shifted to more creativity, innovation and new
waysoflookingatbusinessanddoingitinnovelways.Theearlierconceptofhavinghighly
functionalizeddepartmentsanddevelopingspecializationoflabourislosingitscredibility.
Organizationsarebecomingmoreresponsive,flexible,andadaptabletochangingbusiness
situations.Insuchenvironmentsthatarechargedwithhighlevelofcompetition,developing
competitiveedgeforsurvivalandgrowthhasbecomeimperativeforcompanies.Whatdo
you think will business strategy concepts and techniques benefit foreign businesses as
muchasdomesticfirms?Fig1.1Theroleofcorevalues,purposeandvisionarygoalsina
strategyformationprocess
Theneedisnowtodistinguishbetweenlong-rangeplanningandstrategicplanning.
Theimportanceofstrategicmanagementinsettingthedirectionsforgrowthoforganizations
isbeingincreasinglyrealizedthesedays.Theevolutionofobjectivesaftersettingdirections
forgrowthoforganisationshasbecomenecessary.Thetechniqueofstrategicmanagement
is used as a major vehicle for planning and implementing major changes in organisation.
Theimplementationofthestrategicplansneedsgoodteamworkandunderstandingofthe
concept at grass root Have a look at the difference between the two:

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NOTES
1.6 VARIOUSAPPROACHES OFSTRATEGIC MANAGEMENT
In general terms, there are two main approaches, which are opposite but
complementeachotherinsomeways,tostrategicmanagement:
Major approach of strategic management
I-TheIndustrialOrganizationalApproach
Based on economic theory — deals with issues like competitive rivalry, resource
allocation,economiesofscale
Assumptions—rationality,selfdisciplinebehaviour,profitmaximization
II-The SociologicalApproach
Deals primarily with human interactions
Assumptions—boundedrationality,satisfyingbehaviour,profitsub-optimality.Anexample
of a company that currently operates this way is Google.
Strategic management techniques can be viewed as bottom-up, top-down, or
collaborativeprocesses.Inthebottom-upapproach,employeessubmitproposalstotheir
managers who, in turn, funnel the best ideas further up the organization. This is often
accomplishedbyacapitalbudgetingprocess.Proposalsareassessedusingfinancialcriteria
such as return on investment or cost benefit analysis. The proposals that are approved
formthesubstanceofanewstrategy,allofwhichisdonewithoutagrandstrategicdesign
orastrategicarchitect.Thetop-downapproachisthemostcommonbyfar.Init,theCEO
(suchasDonSheelen,JeffBezosandSamuelJ.Palmisano)possiblywiththeassistanceof
astrategicplanningteam,decidesontheoveralldirectionthecompanyshouldtake.Some
organizationsarestartingtoexperimentwithcollaborativestrategicplanningtechniques
thatrecognizetheemergentnatureofstrategicdecisions.

STRATEGICMANAGEMENT
NOTES
1.7 STRATEGYAND STRATEGYFORMATION PROCESS
1.7.1 Strategic Management Processes
The strategic management formulation and implementation methods vary with
product profile, Company profile, environment within and outside the Organization and
various other factors. Large organizations which use sophisticated planning use detailed
strategicmanagementModelswhereassmallerorganizationswhereformalityislowuse
simpler models. Small businesses concentrate on planning steps compared to larger
companies in the same industry. Large firms have diverse products, operations, markets,
and technologies and hence they have to essentially use complex systems. In spite of the
fact that companies have different structures, systems, product profiles, etc, various
components of models used for analysis of strategic management are quite similar.You
must have observed that different thinkers have defined business strategy differently,yet
there are some common elements in the way it is defined and understood. The strategic
managementconsistsofdifferentphases,whicharesequentialinnature.
There are four essential phases of strategic management, they are process. In
differentcompaniesthesephasesmayhavedifferent,nomenclaturesandthephasesmay
haveadifferentsequences,
however, the basic content remains same.The four phases can be listed as below.
1. Definingthevision,businessmission,purpose,andbroadobjectives.
2. Formulationofstrategies.
3. Implementationofstrategies.
4. Evaluationofstrategies.
These phases are linked to each other in a sequence as shown in
It may not be possible to draw a clear line of difference between each phase, and
thechangeoverfromonephasetoanotherisgradual.Thenextphaseinthesequencemay
gradually evolve and merge into the following phase.An important linkage between the
phases is established through a feedback mechanism or corrective action. The feedback
mechanismresultsinacourseofactionforrevising,reformulating,andredefiningthepast
phase.Theprocessishighlydynamicandcompartmentalizationoftheprocessisdifficult.

DBA 1703
NOTES
The change over is not clear and boundaries of phases overlap. My purpose to depict this
diagramistoassistyouinrememberingandrecallingitwitheaseExhibitPhasesofStrategic
ManagementProcess
Strategic management process that could be followed in a typical organization is
presented in .The process takes place in the following stages:
1. The Strategic Planner has to define what is intended to be accomplished (not just
desired).Thiswillhelpindefiningtheobjectives,strategiesandpolicies.
2. InthelightofstageI,theresultsofthecurrentperformanceoftheorganizationare
documented.

STRATEGICMANAGEMENT
NOTES
3. The Board of Directors and the top management will have to review the current
performanceofthedocumented.
4. Inviewofthereview,theorganizationwillhavetoscantheinternalenvironment
forstrengthsandweaknessesandtheexternalenvironmentforopportunitiesand
threats.
5. Theinternalandexternalscanhelpsinselectingthestrategicfactors.
6. ThesehavetobereviewedandredefinedinrelationtotheMissionandObjectives.
7. At this stage a set of strategic alternatives and generated.
8. The best strategic alternative is selected and implemented through programmed
budgets and procedures.
9. Monitoring,evaluationandreviewofthestrategicalternativechosenisundertaken
inthismode.Thiscanprovideafeedbackonthechangesintheimplementationif
required.As can be seen, this provides a rational approach to strategic decision
making and it can be successfully practiced by Indian organizations, which now
havetooperateinacompetitiveenvironment.
1.7.2 Top Management Decisions On Strategic Issues
To establish the vision of the firm, stating of corporate objectives, and strategic
thrust areas, defining a comprehensive corporate philosophy and values, identifying the
domains in which an organization would operate, learning and recognizing worldwide
business trends, and allocation of resources in line with corporate priorities, are some of
thekeyareaswhereintopmanagementoforganisationstakedecisions.Letusnowlookat
thedomainoftopmanagement?StrategicIssuesforSharingofConcernandResourcesto
meet certain specific needs of certain customers, use of common upgraded technologies
bycertainbusinessunits,deploymentofpeople,physicalassetsormoneyfrominternalor
externalsourcesandtoachieveeconomicsofscaleindeployment,certaindecisionsmay
be taken by the management.
1.7.3 Strategic Issues Likely To Have Long Term Impact
Strategic decisions for implementing a course of action have broad implications
andlongtermramificationsandthepeopleofanorganisationhavetocommitthemselves
to the decisions and plans for a long period of time. Once a firm takes strategic decisions
and implements the action programs, the impact is seen slowly on its competitive image
and the advantage tied to the particular strategy start pouring in. The companies become

DBA 1703
NOTES
knownincertainmarkets,products,ortechnologiesorthedecisionsmayadverselyaffect
thepreviousprogress.Intoday’sbusinessworld,wherechangesarebyleapsandbounds,
someorganisationsmaydecideforradicalchangesthroughreengineeringoftheirbusiness
processestogainstrategicallybetterposition
Strategic Directions are Futuristic
Strategies are essentially for the future. Strategic decisions are taken based o
forecasts that are in turn based on available data on trends. The managers involved in
strategicplanningconcentrateondevelopingprojectionsthatwouldtakethecompanyto
betterstrategicposition.Thecompaniesthusbecomeproactiveratherthanbeingreactive
tobusinesssituations.StrategieshaveMultiFunctionalandMultiBusinessEffectsEvery
companyhasseveralbusinessunits.Strategicdecisionsarecoordinativeinnatureamong
allthebusinessunitsofthecompany.Manystrategicdecisionsonproductmix,competitive
edge, organisational structure etc. affect various departments and functions that may be
classifiedasstrategicbusinessunits(SBUs).Eachoftheseunitsgetaffectedbythedecision
taken at the top level, regarding allocation of resources and deployment of personnel etc.
So,BusinessStrategyasadisciplinefocusesattheorganizationasonesingleunit.Strategies
are Defined Based on Study of Environment The organisation culture internal to the
organisationandalsotheexternalenvironmentmustbethoroughlyscannedandstudiedto
decideonstrategies.Theinteractionbetweentheorganisationsandtheexternalenvironment
affects both of them. The organisation tends to change the environment and the same
environmentmakesanimpactontheorganisation.Thefirmshavetodefinetheirstrategic
positionwithregardtotheenvironmentanddecidestrategiesthatwilltakeittothedesired
position. The firms are part of the system, where customers, stake holders, competitors
etc. exist and the firm cannot remain insulated from these determinants of the external
environment
1.8 STRATEGYPLANNINGPROCESS
1.8.1 Strategic Planning Model
Elements In Strategic Management Process
Each phase of strategic management process can be viewed to be consisting of a
numberofelements,whichcanbeclearlydefinedwithinputandoutputrelationships.

STRATEGICMANAGEMENT
NOTES
The steps have logical connectivity and hence these are sequential. These steps
canbeillustratedwiththehelpofaflowdiagram.Thefollowingdiscretetwelvestepscan
be considered as comprehensive.
1. Definingthevisionofthecompany
2. Definingthemissionofthecompany
3. Determiningthepurposesorgoals
4. Definingtheobjectives
5. Environmentscanning
6. Carrying out corporate appraisal
7. Developingstrategicalternatives
8. Selectingastrategy
9. Formulatingdetailedstrategy
10. Preparingaplan
11. Implementingastrategy
12. Evaluatingastrategy
Figure 1.2 The Strategic Planning Process

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1.8.2 Strategic Management Models
Firstly have a look at the various models which has got relevance to the strategic
process. Now think of a firm which in your opinion has been successful over the past 15
yearsandlistdownthethingsyouthinkhaveattributedtoitssuccess:Someofthestrategic
management models are shown. Now, I will discuss each of the elements of strategic
managementmodel.
Exhibit Strategic Management Model:
• Companyvisionstatement
• Companymissionstatement
• Companyprofile
• Externalenvironmentandinternalenvironment
• Evolutionstrategicchoicesandselection
• Longtermobjectives
• Grandstrategy
• Annualobjective
• Functionalstrategy
• Operatingpolicies
• InstitutionalizingStrategy
• Controlandevaluation
1.8.3 Working Model Of Strategic Management
Afterlookingattheabovegivenfig1.2,wewillnowdiscusseachphaseindetail.
Vision
Let us, now discuss in details the model of strategic managementVision of The
Company
VisionofacompanyisratherapermanentstatementarticulatedbytheCEOofthe
companywhomaybeManagingDirector,President,Chairman,etc.

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NOTES
The purpose of a vision statement is to:
1. Communicate with the people of the organisation and to those who are in some
way connected or concerned with the organisation about its very existence in
terms of corporate purpose, business scope, and the competitive leadership.
2. Cast a framework that would lead to development of interrelationships between
firm and stakeholders viz. employees, shareholders, suppliers, customers, and
variouscommunitiesthatmaybedirectlyorindirectlyinvolvedwiththefirm.
3. Definebroadobjectiveregardingperformanceofthefirmanditsgrowthinvarious
fieldsvitaltothefirm.So,letstalkaboutourownRaiUniversity,findoutwhatis
thevisionstatementandlistdownvariouspurposesofourvisionstatement.
Visionisathemewhichgivesafocusedviewofacompany.Itisaunifyingstatement
andavitalchallengetoalldifferentunitsofanorganisationthatmaybebusypursuingtheir
independent objectives. It consists of a sense of achievable ideals and is a fountain of
inspiration for performing the daily activities. It motivates people of an organisation to
behave in a way which would be congruent with the corporate ethics and values. Many
firmsdonothaveclearvisionstatements.Anindirectmethodofknowingwhetherafirm
hasreachedthestageofcorporatestrategicmanagementisemergenceofavisionstatement.
Visionofafirmcannotbehighjackedfromacompany;however,afirmmaydefinitelyget
inspired by the vision statement of another firm. It has to be evolved after a lot of
deliberations,brainstorming,andthinking.Itispertinentthatyouasanindividualworking
inafirmshouldbecomeanactiveparticipantandcollaboratorinaccomplishingcorporate
objectives.Youmustunderstandandsharethevisionofthefirmbecauseyouwouldhave
to contribute in transformation of vision into a reality through his or her actions. Total
behaviourofpeopleofanorganizationshouldgetconditionedbythebasicframeworkof
vision.Personalobjectivesofindividualsareveryimportanttothemandonlytofulfillthese
objectivespeoplejoinorganisations.
Visionofacompanywhentranslatedintoactionprogrammemustbeabletomeet
personalneedsofpeople.Thisincludestheneedofachievementalso.Visionofafirmthus
encompasses personal objectives of people which they try to achieve.
Step 1: Name of the company
Step 2: Practices that have made the company successful

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Theprimarypurposeofthestrategicmanagementprocessistoenablecompanies
to achieve strategic competitiveness and earn above average returns. Researches have
indicatedthatcompaniesthatengageinstrategicmanagementgenerallyoutperformthose
thatdonot.Theattainmentofanappropriatematchorfitbetweenacompany’senvironment
anditsstrategy,structure,andprocesseshaspositiveeffectsonthecompany’sperformance.
BruceHenderson,founderoftheBostonConsultingGroup,pointedoutthatacompany
cannotaffordtofollowintuitivestrategiesonceitbecomeslarge,haslayersofmanagement,
oritsenvironmentchangessubstantially.Astheworld’senvironmentbecomesincreasingly
complex and changing, today’s companies, as one way to make the environment more
manageable,usestrategicmanagement.
Strategic competitiveness is achieved when a company successfully formulates
andimplementsavaluecreatingstrategy.Byimplementingavaluecreatingstrategythat
currentandpotentialcompetitorsarenotsimultaneouslyimplementingandthatcompetitors
areunabletoduplicate,acompanyachievesasustainedorsustainablecompetitiveadvantage.
So long as a company can sustain (or maintain) a competitive advantage, investors will
earn above average returns.Above average returns represent returns that exceed returns
that investors expect to earn from other investments with similar levels of risk (investor
uncertaintyabouttheeconomicgainsorlossesthatwillresultfromaparticularinvestment).
In other words, above average returns exceed investors’ expected levels of return for
given levels of risk. In the long run, companies must earn at least average returns and
provide investors with average returns if they are to survive. If a company earns below
averagereturnsandprovidesinvestorswithbelowaveragereturns,investorswillwithdraw
theirfundsandplacethemininvestmentsthatearnatleastaveragereturns.Internationally
thesetypesofcompaniesareprimetakeovertargets,aconceptthatispickingupinIndia.
A framework that can assist companies in their quest for strategic competitiveness is the
strategicmanagementprocess,thefullsetofcommitments,decisionsandactionsrequired
foracompanytosystematicallyachievestrategiccompetitivenessandearnaboveaverage.
Mission
Anorganization’smissionisthepurposeorreasonfortheorganizationsexistence.
A well convinced mission statement defines the fundamental, unique purpose that sets a
company apart other firms of its and identifies the scope of the company’s operations in
terms of products offered and market served.

STRATEGICMANAGEMENT
NOTES
Objectives
It is the end results of planned activity.The corporate objectives achievement
shouldresultinthefulfillmentofacorporation’smission.
Some of the areas in which corporations might establish its goals and objectives are:
• Profitability
• Efficiency
• Growth
• Shareholderwealth
• Utilizationofresources
• Reputation
• Contributiontoemployees
• Contribution to society through taxes paid etc..,
• Marketleadership
• Technologicalleadership
• Survival
Strategy
Strategy at Different Levels of a Business
Strategies exist at several levels in any organization - ranging from the overall
business(orgroupofbusinesses)throughtoindividualsworkinginit.
• Corporate Strategy - is concerned with the overall purpose and scope of the
businesstomeetstakeholderexpectations.Thisisacruciallevelsinceitisheavily
influencedbyinvestorsinthebusinessandactstoguidestrategicdecision-making
throughoutthebusiness.Corporatestrategyisoftenstatedexplicitlyina“mission
statement”.
• Business Unit Strategy - is concerned more with how a business competes
successfullyinaparticularmarket.Itconcernsstrategicdecisionsaboutchoiceof
products, meeting needs of customers, gaining advantage over competitors,
exploitingorcreatingnewopportunitiesetc.

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• Operational Strategy - is concerned with how each part of the business is
organized to deliver the corporate and business-unit level strategic direction.
Operational strategy therefore focuses on issues of resources, processes, people
etc.
Policies
A Policy is a broad guideline for decision making that links the formulation of
strategywithitsimplementation
Programs
A program is a statement of the activities or steps needed to accomplish a single
use plan. It makes the strategy action oriented.
Budgets
ABudget is a statement of a corporation’s programs in term of dollars/money
Used in planning and control, a budget lists the detailed cost of each program.
Procedures
Itisasystemofsequentialstepsortechniquesthatdescribeindetailhowaparticular
task or job is to be done.
1.9 MINTZBERG’S MODES OFSTRATEGIC DECISION MAKING
• EntrepreneurialMode
• Adaptive Mode
• PlanningMode
• LogicalIncrementalism
1.10 CORPORATE GOVERNANCE & SOCIALRESPONSIBILITY
Corporate governance is the set of processes, customs, policies, laws and
institutionsaffectingthewayacorporationisdirected,administeredorcontrolled.Corporate

STRATEGICMANAGEMENT
NOTES
governancealsoincludestherelationshipstakeholdersamongthemanyplayersinvolved
(the stakeholders) and the goals for which the corporation is governed. The principal
players are the shareholders, management and the board of directors. Other stakeholders
include employees, suppliers, customers, banks and other lenders, regulators, the
environmentandthecommunityatlarge.
Corporategovernanceisamulti-facetedsubject.Animportantthemeofcorporate
governanceistoensuretheaccountabilityoftheimpactofacorporategovernancesystem
in economic efficiency, with a strong emphasis on shareholders welfare. There are yet
other aspects to the corporate governance subject, such as the stake holder view and
certainindividualsinanorganizationthroughmechanismsthattrytoreduceoreliminatethe
principal–agentproblem.Arelatedbutseparatethreadofdiscussionsfocusonthecorporate
governancemodelsaroundtheworld.
1.10.1 Definition Of Corporate Governance
In A Board Culture of Corporate Governance business author Gabrielle
O’Donovan definescorporategovernanceas‘aninternalsystemencompassingpolicies,
processes and people, which serves the needs of shareholders and other stakeholders, by
directingandcontrollingmanagementactivitieswithgoodbusinesssavvy,objectivityand
integrity.Soundcorporategovernanceisreliantonexternalmarketplacecommitmentand
legislation,plusahealthyboardculturewhichsafeguardspoliciesandprocesses’.
O’Donovan goes on to say that ‘the perceived quality of a company’s corporate
governance can influence its share price as well as the cost of raising capital. Quality is
determinedbythefinancialmarkets,legislationandotherexternalmarketforcesplusthe
internationalorganisationalenvironment;howpoliciesandprocessesareimplementedand
how people are led. External forces are, to a large extent, outside the circle of control of
any board.The internal environment is quite a different matter, and offers companies the
opportunity to differentiate from competitors through their board culture.To date, too
muchofcorporategovernancedebatehascentredonlegislativepolicy,todeterfraudulent
activitiesandtransparencypolicywhichmisleadsexecutivestotreatthesymptomsandnot
the cause.
Corporate Governance is a system of structuring, operating and controlling a
companywithaviewtoachievelongtermstrategicgoalstosatisfyshareholders,creditors,

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NOTES
employees, customers and suppliers, and complying with the legal and regulatory
requirements,apartfrommeetingenvironmentalandlocalcommunityneeds.
Report of SEBI committee (India) on Corporate Governance defines corporate
governanceastheacceptancebymanagementoftheinalienablerightsofshareholdersas
the true owners of the corporation and of their own role as trustees on behalf of the
shareholders.Itisaboutcommitmenttovalues,aboutethicalbusinessconductandabout
makingadistinctionbetweenpersonal&corporatefundsinthemanagementofacompany.”
The definition is drawn from Gandhian principle of Trusteeship and Directive
Principle of constitution. Corporate Governance is viewed as ethics and a moral duty.
1.10.2 History Of Corporate Governance
In the 19th
century, state corporation law enhanced the rights of corporate boards
to govern without unanimous consent of shareholders in exchange for statutory benefits
like appraisal rights, to make corporate governance more efficient. Since that time, and
becausemostlargepubliclytradedcorporationsintheUSareincorporatedundercorporate
administrationfriendlyDelawarelaw,andbecausetheUS’swealthhasbeenincreasingly
securitizedintovariouscorporateentitiesandinstitutions,therightsofindividualowners
and shareholders have become increasingly derivative and dissipated. The concerns of
shareholdersoveradministrationpayandstocklossesperiodicallyhasledtomorefrequent
calls for corporate governance reforms.
In the 20th century in the immediate aftermath of theWall Street Crash of 1929
legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means
pondered on the changing role of the modern corporation in society. Berle and Means’
monograph“TheModernCorporationandPrivateProperty”(1932,Macmillan)continues
tohaveaprofoundinfluenceontheconceptionofcorporategovernanceinscholarlydebates
today.
From the Chicago school of economics, Ronald Coase’s “Nature of the Firm”
(1937) introduced the notion of transaction costs into the understanding of why firms are
founded and how they continue to behave. Fifty years later, Eugene Fama and Michael
Jensen’s “The Separation of Ownership and Control” (1983, Journal of Law and
Economics) firmly established agency theory as a way of understanding corporate

STRATEGICMANAGEMENT
NOTES
governance: the firm is seen as a series of contracts.Agency theory’s dominance was
highlightedina1989articlebyKathleenEisenhardt(AcademyofManagementReview).
US expansion after World War II through the emergence of multinational
corporations saw the establishment of the managerial class.Accordingly, the following
HarvardBusinessSchoolManagementprofessorspublishedinfluentialmonographsstudying
theirprominence:MylesMace(entrepreneurship),AlfredDChandler,Jr(businesshistory),
Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational behavior).
According to Lorsch and MacIver “many large corporations have dominant control over
businessaffairswithoutsufficientaccountabilityormonitoringbytheirboardofdirectors.”
Since the late 1970’s, corporate governance has been the subject of significant
debateintheU.S.andaroundtheglobe.Bold,broadeffortstoreformcorporategovernance
have been driven, in part, by the needs and desires of shareowners to exercise their rights
of corporate ownership and to increase the value of their shares and, therefore, wealth.
Over the past three decades, corporate directors’ duties have expanded greatly beyond
theirtraditionallegalresponsibilityofdutyofloyaltytothecorporationanditsshareowners.
Inthefirsthalfofthe1990s,theissueofcorporategovernanceintheU.S.received
considerablepressattentionduetothewaveofCEOdismissals(e.g.:IBM,Kodak,Honey
well)bytheirboards.CALERSledawaveofinstitutionalshareholderactivism(something
only very rarely seen before), as a way of ensuring that corporate value would not be
destroyed by the now traditionally cozy relationships between the CEO and the board of
directors(e.g.,bytheunrestrainedissuanceofstockoptions,notinfrequentlybackdated).
In1997,theEastAsianFinancialCrisissawtheeconomiesof Thailand,Indonesia,
SouthKorea,MalaysiaandThePhilippinesseverelyaffectedbytheexitofforeigncapital
after property assets collapsed. The lack of corporate governance mechanisms in these
countrieshighlightedtheweaknessesoftheinstitutionsintheireconomies.
Intheearly2000s,themassivebankruptcies(andcriminalmalfeasance)ofEnron
and Worldcom, as well as lesser corporate debacles, such as Aldelphia
Communications,AOL,ArthurAndersen,GlobalCrossingTyco,and,morerecently,Fannie
MaeandFreddieMac,ledtoincreasedshareholderandgovernmentalinterestincorporate
governance.ThisculminatedinthepassageoftheSarbanes-OxleyActof2002.But,since
then,thestockmarkethasgreatlyrecovered,andshareholderzealhaswanedaccordingly.

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1.10.3 Impact Of Corporate Governance
Positiveeffectofgoodcorporategovernanceondifferentstakeholdersultimately
results into strong economy and hence good corporate governance is tool for socio-
economic development.After EastAsia economy collapse in late 20th century, World
Bank president warned those countries, that for sustainable development, corporate
governance is must to be good. Economic health of a nation depends substantially how
sound and ethical businesses are.
Enlightened Corporate Governance
Corporate governance, the unwieldy name given to the systems that guide the
controlandmanagementofcorporations,isarelativelyrecenttermthatcameintobeingin
the 1970s. Because corporate governance structures and processes specify the various
roles and duties of corporate directors, senior executives, shareholders, and other
stakeholdersinthecorporation,theyplayalargeroleindetermininghowresponsibleand
accountable a corporation’s leaders will be in exercising their authority.When properly
designed,governanceprocessesguidecompaniestowardusefulobjectivesandhelpthem
monitorandmeasuretheirprogressinachievingthoseobjectives;whenpoorlydesigned,
these processes permit companies to drift toward painful losses for shareholders and
everyone else with a stake in the company.
Acompany’scorporategovernance—whethergoodorbad—isestablishedbyits
board of directors. Ideally, these directors will be energetic, experienced people deeply
concernedaboutthecompany’swelfare.Becausetheboard’smostpivotalresponsibilities
are to hire and supervise the company’s chief executive officer (CEO), these directors
should not be company employees who work under the CEO’s direction; instead, they
shouldbeindependentofthecompany’smanagement.Whenindependentdirectorsknow
how to work effectively with the company’s senior management team, they are likely to
produce a corporate climate that accelerates the growth of long-term shareholder value.
Role of Institutional Investors
Many years ago, worldwide, buyers and sellers of corporation stocks were
individual investors, such as wealthy businessmen or families, who often had a vested,
personalandemotionalinterestinthecorporationswhosesharestheyowned.Overtime,

STRATEGICMANAGEMENT
NOTES
markets have become largely institutionalized: buyers and sellers are largely institutions
(e.g., pension funds, insurance companies, mutual funds, hedge funds, investor groups,
and banks).
Theriseoftheinstitutionalinvestorhasbroughtwithitsomeincreaseofprofessional
diligencewhichhastendedtoimproveregulationofthestockmarket(butnotnecessarily
in the interest of the small investor or even of the naïve institutions, of which there are
many).Notethatthisprocessoccurredsimultaneouslywiththedirectgrowthofindividuals
investing indirectly in the market (for example individuals have twice as much money in
mutual funds as they do in bank accounts). However this growth occurred primarily by
wayofindividualsturningovertheirfundsto‘professionals’tomanage,suchasinmutual
funds.Inthisway,themajorityofinvestmentnowisdescribedas“institutionalinvestment”
eventhoughthevastmajorityofthefundsareforthebenefitofindividualinvestors.
Programtrading,thehallmarkofinstitutionaltrading,isaveragingover60%aday
in 2007. Unfortunately, there has been a concurrent lapse in the oversight of large
corporations,whicharenowalmostallownedbylargeinstitutions.TheBoardofDirectors
oflargecorporationsusedtobechosenbytheprincipalshareholders,whousuallyhadan
emotional as well as monetary investment in the company (think Ford), and the Board
diligentlykeptaneyeonthecompanyanditsprincipalexecutives(theyusuallyhiredand
fired the President, or Chief Executive Officer— CEO).
Nowadays, if the owning institutions don’t like what the President/CEO is doing
andtheyfeelthatfiringthemwilllikelybecostly(think“goldenhandshake”)and/ortime
consuming,theywillsimplysellouttheirinterest.TheBoardisnowmostlychosenbythe
President/CEO, and may be made up primarily of their friends and associates, such as
officers of the corporation or business colleagues. Since the (institutional) shareholders
rarely object, the President/CEO generally takes the Chair of the Board position for his/
herself(whichmakesitmuchmoredifficultfortheinstitutionalownersto“fire”him/her).
Occasionally, but rarely, institutional investors support shareholder resolutions on such
matters as executive pay and anti-takeover measures.
Finally, the largest pools of invested money (such as the mutual fund ‘Vanguard
500’, or the largest investment management firm for corporations, State Street Corp) are
designed simply to invest in a very large number of different companies with sufficient
liquidity,basedontheideathatthisstrategywilllargelyeliminateindividualcompanyfinancial

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NOTES
orotherriskand,therefore,theseinvestorshaveevenlessinterestinaparticularcompany’s
governance.
Since the marked rise in the use of Internet transactions from the 1990’s, both
individualandprofessionalstockinvestorsaroundtheworldhaveemergedasapotential
new kind of major (short term) force in the direct or indirect ownership of corporations
andinthemarkets:thecasualparticipant.Evenasthepurchaseofindividualsharesinany
onecorporationbyindividualinvestorsdiminishes,thesaleofderivatives(e.g.,exchange
traded funds (ETFs), Stock market index options, etc.) has soared. So, the interests of
mostinvestorsarenowincreasinglyrarelytiedtothefortunesofindividualcorporations.
But,theownershipofstocksinmarketsaroundtheworldvaries;forexample,the
majorityofthesharesintheJapanesemarketareheldbyfinancialcompaniesandindustrial
corporations (there is a large and deliberate amount of cross-holding among Japanese
keirestu corporations and within S. Korean chaebol ‘groups’), whereas stock in the USA
ortheUKandEuropearemuchmorebroadlyowned,oftenstillbylargeindividualinvestors.
1.10.4 Parties To Corporate Governance
Parties involved in corporate governance include the regulatory body (e.g. the
Chief Executive Officer, the board of directors, management and shareholders). Other
stakeholders who take part include suppliers, employees, creditors, customers and the
communityatlarge.
Incorporations,theshareholderdelegatesdecisionrightstothemanagertoactin
the principal’s best interests. This separation of ownership from control implies a loss of
effective control by shareholders over managerial decisions. Partly as a result of this
separation between the two parties, a system of corporate governance controls is
implemented to assist in aligning the incentives of managers with those of shareholders.
Withthesignificantincreaseinequityholdingsofinvestors,therehasbeenanopportunity
for a reversal of the separation of ownership and control problems because ownership is
notsodiffuse.
A board of directors often plays a key role in corporate governance. It is their
responsibility to endorse the organisation’s strategy, develop directional policy, appoint,

STRATEGICMANAGEMENT
NOTES
superviseandremunerateseniorexecutivesandtoensureaccountabilityoftheorganisation
to its owners and authorities.
The Company Secretary, known as a Corporate Secretary in the US and often
referredtoasaCharteredSecretaryifqualifiedbytheInstituteofChartedSecretariesand
Administrators(ICSA),isahighrankingprofessionalwhoistrainedtoupholdthehighest
standardsofcorporategovernance,effectiveoperations,complianceandadministration.
Allpartiestocorporategovernancehaveaninterest,whetherdirectorindirect,in
theeffectiveperformanceoftheorganisation.Directors,workersandmanagementreceive
salaries,benefitsandreputation,whileshareholdersreceivecapitalreturn.Customersreceive
goods and services; suppliers receive compensation for their goods or services. In return
these individuals provide value in the form of natural, human, social and other forms of
capital.
Akeyfactorinanindividual’sdecisiontoparticipateinanorganisatione.g.through
providingfinancialcapitalandtrustthattheywillreceiveafairshareoftheorganisational
returns. If some parties are receiving more than their fair return then participants may
choosetonotcontinueparticipatingleadingtoorganizationalcollapse.
1.10.5 Principles Of Corporate Governance
Keyelementsofgoodcorporategovernanceprinciplesincludehonesty,trustand
integrity, openness, performance orientation, responsibility and accountability, mutual
respect,andcommitmenttotheorganization.
Ofimportanceishowdirectorsandmanagementdevelopamodelofgovernance
thatalignsthevaluesofthecorporateparticipantsandthenevaluatethismodelperiodically
for its effectiveness. In particular, senior executives should conduct themselves honestly
andethically,especiallyconcerningactualorapparentconflictsofinterests,anddisclosure
infinancialreports.
Commonly accepted principles of corporate governance include:
• Rightsandequitabletreatmentofshareholders:Organizationsshouldrespect
therightsofshareholdersandhelpshareholderstoexercisethoserights.Theycan

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NOTES
helpshareholdersexercisetheirrightsbyeffectivelycommunicatinginformation
thatisunderstandableandaccessibleandencouragingshareholderstoparticipate
ingeneralmeetings.
• Interests of other stakeholders: Organizations should recognize that they have
legalandotherobligationstoalllegitimatestakeholders.
• Role and responsibilities of the board: The board needs a range of skills and
understanding to be able to deal with various business issues and have the ability
toreviewandchallengemanagementperformance.Itneedstobeofsufficientsize
andhaveanappropriatelevelofcommitmenttofulfillitsresponsibilitiesandduties.
Thereareissuesabouttheappropriatemixofexecutiveandnon-executivedirectors.
The key roles of Chairperson and CEO should not be held by the same person.
• Integrityandethicalbehaviour:Organizationsshoulddevelopacodeofconduct
for their directors and executives that promotes ethical and responsible decision
making. It is important to understand, though, that systemic reliance on integrity
andethicsisboundtoeventualfailure.Becauseofthis,manyorganizationsestablish
ComplianceandEthicsProgramstominimizetheriskthatthefirmstepsoutsideof
ethicalandlegalboundaries.
• Disclosure and transparency: Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide
shareholderswithalevelofaccountability.Theyshouldalsoimplementprocedures
to independently verify and safeguard the integrity of the company’s financial
reporting. Disclosure of material matters concerning the organization should be
timely and balanced to ensure that all investors have access to clear, factual
information.
Issues involving corporate governance principles include:
• oversightofthepreparationoftheentity’sfinancialstatements
• internalcontrolsandtheindependenceoftheentity’sauditors
• reviewofthecompensationarrangementsforthechiefexecutiveofficerandother
seniorexecutives
• thewayinwhichindividualsarenominatedforpositionsontheboard
• theresourcesmadeavailabletodirectorsincarryingouttheirduties
• oversightandmanagementofrisk
• dividendpolicy

STRATEGICMANAGEMENT
NOTES
1.10.6 MechanismsAnd Controls
Corporate governance mechanisms and controls are designed to reduce the
inefficienciesthatarisefrommoraldhazardandadverseselection.Forexample,tomonitor
managers’behaviour, an independent third party (the auditor) attests the accuracy of
informationprovidedbymanagementtoinvestors.Anidealcontrolsystemshouldregulate
bothmotivationandability.
Internal corporate governance controls
Internalcorporategovernancecontrolsmonitoractivitiesandthentakecorrective
actiontoaccomplishorganisationalgoals.Examplesinclude:
• Monitoring by the board of directors: The board of directors, with its legal
authoritytohire,fireandcompensatetopmanagement,safeguardsinvestedcapital.
Regular board meetings allow potential problems to be identified, discussed and
avoided.Whilstnon-executivedirectorsarethoughttobemoreindependent,they
maynotalwaysresultinmoreeffectivecorporategovernanceandmaynotincrease
performance.Differentboardstructuresareoptimalfordifferentfirms.Moreover,
theabilityoftheboardtomonitorthefirm’sexecutivesisafunctionofitsaccessto
information. Executive directors possess superior knowledge of the decision-
makingprocessandthereforeevaluatetopmanagementonthebasisofthequality
of its decisions that lead to financial performance outcomes, ex ante. It could be
argued,therefore,thatexecutivedirectorslookbeyondthefinancialcriteria.
• Remuneration: Performance-based remuneration is designed to relate some
proportion of salary to individual performance. It may be in the form of cash or
non-cash payments such as shares and share options, superannuation or other
benefits. Such incentive schemes, however, are reactive in the sense that they
provide no mechanism for preventing mistakes or opportunistic behaviour, and
canelicitmyopicbehaviour.
External corporate governance controls
External corporate governance controls encompass the controls external
stakeholdersexerciseovertheorganisation.Examplesinclude:

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NOTES
• debt covenants
• governmentregulations
• mediapressure
• takeovers
• competition
• manageriallabourmarket
• telephonetapping
1.10.7 Systemic Problems Of Corporate Governance
• Supply of accounting information: Financial accounts form a crucial link in
enablingprovidersoffinancetomonitordirectors.Imperfectionsinthefinancial
reporting process will cause imperfections in the effectiveness of corporate
governance. This should, ideally, be corrected by the working of the external
auditingprocess.
• Demandforinformation:Abarriertoshareholdersusinggoodinformationisthe
cost of processing it, especially to a small shareholder.The traditional answer to
this problem is the efficient market hypothesis (in finance, the efficient market
hypothesis(EMH)assertsthatfinancialmarketsareefficient),whichsuggeststhat
theshareholderwillfreerideonthejudgementsoflargerprofessionalinvestors.
• Monitoring costs: In order to influence the directors, the shareholders must
combine with others to form a significant voting group which can pose a real
threatofcarryingresolutionsorappointingdirectorsatageneralmeeting.
Role of theAccountant
Financial reporting is a crucial element necessary for the corporate governance
system to function effectively.Accountants andAuditors are the primary providers of
informationtocapitalmarketparticipants.Thedirectorsofthecompanyshouldbeentitled
toexpectthatmanagementpreparethefinancialinformationincompliancewithstatutory
andethicalobligations,andrelyonauditors’competence.
Current accounting practice allows a degree of choice of method in determining
themethodofmeasurement,criteriaforrecognition,andeventhedefinitionoftheaccounting
entity.Theexerciseofthischoicetoimproveapparentperformance(popularlyknownas

STRATEGICMANAGEMENT
NOTES
creativeaccounting)imposesextrainformationcostsonusers.Intheextreme,itcaninvolve
non-disclosureofinformation.
.
One area of concern is whether the accounting firm acts as both the independent
auditorandmanagementconsultanttothefirmtheyareauditing.Thismayresultinaconflict
ofinterestwhichplacestheintegrityoffinancialreportsindoubtduetoclientpressureto
appease management. The power of the corporate client to initiate and terminate
managementconsultingservicesand,morefundamentally,toselectanddismissaccounting
firms contradicts the concept of an independent auditor. Changes enacted in the United
States in the form of the Sarbanes-OxleyAct (in response to the Enron situation as noted
below)prohibitaccountingfirmsfromprovidingbothauditingandmanagementconsulting
services. Similar provisions are in place under clause 49 of SEBIAct in India.
TheEnroncollapseisanexampleofmisleadingfinancialreporting.Enronconcealed
huge losses by creating illusions that a third party was contractually obliged to pay the
amountofanylosses.However,thethirdpartywasanentityinwhichEnronhadasubstantial
economicstake.IndiscussionsofaccountingpracticeswithArthurAndersen,thepartner
inchargeofauditing,viewsinevitablyledtotheclientprevailing.
However,goodfinancialreportingisnotasufficientconditionfortheeffectiveness
of corporate governance if users don’t process it, or if the informed user is unable to
exerciseamonitoringroleduetohighcosts.
Rules versus principles
Rulesaretypicallythoughttobesimplertofollowthanprinciples,demarcatinga
clear line between acceptable and unacceptable behaviour. Rules also reduce discretion
onthepartofindividualmanagersorauditors.
In practice rules can be more complex than principles. They may be ill-equipped
to deal with new types of transactions not covered by the code. Moreover, even if clear
rulesarefollowed,onecanstillfindawaytocircumventtheirunderlyingpurpose-thisis
harder to achieve if one is bound by a broader principle.

DBA 1703
NOTES
Principles on the other hand are a form of self regulation. It allows the sector to
determine what standards are acceptable or unacceptable. It also pre-empts over zealous
legislationsthatmightnotbepractical.
Enforcement
Enforcement can affect the overall credibility of a regulatory system. They both
deterbadactorsandlevelthecompetitiveplayingfield.Nevertheless,greaterenforcement
is not always better, for taken too far it can dampen valuable risk-taking. In practice,
however, this is largely a theoretical, as opposed to a real, risk.
Action Beyond Obligation
Enlightenedboardsregardtheirmissionashelpingmanagementleadthecompany.
Theyaremorelikelytobesupportiveoftheseniormanagementteam.Becauseenlightened
directorsstronglybelievethatitistheirdutytoinvolvethemselvesinanintellectualanalysis
ofhowthecompanyshouldmoveforwardintothefuture,mostofthetime,theenlightened
boardisalignedonthecriticallyimportantissuesfacingthecompany.
Unlike traditional boards, enlightened boards do not feel hampered by the rules
and regulations of the Sarbanes-OxleyAct. Unlike standard boards that aim to comply
withregulations,enlightenedboardsregardcompliancewithregulationsasmerelyabaseline
forboardperformance.Enlighteneddirectorsgofarbeyondmerelymeetingtherequirements
on a checklist. They do not need Sarbanes-Oxley to mandate that they protect values and
ethics or monitor CEO performance.
At the same time, enlightened directors recognize that it is not their role to be
involvedintheday-to-dayoperationsofthecorporation.Theyleadbyexample.Overall,
whatmostdistinguishesenlighteneddirectorsfromtraditionalandstandarddirectorsisthe
passionateobligationtheyfeeltoengageintheday-to-daychallengesandstrategizingof
thecompany.Enlightenedboardscanbefoundinverylarge,complexcompanies,aswell
assmallercompanies.

STRATEGICMANAGEMENT
NOTES
1.10.8 Corporate Governance ModelsAroundThe World
Although the US model of corporate governance is the most notorious, there is a
considerable variation in corporate governance models around the world. The intricated
shareholdingstructuresofkeiretsusinJapan,theheavypresenceofbanksintheequityof
germanfirms,thechaebolsinSouthKoreaandmanyothersareexamplesofarrangements
which try to respond to the same corporate governance challenges as in the US.
• Anglo-American Model
Therearemanydifferentmodelsofcorporategovernancearoundtheworld.These
differaccordingtothevarietyofcapitalisminwhichtheyareembedded.Theliberalmodel
that is common inAnglo-American countries tends to give priority to the interests of
shareholders.ThecoordinatedmodelthatonefindsinContinentalEuropeandJapanalso
recognizes the interests of workers, managers, suppliers, customers, and the community.
Bothmodelshavedistinctcompetitiveadvantages,butindifferentways.Theliberalmodel
ofcorporategovernanceencouragesradicalinnovationandcostcompetition,whereasthe
coordinatedmodelofcorporategovernancefacilitatesincrementalinnovationandquality
competition.However,thereareimportantdifferencesbetweentheU.S.recentapproach
to governance issues and what has happened in the U.K..
In the United States, a corporation is governed by a board of directors, which has
thepowertochooseanexecutiveofficer,usuallyknownasthechiefexecutiveofficer.The
CEO has broad power to manage the corporation on a daily basis, but needs to get board
approvalforcertainmajoractions,suchashiringhis/herimmediatesubordinates,raising
money,acquiringanothercompany,majorcapitalexpansions,orotherexpensiveprojects.
Other duties of the board may include policy setting, decision making, monitoring
management’s performance, or corporate control.
Theboardofdirectorsisnominallyselectedbyandresponsibletotheshareholders,
but the bylaws of many companies make it difficult for all but the largest shareholders to
haveanyinfluenceoverthemakeupoftheboard;normally,individualshareholdersarenot
offered a choice of board nominees among which to choose, but are merely asked to
rubberstamp the nominees of the sitting board. Perverse incentives have pervaded many
corporate boards in the developed world, with board members beholden to the chief

DBA 1703
NOTES
executivewhoseactionstheyareintendedtooversee.Frequently,membersoftheboards
of directors are CEOs of other corporations, which some see as a conflict of interest.
The U.K. has pioneered a flexible model of regulation of corporate governance,
knownasthe“complyorexplain”codeofgovernance.Thisisaprinciplebasedcodethat
lists a dozen of recommended practices, such as the separation of CEO and Chairman of
theBoard,theintroductionofatimelimitforCEOs’contracts,theintroductionofaminimum
numberofnon-executivesDirectors,ofindependentdirectors,thedesignationofasenior
nonexecutivedirector,theformationandcompositionofremuneration,auditandnomination
committees.PubliclylistedcompaniesintheU.K.havetoeitherapplythoseprinciplesor,
if they choose not to, to explain in a designated part of their annual reports why they
decidednottodoso.Themonitoringofthoseexplanationsislefttoshareholdersthemselves.
The tenet of the Code is that one size does not fit all in matters of corporate governance
and that instead of a statuary regime like the Sarbanes-OxleyAct in the U.S., it is best to
leave some flexibility to companies so that they can make choices most adapted to their
circumstances. If they have good reasons to deviate from the sound rule, they should be
abletoconvincinglyexplainthosetotheirshareholders.
The code has been in place since 1993 and has had drastic effects on the way
firms are governed in the U.K.Astudy byArcot, Bruno and Faure-Grimaud from the
Financial Markets Group at the London School of Economics shows that in 1993, about
10% of the UK companies member of the FTSE 350 were compliants on all dimensions
whiletheyweremorethan60%in2003.Thesamesuccesswasnotachievedwhenlooking
at the explanation part for non compliant companies. Many deviations are simply not
explainedandalargemajorityofexplanationsfailtoidentifyspecificcircumstancesjustifying
those deviations. Still, the overall view is that the U.K.’s system works fairly well and in
fact is often branded as a benchmark, followed by several countries.
• NonAnglo-American Model
InEastAsiancountries,family-ownedcompaniesdominate.AstudybyClaessens,
Djankov and Lang (2000) investigated the top 15 families in EastAsian countries and
foundthattheydominatedlistedcorporateassets.IncountriessuchasPakistan,Indonesia
andthePhilippines,thetop15familiescontrolledover50%ofpubliclyownedcorporations
through a system of family cross-holdings, thus dominating the capital markets. Family-
ownedcompaniesalsodominatetheLatinmodelofcorporategovernance,thatiscompanies

STRATEGICMANAGEMENT
NOTES
inMexico,Italy,Spain,France(toacertainextent),Brazil,Argentina,andothercountries
inSouthAmerica.
Europe andAsia exemplify the insider system: Shareholder and stakeholder • a
smallnumberoflistedcompanies,•anilliquidcapitalmarketwhereownershipandcontrol
arenotfrequentlytraded•highconcentrationofshareholdinginthehandsofcorporations,
institutions, families or government. • the insider model uses a system of interlocking
networksandcommittees.
Atthesametimethatdevelopingcountriesareundergoingaprocessofeconomic
growth and transformation, they are also experiencing a revolution in the business and
politicalrelationshipsthatcharacterizetheirprivateandpublicsectors.Establishinggood
corporategovernancepracticesisessentialtosustaininglong-termdevelopmentandgrowth
as these countries move from closed, market-unfriendly, undemocratic systems towards
open,market-friendly,democraticsystems.Goodcorporategovernancesystemswillallow
organizationstorealizetheirmaximumproductivityandefficiency,minimizecorruptionand
abuseofpower,andprovideasystemofmanagerialaccountability.Thesegoalsareequally
important for both private corporations and government bodies.
Because of the implicit relationship between private interests and the larger
government, good corporate governance practices are essential to establishing good
governance at the national level in developing countries.Anumber of ties the keep the
publicandprivatesectorscloselylinked.Ononehand,judiciaryandregulatorybodiesas
well as legislatures play a role in corporate management and oversight.At the same time
cartels and large corporate interests use their size to exert not only economic, but also
political power.These two sectors are so intertwined that a country cannot significantly
changeonewithoutsimultaneouslyinstitutingchangesintheother.
AccordingtoNicolasMeisel,therearefourprioritieswhichdevelopingcountries
should concentrate on while experimenting with new forms of corporate and public
governance.Thefirstistofocusonimprovingthequalityofinformationandincreasingthe
speedatwhichitiscreatedanddistributedtothepublic.Goodcommunicationisimportant
tothefunctioningofanyorganization.Thesecondistoallowindividualactorsmoreautonomy
whileatthesametimemaintainingorincreasingaccountability.Thirdly, if a hierarchical
organizationusedtoorientprivateactivitiestowardthegeneralinterest,newcountervailing
powers should be encouraged to fill this role. Finally, the part the state plays and how

DBA 1703
NOTES
governmentofficialsareselectedmustbeconsideredifadevelopingeconomyistoachieve
sustainable growth. This may involve making it easier for newcomers with new ideas
incumbentswhomayholdtoolder, possibly outdated, models.
Codes and guidelines
Corporate governance principles and codes have been developed in different
countries and issued from stock exchanges, corporations, institutional investors, or
associations (institutes) of directors and managers with the support of governments and
internationalorganizations.Asarule,compliancewiththesegovernancerecommendations
isnotmandatedbylaw,althoughthecodeslinkedtostockexchangelistingrequirements
may have a coercive effect.
For example, companies quoted on the London andToronto Stock Exchanges
formallyneednotfollowtherecommendationsoftheirrespectivenationalcodes.However,
they must disclose whether they follow the recommendations in those documents and,
wherenot,theyshouldprovideexplanationsconcerningdivergentpractices.Suchdisclosure
requirementsexertasignificantpressureonlistedcompaniesforcompliance.
IntheUnitedStates,companiesareprimarilyregulatedbythestateinwhichthey
incorporate though they are also regulated by the federal government and, if they are
public, by their stock exchange. The highest number of companies are incorporated in
Delaware,includingmorethanhalfoftheFortune500.ThisisduetoDelaware’sgenerally
business-friendlycorporatelegalenvironmentandtheexistenceofastatecourtdedicated
solely to business issues (Delaware Court of Chancery).
Moststates’corporatelawgenerallyfollowtheAmericanBarAssociation’sModel
Business CorporationAct.While Delaware does not follow theAct, it still considers its
provisionsandseveralprominentDelawarejustices,includingformerDelawareSupreme
Court Chief Justice E.Norman veasey participate onABAcommittees.
One issue that has been raised since the Disney decision in 2005 is the degree to
whichcompaniesmanagetheirgovernanceresponsibilities;inotherwords,dotheymerely
trytosupersedethelegalthreshold,orshouldtheycreategovernanceguidelinesthatascend
tothelevelofbestpractice.Forexample,theguidelinesissuedbyassociationsofdirectors
(see Section 3 above), corporate managers and individual companies tend to be wholly

STRATEGICMANAGEMENT
NOTES
voluntary.Forexample,TheGMBoardGuidelinesreflectthecompany’seffortstoimprove
its own governance capacity. Such documents, however, may have a wider multiplying
effectpromptingothercompaniestoadoptsimilardocumentsandstandardsofbestpractice.
One of the most influential guidelines has been the 1999 OECD Principles of
Corporate Governance. This was revised in 2004. The OECD remains a proponent of
corporategovernanceprinciplesthroughouttheworld.
TheWorldBusinessCouncilforSustainableDevelopmentWBCSDhasalsodone
substantial work on corporate governance, particularly on accountability and reporting,
and in 2004 created an Issue Management Tool: Strategic challenges for business in the
useofcorporateresponsibilitycodes,standards,andframeworks.Thisdocumentaimsto
provide general information, a “snap-shot” of the landscape and a perspective from a
think-tank/professionalassociationonafewkeycodes,standardsandframeworksrelevant
tothesustainabilityagenda.
1.10.9 Corporate GovernanceAnd Firm Performance
In its ‘Global Investor Opinion Survey’ of over 200 institutional investors first
undertaken in 2000 and updated in 2002, McKinsey found that 80% of the respondents
wouldpayapremiumforwell-governedcompanies.Theydefinedawell-governedcompany
asonethathadmostlyout-sidedirectors,whohadnomanagementties,undertookformal
evaluation of its directors, and was responsive to investors’ requests for information on
governance issues. The size of the premium varied by market, from 11% for Canadian
companiestoaround40%forcompanieswheretheregulatorybackdropwasleastcertain
(those in Morocco,Egypt and Russia).
Otherstudieshavelinkedbroadperceptionsofthequalityofcompaniestosuperior
sharepriceperformance.InastudyoffiveyearcumulativereturnsofFortuneMagazine’s
surveyof‘mostadmiredfirms’,Antunovichetalfoundthatthose“mostadmired”hadan
averagereturnof125%,whilstthe‘leastadmired’firmsreturned80%.Inaseparatestudy
BusinessWeekenlistedinstitutionalinvestorsand‘experts’toassistindifferentiatingbetween
boardswithgoodandbadgovernanceandfoundthatcompanieswiththehighestrankings
hadthehighestfinancialreturns.

DBA 1703
NOTES
On the other hand, research into the relationship between specific corporate
governancecontrolsandfirmperformancehasbeenmixedandoftenweak.Thefollowing
examplesareillustrative.
Board composition
Some researchers have found support for the relationship between frequency of
meetingsandprofitability.Othershavefoundanegativerelationshipbetweentheproportion
of external directors and firm performance, while others found no relationship between
externalboardmembershipandperformance.InarecentpaperBagahatandBlackfound
thatcompanieswithmoreindependentboardsdonotperformbetterthanothercompanies.
Itisunlikelythatboardcompositionhasadirectimpactonfirmperformance.
Remuneration/Compensation
Theresultsofpreviousresearchontherelationshipbetweenfirmperformanceand
executivecompensationhavefailedtofindconsistentandsignificantrelationshipsbetween
executives’remunerationandfirmperformance.Lowaveragelevelsofpay-performance
alignmentdonotnecessarilyimplythatthisformofgovernancecontrolisinefficient.Notall
firmsexperiencethesamelevelsofagencyconflict,andexternalandinternalmonitoring
devices may be more effective for some than for others.
Some researchers have found that the largest CEO performance incentives came
from ownership of the firm’s shares, while other researchers found that the relationship
betweenshareownershipandfirmperformancewasdependentonthelevelofownership.
Theresultssuggestthatincreasesinownershipabove20%causemanagementtobecome
more entrenched, and less interested in the welfare of their shareholders.
Somearguethatfirmperformanceispositivelyassociatedwithshareoptionplans
and that these plans direct managers’ energies and extend their decision horizons toward
the long-term, rather than the short-term, performance of the company. However, that
pointofviewcameundersubstantialcriticismcircainthewakeofvarioussecurityscandals
includingmutualfundtimingepisodesand,inparticular,thebackdatingofoptiongrantsas
documentedbyUniversityofIowaacademicErikLieandreportedbyJamesBlanderand
Charles Forelle of theWall Street Journal.

STRATEGICMANAGEMENT
NOTES
Evenbeforethenegativeinfluenceonpublicopinioncausedbythe2006backdating
scandal, use of options faced various criticisms.Aparticularly forceful and long running
argumentconcernedtheinteractionofexecutiveoptionswithcorporatestockrepurchase
programs. Numerous authorities (including U.S. Federal Reserve Board economist
Weisbenner) determined options may be employed in concert with stock buybacks in a
manner contrary to shareholder interests. These authors argued that, in part, corporate
stock buybacks for U.S. Standard & Poors 500 companies surged to a $500 billion
annual rate in late 2006 because of the impact of options.Acompendium of academic
worksontheoption/buybackissueisincludedinthestudyScandabyauthorM.Gumport
issued in 2006.
Acombinationofaccountingchangesandgovernanceissuesledoptionstobecome
a less popular means of remuneration as 2006 progressed, and various alternative
implementationsofbuybackssurfacedtochallengethedominanceof“openmarket”cash
buybacks as the preferred means of implementing a share repurchase plan.
1.10.10 Initiative Of Indian Government Of Corporate Governance
National foundation for corporate governance (ATrust formed by MCA, CII, ICAI
& ICSI)
Vision:
• BeACatalyst In Making IndiaThe Best In Corporate Governance
PracticesMission:
• Tofosteracultureforpromotinggoodgovernance,voluntarycomplianceand
facilitateeffectiveparticipationofdifferentstakeholders;
• To create a framework of best practices, structure, processes and ethics;
• TomakesignificantdifferencetoIndianCorporateSectorbyraisingthe
standardofcorporategovernanceinIndiatowardsachievingstabilityand
growth
Invites Companies to Showcase their Good Corporate Governance Practices:
In order to promote Corporate Governance in India, NFCG has undertaken a
majorcampaigntodisseminate,topublicatlarge,thegoodcorporategovernancepractices

DBA 1703
NOTES
followed by the Industries especially among the Small and Medium Enterprises (SMEs)
andunlistedCompanies.
In case you believe that your company has initiated some benchmark Corporate
Governance initiatives then we invite you to forward.Abrief audio-visual presentation
highlightingthefollowing:-
• The Corporate Governance practices followed in your Company;
• The net worth of the Company in the terms of assets, turnover and profit before
the implementation of the good Corporate Governance practices;
• The cost of implementation of the Corporate Governance Practices;
• The effect on the net worth and business Operations of the Company after the
implementation of the good Corporate Governance practices
• TheshortlistedpresentationswillbetelecastononeoftheprominentbusinessTV
Channels and also given awards /certificate by NFCG.
SUMMARY
Strategic management is the art and science of formulating, implementing and
evaluatingcross-functionaldecisionsthatwillenableanorganizationtoachieveitsobjectives.
Itistheprocessofspecifyingtheorganization’sobjectives,developingpoliciesandplans
toachievetheseobjectives,andallocatingresourcestoimplementthepoliciesandplansto
achievetheorganization’sobjectives.Strategicmanagementasadisciplineoriginatedin
the 1950s and 60s.Although there were numerous early contributors to the literature, the
most influential pioneers were Alfred D. Chandler, Jr., Philip Selznick, IgorAnsoff, and
Peter Drucker.
Thestepsinvolvedinstrategicmanagementprocessare:
1. Definingthevision,businessmission,purpose,andbroadobjectives.2.Formulation
ofstrategies.3.Implementationofstrategies.4.Evaluationofstrategies.
The four phases can be listed as below. 1. Defining the vision, business mission,
purpose,andbroadobjectives.2.Formulationofstrategies.3.Implementationofstrategies.4.
Evaluationofstrategies.

STRATEGICMANAGEMENT
NOTES
Corporate governance is the set of processes, customs, policies, laws and
institutionsaffectingthewayacorporationisdirectedanagementare:Clarityofstrategic
vision for the? organization, Focus on what is strategically? important to the
organization,Betterunderstandingoftherapidly?changingbusinessenvironment.
Thefourphasescanbelistedasadministeredorcontrolled.Corporategovernance
also includes the relationship stakeholders among the many players involved (the
stakeholders) and the goals for which the corporation is governed. The principal players
are the shareholders, management and the board of directors. Other stakeholders include
employees, suppliers, customers, banks and other lenders, regulators, the environment
andthecommunityatlarge.
Short Questions
Q1.Definestrategy.
Q2. What is policy, procedure and budget?
Q3. Mention the three types of strategies.
Q4.Define Corporate Governanace.
Review questions
Q5.Explainthestrategicformulationprocess.
Q6.Discusstheevolutionandgrowthofstrategicmanagement.
Q7.Explainthedifferentapproachesofstrategicmanagement.
Q8. Discuss the key role to be played by the all levels of management in strategic
formulations.
Q9.Discuss the role of corporate governance and its influences in corporations
performances.

DBA 1703
NOTES

STRATEGICMANAGEMENT
NOTES
UNITII
COMPETITIVEADVANTAGE
INTRODUCTION
Theinteractionofthefourenvironmentaldimensionscreatesfurthersub-dimensions
such as political and economic environments that act as a filter between the internal and
external environment and profoundly affect the performance of the corporation. Culture
here refers to transmitted patterns of behaviour shared by members of a group which
providethemwitheffectivemechanismsforinteraction(Krefting&Krefting,1991).Culture
canbethoughtofasanoverridingconcept(eg.westernculturesandindigenouscultures)
that directs the sociocultural specificity of group environments each with its own beliefs
andritualsthatareusedtodeterminebehaviouralnorms.
MichaelPorterprovidedaframeworkthatmodelsanindustryasbeinginfluenced
byfiveforces.Thestrategicbusinessmanagerseekingtodevelopanedgeoverrivalfirms
canusethismodeltobetterunderstandtheindustrycontextinwhichthefirmoperates.When
a rival acts in a way that elicits a counter-response by other firms, rivalry intensifies.The
intensity of rivalry commonly is referred to as being cutthroat, intense, moderate, or
weak,basedonthefirms’aggressivenessinattemptingtogainanadvantage
Learning Objectives
Afterlearningthisunityoumustbeableto:
• Analyzetheexternalenvironmentinfluencingtheindustryaswellasstrategy
• Understand the porter’sfiveforcesmodelanditsusesinstrategicmanagement
• Knowthecompetitivechangesandthestagesofindustrialanalysis
• Predictthechangesintheindustrystructureduetotheglobalization
• Analyzetheimportanceofcapabilitiesandcompetenciesingainingcompetitive
advantage

DBA 1703
NOTES
• Implementtheporter’smodelonGainingCompetitiveAdvantage
• Planningforthesustainabilityofcompetitiveness.
2.1 EXTERNAL ENVIRONMENT
Theexternalenvironmentisalltheconditionssurroundingaperson,andhasbeen
classified in various ways. Any organization before they begin the work of strategy
formulations,itmustscantheexternalenvironmenttoidentifypossibleopportunitiesand
threatsanditsinternalenvironmentforstrengthsandweaknesses.Environmentalscanning
isthemonitoring,evaluating,anddisseminatingofinformationfromtheexternalandinternal
environmenttokeypeoplewithinthecorporation.
Themajorfourenvironmentaldimensionsareasfollows
1. Economicalfactors
2. Technologicalfactors
3. Politicalfactors
4. Socio-culturalfactors
Letusseeeachofthefactorssomeinfluencingvariables:
A Economical factors :
• GDPtrends
• Interest rates
• Moneysupply
• Inflationrates
• Unemploymentlevels
• Wage/pricecontrols
• Devaluation/revaluation
• Energyavailabilityandcost
• Disposableanddiscretionaryincome

STRATEGICMANAGEMENT
NOTES
B Technological factors:
• GovernmentspendingforR&D
• Technologicalefforts
• Patentprotection
• New products
• Technologytransfer
• Automation
• Internetavailability
• Infrastructure
C Political and Legal factors:
• Antitrustregulations
• Environmentprotectionlaws
• Taxlaws
• Specialincentives
• Foreigntraderegulations
• Attitudetowardsforeigncompanies
• Lawsonhiringandpromotion
• Stabilityofthegovernment
D Socio-Cultural factors
• Lifestylechanges
• Career expectations
• ConsumerActivism
• Rateoffamilyformation
• Growthrateofpopulation
• Agedistributionofpopulation
• Regionalshiftsinpopulation
• Lifeexpectancies
• Birthrates
The interaction of these four environmental dimensions creates further sub-
dimensions such as political and economic environments that act as a filter between the
internalandexternalenvironmentandprofoundlyaffecttheperformanceofthecorporation.

DBA 1703
NOTES
Although aspects of this environment are defined separately, the environmental
impact that is brought to bear on occupational performance is an integration of sensory,
physical, social and cultural dimensionsV(Llorens, 1984b, Spencer, 1987).
Physicalaspectsoftheenvironmentrefertothenaturalandconstructedsurroundings
thatformphysicalboundaries.Thisphysicalenvironmentcontributestoshapingoccupational
performancebyinfluencingtheextenttowhichselfmaintenance;productivity;leisureand
rest occupations can be performed.
Culture here refers to transmitted patterns of behaviour shared by members of a
groupwhichprovidethemwitheffectivemechanismsforinteraction(Krefting&Krefting,
1991). Culture can be thought of as an overriding concept (eg. western cultures and
indigenouscultures)thatdirectsthesocioculturalspecificityofgroupenvironmentseach
withitsownbeliefsandritualsthatareusedtodeterminebehaviouralnorms.
2.2 MICHAELPORTER FIVE FORCES MODEL
A model for industry analysis
Themodelofpurecompetitionimpliesthatrisk-adjustedratesofreturnshouldbe
constantacrossfirmsandindustries.However,numerouseconomicstudieshaveaffirmed
thatdifferentindustriescansustaindifferentlevelsofprofitability;partofthisdifferenceis
explainedbyindustrystructure.
MichaelPorterprovidedaframeworkthatmodelsanindustryasbeinginfluenced
byfiveforces.Thestrategicbusinessmanagerseekingtodevelopanedgeoverrivalfirms
can use this model to better understand the industry context in which the firm operates.

STRATEGICMANAGEMENT
NOTES

DBA 1703
NOTES
I. Rivalry
Inthetraditionaleconomicmodel,competitionamongrivalfirmsdrivesprofitsto
zero.Butcompetitionisnotperfectandfirmsarenotunsophisticatedpassivepricetakers.
Rather, firms strive for a competitive advantage over their rivals.The intensity of rivalry
amongfirmsvariesacrossindustries,andstrategicanalystsareinterestedinthesedifferences.
Economists measure rivalry by indicators of industry concentration. The
ConcentrationRatio(CR)isonesuchmeasure.TheBureauofCensusperiodicallyreports
theCRformajorStandardIndustrialClassifications(SIC’s).TheCRindicatesthepercent
ofmarketshareheldbythefourlargestfirms(CR’sforthelargest8,25,and50firmsinan
industryalsoareavailable).Ahighconcentrationratioindicatesthatahighconcentrationof
market share is held by the largest firms - the industry is concentrated. With only a few
firmsholdingalargemarketshare,thecompetitivelandscapeislesscompetitive(closerto
amonopoly).Alowconcentrationratioindicatesthattheindustryischaracterizedbymany
rivals, none of which has a significant market share. These fragmented markets are said
tobecompetitive.Theconcentrationratioisnottheonlyavailablemeasure;thetrendisto
defineindustriesintermsthatconveymoreinformationthandistributionofmarketshare.
If rivalry among firms in an industry is low, the industry is considered to be
disciplined.Thisdisciplinemayresultfromtheindustry’shistoryofcompetition,theroleof
aleadingfirm,orinformalcompliancewithagenerallyunderstoodcodeofconduct.Explicit
collusiongenerallyisillegalandnotanoption;inlow-rivalryindustriescompetitivemoves
mustbeconstrainedinformally.However,amaverickfirmseekingacompetitiveadvantage
candisplacetheotherwisedisciplinedmarket.
When a rival acts in a way that elicits a counter-response by other firms, rivalry
intensifies. The intensity of rivalry commonly is referred to as being cutthroat, intense,
moderate,orweak,basedonthefirms’aggressivenessinattemptingtogainanadvantage.
Inpursuinganadvantageoveritsrivals,afirmcanchoosefromseveralcompetitive
moves:
• Changing prices - raising or lowering prices to gain a temporary advantage.
• Improvingproductdifferentiation-improvingfeatures,implementinginnovations
inthemanufacturingprocessandintheproductitself.

STRATEGICMANAGEMENT
NOTES
• Creativelyusingchannelsofdistribution-usingverticalintegrationorusinga
distributionchannelthatisnoveltotheindustry.Forexample,withhigh-endjewelry
storesreluctanttocarryitswatches,Timexmovedintodrugstoresandothernon-
traditional outlets and cornered the low to mid-price watch market.
• Exploiting relationships with suppliers - for example, from the 1950’s to the
1970’sSears,RoebuckandCo.dominatedtheretailhouseholdappliancemarket.
Sears set high quality standards and required suppliers to meet its demands for
productspecificationsandprice.
• Theintensityofrivalryisinfluencedbythefollowingindustrycharacteristics:
• Alargernumberoffirmsincreasesrivalrybecausemorefirmsmustcompetefor
thesamecustomersandresources.Therivalryintensifiesifthefirmshavesimilar
market share, leading to a struggle for market leadership.
• Slowmarketgrowthcausesfirmstofightformarketshare.Inagrowingmarket,
firmsareabletoimproverevenuessimplybecauseoftheexpandingmarket.
• Highfixedcosts resultinaneconomyofscaleeffectthatincreasesrivalry.When
totalcostsaremostlyfixedcosts,thefirmmustproducenearcapacitytoattainthe
lowestunitcosts.Sincethefirmmustsellthislargequantityofproduct,highlevels
of production lead to a fight for market share and results in increased rivalry.
• High storage costs or highly perishable products cause a producer to sell
goodsassoonaspossible.Ifotherproducersareattemptingtounloadatthesame
time,competitionforcustomersintensifies.
• Low switching costs increases rivalry.When a customer can freely switch from
one product to another there is a greater struggle to capture customers.
• Lowlevelsofproductdifferentiationisassociatedwithhigherlevelsofrivalry.
Brandidentification,ontheotherhand,tendstoconstrainrivalry.
• Strategic stakes are high when a firm is losing market position or has potential
forgreatgains.Thisintensifiesrivalry.
• High exit barriers place a high cost on abandoning the product. The firm must
compete. High exit barriers cause a firm to remain in an industry, even when the
ventureisnotprofitable.Acommonexitbarrierisassetspecificity.Whentheplant
and equipment required for manufacturing a product is highly specialized, these
assetscannoteasilybesoldtootherbuyersinanotherindustry.LittonIndustries’
acquisition of Ingalls Shipbuilding facilities illustrates this concept. Litton was
successfulinthe1960’swithitscontractstobuildNavyships.ButwhentheVietnam
war ended, defense spending declined and Litton saw a sudden decline in its
earnings.As the firm restructured, divesting from the shipbuilding plant was not

DBA 1703
NOTES
feasible since such a large and highly specialized investment could not be sold
easily,andLittonwasforcedtostayinadecliningshipbuildingmarket.
• A diversity of rivalswithdifferentcultures,histories,andphilosophiesmakean
industry unstable. There is greater possibility for mavericks and for misjudging
rival’s moves. Rivalry is volatile and can be intense. The hospital industry, for
example, is populated by hospitals that historically are community or charitable
institutions,byhospitalsthatareassociatedwithreligiousorganizationsoruniversities,
and by hospitals that are for-profit enterprises. This mix of philosophies about
mission has lead occasionally to fierce local struggles by hospitals over who will
get expensive diagnostic and therapeutic services.At other times, local hospitals
are highly cooperative with one another on issues such as community disaster
planning.
IndustryShakeout. Agrowingmarketandthepotentialforhighprofitsinduces
newfirmstoenteramarketandincumbentfirmstoincreaseproduction.Apointisreached
where the industry becomes crowded with competitors, and demand cannot support the
newentrantsandtheresultingincreasedsupply.Theindustrymaybecomecrowdedifits
growthrateslowsandthemarketbecomessaturated,creatingasituationofexcesscapacity
withtoomanygoodschasingtoofewbuyers.Ashakeoutensues,withintensecompetition.
BCGfounderBruceHendersongeneralizedthisobservationastheRuleofThree
and Four: a stable market will not have more than three significant competitors, and the
largestcompetitorwillhavenomorethanfourtimesthemarketshareofthesmallest.Ifthis
ruleistrue,itimpliesthat:
• If there is a larger number of competitors, a shakeout is inevitable
• Survivingrivalswillhavetogrowfasterthanthemarket
• Eventualloserswillhaveanegativecashflowiftheyattempttogrow
• Allexceptthetwolargestrivalswillbelosers
Thedefinitionofwhatconstitutesthe“market”isstrategicallyimportant.
Whatever the merits of this rule for stable markets, it is clear that market stability
andchangesinsupplyanddemandaffectrivalry.Cyclicaldemandtendstocreatecutthroat
competition.Thisistrueinthedisposablediaperindustryinwhichdemandfluctuateswith

STRATEGICMANAGEMENT
NOTES
birth rates, and in the greeting card industry in which there are more predictable business
cycles.
II. Threat of Substitutes
In Porter’s model, substitute products refer to products in other industries.To the
economist, a threat of substitutes exists when a product’s demand is affected by the price
changeofasubstituteproduct.Aproduct’spriceelasticityisaffectedbysubstituteproducts
-asmoresubstitutesbecomeavailable,thedemandbecomesmoreelasticsincecustomers
havemorealternatives.Aclosesubstituteproductconstrainstheabilityoffirmsinanindustry
to raise prices.
ThecompetitionengenderedbyaThreatofSubstitutecomesfromproductsoutside
the industry. The price of aluminum beverage cans is constrained by the price of glass
bottles,steelcans,andplasticcontainers.Thesecontainersaresubstitutes,yettheyarenot
rivalsinthealuminumcanindustry.Tothemanufacturerofautomobiletires,tireretreads
are a substitute. Today, new tires are not so expensive that car owners give much
consideration to retreating old tires. But in the trucking industry new tires are expensive
and tires must be replaced often. In the truck tire market, retreating remains a viable
substitute industry. In the disposable diaper industry, cloth diapers are a substitute and
their prices constrain the price of disposables.
Whilethetreatofsubstitutestypicallyimpactsanindustrythroughpricecompetition,
therecanbeotherconcernsinassessingthethreatofsubstitutes.Considerthesubstitutability
ofdifferenttypesofTVtransmission:localstationtransmissiontohomeTVantennasvia
theairwaysversustransmissionviacable,satellite,andtelephonelines.Thenewtechnologies
availableandthechangingstructureoftheentertainmentmediaarecontributingtocompetition
amongthesesubstitutemeansofconnectingthehometoentertainment.Exceptinremote
areas it is unlikely that cable TV could compete with free TV from an aerial without the
greaterdiversityofentertainmentthatitaffordsthecustomer.
III. Buyer Power
Thepowerofbuyersistheimpactthatcustomershaveonaproducingindustry.In
general, when buyer power is strong, the relationship to the producing industry is near to
whataneconomisttermsa monopsony-amarketinwhichtherearemanysuppliersand

DBA 1703
NOTES
one buyer. Under such market conditions, the buyer sets the price. In reality few pure
monopsoniesexist,butfrequentlythereissomeasymmetrybetweenaproducingindustry
andbuyers.Thefollowingtablesoutlinesomefactorsthatdeterminebuyerpower.
IV. SupplierPower
Aproducingindustryrequiresrawmaterials-labor,components,andothersupplies.
Thisrequirementleadstobuyer-supplierrelationshipsbetweentheindustryandthefirms
that provide it the raw materials used to create products. Suppliers, if powerful, can exert
an influence on the producing industry, such as selling raw materials at a high price to
capturesomeoftheindustry’sprofits.Thefollowingtablesoutlinesomefactorsthatdetermine
supplierpower.

STRATEGICMANAGEMENT
NOTES
V. Barriers to Entry / Threat of Entry
Itisnotonlyincumbentrivalsthatposeathreattofirmsinanindustry;thepossibility
thatnewfirmsmayentertheindustryalsoaffectscompetition.Intheory,anyfirmshouldbe
abletoenterandexitamarket,andiffreeentryandexitexists,thenprofitsalwaysshould
be nominal. In reality, however, industries possess characteristics that protect the high
profit levels of firms in the market and inhibit additional rivals from entering the market.
These are barriers to entry.
Barriers to entry are more than the normal equilibrium adjustments that markets
typicallymake.Forexample,whenindustryprofitsincrease,wewouldexpectadditional

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