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Define the environment in the context of business Learn the difference between the general environment and the industry Explain how PESTEL analysis is useful to organizations Explain how five forces analysis is useful to organizations Understand what strategic groups are Chapter 3 Learning Objectives 3-1 Environment: Set of external conditions and forces that have the potential to influence the organization General environment (macroenvironment): Overall trends and events in a society such as - social trends, technological trends, demographics, and economic conditions Industry (competitive environment): Consists of multiple organizations that collectively compete with one another by providing similar goods, services, or both Environment 3-2 The environment provides resources that an organization needs in order to create goods and services The environment is a source of opportunities and threats for an organization Opportunities: Events and trends that create chances to improve an organization’s performance level Threats: Events and trends that may undermine an organization’s performance The environment shapes the various strategic decisions that executives make as they attempt to lead their organizations to success Why Does the Environment Matter? 3-3 A tool that executives can rely upon, to organize factors within the general environment and identify how these factors influence industries and the firms within them The Elements of the General Environment: PESTEL Analysis 3-4 4 PESTEL Analysis 5 Five forces analysis: Technique for understanding an industry, by examining the interactions among: Competitors in an industry Potential new entrants to the industry Substitutes for the industry’s offerings Suppliers to the industry Industry’s buyers Purpose of the analysis is to identify how much profit potential exists in an industry Five Forces Analysis 3-6 Porter’s Five Forces 3-7 7 Competitors Intense Rivalry 9 Industry Concentration 10 Potential Entrants Economics of scale Capital requirements Access to distribution channels Government policy Differentiation Switching costs Expected retaliation Cost advantages independent of size Barriers to Entry 12 Suppliers Suppliers 14 Buyers Buyers 16 Substitutes Substitutes 18 It assumes that competition is a zero sum game - the amount of profit potential in an industry is fixed Collaboration is a possibility that five forces analysis tends to downplay Doesn’t explain variation in performance within an industry Limitations of Five Forces Analysis 3-19 19 Strategic groups: Consist of a set of industry competitors, that have similar characteristics to each other but differ in important ways from the members of other groups Narrows the focus by centering on subsets of the competitors, whose strategies are similar to each other The analysis of the strategic groups in an industry can offer important insights to executives Cl ...

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Define the environment in the context of business Learn the difference between the general environment and the industry Explain how PESTEL analysis is useful to organizations Explain how five forces analysis is useful to organizations Understand what strategic groups are Chapter 3 Learning Objectives 3-1 Environment: Set of external conditions and forces that have the potential to influence the organization General environment (macroenvironment): Overall trends and events in a society such as - social trends, technological trends, demographics, and economic conditions Industry (competitive environment): Consists of multiple organizations that collectively compete with one another by providing similar goods, services, or both Environment 3-2 The environment provides resources that an organization needs in order to create goods and services
The environment is a source of opportunities and threats for an organization Opportunities: Events and trends that create chances to improve an organization’s performance level Threats: Events and trends that may undermine an organization’s performance The environment shapes the various strategic decisions that executives make as they attempt to lead their organizations to success Why Does the Environment Matter? 3-3 A tool that executives can rely upon, to organize factors within the general environment and identify how these factors influence industries and the firms within them The Elements of the General Environment: PESTEL Analysis 3-4 4 PESTEL Analysis 5 Five forces analysis: Technique for understanding an industry, by examining the interactions among: Competitors in an industry Potential new entrants to the industry
Substitutes for the industry’s offerings Suppliers to the industry Industry’s buyers Purpose of the analysis is to identify how much profit potential exists in an industry Five Forces Analysis 3-6 Porter’s Five Forces 3-7 7 Competitors Intense Rivalry 9 Industry Concentration 10 Potential Entrants
Economics of scale Capital requirements Access to distribution channels Government policy Differentiation Switching costs Expected retaliation Cost advantages independent of size Barriers to Entry 12 Suppliers Suppliers 14 Buyers
Buyers 16 Substitutes Substitutes 18 It assumes that competition is a zero sum game - the amount of profit potential in an industry is fixed Collaboration is a possibility that five forces analysis tends to downplay Doesn’t explain variation in performance within an industry Limitations of Five Forces Analysis 3-19 19 Strategic groups: Consist of a set of industry competitors, that have similar characteristics to each other but differ in important ways from the members of other groups Narrows the focus by centering on subsets of the competitors,
whose strategies are similar to each other The analysis of the strategic groups in an industry can offer important insights to executives Closest rivals Alternative paths to success Untapped opportunities Mapping Strategic Groups 3-20 Strategic Groups in the Restaurant Industry An organization’s environment is a major consideration. The environment is the source of resources that the organizations needs. It provides opportunities and threats, and it influences the various strategic decisions that executives must make. PESTEL analysis can be a useful tool in understanding an organization’s general environment. Five Forces analysis can be a useful tool in understanding an organization’s industry environment. Chapter 3: Key Takeaways 22 On strategic management: A primer Dr. Brandon Ofem
Assistant Professor Global Leadership and Management University of Missouri-St. Louis 1 Learning objectives Gain a bird’s eye view on strategic management Deepen appreciation on the importance of accurate knowledge for strategic decision-making Apply tools of strategic management to analyze companies Gain greater confidence in leading companies to success! Instructional plan On strategy History of knowledge
Strategic analysis Tips for growing as a leader What explains the success of organizations? 1-4 Organizations are social structures created by individuals to support the collaborative pursuit of specified goals. Why study strategic management? Organizations control the world’s wealth. Much of human life is patterned by organizations.
As an applied field, it’s based on very practical knowledge. The $87 trillion global economy is controlled by organizations. All wealth is actually created by business. Business creates wealth when it meets needs at a profit. That's how all wealth is created. It's meeting needs at a profit that leads to taxes and that leads to incomes and that leads to charitable donations. That's where all the resources come from. Only business can actually create resources. Other institutions can utilize them to do important work, but only business can create them. And business creates them when it's able to meet a need at a profit. Organizations are perhaps the dominant characteristic of modern societies. Can you think of other reasons? 5 Elements of organizations Organizations as systems Strategy is the process of leading these social systems to success. We study the people and teams at the helm of these organizations and figure out what sort of things they can do to enhance the performance of their social systems. 7
On strategy Skilled action is the product of skilled thought. Three important revolutions shaped the course of human history: Cognitive revolution occurred about 70,000 years ago with the emergence of fictive language. Agricultural revolution occurred about 12, 000 with the domestication of plants and animals. Scientific revolution started only about 500 years ago with the increased adoption of empirically-tested methods of inquiry. History of knowledge Strategy, in its most primal form, can be traced back to the ancient history of our species. How many of you have read this book, Sapiens? The author organizes all of human history around three big revolutions. The first is called the cognitive
revolution, which I think is one of the weirdest and deepest mysteries of our existence. From about 2 million years ago until around 10,000 years ago, the world was home, at one and the same time, to several different human species. Then, around 70,000 years ago, one particular species of humans, homo sapiens, evolved the incredible capacity for fictive language. This new capacity for abstract thought proved remarkabl y powerful for describing and communicating about the external world. It also allowed us to coordinate in complex and unprecedented to achieve objectives, which back in those days usually to do with hunting, survival or warfare. Then around 12,000 ago we figured out to domesticate plants and animals, which led to the rise of kingdoms, cities, and settlements. We no longer had to depend on a hunter-gatherer lifestyle. This also led to new management challenges among the ruling class of how to allocate resources, such as food, to their people. The scientific revolution started only 500 years ago and it’s still going on today. With it came increased adoption of empirically- tested methods of inquiry for learning about our world. 10 Adaptive benefits of knowledge Human thought is a powerful instrument in comprehending the environment and dealing with it. Theory can improve the human condition. Life, health, wealth, inequality, peace, safety, equal rights, knowledge, quality of life Life, health, wealth, inequality, peace, safety, equal rights,
knowledge, quality of life. Theory has made the world a lot better. 11 Germ theory of disease We didn’t know germs caused the spread of disease until the 19th century! Germ theory, in medicine, the theory that certain diseases are caused by the invasion of the body by microorganisms, organisms too small to be seen except through a microscope. The French chemist and microbiologist Louis Pasteur, the English surgeon Joseph Lister, and the German physician Robert Koch are given much of the credit for development and acceptance of the theory. In the mid-19th century Pasteur showed that fermentation and putrefaction are caused by organisms in the air; in the 1860s Lister revolutionized surgical practice by utilizing carbolic acid (phenol) to exclude atmospheric germs and thus prevent putrefaction in compound fractures of bones; and in the 1880s Koch identified the organisms that cause tuberculosis and cholera. (Source: https://www.britannica.com/science/germ-theory) 12 Simple and brilliant solution In the 1840s, shortly before the French bacteriologist Louis Pasteur’s (1822–1895) groundbreaking work, Hungarian
physician Ignaz Semmelweis (1818–1865) made an important contribution to the future development of germ theory. He concluded that handwashing before delivering a baby prevented the spread of childbed fever (infection after childbirth). Before Semmelweis developed his theory, he observed that physicians often moved directly from performing autopsies on women who had recently died of childbed fever to attend the next live birth. Semmelweis noted that this practice resulted in the new mothers contracting a virulent form of the fever, which often caused their deaths while still in the hospital. He was able to demonstrate that simple hand washing before deliveries prevented childbed fever. This was a crucial link in the experimental chain leading to the synthesis of germ theory. During his life, his theory was largely rejected by the medical community. At the end of his life he had a nervous breakdown and was committed to an mental hospital, where he died. Ironically, In 1865 he suffered a breakdown and was taken to a mental hospital, where he died. Ironically, his illness and death were caused by the infection of a wound on his right hand, apparently the result of an operation he had performed before being taken ill. He died of the same type of infectious disease against which he had struggled all his professional life. History hasn’t forgotten him though. He’s now considered the pioneer of what is now standard practice in countless hospitals and organizations around the globe: handwashing. It makes me wonder: What other principles about our world are waiting to be discovered that could result in new and simple practices that change our lives for the better? 13 Deep and accurate understanding of the world is an ethical imperative.
Strategic management process https://www.mbaskool.com/business-concepts/marketing-and- strategy-terms/7247-strategic-management-process.html 1. Goal Setting: The vision and goals of the organization are clearly stated. The short-term and long-term goals are defined, processes to achieve the objectives are identified and current staff is evaluated to choose capable people to work on the processes. This can be done through proper environmental scanning. 2. Analysis: Data relevant to achieve the goals of the organization is gathered, potential internal and external factors that can affect the sustainable growth of the organization are examined and SWOT analysis is also performed. 3. Strategy Formulation: Once the analysis is done, the organization moves to the Strategy Formulation stage where the plan to acquire the required resources is designed, prioritization of the issues facing the business is done and finally the strategy is formulated accordingly. 4. Implementation: After formulation of the strategy, the employees of the organization are clearly made aware of their roles and responsibilities. It is ensured that funds would be
available all the time. Then the implementation begins. 5. Strategy Evaluation: In this process, the strategies being implemented are evaluated regularly to check whether they are on track and are providing the desired results. In case of deviations, the corrective actions are taken. As shown in the figure, the five stages are not stand-alone and constantly interact with each other in order to ensure better management of the business. Importance of Strategic Management Process The strategic management process enables the organization of plan ahead through proper approach in order to gain competitive advantage wrt competitors. The process equips the organization to deal various internal and external factors. The process can differ for various organization depending on their size, domain, focus and core competency but the importance of strategic management process remains the same. Limitations of Strategic Management Process Strategic Management process is not an objective one time process which would yield the expected results in the first attempt. Optimizing the strategic management process for the organization may take time. The 5 steps stated above may have to be revisited multiple times and still the results may differ. The main limitation is the time it would take to completely tune and manage the process for a particular organization in order to see real benefits but having said that strategic management process if mastered properly can lead to serious advantage for the organizations. Hence, this concludes the definition of Strategic Management Process along with its overview. 16 1. Study how the company works.
How it makes money. How it is organized. Its key resources/capabilities. Its weaknesses. 2. Study the environment it operates in. What markets does it compete? What markets are growing? What trends should the company respond to? 3. Recommend action. Adopt a long-term perspective. Wealth is not created in a day. Craft action(s) that capitalize on opportunities and mitigate threats. Provide empirically-grounded and well-reasoned justification (i.e. be sensible). Recommendations should flow from deep knowledge of the company and its environment. Imagine ways to build/do things that people love! Strategic analysis (in a nutshell) 17 Brilliant strategies are born of deep knowledge of the organization and the environment. I think this is the essence of strategy. Projects and opportunities of the highest value are best assessed in the crucible of critical and expert thought. So in my capstone course, I try to direct students to developing expertise around a company and its
strategic situation. 18 A 10 year study reveals what great executives know and do They know the whole business. They are great decision-makers. They know the industry. They form deep, trusting relationships. https://hbr.org/2016/01/a-10-year-study-reveals-what-great- executives-know-and-do As part of our ten-year longitudinal study on executive transitions, which included more than 2,700 leadership interviews, we did a rigorous statistical analysis (including more than 90 regression analyses) to isolate the skills of the top-performing executives. We isolated seven performance factors correlated to strong organizational performance as well as leadership strengths through IBM Watson’s content analysis tools as well as historical performance reviews of these leaders and their direct reports. These seven factors led to our discovery of four recurring patterns that distinguished exceptional executives. What separated the “best of the best” from everyone else is a consistent display of mastery across four highly correlated dimensions, while “good” executives may have only excelled in two or three. Executives who shine across all four of
these dimensions achieve the greatest success for themselves and their organizations. 19 Professional skills worth cultivating Due to the rapid pace of technological change and disruptive waves of automation sweeping the global economy, the most valuable skills on the marketplace are social intelligence, complex critical thinking, and creative-problem solving. What are some ways you can development and practice these skills? First and foremost, be engaged with people! Get involved with projects that interest you and practice skills of collaboration. 20 Strategic management is the “art of arts” because it organizes and uses human talent. I had a student last semester describe strategic management as the “art of arts.” I agree with her. I think she’s on point. I think executives can be likened to the conductor of a symphony. Just like the conductor needs to orchestrate the individual talents, melodies, and unique styles of the individuals to create music that’s richer and more beautiful than any single individual could
produce, executives need to orchestrate the talents and dreams of their teammates to create something even more beautiful, social and economic wealth. 21 Last summer I went sailplaning with my Uncle Dan who lives in Tahachapee. He’s an elite pilot. He designs them too. We met at Mountain Valley Airport. Once we got the plane, we went through an equipment and operational checklist to make sure everything was a go for flight. Then a small planed towed us with a rope to lift off. Once we got airborne we had to find a thermal, which is a column of rising air. We found one pretty quickly, entered it, and then began a circling motion and rode the currents to the top of it. Once we reached 10,000 feet, we soared for about 45 minutes. Throughout the flight my uncle shared his thought processes about what he was doing. I was struck by the depth of his knowledge. He was constantly assessing the situation and thinking of contingencies, while simultaneously making expert decisions. Mastery at it finest. I see a striking parallel between sailplaning and leading companies. Both require reading and following the natural currents. Executives need to be able skillfully navigate their organizations through environmental trends, which requires attentive and accurate assessments of the competitive landscape. 22 Chapter 9: Learning Objectives Describe the building blocks of organizational structure
Explain when a change in structure might be necessary List the three basic legal forms of business Describe 3 organizational control systems Identify the strengths and weaknesses of common management fads 9-1 1 Building Blocks of Organizational Structure Building Blocks of Organizational Structure Creating an Organizational Structure 9-4 Simple Structures 5
An Example of a Simple Structure 6 6 Simple Structures Advantages of simple structure: Flexibility offered by simple structures encourages employees’ creativity and individualism Disadvantages of simple structure: A lack of clear guidance from the top of the organization can create confusion for employees, undermine their motivation, and make them dissatisfied with their jobs 9-7 Creating an Organizational Structure 9-8 Functional Structure 9 An Example of a Functional Structure
Functional Structure Advantages of functional structure: Each person tends to learn a great deal about their particular function Tends to create highly-skilled specialists Grouping everyone that serves a particular function into one department tends to keep costs low and create efficiency Conflicts are rare Disadvantages of functional structure: Executing strategic changes can be very slow when compared to other structures 9-11 Creating an Organizational Structure 9-12 Example of a Multidivisional Structure Multidivisional Structure Advantages of multidivisional structure: Allows a firm to act quickly Helps an organization to better serve customers’ needs Disadvantages of multidivisional structure: Empowering divisions to act quickly can backfire if people in those divisions take actions that do not fit with the company’s overall strategy They tend to be more costly to operate than functional structures
Creating an Organizational Structure 9-15 Example of a Matrix Structure Within functional and multidivisional structures, vertical linkages between bosses and subordinates are the most elements. Matrix structures, in contrast, rely heavily on horizontal relationships.In particular, these structures create cross-functional teams that each work on a different project. This offers several benefits: maximizing the organization’s flexibility, enhancing communication across functional lines, and creating a spirit of teamwork and collaboration. A matrix structure can also help develop new managers. In particular, a person without managerial experience can be put in charge of a relatively small project as a test to see whether the person has a talent for leading others. 16 Matrix Structure Advantages of matrix structure: Maximizing the organization’s flexibility Enhancing communication across functional lines Creating a spirit of teamwork and collaboration Developing new managers Disadvantages of matrix structure: Violates the unity of command principle because each employee is assigned multiple bosses Potential for conflicts to arise among project managers 9-17
Creating an Organizational Structure Boundaryless organization: An organization that removes the usual barriers between parts of the organization as well as barriers between the organization and others This term was created by former General Electric CEO Jack Welch Making progress toward being boundaryless can help an organization become more flexible and responsive 9-18 Removing Barriers for Coordination 19 An illustration of how removing barriers can be valuable has its roots in a very unfortunate event. During 2005’s Hurricane Katrina, rescue efforts were hampered by a lack of coordination between responders from the National Guard (who are controlled by state governments) and from active-duty military units (who are controlled by federal authorities). According to one National Guard officer, “It was just like a solid wall was between the two entities.”[6] Efforts were needlessly duplicated in some geographic areas while attention to other areas was delayed or inadequate. For example, poor coordination caused the evacuation of thousands of people from the New Orleans Superdome to be delayed by a full day. The results were immense human suffering and numerous fatalities. To avoid similar problems from arising in the future, barriers between the National Guard and active-duty military units are being bridged by special military officers called dual -status commanders. These individuals will be empowered to lead both
types of units during a disaster recovery effort, helping to ensure that all areas receive the attention they need in a timely manner. 19 Example of Boundaryless Structure Rather than granting formal titles to certain people, leaders with W.L. Gore emerge based on performance and they attract followers to their ideas over time. As one employee noted, “We vote with our feet. If you call a meeting, and people show up, you’re a leader.” 20 Eliminating all internal and external barriers is not possible, of course, but making progress toward being boundaryless can help an organization become more flexible and responsive. One example is W.L. Gore, a maker of fabrics, medical implants, industrial sealants, filtration systems, and consumer products. This firm avoids organizational charts, management layers, and supervisors despite having approximately nine thousand employees across thirty countries. Rather than granting formal titles to certain people, leaders with W.L. Gore emerge based on performance and they attract followers to their ideas over time. As one employee noted, “We vote with our feet. If you call a meeting, and people show up, you’re a leader. http://www.gore.com/en_xx/ 20 Reasons for Changing an Organization’s Structure Creating an organizational structure is not a one time activity Executives must revisit an organization’s structure over time
and make changes to it if certain danger signs arise A structure might need to be adjusted if decisions with the organization are being made too slowly or if the organization is performing poorly. Sometimes structures become too complex and need to be simplified 9-21 Creating Organizational Control Systems Organizational control systems: Allow executives to track how well the organization is performing, identify areas of concern, and then take action to address the concerns Three basic types of control systems are available to executives: Output Behavioral Clan Different organizations emphasize different types of control, but most organizations use a mix of all three types 9-22 In addition to creating an appropriate organizational structure, effectively executing strategy depends on the skillful use of organizational control systems. Executives create strategies to try to achieve their organization’s vision, mission, and goals. Organizational control systems allow executives to track how well the organization is performing, identify areas of concern, and then take action to address the concerns. Three basic types of control systems are available to executives: (1) output control, (2) behavioral control, and (3) clan control. Different organizations emphasize different types of control, but most organizations use a mix of all three types.
22 Creating Organizational Control Systems Output control: Control that focuses on measurable results within an organization Behavioral control: Control that focuses on controlling the actions that ultimately lead to results Clan control: Informal type of control that relies on shared traditions, expectations, values, and norms to lead people to work toward the good of their organization 9-23 Output Control 24 Output control focuses on measurable results within an organization. Examples from the business world include the number of hits a website receives per day, the number of microwave ovens an assembly line produces per week, and the number of vehicles a car salesman sells per month (Figure 9.6 "Output Controls"). In each of these cases, executives must decide what level of performance is acceptable, communica te expectations to the relevant employees, track whether performance meets expectations, and then make any needed changes. In an ironic example, a group of post office workers in Pensacola, Florida, were once disappointed to learn that their paychecks had been lost—by the US Postal Service! The corrective action was simple: they started receiving their pay via direct deposit rather than through the mail. 24
Behavioral Control 25 While output control focuses on results, behavioral control focuses on controlling the actions that ultimately lead to results. In particular, various rules and procedures are used to standardize or to dictate behavior. In most states, for example, signs are posted in restaurant bathrooms reminding employees that they must wash their hands before returning to work. The dress codes that are enforced within many organizations are another example of behavioral control. To try to prevent employee theft, many firms have a rule that requires checks to be signed by two people. And in a somewhat bizarre example, some automobile factories dictate to workers how many minutes they can spend in restrooms during their work shift. 25 Clan Control 26 Instead of measuring results (as in outcome control) or dictating behavior (as in behavioral control), clan control is an informal type of control. Specifically, clan control relies on shared traditions, expectations, values, and norms to lead people to work toward the good of their organization (Figure 9.8 "Clan Controls"). Clan control is often used heavily in settings where creativity is vital, such as many high-tech businesses. In these companies, output is tough to dictate, and many rules are not appropriate. The creativity of a research scientist would be
likely to be stifled, for example, if she were given a quota of patents that she must meet each year (output control) or if a strict dress code were enforced (behavioral control). 26 Clan Control 27 As part of the team-building effort at Google, new employees are known as Noogles and are given a propeller hat to wear. 27 Management fads 28 The history of fads allows us to make certain predictions about today’s hot ideas, such as empowerment, “good to great,” and viral marketing. Executives who distill and act on basic lessons from these fads are likely to enjoy performance improvements. Empowerment, for example, builds on important research findings regarding employees—many workers have important insights to offer to their firms, and these workers become more engaged in their jobs when executives take their insights seriously. Relying too heavily on a fad, however, seldom turns out well. Just as executives in the 1980s could not treat In Search of Excellence as a recipe for success, today’s executives should avoid treating James Collins’s 2001 best-selling book Good to Great: Why Some Companies Make the Leap…and Others Don’t
as a detailed blueprint for running their companies. Overall, executives should understand that management fads usually contain a core truth that can help organizations improve but that a balance of output, behavioral, and clan control is needed within most organizations. As legendary author Jack Kerouac noted, “Great things are not accomplished by those who yield to trends and fads and popular opinion.” 28 Legal Forms of Business 29 Chapter 9: Key Takeaways Leaders of firms, ranging from the smallest sole proprietorship to the largest global corporation, must make decisions about the delegation of authority and responsibility when organizing activities within their firms. Deciding how to best divide labor to increase efficiency and effectiveness is often the starting point for more complex decisions that lead to the creation of formal organizational charts. To execute strategy effectively, managers also depend on the skillful use of organizational control systems that involve output, behavioral, and clan controls. Executives need to avoid letting their firms become “out of control” by being skeptical of management fads. The legal form a business takes is an important decision with implications for a firm’s organizational structure. 30
Chapter 10: Learning Objectives Understand the key roles played by boards of directors. Explain different terms associated with corporate takeovers. Know the three levels and six stages of moral development suggested by Kohlberg. Describe famous corporate scandals. Know the dimensions of corporate social performance tracked by KLD. Know the three major generational influences that make up the majority of the current workforce and their different perspectives and influences. Understand how decision biases may impede effective decision making. Learning Objectives, continued Know the dimensions of corporate social performance tracked by KLD. Know the three major generational influences that make up the majority of the current workforce and their different perspectives and influences. Understand how decision biases may impede effective decision making. © 2015 by Flat World Education, Inc. Boards of Directors Board of directors: A group of individuals, either elected or appointed, that oversees the activities of an organization or corporation
Corporate governance: The processes, policies, and laws that govern an organization (often corporations) to establish accountability and try and eliminate conflicts of interest associated with the principle-agent problems 10-3 Boards of Directors 4 Boards of Directors Stakeholders: Individuals and groups that have an interest so as to stake a claim in an organization The key stakeholder of most corporations is generally agreed to be the shareholders of the company’s stock Most large, publicly traded firms in the United States are made up of thousands of shareholders 10-5 Boards of Directors Agency problem: Exists when the interest of the individuals that act as agents to manage the company, that may not align with the interest of the firm’s stockholders The composition of the board is critical because the dynamics of the board play an important part in resolving the agency problem 10-6 Boards of Directors Board insiders: Members of the board of directors that are generally employed inside of the organization
Board outsiders: Members of the board of directors that are generally employed outside of the organization CEO duality: Occurs when the chief executive officer is also the chairman of the board of directors Has been known to create bitter divide within a corporation 10-7 Boards of Directors One of the most visible roles of boards of directors is the setting of CEO pay Large corporations must pay competitive wages for the scarce talent that is needed to manage billion dollar corporations CEO compensation is a function of the competitive wages that other corporations would offer for a potential CEO’s services Boards will face considerable scrutiny from investors if CEO pay is out of line with industry norms 10-8 CEO Compensation 9 Corporate Takeovers 10 10
Stages of Moral Development Psychologist Lawrence Kohlberg suggests that there are six distinct stages of moral development Kohlberg’s six stages were grouped into three levels: Pre-conventional Conventional Post-conventional 10-11 This theory holds that moral reasoning, the basis for ethical behavior, has six identifiable developmental stages, each mor e adequate at responding to moral dilemmas than its predecessor. 11 Stages of Moral Development 12 Heinz Dilemma 13 13 Corporate Ethics and Social Responsibility 14
Corporate Ethics and Social Responsibility Sarbanes-Oxley Act of 2002: Law that set new or increased standards for the boards of public United States companies and accounting firms Signed by President Bush in 2002 In response to corporate scandals at Enron, WorldCom, and Tyco 11 aspects that represented some of the most far-reaching reforms since the presidency of Franklin Roosevelt For example, senior executive responsibility for financial statement accuracy, independent auditors, criminal penalties for destroying financial records, etc. 10-15 Cost of Corruption 16 http://www.pbs.org/frontlineworld/stories/bribe/2009/02/spotlig ht-the-victims-of-corruption.html According to a 2004 study by the World Bank Institute, $1 trillion is paid every year in bribes worldwide. Many agree that the victims of bribery are often those living in poverty in the developing world, in countries rich in resources but dominated by corrupt governments. While the vast majority of these citizens remain very poor, often living on $1 a day, their elected officials accumulate enormous personal wealth, taking millions in bribes from corporations looking to secure lucrative contracts. Research by Transparency International shows that bribery not only stymies development, it also impacts health services, literacy rates and the environment. In the above video
clip, experts talk about some of the countries hardest hit by a culture of corruption. 16 Corporate Ethics and Social Responsibility Social entrepreneurship: Entrepreneurial actions where both economic and social value creation occur 17 Corporate Ethics and Social Responsibility Corporate social performance (CSP): The degree to which a firm's actions honor ethical values that respect individuals, communities, and the natural environment Kinder, Lydenberg and Domini & Co. (KLD), a Boston-based firm that rates firms on a number of stakeholder-related issues with the goal of measuring CSP 18 Corporate Ethics and Social Responsibility 19 Understanding Thought Patterns Kurt Lewin, known as the founder of social psychology, created the well know formula: B = f (P,E) In other words, individual behavior is a function of characteristics of the person and characteristics of the
environment 20 Generational Factors 21 Rational Decision Making The process of rational decision-making involves problem identification, establishment and weighing of decision criteria, generation and evaluation of alternatives, selection of the best alternative, decision implementation, and decision evaluation. There are several problems with this model when applied to many complex decisions. Many strategic decisions are not presented in obvious ways and many CEOs may not be aware their firms are having problems until it’s too late to create a viable solution. Rational decision-making assumes that options are clear and that a single best solution exists. Rational decision-making assumes no time or cost constraints. Rational decision-making assumes accurate information is available. © 2015 by Flat World Education, Inc. 22 Decision Biases 10-23
Decision Biases 10-24 24 Chapter 10: Key Takeaways This chapter explains the role of boards of directors in the corporate governance of organizations such as large, publicly traded corporations. Wise boards work to manage the agency problem that creates a conflict of interest between top managers such as CEO and other groups with a stake in the firm. When boards fail to do their duties, numerous scandals may ensue. Corporate scandals became so widespread that new legislation such as the Sarbanes-Oxley Act of 2002 has been developed with the hope of impeding future actions by executives associated with unethical or illegal behavior. Firms should be aware of generational influences as well as other biases that may lead to poor decisions. © 2015 by Flat World Education, Inc. 25 Learning Objectives: Chapter 2 Define vision and mission and distinguish between them Understand SMART goals
Understand the complexities associated with assessing organizational performance Understand how thinking and acting entrepreneurially can help organizations and individuals List and define the five dimensions of an entrepreneurial orientation Page 1 Importance of Vision Vision: What the organization aspires to become in the future A key tool for inspiring the people in an organiza tion Well-constructed visions clearly articulate an organization’s aspirations and can give an organization an edge over its rivals The best visions are inspirational, clear, memorable, and concise Page 2 Vision Statements Page 3 Vision Statements A world where everyone has a decent place to live. 4 To become a world leader at connecting people to wildlife and
conservation. Our vision is that people everywhere will share the power of a wish. Mission Statements Mission: States the reasons for an organization’s existence Well-written mission statements effectively capture an organization’s identity Answers the fundamental question of “who are we? Reflects on the organization’s past and present States why the organization exists and what role it plays in the society The best are clear, memorable, and concise Page 5 Mission Statements Page 6 Crafting Strategy Page 7 SMART Goals An organization’s vision and mission offer a broad, overall sense of the organization’s direction. To work toward achieving these overall aspirations, organizations also need to create
goals—narrower aims that should provide clear and tangible guidance to employees as they perform their work on a daily basis. S – Specific M – Measurable A – Aggressive R – Realistic T – Time-bound Page 8 A goal is specific if it is explicit rather than vague. A goal is measurable to the extent that whether the goal is achieved can be quantified. A goal is aggressive if achieving it presents a significant challenge to the organization. A series of research studies have demonstrated that performance is strongest when goals are challenging but attainable. Such goals force people to test and extend the limits of their abilities. Realistic goals are feasible. Goals should be time-bound through the creation of deadlines 8 SMART Goals Page 9 Assessing Organizational Performance Organizational performance: How well an organization is doing at reaching its vision, mission, and goals A multidimensional concept Vital aspect of strategic management
Assists executives in knowing how well their organizations are performing Page 10 Assessing Organizational Performance Performance measure: A metric along which organizations can be gauged Used by executives to examine measures such as profits, stock price, and sales Helps understand how well an organization is competing in the market Performance referent: Benchmark used to make sense of an organization’s standing along a performance measure Page 11 Financial Performance Measures and Referents Page 12 The Balanced Scorecard An approach to assessing performance that targets managers’ attention on four areas: Financial – “How do we look to shareholders?” Customer – “How do customers see us?” Internal business process – “What must we excel at?” Learning and growth - “Can we continue to improve and create value?” Helps managers resist the temptation to fixate on financial measures, and instead monitor a diverse set of important
measures Page 13 The Balanced Scorecard Page 14 The Triple Bottom Line Provides a tool to help executives focus on performance targets beyond profits alone Emphasizes the three Ps People (Social concerns) Planet (Environmental concerns) Profits (Economic concerns) Page 15 The Triple Bottom Line Page 16 Assessing Performance Page 17 six blind men set out to “see” what an elephant was like. The first man touched the elephant’s side and believed the beast to be like a great wall. The second felt the tusks and thought elephants must be like spears. Feeling the trunk, the third man
thought it was a type of snake. Feeling a limb, the fourth man thought it was like a tree trunk. The fifth, examining an ear, thought it was like a fan. The sixth, touching the tail, thought it was like a rope. If the men failed to communicate their different impressions they would have all been partially right but wrong about what ultimately mattered. This story parallels the challenge involved in understanding the multidimensional nature of organization performance because different measures and referents may tell a different story about the organization’s performance. 17 The CEO as Celebrity Advantages Serves as an intangible asset for the CEO’s firm - may increase opportunities available to the firm Hiring or developing a celebrity CEO may increase stock price, enhance a firm’s image, and improve the morale of employees and other stakeholders Disadvantages Magnifies any gaps between actual and expected firm performance Faces larger and more lasting reputation erosion if their performance and behavior is inconsistent with their celebrity image 2-18 18 Types of CEOs 2-19
Entrepreneurial Orientation Processes, practices, and decision-making styles of organizations that act entrepreneurially An organization’s level of EO can be understood by examining how it stacks up relative to five dimensions: Innovativeness Proactiveness Risk taking Competitive aggressiveness Autonomy 2-20 Entrepreneurial Orientation 21 Entrepreneurial Orientation An entrepreneurial orientation is also important for nonprofit and/or public organizations “If anything, relative to for-profits, there is a need for more creativity in managing multiple stakeholders with conflicting demands; heightened imagination in finding ways to garner, combine, and deploy scarce resources; and enhanced innovation in addressing vexing social problems” (Morris et al., 2011: p. 950). 22
Research setting 23 Promoting an Entrepreneurial Orientation Page 24 Chapter 2: Key Takeaways Page 25 Strategic leaders need to ensure that their organizations have three types of aims. A vision states what the organization aspires to become in the future. A mission reflects the organization’s past and present by stating why the organization exists and what role it plays in society. Goals are the more specific aims that organizations pursue to reach their visions and missions. The best goals are SMART: specific, measurable, aggressive, realistic, and time-bound. Organizational performance is a multidimensional concept, and wise managers rely on multiple measures of performance when gauging the success or failure of their organizations. CEOs should be aware of and manage the potential for increased scrutiny associated with their status. Building an entrepreneurial orientatio n can be valuable to organizations and individuals alike in identifying and seizing new opportunities. Entrepreneurial orientation consists of five dimensions: (1) autonomy, (2) competitive aggressiveness, (3)
innovativeness, (4) proactiveness, and (5) risk taking. Chapter 5: Selecting Business-level Strategies Understand and be able to apply the four primary generic strategies to the analysis of companies Know the advantages and disadvantages associated with each strategy Know the limitations of generic strategies 5-1 Generic Strategies A general way of positioning a firm’s business level strategy within an industry Focusing on generic strategies allows executives to concentrate on the core elements of firms’ business-level strategies The most popular set of generic strategies is based on the work of Professor Michael Porter of the Harvard Business School 5-2 Generic Strategies Two competitive dimensions are the keys to business-level strategy: Source of competitive advantage - gain an edge on rivals by keeping costs down or offer something unique in the market Scope of operations – target customers in general or seek to
attract just a segment of customers Four generic business-level strategies emerge from these decisions: Cost leadership Differentiation Focused cost leadership Focused differentiation Generic Strategies Page 4 Cost Leadership Cost leadership: Generic strategy that offers products or services with acceptable quality and features to a broad set of customers at a low price Economies of scale are essential Expenses are distributed across a greater number of items 5-5 Cost Leadership Page 6 Cost Leadership Page 7
The Yugo, for example, was an extremely unreliable car that was made in Eastern Europe and sold in the United States for about $4,000. Despite its attractive price tag, the Yugo was a dismal failure because drivers simply could not depend on the car for transportation. Yugo exited the United States in the early 1990s and closed down entirely in 2008. 7 Cost Leadership “Dell finds it hilarious that HP and Sony fund researchers to come up with new ideas.” Page 8 “Steamrollered by Dell” Newsweek, February 21, 2005 8 Cost Leadership 5-9 Differentiation Differentiation strategy: A generic strategy that attempts to convince customers to pay a premium price for its good or services by providing unique and desirable features Using a differentiation strategy means that a firm is competing based on uniqueness, rather than price Its success depends on offering unique features and
communicating the value of these features to potential customers 5-10 Differentiation 11 71 Differentiation Page 12 12 Strategy Formulation in Razor Industry Page 13 13 Focused Cost Leadership and Focused Differentiation Focus strategies: Generic business strategies that involve
targeting a relatively narrow niche of potential customers Focused cost leadership: A generic business strategy that requires competing based on price to target a narrow market Focused differentiation: A generic business strategy that requires offering unique features that fulfill the demands of a narrow market 5-14 Focused Cost Leadership Page 15 Focused Cost Leadership Page 16 16 Focused Differentiation Page 17 Page 18 Focused Differentiation
18 Focused Cost Leadership and Focused Differentiation 5-19 Best-Cost A business level strategy followed by firms that charge relatively low prices and offer substantial differentiation 5-20 Difficulty of the Best-Cost Strategy Creating unique features and communicating to customers why these features are useful generally raises a firm’s costs of doing business Page 21 Best-Cost Page 22 Pursuing Best-Cost through Low-Overhead Page 23
23 Stuck in the Middle A situation where a business level strategy does not offer features that are unique enough to convince customers to buy its offerings Its prices are too high to effectively compete on based on price Lack a clear market or competitive pricing 5-24 Stuck in the Middle Page 25 Getting Outmaneuvered by Competitors Firms often become stuck in the middle not because executives fail to arrive at a well-defined strategy But because firms are simply outmaneuvered by their rivals Strategies must adapt to changes in the general and industry environments Page 26
26 Chapter 5: Key Takeaways This chapter explains generic business-level strategies that executives select to keep their companies competitive. Executives must select their company’s source of competitive advantage by choosing to compete based on low-cost versus more expensive features that differentiate their company from competitors. Targeting either a narrow or broad market helps companies further understand their customer base. Based on these choices, companies will follow cost leadership, differentiation, focused cost leadership, or focused differentiation strategies. Another potentially viable business strategy, best cost, exists when companies offer relatively low prices while still managing to differentiate their goods or services on some important value - added aspects. All companies can fall victim to being “stuck in the middle” by not offering unique features or competitive prices. Page 27 Chapter 8: Corporate Strategy List and define the three concentration strategies Explain the benefits of vertical integration Describe the two types of diversification and when they should be used
Give examples of retrenchment and restructuring Describe why portfolio planning is useful for corporations Page 1 Concentration Strategies Concentration strategies: Strategies that firms use to try to successfully compete only within a single industry There are three concentration strategies: Market penetration Market development Product development 8-2 Concentration Strategies 8-3 Concentration Strategies 8-4 Concentration Strategies 8-5 Concentration Strategies Horizontal integration: Pursuing a concentration strategy by
acquiring or merging with a rival Types of horizontal integration: Acquisition Merger 8-6 Concentration Strategies Acquisition: Takes place when one company purchases another company The acquired company is smaller than the firm that purchases it Merger: Joining of two companies into one Involves similarly sized companies 8-7 Concentration Strategies Horizontal integration can be attractive for several reasons: Aimed at lowering costs by achieving greater economies of scale Provide access to new distribution channels Despite the potential benefits of mergers and acquisitions, their financial results often are very disappointing More than 60 percent of mergers and acquisitions erode shareholder wealth Fewer than one in six increases shareholder wealth http://www.youtube.com/watch?v=9dFvhq2sKfM 8 Vertical Integration Strategies Vertical integration: When a firm gets involved in new portions of the value chain Can be very attractive when a firm’s suppliers or buyers have
too much power over the firm and are becoming increasingly profitable at the firm’s expense By entering the domain of a supplier or a buyer, executives can reduce or eliminate the leverage that the supplier or buyer has over the firm Can create risks Can create complacency 8-9 Vertical Integration Strategies Backward vertical integration: A strategy that involves a firm entering a supplier’s business Used when executives are concerned that a supplier has too much power over their firms Forward vertical integration: A strategy that involves a firm entering a buyer’s business Useful for neutralizing the effect of powerful buyers 8-10 Vertical Integration Strategies 11 Risk of not being vertically integrated 12 The risk of not being vertically integrated is illustrated by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Although the US government held BP responsible for the
disaster, BP cast at least some of the blame on drilling rig owner Transocean and two other suppliers: Halliburton Energy Services (which created the cement casing for the rig on the ocean floor) and Cameron International Corporation (which had sold Transocean blowout prevention equipment that failed to prevent the disaster). In April 2011, BP sued these three firms for what it viewed as their roles in the oil spill. 12 Diversification Strategies Diversification strategies: Involve a firm entering entirely new industries Requires moving into new value chains Three tests for diversification: How attractive is the industry that a firm is considering entering? How much will it cost to enter the industry? Will the new unit and the firm be better off? 8-13 Diversification Strategies Related diversification: When a firm moves into a new industry that has important similarities with the firm’s existing industry or industries Core competency: A skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business 8-14 Diversification Strategies Unrelated diversification: When a firm enters an industry that lacks any important similarities with the firm’s existing industry or industries
Most unrelated diversification efforts do not have happy endings 8-15 Unrelated Diversification 16 Strategies for Getting Smaller-Retrenchment Retrenchment: Reducing the size of part of a firm’s operations, often through laying off employees Firms following a retrenchment strategy shrink one or more of their business units Firms using this strategy hope to make just a small retreat rather than losing a battle for survival 8-17 Strategies for Getting Smaller-Restructuring Diversification discount: The tendency of investors to undervalue the shares of a diversified firm Divestment: Selling off part of a firm’s operations Spin-off: Creating a new company whose stock is owned by investors out of a piece of a bigger company Liquidation: Shutting down portions of a firm’s operations, often at a tremendous financial loss 8-18 Investors often struggle to understand the complexity of
diversified firms, and this can result in relatively poor performance by the stocks of such firms. This is known as a diversification discount. Executives sometimes attempt to unlock hidden shareholder value by breaking up diversified companies. 18 Spin-offs 19 Portfolio Planning and Corporate Level Strategy Portfolio planning: A process that helps executives make decisions involving their firms’ various industries Offers suggestions about what to do within each industry, and provides ideas for how to allocate resources across industries. It first gained widespread attention in the 1970s and it remains a popular tool among executives today 8-20 Portfolio Planning and Corporate Level Strategy The Boston Consulting Group (BCG) matrix Best-known approach to portfolio planning Using the matrix requires a firm’s businesses to be categorized as high or low along two dimensions: Its share of the market The growth rate of its industry 8-21 Portfolio Planning and Corporate Level Strategy
8-22 Portfolio Planning and Corporate Level Strategy Limitations to portfolio planning: Oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company’s operations within an industry Can create motivational problems among employees Does not help identify new opportunities 8-23 Research Round-Up: Divestiture and Firm Performance For decades, executives have faced the dilemma of deciding when it might be wise to spin-off or sell parts of their firms. A recent research study combined the findings of 94 previous studies of divestiture determined that divestiture activities help firm performance. In addition, firms with strategic motivations to divest outperformed those that lacked a strategic rationale for divestment. Executives must carefully manage their collection of corporate assets and be willing to sell them if the right opportunity arises. 24 Chapter 8: Key Takeaways Executives grappling with corporate-level strategy must decide in what industry or industries their firms will compete. Many of the possible answers to this question involve growth. Concentration strategies involve competing within existing
domains to expand within those domains. This can take the form of market penetration, market development, or product development. Integration involves expanding into new stages of the value chain. Backward integration occurs when a firm enters a supplier’s business while forward vertical integration occurs when a firm enters a customer’s business. Diversification involves entering entirely new industries; this can be an industry that is related or unrelated to a firm’s existing activities. Sometimes being smart about corporate-level strategy requires shrinking the firm through retrenchment or restructuring. Portfolio planning can be useful for analyzing firms that participate in a wide variety of industries. 25 Chapter 4 Learning Objectives Define the four characteristics of resources that lead to sustained competitive advantage as articulated by the resource- based theory of the firm Understand the difference between resources and capabilities Understand how intellectual property can be a valuable resource for firms Know the 4 Ps of marketing 4-1
Learning Objectives Define the primary activities of the value chain Be able to discuss other theories about firm success and failure beyond resource-based theory Learn how SWOT analysis can help organizations and individuals, and its limitations 4-2 Resource-based Theory Contends that the possession of strategic resources provides an organization with a golden opportunity to develop competitive advantages over its rivals A strategic resource is: Valuable Rare Difficult to imitate Nonsubstitutable 4-3 3 Resource-based Theory Sustained competitive advantage: A competitive advantage that will endure over time Tangible resources: Resources than can be readily seen, touched, and quantified such as physical assets, property, plant, equipment and cash Intangible resources: Resources that are difficult to see, touch, or quantify such as the knowledge and skills of employees, a firm’s reputation, and a firm’s culture 4-4
Resource-based Theory Page 5 Resource-based Theory Capabilities: What an organization can do based on the resources it possesses Dynamic capability: Unique ability to create new capabilities by continually updating a firm’s array of capabilities in order to keep pace with changes in its environment Distinctive competence: A set of activities that an organization performs especially well 4-6 http://www.youtube.com/watch?v=BoYbxXGAdC4 6 Paperscape Exercise Page 7 4 Ps of Marketing Marketing mix: Consists of the four Ps (Product, Price, Place, Promotion) that firms use to offer customers a coherent and persuasive message Page 8
Leveraging resources and capabilities to create desirable products and services is important, but customers must still be convinced to purchase these goods and services. The marketing mix—also known as the four Ps of marketing— provides important insights into how to make this happen. 8 4 Ps of Marketing Page 9 4 Ps of Marketing Page 10 Intellectual Property Intellectual property refers to creations of the mind such as inventions, artistic products, and symbols. Four types include: Patents Trademarks Copyrights Trade secrets Page 11 Patents 4-12
Patents Page 13 13 Trademarks 4-14 Trademarks Page 15 Trade Secrets 4-16 Trade Secrets Page 17 Copyrights
4-18 18 Copyrights Page 19 http://www.ted.com/talks/rob_reid_the_8_billion_ipod.html 19 Value Chain Primary activities: Actions that are directly involved in the creation and distribution of goods and services Inbound logistics (arrival of new material) Operations (production process) Marketing and Sales (attracting potential customers) Service (provide assistance to customers) 4-20 Value Chain Secondary activities: Not directly involved in the evolution of a product, but instead provide important underlying support for primary activities Firm infrastructure (how the firm is organized and led by executives) Human resources management (recruitment, training, and compensation of employees Technology (use of computerization and telecommunications to
support primary activities) Procurement (negotiating for and purchasing raw materials) 4-21 The Value Chain 4-22 Supply Chain Supply chain: System of people, activities, information, and resources involved in creating a product and moving it to the customer A broader concept than a value chain Captures the entire process of creating and distributing a product, often across several firms 4-23 Supply Chain Best value supply chains: Focuses on the total value added to the customer Four components of a best value supply chain include: Strategic supply chain management: Create competitive advantages and enhance firm performance; strives to excel along four measures: Speed, Quality, Cost, and Flexibility Agility: Ability to act rapidly in response to dramatic changes in supply and demand Adaptability: Willingness and capacity to reshape supply chains when necessary Alignment: Creating consistency in the interests of all participants in a supply chain 4-24
Other Views on Firm Performance Enactment: Contends that an organization can, at least in part, create an environment for itself that is beneficial to the organization by putting strategies in place that reshape competitive conditions in a favorable way Environmental determinism: Contends that organizations are very limited in their ability to adapt to the conditions around them Institutional theory: Examines the extent to which firms copy each other’s strategies Transaction cost economics: Centers on whether it is cheaper for a firm to make or to buy the products that it needs 4-25 SWOT Analysis A technique for understanding a firm’s strengths and weaknesses along with the opportunities and threats that exist in the firm’s environment Takes a narrower focus by centering on an individual firm Used to compare internal and external factors in order to generate ideas about how their firm might become more successful 4-26 SWOT Analysis
Page 27 SWOT Analysis It is wise to focus on ideas that allow a firm to: Leverage its strengths Steer clear of or resolve its weaknesses Capitalize on opportunities Protect itself against threats 4-28 SWOT Analysis Exercise Page 29 Chapter 4: Key Takeaways Page 30 Resource-based theory argues that firms will perform better when they assemble resources that are valuable, rare, difficult to imitate, and nonsubstitutable. Different forms of intellectual property often serve as strategic resources for firms. Examining a firm’s resources can be aided by the value chain, a tool that systematically examines primary and secondary activities in the creation of a good or service, and by a knowledge of supply chain management that examines the value added of multiple firms working together. While resource-based theory provides a dominant view for
examining the determinants of firm success, other perspectives provide insight for understanding specific behaviors of firms within an industry. SWOT analysis is a simple but powerful technique for examining the interactions between factors internal and external to the firm. Chapter 7: Competing Internationally Describe the benefits and risks of competing internationally. Utilize the "diamond model" to explain why some firms compete better in international markets than others. List and define the three types of international strategies that firms can adopt. Describe four options for entering an international market. 1 Why sell internationally? The most obvious reason to compete in international markets is gaining access to new customers The U.S. accounts for only about 5% of the world’s population Selling goods and services to the other 95% of people on the planet can be very appealing for companies whose industry within their home market are saturated 7-2
Why sell internationally? Many firms that compete in international markets hope to gain cost advantages If a firm can increase it sales volume by entering a new country, for example, it may attain economies of scale that lower its production costs Offshoring: Relocation of a business activity to another country A popular yet controversial means for reducing costs The job losses in the firm’s home country can devastate local communities Reshoring 7-3 Why sell internationally? Business risk: The potential that a business operation might fail If a firm is completely dependent on one country, negative events in that country could ruin the firm Business risk is reduced when involved in multiple countries 7-4 Why Compete in New Markets? 5 International Market Risk 6
International Market Risk Political risk: The potential for government upheaval or interference with business to harm an operation within a country Unstable governments make it difficult for firms to plan for the future A government hostile to foreign businesses could impose new taxes and new regulations Nationalization: Seizure of privately-owned business operations by the national government 7-7 International Market Risk Economic risk: The potential for a country’s economic conditions and policies, property rights protections, and currency exchange rates to harm an operation Cultural risk: The potential for a company’s operations in a country to struggle due to differences in language, customs, norms and customer preferences 7-8 Cultural Intelligence 9 Cultural Intelligence 10
7-11 Porter’s Diamond Model Drivers of Success and Failure Demand conditions: The nature of domestic customers, especially when they have high expectations of the goods and services that they buy Firms benefit when their domestic customers have high expectations 7-12 d 12 Drivers of Success and Failure 13 Drivers of Success and Failure Factor conditions: The nature of raw material and other inputs that firms need in order to create goods and services Firms benefit when they have good access to factor conditions and face challenges when they do not Overcoming disadvantages in factor conditions leads companies
to develop unique skills Just-in-time inventory management: A production system that conserves space and lowers costs, by requiring inputs to a production process to arrive at the moment they are needed 7-14 Drivers of Success and Failure 15 Drivers of Success and Failure Related and supporting industries: The extent to which firms’ domestic suppliers and other complementary industries are developed and helpful In extreme cases, the poor condition of related and supporting industries can undermine an operation 7-16 Drivers of Success and Failure 17 Drivers of Success and Failure Firm strategy, structure, and rivalry: How challenging it is to survive domestic competition Companies that have survived intense rivalry within their home markets are likely to have developed strategies and structures that will facilitate their success when competing in international
markets 7-18 Drivers of Success and Failure 19 7-20 Porter’s Diamond Model Types of International Strategies Multinational corporation: A firm that has operations in more than one country International strategy Strategies that are used to guide a firm’s effort in various countries These strategies vary in their emphasis on achieving efficiency around the world and responding to local needs There are three main international strategies available: Multidomestic Global Transnational 7-21 Types of International Strategies Multidomestic strategy: Sacrifices efficiency in favor of being responsive to varying local preferences across countries Global strategy: Sacrifices responsiveness to local preferences in favor of being efficient
This strategy is the complete opposite of a multidomestic strategy Stresses the need to gain economies of scale by offering essentially the same products or services in each market Transnational strategy: Involves balancing the desire for efficiency with the need to varying preferences across countries Seeks a middle ground between a multidomestic strategy and a global strategy 7-22 Types of International Strategies 7-23 Options for Competing in International Markets When the executives in charge of a firm decide to enter a new country, they must decide between the five different ways of entering: Exporting involves creating goods within a firm’s home country and then shipping them to another country. A wholly-owned subsidiary is a business operation in a foreign country that a firm fully owns. A firm can develop a wholly-owned subsidiary through a greenfield venture, meaning that the firm creates the entire operation itself. Another possibility is purchasing an existing operation from a local company or another foreign operator. Franchising has been used by many firms who compete in service industries to develop a worldwide presence. © 2015 by Flat World Education, Inc.
24 Options for Competing in International Markets Licensing is most frequently used in manufacturing industries. Licensing involves granting a foreign company the right to create a company’s product within a foreign country in exchange for a fee. A firm that grants a license avoids absorbing a lot of costs, but its profits are limited to the fees that it collects from the local firm. Creating a joint venture or a strategic alliance is also an option. In a joint venture, two or more organizations each contribute to the creation of a new entity. In a strategic alliance, firms work together cooperatively, but no new organization is formed. In both cases, the firm and its local partner or partners share decision making authority, control of the operation, and any profits that the relationship creates. 25 Research Round-Up: Entry Strategies in Emerging Economies A study of four emerging economies—India, Vietnam, South Africa, and Egypt—examined multinational enterprises that used greenfield ventures, acquisitions, or joint ventures. The study found that forms of entry that could be more easily managed at arm’s length—greenfield ventures and acquisitions—were more common than joint ventures in countries that offer high levels of freedom to engage in business activity.
Relying on joint ventures is helpful in countries that have inefficient markets or those marked by corrupt business practices. The overall message of this study is that when choosing a market entry strategy, executives must consider both the need to gain access to local resources and the business norms and rules in a particular country. 26 Chapter 7: Key Takeaways This chapter explains competition in international markets. Executives must consider the benefits and risks of competing internationally when making decisions about whether to expand overseas. Executives also need to determine the likelihood that their firms will succeed when they compete in international markets by examining demand conditions, factor conditions, related and supporting industries, and strategy, structure, and rivalry among its domestic competitors. When a firm does venture overseas, a decision must be made about whether its international strategy will be multidomestic, global, or transnational. When leading a firm to enter a new market, executives can choose to manage the operation via exporting, creating a wholly owned subsidiary, franchising, licensing, and creating a joint venture or strategic alliance. 27
Learning Objectives: Chapter 1 Identify the fundamental question of strategic management List and define the 5 P’s of strategy Contrast intended, emergent, and realized strategies Describe how strategic management evolved into a field of study Summarize the strategic management process 1-1 Strategic management process 2 What is strategic management? Examines how actions and events involving top executives (such as Steve Jobs), firms (Apple), and industries (the tablet market) influence a firm’s success or failure Formal tools that exist for understanding these relationships are not enough Creativity is just as important to strategic management 1-3 5 P’s of Strategy 4
A business model should be a central element of a firm’s strategic plan. A business model describes the process through which a firm hopes to earn profits. 4 Strategies Intended strategies: Strategy that an organization hopes to execute Deliberate strategy: The parts of the intended strategy that an organization continues to pursue over time Emergent strategies: Unplanned strategy that arises in response to unexpected opportunities and challenges Realized strategies: The strategy that an organization actually follows. They are a product of both intended and realized strategies Non-realized strategy: The parts of the intended strategy that are abandoned 1-5 Intended, Deliberate, and Realized Strategy 1-6 6
History of Strategic Management 1-7 7 8 Classic Military Strategy 8 Modern History of Strategic Management 1-9 9 Modern History of Strategic Management 1-10 Modern History of Strategic Management 1-11 Strategic Management Process
Strategic management process: Building a careful understanding of how the world is changing and the a knowledge of how those changes might affect a particular firm Understanding strategy and performance Environmental and Internal scanning Strategy formulation Strategy implementation 1-12 Chapter 1: Key Takeaways Strategic management focuses on firms and the different strategies that they use to become and remain successful. Multiple views of strategy exist, and the 5 P’s described by Henry Mintzberg enhance understanding of the various ways in which firms conceptualize strategy. Most organizations create intended strategies that they hope to follow to be successful. Over time, however, changes in an organization’s situation give rise to new opportunities and challenges. Organizations respond to these changes using emergent strategies. Realized strategies are a product of both intended and emergent strategies. Although strategic management as a field of study has develop mostly over the last century, the concept of strategy is much older. Understanding strategic management can benefit greatly by learning the lessons that ancient history and military strategy provide. Strategic management is a process that requires the ability to manage change. Consequently, executives must be careful to monitor and to interpret the events in their environment, to take
appropriate actions when change is needed, and to monitor their performance to ensure that their firms are able to survive and, it is hope, thrive over time. 13 13 Crafting Strategy (Mintzberg, 1987) 14 Imagine someone planning strategy. What likely springs to mind is an image of orderly thinking: a senior manager, or a group of them, sitting in an office formulating courses of action that everyone else will implement on schedule. The keynote is reason-rational control, the systematic analysis of competitors and markets, of company strengths and weaknesses, the combination of these analyses producing clear, explicit, full - blown strategies. Now imagine someone crafting strategy, A whole different image likely results, as different from planning as craft is from mechanization. Craft involves traditional skill, dedication, perfection through the mastery of detail. What springs to mind is not so much thinking and reason as involvement, a feeling of intimacy and harmony with the materials at hand, developed through long experience and commitment. Formulation and implementation merge into a fluid process of learning through which creative strategies evolve.
14 Chapter 6: Supporting Business-Level StrategiesUnderstand the various forms of competitive and cooperative moves Explain the importance of competitive intelligence Utilize concepts from chapter to offer recommendations for companies Page * Making Competitive MovesA first-mover advantage exists when making the initial move into a market allows a firm to establish a dominant position that other firms struggle to overcome. A first-mover cannot be sure that customers will embrace its offering, making a first move inherently risky.A disruptive innovation is one that conflicts with, and threatens to replace, traditional approaches to competing within an industry.A foothold is a small position that a firm intentionally establishes within a market in which it does not yet compete. * Making Competitive movesA blue ocean strategy involves creating a new, untapped market rather than competing with rivals in an existing market.Bricolage creates new markets by using whatever materials and resources happen to be available
as the inputs into a creative process. Hypercompetition refers to a situation that involves very rapid and unpredictable moves and countermoves that can undermine competitive advantages. Under such conditions, it is often better to make a reasonable move quickly rather than hoping to uncover the perfect move through extensive and time-consuming analysis. Page * Responding to Competitors’ Moves © 2015 by Flat World Education, Inc. © Thinkstock Fighting brand: A lower-end brand that a firm introduces to try protect the firm’s market share without damaging the firm’s existing brands. * Responding To Competitors’ Moves 6-* Page * Competitive Intelligence A systematic and ethical program for gathering information about competitors and general business trends to further your own company’s goals
Page * Why CI? Play the Game DifferentlyNew market opportunityNew customersDevelop/leverage new value chain strengthsNew strategies/tacticsNew “flow” of the game Figuring out what drives behavior Environment/industry drivers Organizational drivers Managerial drivers Playing the Game Better Focus on existing competitors/strategic position Leverage value chain strengths Incrementally improve existing strategies/tactics Page * Competitor Intelligence Pyramid Industry experts/analysts Industry publications Trade shows/conferences Advertisements/PR University research centers Financial Court documents/patents Suppliers/customers Newspapers Help wanted ads Reverse engineering labs *
Chapter SummaryExecutives may choose to act swiftly by being a first mover in their market, and their firms may benefit if they are offering disruptive innovations to an industry.Executives may also choose a more conservative route by establishing a foothold within an area that can serve as a launching point or by avoiding existing competitors overall by using a blue ocean strategy. When firms are on the receiving end of a competitive attack, they are likely to retaliate to the extent that they possess awareness, motivation, and capability.When firms encounter a potentially disruptive innovation, they might ignore the threat, confront it head on, or attack along a different dimension. Rather than engaging in a head-to-head battle with competitors, executives may also choose to engage in a cooperative strategy such as a joint venture, strategic alliance, colocation, or co- opetition. Regardless of the decision executives make, in many cases any attempt to act on a viable road map will result in progress that will get the firm moving in the right direction. *

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Define the environment in the context of businessLearn the d

  • 1. Define the environment in the context of business Learn the difference between the general environment and the industry Explain how PESTEL analysis is useful to organizations Explain how five forces analysis is useful to organizations Understand what strategic groups are Chapter 3 Learning Objectives 3-1 Environment: Set of external conditions and forces that have the potential to influence the organization General environment (macroenvironment): Overall trends and events in a society such as - social trends, technological trends, demographics, and economic conditions Industry (competitive environment): Consists of multiple organizations that collectively compete with one another by providing similar goods, services, or both Environment 3-2 The environment provides resources that an organization needs in order to create goods and services
  • 2. The environment is a source of opportunities and threats for an organization Opportunities: Events and trends that create chances to improve an organization’s performance level Threats: Events and trends that may undermine an organization’s performance The environment shapes the various strategic decisions that executives make as they attempt to lead their organizations to success Why Does the Environment Matter? 3-3 A tool that executives can rely upon, to organize factors within the general environment and identify how these factors influence industries and the firms within them The Elements of the General Environment: PESTEL Analysis 3-4 4 PESTEL Analysis 5 Five forces analysis: Technique for understanding an industry, by examining the interactions among: Competitors in an industry Potential new entrants to the industry
  • 3. Substitutes for the industry’s offerings Suppliers to the industry Industry’s buyers Purpose of the analysis is to identify how much profit potential exists in an industry Five Forces Analysis 3-6 Porter’s Five Forces 3-7 7 Competitors Intense Rivalry 9 Industry Concentration 10 Potential Entrants
  • 4. Economics of scale Capital requirements Access to distribution channels Government policy Differentiation Switching costs Expected retaliation Cost advantages independent of size Barriers to Entry 12 Suppliers Suppliers 14 Buyers
  • 5. Buyers 16 Substitutes Substitutes 18 It assumes that competition is a zero sum game - the amount of profit potential in an industry is fixed Collaboration is a possibility that five forces analysis tends to downplay Doesn’t explain variation in performance within an industry Limitations of Five Forces Analysis 3-19 19 Strategic groups: Consist of a set of industry competitors, that have similar characteristics to each other but differ in important ways from the members of other groups Narrows the focus by centering on subsets of the competitors,
  • 6. whose strategies are similar to each other The analysis of the strategic groups in an industry can offer important insights to executives Closest rivals Alternative paths to success Untapped opportunities Mapping Strategic Groups 3-20 Strategic Groups in the Restaurant Industry An organization’s environment is a major consideration. The environment is the source of resources that the organizations needs. It provides opportunities and threats, and it influences the various strategic decisions that executives must make. PESTEL analysis can be a useful tool in understanding an organization’s general environment. Five Forces analysis can be a useful tool in understanding an organization’s industry environment. Chapter 3: Key Takeaways 22 On strategic management: A primer Dr. Brandon Ofem
  • 7. Assistant Professor Global Leadership and Management University of Missouri-St. Louis 1 Learning objectives Gain a bird’s eye view on strategic management Deepen appreciation on the importance of accurate knowledge for strategic decision-making Apply tools of strategic management to analyze companies Gain greater confidence in leading companies to success! Instructional plan On strategy History of knowledge
  • 8. Strategic analysis Tips for growing as a leader What explains the success of organizations? 1-4 Organizations are social structures created by individuals to support the collaborative pursuit of specified goals. Why study strategic management? Organizations control the world’s wealth. Much of human life is patterned by organizations.
  • 9. As an applied field, it’s based on very practical knowledge. The $87 trillion global economy is controlled by organizations. All wealth is actually created by business. Business creates wealth when it meets needs at a profit. That's how all wealth is created. It's meeting needs at a profit that leads to taxes and that leads to incomes and that leads to charitable donations. That's where all the resources come from. Only business can actually create resources. Other institutions can utilize them to do important work, but only business can create them. And business creates them when it's able to meet a need at a profit. Organizations are perhaps the dominant characteristic of modern societies. Can you think of other reasons? 5 Elements of organizations Organizations as systems Strategy is the process of leading these social systems to success. We study the people and teams at the helm of these organizations and figure out what sort of things they can do to enhance the performance of their social systems. 7
  • 10. On strategy Skilled action is the product of skilled thought. Three important revolutions shaped the course of human history: Cognitive revolution occurred about 70,000 years ago with the emergence of fictive language. Agricultural revolution occurred about 12, 000 with the domestication of plants and animals. Scientific revolution started only about 500 years ago with the increased adoption of empirically-tested methods of inquiry. History of knowledge Strategy, in its most primal form, can be traced back to the ancient history of our species. How many of you have read this book, Sapiens? The author organizes all of human history around three big revolutions. The first is called the cognitive
  • 11. revolution, which I think is one of the weirdest and deepest mysteries of our existence. From about 2 million years ago until around 10,000 years ago, the world was home, at one and the same time, to several different human species. Then, around 70,000 years ago, one particular species of humans, homo sapiens, evolved the incredible capacity for fictive language. This new capacity for abstract thought proved remarkabl y powerful for describing and communicating about the external world. It also allowed us to coordinate in complex and unprecedented to achieve objectives, which back in those days usually to do with hunting, survival or warfare. Then around 12,000 ago we figured out to domesticate plants and animals, which led to the rise of kingdoms, cities, and settlements. We no longer had to depend on a hunter-gatherer lifestyle. This also led to new management challenges among the ruling class of how to allocate resources, such as food, to their people. The scientific revolution started only 500 years ago and it’s still going on today. With it came increased adoption of empirically- tested methods of inquiry for learning about our world. 10 Adaptive benefits of knowledge Human thought is a powerful instrument in comprehending the environment and dealing with it. Theory can improve the human condition. Life, health, wealth, inequality, peace, safety, equal rights, knowledge, quality of life Life, health, wealth, inequality, peace, safety, equal rights,
  • 12. knowledge, quality of life. Theory has made the world a lot better. 11 Germ theory of disease We didn’t know germs caused the spread of disease until the 19th century! Germ theory, in medicine, the theory that certain diseases are caused by the invasion of the body by microorganisms, organisms too small to be seen except through a microscope. The French chemist and microbiologist Louis Pasteur, the English surgeon Joseph Lister, and the German physician Robert Koch are given much of the credit for development and acceptance of the theory. In the mid-19th century Pasteur showed that fermentation and putrefaction are caused by organisms in the air; in the 1860s Lister revolutionized surgical practice by utilizing carbolic acid (phenol) to exclude atmospheric germs and thus prevent putrefaction in compound fractures of bones; and in the 1880s Koch identified the organisms that cause tuberculosis and cholera. (Source: https://www.britannica.com/science/germ-theory) 12 Simple and brilliant solution In the 1840s, shortly before the French bacteriologist Louis Pasteur’s (1822–1895) groundbreaking work, Hungarian
  • 13. physician Ignaz Semmelweis (1818–1865) made an important contribution to the future development of germ theory. He concluded that handwashing before delivering a baby prevented the spread of childbed fever (infection after childbirth). Before Semmelweis developed his theory, he observed that physicians often moved directly from performing autopsies on women who had recently died of childbed fever to attend the next live birth. Semmelweis noted that this practice resulted in the new mothers contracting a virulent form of the fever, which often caused their deaths while still in the hospital. He was able to demonstrate that simple hand washing before deliveries prevented childbed fever. This was a crucial link in the experimental chain leading to the synthesis of germ theory. During his life, his theory was largely rejected by the medical community. At the end of his life he had a nervous breakdown and was committed to an mental hospital, where he died. Ironically, In 1865 he suffered a breakdown and was taken to a mental hospital, where he died. Ironically, his illness and death were caused by the infection of a wound on his right hand, apparently the result of an operation he had performed before being taken ill. He died of the same type of infectious disease against which he had struggled all his professional life. History hasn’t forgotten him though. He’s now considered the pioneer of what is now standard practice in countless hospitals and organizations around the globe: handwashing. It makes me wonder: What other principles about our world are waiting to be discovered that could result in new and simple practices that change our lives for the better? 13 Deep and accurate understanding of the world is an ethical imperative.
  • 14. Strategic management process https://www.mbaskool.com/business-concepts/marketing-and- strategy-terms/7247-strategic-management-process.html 1. Goal Setting: The vision and goals of the organization are clearly stated. The short-term and long-term goals are defined, processes to achieve the objectives are identified and current staff is evaluated to choose capable people to work on the processes. This can be done through proper environmental scanning. 2. Analysis: Data relevant to achieve the goals of the organization is gathered, potential internal and external factors that can affect the sustainable growth of the organization are examined and SWOT analysis is also performed. 3. Strategy Formulation: Once the analysis is done, the organization moves to the Strategy Formulation stage where the plan to acquire the required resources is designed, prioritization of the issues facing the business is done and finally the strategy is formulated accordingly. 4. Implementation: After formulation of the strategy, the employees of the organization are clearly made aware of their roles and responsibilities. It is ensured that funds would be
  • 15. available all the time. Then the implementation begins. 5. Strategy Evaluation: In this process, the strategies being implemented are evaluated regularly to check whether they are on track and are providing the desired results. In case of deviations, the corrective actions are taken. As shown in the figure, the five stages are not stand-alone and constantly interact with each other in order to ensure better management of the business. Importance of Strategic Management Process The strategic management process enables the organization of plan ahead through proper approach in order to gain competitive advantage wrt competitors. The process equips the organization to deal various internal and external factors. The process can differ for various organization depending on their size, domain, focus and core competency but the importance of strategic management process remains the same. Limitations of Strategic Management Process Strategic Management process is not an objective one time process which would yield the expected results in the first attempt. Optimizing the strategic management process for the organization may take time. The 5 steps stated above may have to be revisited multiple times and still the results may differ. The main limitation is the time it would take to completely tune and manage the process for a particular organization in order to see real benefits but having said that strategic management process if mastered properly can lead to serious advantage for the organizations. Hence, this concludes the definition of Strategic Management Process along with its overview. 16 1. Study how the company works.
  • 16. How it makes money. How it is organized. Its key resources/capabilities. Its weaknesses. 2. Study the environment it operates in. What markets does it compete? What markets are growing? What trends should the company respond to? 3. Recommend action. Adopt a long-term perspective. Wealth is not created in a day. Craft action(s) that capitalize on opportunities and mitigate threats. Provide empirically-grounded and well-reasoned justification (i.e. be sensible). Recommendations should flow from deep knowledge of the company and its environment. Imagine ways to build/do things that people love! Strategic analysis (in a nutshell) 17 Brilliant strategies are born of deep knowledge of the organization and the environment. I think this is the essence of strategy. Projects and opportunities of the highest value are best assessed in the crucible of critical and expert thought. So in my capstone course, I try to direct students to developing expertise around a company and its
  • 17. strategic situation. 18 A 10 year study reveals what great executives know and do They know the whole business. They are great decision-makers. They know the industry. They form deep, trusting relationships. https://hbr.org/2016/01/a-10-year-study-reveals-what-great- executives-know-and-do As part of our ten-year longitudinal study on executive transitions, which included more than 2,700 leadership interviews, we did a rigorous statistical analysis (including more than 90 regression analyses) to isolate the skills of the top-performing executives. We isolated seven performance factors correlated to strong organizational performance as well as leadership strengths through IBM Watson’s content analysis tools as well as historical performance reviews of these leaders and their direct reports. These seven factors led to our discovery of four recurring patterns that distinguished exceptional executives. What separated the “best of the best” from everyone else is a consistent display of mastery across four highly correlated dimensions, while “good” executives may have only excelled in two or three. Executives who shine across all four of
  • 18. these dimensions achieve the greatest success for themselves and their organizations. 19 Professional skills worth cultivating Due to the rapid pace of technological change and disruptive waves of automation sweeping the global economy, the most valuable skills on the marketplace are social intelligence, complex critical thinking, and creative-problem solving. What are some ways you can development and practice these skills? First and foremost, be engaged with people! Get involved with projects that interest you and practice skills of collaboration. 20 Strategic management is the “art of arts” because it organizes and uses human talent. I had a student last semester describe strategic management as the “art of arts.” I agree with her. I think she’s on point. I think executives can be likened to the conductor of a symphony. Just like the conductor needs to orchestrate the individual talents, melodies, and unique styles of the individuals to create music that’s richer and more beautiful than any single individual could
  • 19. produce, executives need to orchestrate the talents and dreams of their teammates to create something even more beautiful, social and economic wealth. 21 Last summer I went sailplaning with my Uncle Dan who lives in Tahachapee. He’s an elite pilot. He designs them too. We met at Mountain Valley Airport. Once we got the plane, we went through an equipment and operational checklist to make sure everything was a go for flight. Then a small planed towed us with a rope to lift off. Once we got airborne we had to find a thermal, which is a column of rising air. We found one pretty quickly, entered it, and then began a circling motion and rode the currents to the top of it. Once we reached 10,000 feet, we soared for about 45 minutes. Throughout the flight my uncle shared his thought processes about what he was doing. I was struck by the depth of his knowledge. He was constantly assessing the situation and thinking of contingencies, while simultaneously making expert decisions. Mastery at it finest. I see a striking parallel between sailplaning and leading companies. Both require reading and following the natural currents. Executives need to be able skillfully navigate their organizations through environmental trends, which requires attentive and accurate assessments of the competitive landscape. 22 Chapter 9: Learning Objectives Describe the building blocks of organizational structure
  • 20. Explain when a change in structure might be necessary List the three basic legal forms of business Describe 3 organizational control systems Identify the strengths and weaknesses of common management fads 9-1 1 Building Blocks of Organizational Structure Building Blocks of Organizational Structure Creating an Organizational Structure 9-4 Simple Structures 5
  • 21. An Example of a Simple Structure 6 6 Simple Structures Advantages of simple structure: Flexibility offered by simple structures encourages employees’ creativity and individualism Disadvantages of simple structure: A lack of clear guidance from the top of the organization can create confusion for employees, undermine their motivation, and make them dissatisfied with their jobs 9-7 Creating an Organizational Structure 9-8 Functional Structure 9 An Example of a Functional Structure
  • 22. Functional Structure Advantages of functional structure: Each person tends to learn a great deal about their particular function Tends to create highly-skilled specialists Grouping everyone that serves a particular function into one department tends to keep costs low and create efficiency Conflicts are rare Disadvantages of functional structure: Executing strategic changes can be very slow when compared to other structures 9-11 Creating an Organizational Structure 9-12 Example of a Multidivisional Structure Multidivisional Structure Advantages of multidivisional structure: Allows a firm to act quickly Helps an organization to better serve customers’ needs Disadvantages of multidivisional structure: Empowering divisions to act quickly can backfire if people in those divisions take actions that do not fit with the company’s overall strategy They tend to be more costly to operate than functional structures
  • 23. Creating an Organizational Structure 9-15 Example of a Matrix Structure Within functional and multidivisional structures, vertical linkages between bosses and subordinates are the most elements. Matrix structures, in contrast, rely heavily on horizontal relationships.In particular, these structures create cross-functional teams that each work on a different project. This offers several benefits: maximizing the organization’s flexibility, enhancing communication across functional lines, and creating a spirit of teamwork and collaboration. A matrix structure can also help develop new managers. In particular, a person without managerial experience can be put in charge of a relatively small project as a test to see whether the person has a talent for leading others. 16 Matrix Structure Advantages of matrix structure: Maximizing the organization’s flexibility Enhancing communication across functional lines Creating a spirit of teamwork and collaboration Developing new managers Disadvantages of matrix structure: Violates the unity of command principle because each employee is assigned multiple bosses Potential for conflicts to arise among project managers 9-17
  • 24. Creating an Organizational Structure Boundaryless organization: An organization that removes the usual barriers between parts of the organization as well as barriers between the organization and others This term was created by former General Electric CEO Jack Welch Making progress toward being boundaryless can help an organization become more flexible and responsive 9-18 Removing Barriers for Coordination 19 An illustration of how removing barriers can be valuable has its roots in a very unfortunate event. During 2005’s Hurricane Katrina, rescue efforts were hampered by a lack of coordination between responders from the National Guard (who are controlled by state governments) and from active-duty military units (who are controlled by federal authorities). According to one National Guard officer, “It was just like a solid wall was between the two entities.”[6] Efforts were needlessly duplicated in some geographic areas while attention to other areas was delayed or inadequate. For example, poor coordination caused the evacuation of thousands of people from the New Orleans Superdome to be delayed by a full day. The results were immense human suffering and numerous fatalities. To avoid similar problems from arising in the future, barriers between the National Guard and active-duty military units are being bridged by special military officers called dual -status commanders. These individuals will be empowered to lead both
  • 25. types of units during a disaster recovery effort, helping to ensure that all areas receive the attention they need in a timely manner. 19 Example of Boundaryless Structure Rather than granting formal titles to certain people, leaders with W.L. Gore emerge based on performance and they attract followers to their ideas over time. As one employee noted, “We vote with our feet. If you call a meeting, and people show up, you’re a leader.” 20 Eliminating all internal and external barriers is not possible, of course, but making progress toward being boundaryless can help an organization become more flexible and responsive. One example is W.L. Gore, a maker of fabrics, medical implants, industrial sealants, filtration systems, and consumer products. This firm avoids organizational charts, management layers, and supervisors despite having approximately nine thousand employees across thirty countries. Rather than granting formal titles to certain people, leaders with W.L. Gore emerge based on performance and they attract followers to their ideas over time. As one employee noted, “We vote with our feet. If you call a meeting, and people show up, you’re a leader. http://www.gore.com/en_xx/ 20 Reasons for Changing an Organization’s Structure Creating an organizational structure is not a one time activity Executives must revisit an organization’s structure over time
  • 26. and make changes to it if certain danger signs arise A structure might need to be adjusted if decisions with the organization are being made too slowly or if the organization is performing poorly. Sometimes structures become too complex and need to be simplified 9-21 Creating Organizational Control Systems Organizational control systems: Allow executives to track how well the organization is performing, identify areas of concern, and then take action to address the concerns Three basic types of control systems are available to executives: Output Behavioral Clan Different organizations emphasize different types of control, but most organizations use a mix of all three types 9-22 In addition to creating an appropriate organizational structure, effectively executing strategy depends on the skillful use of organizational control systems. Executives create strategies to try to achieve their organization’s vision, mission, and goals. Organizational control systems allow executives to track how well the organization is performing, identify areas of concern, and then take action to address the concerns. Three basic types of control systems are available to executives: (1) output control, (2) behavioral control, and (3) clan control. Different organizations emphasize different types of control, but most organizations use a mix of all three types.
  • 27. 22 Creating Organizational Control Systems Output control: Control that focuses on measurable results within an organization Behavioral control: Control that focuses on controlling the actions that ultimately lead to results Clan control: Informal type of control that relies on shared traditions, expectations, values, and norms to lead people to work toward the good of their organization 9-23 Output Control 24 Output control focuses on measurable results within an organization. Examples from the business world include the number of hits a website receives per day, the number of microwave ovens an assembly line produces per week, and the number of vehicles a car salesman sells per month (Figure 9.6 "Output Controls"). In each of these cases, executives must decide what level of performance is acceptable, communica te expectations to the relevant employees, track whether performance meets expectations, and then make any needed changes. In an ironic example, a group of post office workers in Pensacola, Florida, were once disappointed to learn that their paychecks had been lost—by the US Postal Service! The corrective action was simple: they started receiving their pay via direct deposit rather than through the mail. 24
  • 28. Behavioral Control 25 While output control focuses on results, behavioral control focuses on controlling the actions that ultimately lead to results. In particular, various rules and procedures are used to standardize or to dictate behavior. In most states, for example, signs are posted in restaurant bathrooms reminding employees that they must wash their hands before returning to work. The dress codes that are enforced within many organizations are another example of behavioral control. To try to prevent employee theft, many firms have a rule that requires checks to be signed by two people. And in a somewhat bizarre example, some automobile factories dictate to workers how many minutes they can spend in restrooms during their work shift. 25 Clan Control 26 Instead of measuring results (as in outcome control) or dictating behavior (as in behavioral control), clan control is an informal type of control. Specifically, clan control relies on shared traditions, expectations, values, and norms to lead people to work toward the good of their organization (Figure 9.8 "Clan Controls"). Clan control is often used heavily in settings where creativity is vital, such as many high-tech businesses. In these companies, output is tough to dictate, and many rules are not appropriate. The creativity of a research scientist would be
  • 29. likely to be stifled, for example, if she were given a quota of patents that she must meet each year (output control) or if a strict dress code were enforced (behavioral control). 26 Clan Control 27 As part of the team-building effort at Google, new employees are known as Noogles and are given a propeller hat to wear. 27 Management fads 28 The history of fads allows us to make certain predictions about today’s hot ideas, such as empowerment, “good to great,” and viral marketing. Executives who distill and act on basic lessons from these fads are likely to enjoy performance improvements. Empowerment, for example, builds on important research findings regarding employees—many workers have important insights to offer to their firms, and these workers become more engaged in their jobs when executives take their insights seriously. Relying too heavily on a fad, however, seldom turns out well. Just as executives in the 1980s could not treat In Search of Excellence as a recipe for success, today’s executives should avoid treating James Collins’s 2001 best-selling book Good to Great: Why Some Companies Make the Leap…and Others Don’t
  • 30. as a detailed blueprint for running their companies. Overall, executives should understand that management fads usually contain a core truth that can help organizations improve but that a balance of output, behavioral, and clan control is needed within most organizations. As legendary author Jack Kerouac noted, “Great things are not accomplished by those who yield to trends and fads and popular opinion.” 28 Legal Forms of Business 29 Chapter 9: Key Takeaways Leaders of firms, ranging from the smallest sole proprietorship to the largest global corporation, must make decisions about the delegation of authority and responsibility when organizing activities within their firms. Deciding how to best divide labor to increase efficiency and effectiveness is often the starting point for more complex decisions that lead to the creation of formal organizational charts. To execute strategy effectively, managers also depend on the skillful use of organizational control systems that involve output, behavioral, and clan controls. Executives need to avoid letting their firms become “out of control” by being skeptical of management fads. The legal form a business takes is an important decision with implications for a firm’s organizational structure. 30
  • 31. Chapter 10: Learning Objectives Understand the key roles played by boards of directors. Explain different terms associated with corporate takeovers. Know the three levels and six stages of moral development suggested by Kohlberg. Describe famous corporate scandals. Know the dimensions of corporate social performance tracked by KLD. Know the three major generational influences that make up the majority of the current workforce and their different perspectives and influences. Understand how decision biases may impede effective decision making. Learning Objectives, continued Know the dimensions of corporate social performance tracked by KLD. Know the three major generational influences that make up the majority of the current workforce and their different perspectives and influences. Understand how decision biases may impede effective decision making. © 2015 by Flat World Education, Inc. Boards of Directors Board of directors: A group of individuals, either elected or appointed, that oversees the activities of an organization or corporation
  • 32. Corporate governance: The processes, policies, and laws that govern an organization (often corporations) to establish accountability and try and eliminate conflicts of interest associated with the principle-agent problems 10-3 Boards of Directors 4 Boards of Directors Stakeholders: Individuals and groups that have an interest so as to stake a claim in an organization The key stakeholder of most corporations is generally agreed to be the shareholders of the company’s stock Most large, publicly traded firms in the United States are made up of thousands of shareholders 10-5 Boards of Directors Agency problem: Exists when the interest of the individuals that act as agents to manage the company, that may not align with the interest of the firm’s stockholders The composition of the board is critical because the dynamics of the board play an important part in resolving the agency problem 10-6 Boards of Directors Board insiders: Members of the board of directors that are generally employed inside of the organization
  • 33. Board outsiders: Members of the board of directors that are generally employed outside of the organization CEO duality: Occurs when the chief executive officer is also the chairman of the board of directors Has been known to create bitter divide within a corporation 10-7 Boards of Directors One of the most visible roles of boards of directors is the setting of CEO pay Large corporations must pay competitive wages for the scarce talent that is needed to manage billion dollar corporations CEO compensation is a function of the competitive wages that other corporations would offer for a potential CEO’s services Boards will face considerable scrutiny from investors if CEO pay is out of line with industry norms 10-8 CEO Compensation 9 Corporate Takeovers 10 10
  • 34. Stages of Moral Development Psychologist Lawrence Kohlberg suggests that there are six distinct stages of moral development Kohlberg’s six stages were grouped into three levels: Pre-conventional Conventional Post-conventional 10-11 This theory holds that moral reasoning, the basis for ethical behavior, has six identifiable developmental stages, each mor e adequate at responding to moral dilemmas than its predecessor. 11 Stages of Moral Development 12 Heinz Dilemma 13 13 Corporate Ethics and Social Responsibility 14
  • 35. Corporate Ethics and Social Responsibility Sarbanes-Oxley Act of 2002: Law that set new or increased standards for the boards of public United States companies and accounting firms Signed by President Bush in 2002 In response to corporate scandals at Enron, WorldCom, and Tyco 11 aspects that represented some of the most far-reaching reforms since the presidency of Franklin Roosevelt For example, senior executive responsibility for financial statement accuracy, independent auditors, criminal penalties for destroying financial records, etc. 10-15 Cost of Corruption 16 http://www.pbs.org/frontlineworld/stories/bribe/2009/02/spotlig ht-the-victims-of-corruption.html According to a 2004 study by the World Bank Institute, $1 trillion is paid every year in bribes worldwide. Many agree that the victims of bribery are often those living in poverty in the developing world, in countries rich in resources but dominated by corrupt governments. While the vast majority of these citizens remain very poor, often living on $1 a day, their elected officials accumulate enormous personal wealth, taking millions in bribes from corporations looking to secure lucrative contracts. Research by Transparency International shows that bribery not only stymies development, it also impacts health services, literacy rates and the environment. In the above video
  • 36. clip, experts talk about some of the countries hardest hit by a culture of corruption. 16 Corporate Ethics and Social Responsibility Social entrepreneurship: Entrepreneurial actions where both economic and social value creation occur 17 Corporate Ethics and Social Responsibility Corporate social performance (CSP): The degree to which a firm's actions honor ethical values that respect individuals, communities, and the natural environment Kinder, Lydenberg and Domini & Co. (KLD), a Boston-based firm that rates firms on a number of stakeholder-related issues with the goal of measuring CSP 18 Corporate Ethics and Social Responsibility 19 Understanding Thought Patterns Kurt Lewin, known as the founder of social psychology, created the well know formula: B = f (P,E) In other words, individual behavior is a function of characteristics of the person and characteristics of the
  • 37. environment 20 Generational Factors 21 Rational Decision Making The process of rational decision-making involves problem identification, establishment and weighing of decision criteria, generation and evaluation of alternatives, selection of the best alternative, decision implementation, and decision evaluation. There are several problems with this model when applied to many complex decisions. Many strategic decisions are not presented in obvious ways and many CEOs may not be aware their firms are having problems until it’s too late to create a viable solution. Rational decision-making assumes that options are clear and that a single best solution exists. Rational decision-making assumes no time or cost constraints. Rational decision-making assumes accurate information is available. © 2015 by Flat World Education, Inc. 22 Decision Biases 10-23
  • 38. Decision Biases 10-24 24 Chapter 10: Key Takeaways This chapter explains the role of boards of directors in the corporate governance of organizations such as large, publicly traded corporations. Wise boards work to manage the agency problem that creates a conflict of interest between top managers such as CEO and other groups with a stake in the firm. When boards fail to do their duties, numerous scandals may ensue. Corporate scandals became so widespread that new legislation such as the Sarbanes-Oxley Act of 2002 has been developed with the hope of impeding future actions by executives associated with unethical or illegal behavior. Firms should be aware of generational influences as well as other biases that may lead to poor decisions. © 2015 by Flat World Education, Inc. 25 Learning Objectives: Chapter 2 Define vision and mission and distinguish between them Understand SMART goals
  • 39. Understand the complexities associated with assessing organizational performance Understand how thinking and acting entrepreneurially can help organizations and individuals List and define the five dimensions of an entrepreneurial orientation Page 1 Importance of Vision Vision: What the organization aspires to become in the future A key tool for inspiring the people in an organiza tion Well-constructed visions clearly articulate an organization’s aspirations and can give an organization an edge over its rivals The best visions are inspirational, clear, memorable, and concise Page 2 Vision Statements Page 3 Vision Statements A world where everyone has a decent place to live. 4 To become a world leader at connecting people to wildlife and
  • 40. conservation. Our vision is that people everywhere will share the power of a wish. Mission Statements Mission: States the reasons for an organization’s existence Well-written mission statements effectively capture an organization’s identity Answers the fundamental question of “who are we? Reflects on the organization’s past and present States why the organization exists and what role it plays in the society The best are clear, memorable, and concise Page 5 Mission Statements Page 6 Crafting Strategy Page 7 SMART Goals An organization’s vision and mission offer a broad, overall sense of the organization’s direction. To work toward achieving these overall aspirations, organizations also need to create
  • 41. goals—narrower aims that should provide clear and tangible guidance to employees as they perform their work on a daily basis. S – Specific M – Measurable A – Aggressive R – Realistic T – Time-bound Page 8 A goal is specific if it is explicit rather than vague. A goal is measurable to the extent that whether the goal is achieved can be quantified. A goal is aggressive if achieving it presents a significant challenge to the organization. A series of research studies have demonstrated that performance is strongest when goals are challenging but attainable. Such goals force people to test and extend the limits of their abilities. Realistic goals are feasible. Goals should be time-bound through the creation of deadlines 8 SMART Goals Page 9 Assessing Organizational Performance Organizational performance: How well an organization is doing at reaching its vision, mission, and goals A multidimensional concept Vital aspect of strategic management
  • 42. Assists executives in knowing how well their organizations are performing Page 10 Assessing Organizational Performance Performance measure: A metric along which organizations can be gauged Used by executives to examine measures such as profits, stock price, and sales Helps understand how well an organization is competing in the market Performance referent: Benchmark used to make sense of an organization’s standing along a performance measure Page 11 Financial Performance Measures and Referents Page 12 The Balanced Scorecard An approach to assessing performance that targets managers’ attention on four areas: Financial – “How do we look to shareholders?” Customer – “How do customers see us?” Internal business process – “What must we excel at?” Learning and growth - “Can we continue to improve and create value?” Helps managers resist the temptation to fixate on financial measures, and instead monitor a diverse set of important
  • 43. measures Page 13 The Balanced Scorecard Page 14 The Triple Bottom Line Provides a tool to help executives focus on performance targets beyond profits alone Emphasizes the three Ps People (Social concerns) Planet (Environmental concerns) Profits (Economic concerns) Page 15 The Triple Bottom Line Page 16 Assessing Performance Page 17 six blind men set out to “see” what an elephant was like. The first man touched the elephant’s side and believed the beast to be like a great wall. The second felt the tusks and thought elephants must be like spears. Feeling the trunk, the third man
  • 44. thought it was a type of snake. Feeling a limb, the fourth man thought it was like a tree trunk. The fifth, examining an ear, thought it was like a fan. The sixth, touching the tail, thought it was like a rope. If the men failed to communicate their different impressions they would have all been partially right but wrong about what ultimately mattered. This story parallels the challenge involved in understanding the multidimensional nature of organization performance because different measures and referents may tell a different story about the organization’s performance. 17 The CEO as Celebrity Advantages Serves as an intangible asset for the CEO’s firm - may increase opportunities available to the firm Hiring or developing a celebrity CEO may increase stock price, enhance a firm’s image, and improve the morale of employees and other stakeholders Disadvantages Magnifies any gaps between actual and expected firm performance Faces larger and more lasting reputation erosion if their performance and behavior is inconsistent with their celebrity image 2-18 18 Types of CEOs 2-19
  • 45. Entrepreneurial Orientation Processes, practices, and decision-making styles of organizations that act entrepreneurially An organization’s level of EO can be understood by examining how it stacks up relative to five dimensions: Innovativeness Proactiveness Risk taking Competitive aggressiveness Autonomy 2-20 Entrepreneurial Orientation 21 Entrepreneurial Orientation An entrepreneurial orientation is also important for nonprofit and/or public organizations “If anything, relative to for-profits, there is a need for more creativity in managing multiple stakeholders with conflicting demands; heightened imagination in finding ways to garner, combine, and deploy scarce resources; and enhanced innovation in addressing vexing social problems” (Morris et al., 2011: p. 950). 22
  • 46. Research setting 23 Promoting an Entrepreneurial Orientation Page 24 Chapter 2: Key Takeaways Page 25 Strategic leaders need to ensure that their organizations have three types of aims. A vision states what the organization aspires to become in the future. A mission reflects the organization’s past and present by stating why the organization exists and what role it plays in society. Goals are the more specific aims that organizations pursue to reach their visions and missions. The best goals are SMART: specific, measurable, aggressive, realistic, and time-bound. Organizational performance is a multidimensional concept, and wise managers rely on multiple measures of performance when gauging the success or failure of their organizations. CEOs should be aware of and manage the potential for increased scrutiny associated with their status. Building an entrepreneurial orientatio n can be valuable to organizations and individuals alike in identifying and seizing new opportunities. Entrepreneurial orientation consists of five dimensions: (1) autonomy, (2) competitive aggressiveness, (3)
  • 47. innovativeness, (4) proactiveness, and (5) risk taking. Chapter 5: Selecting Business-level Strategies Understand and be able to apply the four primary generic strategies to the analysis of companies Know the advantages and disadvantages associated with each strategy Know the limitations of generic strategies 5-1 Generic Strategies A general way of positioning a firm’s business level strategy within an industry Focusing on generic strategies allows executives to concentrate on the core elements of firms’ business-level strategies The most popular set of generic strategies is based on the work of Professor Michael Porter of the Harvard Business School 5-2 Generic Strategies Two competitive dimensions are the keys to business-level strategy: Source of competitive advantage - gain an edge on rivals by keeping costs down or offer something unique in the market Scope of operations – target customers in general or seek to
  • 48. attract just a segment of customers Four generic business-level strategies emerge from these decisions: Cost leadership Differentiation Focused cost leadership Focused differentiation Generic Strategies Page 4 Cost Leadership Cost leadership: Generic strategy that offers products or services with acceptable quality and features to a broad set of customers at a low price Economies of scale are essential Expenses are distributed across a greater number of items 5-5 Cost Leadership Page 6 Cost Leadership Page 7
  • 49. The Yugo, for example, was an extremely unreliable car that was made in Eastern Europe and sold in the United States for about $4,000. Despite its attractive price tag, the Yugo was a dismal failure because drivers simply could not depend on the car for transportation. Yugo exited the United States in the early 1990s and closed down entirely in 2008. 7 Cost Leadership “Dell finds it hilarious that HP and Sony fund researchers to come up with new ideas.” Page 8 “Steamrollered by Dell” Newsweek, February 21, 2005 8 Cost Leadership 5-9 Differentiation Differentiation strategy: A generic strategy that attempts to convince customers to pay a premium price for its good or services by providing unique and desirable features Using a differentiation strategy means that a firm is competing based on uniqueness, rather than price Its success depends on offering unique features and
  • 50. communicating the value of these features to potential customers 5-10 Differentiation 11 71 Differentiation Page 12 12 Strategy Formulation in Razor Industry Page 13 13 Focused Cost Leadership and Focused Differentiation Focus strategies: Generic business strategies that involve
  • 51. targeting a relatively narrow niche of potential customers Focused cost leadership: A generic business strategy that requires competing based on price to target a narrow market Focused differentiation: A generic business strategy that requires offering unique features that fulfill the demands of a narrow market 5-14 Focused Cost Leadership Page 15 Focused Cost Leadership Page 16 16 Focused Differentiation Page 17 Page 18 Focused Differentiation
  • 52. 18 Focused Cost Leadership and Focused Differentiation 5-19 Best-Cost A business level strategy followed by firms that charge relatively low prices and offer substantial differentiation 5-20 Difficulty of the Best-Cost Strategy Creating unique features and communicating to customers why these features are useful generally raises a firm’s costs of doing business Page 21 Best-Cost Page 22 Pursuing Best-Cost through Low-Overhead Page 23
  • 53. 23 Stuck in the Middle A situation where a business level strategy does not offer features that are unique enough to convince customers to buy its offerings Its prices are too high to effectively compete on based on price Lack a clear market or competitive pricing 5-24 Stuck in the Middle Page 25 Getting Outmaneuvered by Competitors Firms often become stuck in the middle not because executives fail to arrive at a well-defined strategy But because firms are simply outmaneuvered by their rivals Strategies must adapt to changes in the general and industry environments Page 26
  • 54. 26 Chapter 5: Key Takeaways This chapter explains generic business-level strategies that executives select to keep their companies competitive. Executives must select their company’s source of competitive advantage by choosing to compete based on low-cost versus more expensive features that differentiate their company from competitors. Targeting either a narrow or broad market helps companies further understand their customer base. Based on these choices, companies will follow cost leadership, differentiation, focused cost leadership, or focused differentiation strategies. Another potentially viable business strategy, best cost, exists when companies offer relatively low prices while still managing to differentiate their goods or services on some important value - added aspects. All companies can fall victim to being “stuck in the middle” by not offering unique features or competitive prices. Page 27 Chapter 8: Corporate Strategy List and define the three concentration strategies Explain the benefits of vertical integration Describe the two types of diversification and when they should be used
  • 55. Give examples of retrenchment and restructuring Describe why portfolio planning is useful for corporations Page 1 Concentration Strategies Concentration strategies: Strategies that firms use to try to successfully compete only within a single industry There are three concentration strategies: Market penetration Market development Product development 8-2 Concentration Strategies 8-3 Concentration Strategies 8-4 Concentration Strategies 8-5 Concentration Strategies Horizontal integration: Pursuing a concentration strategy by
  • 56. acquiring or merging with a rival Types of horizontal integration: Acquisition Merger 8-6 Concentration Strategies Acquisition: Takes place when one company purchases another company The acquired company is smaller than the firm that purchases it Merger: Joining of two companies into one Involves similarly sized companies 8-7 Concentration Strategies Horizontal integration can be attractive for several reasons: Aimed at lowering costs by achieving greater economies of scale Provide access to new distribution channels Despite the potential benefits of mergers and acquisitions, their financial results often are very disappointing More than 60 percent of mergers and acquisitions erode shareholder wealth Fewer than one in six increases shareholder wealth http://www.youtube.com/watch?v=9dFvhq2sKfM 8 Vertical Integration Strategies Vertical integration: When a firm gets involved in new portions of the value chain Can be very attractive when a firm’s suppliers or buyers have
  • 57. too much power over the firm and are becoming increasingly profitable at the firm’s expense By entering the domain of a supplier or a buyer, executives can reduce or eliminate the leverage that the supplier or buyer has over the firm Can create risks Can create complacency 8-9 Vertical Integration Strategies Backward vertical integration: A strategy that involves a firm entering a supplier’s business Used when executives are concerned that a supplier has too much power over their firms Forward vertical integration: A strategy that involves a firm entering a buyer’s business Useful for neutralizing the effect of powerful buyers 8-10 Vertical Integration Strategies 11 Risk of not being vertically integrated 12 The risk of not being vertically integrated is illustrated by the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. Although the US government held BP responsible for the
  • 58. disaster, BP cast at least some of the blame on drilling rig owner Transocean and two other suppliers: Halliburton Energy Services (which created the cement casing for the rig on the ocean floor) and Cameron International Corporation (which had sold Transocean blowout prevention equipment that failed to prevent the disaster). In April 2011, BP sued these three firms for what it viewed as their roles in the oil spill. 12 Diversification Strategies Diversification strategies: Involve a firm entering entirely new industries Requires moving into new value chains Three tests for diversification: How attractive is the industry that a firm is considering entering? How much will it cost to enter the industry? Will the new unit and the firm be better off? 8-13 Diversification Strategies Related diversification: When a firm moves into a new industry that has important similarities with the firm’s existing industry or industries Core competency: A skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business 8-14 Diversification Strategies Unrelated diversification: When a firm enters an industry that lacks any important similarities with the firm’s existing industry or industries
  • 59. Most unrelated diversification efforts do not have happy endings 8-15 Unrelated Diversification 16 Strategies for Getting Smaller-Retrenchment Retrenchment: Reducing the size of part of a firm’s operations, often through laying off employees Firms following a retrenchment strategy shrink one or more of their business units Firms using this strategy hope to make just a small retreat rather than losing a battle for survival 8-17 Strategies for Getting Smaller-Restructuring Diversification discount: The tendency of investors to undervalue the shares of a diversified firm Divestment: Selling off part of a firm’s operations Spin-off: Creating a new company whose stock is owned by investors out of a piece of a bigger company Liquidation: Shutting down portions of a firm’s operations, often at a tremendous financial loss 8-18 Investors often struggle to understand the complexity of
  • 60. diversified firms, and this can result in relatively poor performance by the stocks of such firms. This is known as a diversification discount. Executives sometimes attempt to unlock hidden shareholder value by breaking up diversified companies. 18 Spin-offs 19 Portfolio Planning and Corporate Level Strategy Portfolio planning: A process that helps executives make decisions involving their firms’ various industries Offers suggestions about what to do within each industry, and provides ideas for how to allocate resources across industries. It first gained widespread attention in the 1970s and it remains a popular tool among executives today 8-20 Portfolio Planning and Corporate Level Strategy The Boston Consulting Group (BCG) matrix Best-known approach to portfolio planning Using the matrix requires a firm’s businesses to be categorized as high or low along two dimensions: Its share of the market The growth rate of its industry 8-21 Portfolio Planning and Corporate Level Strategy
  • 61. 8-22 Portfolio Planning and Corporate Level Strategy Limitations to portfolio planning: Oversimplifies the reality of competition by focusing on just two dimensions when analyzing a company’s operations within an industry Can create motivational problems among employees Does not help identify new opportunities 8-23 Research Round-Up: Divestiture and Firm Performance For decades, executives have faced the dilemma of deciding when it might be wise to spin-off or sell parts of their firms. A recent research study combined the findings of 94 previous studies of divestiture determined that divestiture activities help firm performance. In addition, firms with strategic motivations to divest outperformed those that lacked a strategic rationale for divestment. Executives must carefully manage their collection of corporate assets and be willing to sell them if the right opportunity arises. 24 Chapter 8: Key Takeaways Executives grappling with corporate-level strategy must decide in what industry or industries their firms will compete. Many of the possible answers to this question involve growth. Concentration strategies involve competing within existing
  • 62. domains to expand within those domains. This can take the form of market penetration, market development, or product development. Integration involves expanding into new stages of the value chain. Backward integration occurs when a firm enters a supplier’s business while forward vertical integration occurs when a firm enters a customer’s business. Diversification involves entering entirely new industries; this can be an industry that is related or unrelated to a firm’s existing activities. Sometimes being smart about corporate-level strategy requires shrinking the firm through retrenchment or restructuring. Portfolio planning can be useful for analyzing firms that participate in a wide variety of industries. 25 Chapter 4 Learning Objectives Define the four characteristics of resources that lead to sustained competitive advantage as articulated by the resource- based theory of the firm Understand the difference between resources and capabilities Understand how intellectual property can be a valuable resource for firms Know the 4 Ps of marketing 4-1
  • 63. Learning Objectives Define the primary activities of the value chain Be able to discuss other theories about firm success and failure beyond resource-based theory Learn how SWOT analysis can help organizations and individuals, and its limitations 4-2 Resource-based Theory Contends that the possession of strategic resources provides an organization with a golden opportunity to develop competitive advantages over its rivals A strategic resource is: Valuable Rare Difficult to imitate Nonsubstitutable 4-3 3 Resource-based Theory Sustained competitive advantage: A competitive advantage that will endure over time Tangible resources: Resources than can be readily seen, touched, and quantified such as physical assets, property, plant, equipment and cash Intangible resources: Resources that are difficult to see, touch, or quantify such as the knowledge and skills of employees, a firm’s reputation, and a firm’s culture 4-4
  • 64. Resource-based Theory Page 5 Resource-based Theory Capabilities: What an organization can do based on the resources it possesses Dynamic capability: Unique ability to create new capabilities by continually updating a firm’s array of capabilities in order to keep pace with changes in its environment Distinctive competence: A set of activities that an organization performs especially well 4-6 http://www.youtube.com/watch?v=BoYbxXGAdC4 6 Paperscape Exercise Page 7 4 Ps of Marketing Marketing mix: Consists of the four Ps (Product, Price, Place, Promotion) that firms use to offer customers a coherent and persuasive message Page 8
  • 65. Leveraging resources and capabilities to create desirable products and services is important, but customers must still be convinced to purchase these goods and services. The marketing mix—also known as the four Ps of marketing— provides important insights into how to make this happen. 8 4 Ps of Marketing Page 9 4 Ps of Marketing Page 10 Intellectual Property Intellectual property refers to creations of the mind such as inventions, artistic products, and symbols. Four types include: Patents Trademarks Copyrights Trade secrets Page 11 Patents 4-12
  • 66. Patents Page 13 13 Trademarks 4-14 Trademarks Page 15 Trade Secrets 4-16 Trade Secrets Page 17 Copyrights
  • 67. 4-18 18 Copyrights Page 19 http://www.ted.com/talks/rob_reid_the_8_billion_ipod.html 19 Value Chain Primary activities: Actions that are directly involved in the creation and distribution of goods and services Inbound logistics (arrival of new material) Operations (production process) Marketing and Sales (attracting potential customers) Service (provide assistance to customers) 4-20 Value Chain Secondary activities: Not directly involved in the evolution of a product, but instead provide important underlying support for primary activities Firm infrastructure (how the firm is organized and led by executives) Human resources management (recruitment, training, and compensation of employees Technology (use of computerization and telecommunications to
  • 68. support primary activities) Procurement (negotiating for and purchasing raw materials) 4-21 The Value Chain 4-22 Supply Chain Supply chain: System of people, activities, information, and resources involved in creating a product and moving it to the customer A broader concept than a value chain Captures the entire process of creating and distributing a product, often across several firms 4-23 Supply Chain Best value supply chains: Focuses on the total value added to the customer Four components of a best value supply chain include: Strategic supply chain management: Create competitive advantages and enhance firm performance; strives to excel along four measures: Speed, Quality, Cost, and Flexibility Agility: Ability to act rapidly in response to dramatic changes in supply and demand Adaptability: Willingness and capacity to reshape supply chains when necessary Alignment: Creating consistency in the interests of all participants in a supply chain 4-24
  • 69. Other Views on Firm Performance Enactment: Contends that an organization can, at least in part, create an environment for itself that is beneficial to the organization by putting strategies in place that reshape competitive conditions in a favorable way Environmental determinism: Contends that organizations are very limited in their ability to adapt to the conditions around them Institutional theory: Examines the extent to which firms copy each other’s strategies Transaction cost economics: Centers on whether it is cheaper for a firm to make or to buy the products that it needs 4-25 SWOT Analysis A technique for understanding a firm’s strengths and weaknesses along with the opportunities and threats that exist in the firm’s environment Takes a narrower focus by centering on an individual firm Used to compare internal and external factors in order to generate ideas about how their firm might become more successful 4-26 SWOT Analysis
  • 70. Page 27 SWOT Analysis It is wise to focus on ideas that allow a firm to: Leverage its strengths Steer clear of or resolve its weaknesses Capitalize on opportunities Protect itself against threats 4-28 SWOT Analysis Exercise Page 29 Chapter 4: Key Takeaways Page 30 Resource-based theory argues that firms will perform better when they assemble resources that are valuable, rare, difficult to imitate, and nonsubstitutable. Different forms of intellectual property often serve as strategic resources for firms. Examining a firm’s resources can be aided by the value chain, a tool that systematically examines primary and secondary activities in the creation of a good or service, and by a knowledge of supply chain management that examines the value added of multiple firms working together. While resource-based theory provides a dominant view for
  • 71. examining the determinants of firm success, other perspectives provide insight for understanding specific behaviors of firms within an industry. SWOT analysis is a simple but powerful technique for examining the interactions between factors internal and external to the firm. Chapter 7: Competing Internationally Describe the benefits and risks of competing internationally. Utilize the "diamond model" to explain why some firms compete better in international markets than others. List and define the three types of international strategies that firms can adopt. Describe four options for entering an international market. 1 Why sell internationally? The most obvious reason to compete in international markets is gaining access to new customers The U.S. accounts for only about 5% of the world’s population Selling goods and services to the other 95% of people on the planet can be very appealing for companies whose industry within their home market are saturated 7-2
  • 72. Why sell internationally? Many firms that compete in international markets hope to gain cost advantages If a firm can increase it sales volume by entering a new country, for example, it may attain economies of scale that lower its production costs Offshoring: Relocation of a business activity to another country A popular yet controversial means for reducing costs The job losses in the firm’s home country can devastate local communities Reshoring 7-3 Why sell internationally? Business risk: The potential that a business operation might fail If a firm is completely dependent on one country, negative events in that country could ruin the firm Business risk is reduced when involved in multiple countries 7-4 Why Compete in New Markets? 5 International Market Risk 6
  • 73. International Market Risk Political risk: The potential for government upheaval or interference with business to harm an operation within a country Unstable governments make it difficult for firms to plan for the future A government hostile to foreign businesses could impose new taxes and new regulations Nationalization: Seizure of privately-owned business operations by the national government 7-7 International Market Risk Economic risk: The potential for a country’s economic conditions and policies, property rights protections, and currency exchange rates to harm an operation Cultural risk: The potential for a company’s operations in a country to struggle due to differences in language, customs, norms and customer preferences 7-8 Cultural Intelligence 9 Cultural Intelligence 10
  • 74. 7-11 Porter’s Diamond Model Drivers of Success and Failure Demand conditions: The nature of domestic customers, especially when they have high expectations of the goods and services that they buy Firms benefit when their domestic customers have high expectations 7-12 d 12 Drivers of Success and Failure 13 Drivers of Success and Failure Factor conditions: The nature of raw material and other inputs that firms need in order to create goods and services Firms benefit when they have good access to factor conditions and face challenges when they do not Overcoming disadvantages in factor conditions leads companies
  • 75. to develop unique skills Just-in-time inventory management: A production system that conserves space and lowers costs, by requiring inputs to a production process to arrive at the moment they are needed 7-14 Drivers of Success and Failure 15 Drivers of Success and Failure Related and supporting industries: The extent to which firms’ domestic suppliers and other complementary industries are developed and helpful In extreme cases, the poor condition of related and supporting industries can undermine an operation 7-16 Drivers of Success and Failure 17 Drivers of Success and Failure Firm strategy, structure, and rivalry: How challenging it is to survive domestic competition Companies that have survived intense rivalry within their home markets are likely to have developed strategies and structures that will facilitate their success when competing in international
  • 76. markets 7-18 Drivers of Success and Failure 19 7-20 Porter’s Diamond Model Types of International Strategies Multinational corporation: A firm that has operations in more than one country International strategy Strategies that are used to guide a firm’s effort in various countries These strategies vary in their emphasis on achieving efficiency around the world and responding to local needs There are three main international strategies available: Multidomestic Global Transnational 7-21 Types of International Strategies Multidomestic strategy: Sacrifices efficiency in favor of being responsive to varying local preferences across countries Global strategy: Sacrifices responsiveness to local preferences in favor of being efficient
  • 77. This strategy is the complete opposite of a multidomestic strategy Stresses the need to gain economies of scale by offering essentially the same products or services in each market Transnational strategy: Involves balancing the desire for efficiency with the need to varying preferences across countries Seeks a middle ground between a multidomestic strategy and a global strategy 7-22 Types of International Strategies 7-23 Options for Competing in International Markets When the executives in charge of a firm decide to enter a new country, they must decide between the five different ways of entering: Exporting involves creating goods within a firm’s home country and then shipping them to another country. A wholly-owned subsidiary is a business operation in a foreign country that a firm fully owns. A firm can develop a wholly-owned subsidiary through a greenfield venture, meaning that the firm creates the entire operation itself. Another possibility is purchasing an existing operation from a local company or another foreign operator. Franchising has been used by many firms who compete in service industries to develop a worldwide presence. © 2015 by Flat World Education, Inc.
  • 78. 24 Options for Competing in International Markets Licensing is most frequently used in manufacturing industries. Licensing involves granting a foreign company the right to create a company’s product within a foreign country in exchange for a fee. A firm that grants a license avoids absorbing a lot of costs, but its profits are limited to the fees that it collects from the local firm. Creating a joint venture or a strategic alliance is also an option. In a joint venture, two or more organizations each contribute to the creation of a new entity. In a strategic alliance, firms work together cooperatively, but no new organization is formed. In both cases, the firm and its local partner or partners share decision making authority, control of the operation, and any profits that the relationship creates. 25 Research Round-Up: Entry Strategies in Emerging Economies A study of four emerging economies—India, Vietnam, South Africa, and Egypt—examined multinational enterprises that used greenfield ventures, acquisitions, or joint ventures. The study found that forms of entry that could be more easily managed at arm’s length—greenfield ventures and acquisitions—were more common than joint ventures in countries that offer high levels of freedom to engage in business activity.
  • 79. Relying on joint ventures is helpful in countries that have inefficient markets or those marked by corrupt business practices. The overall message of this study is that when choosing a market entry strategy, executives must consider both the need to gain access to local resources and the business norms and rules in a particular country. 26 Chapter 7: Key Takeaways This chapter explains competition in international markets. Executives must consider the benefits and risks of competing internationally when making decisions about whether to expand overseas. Executives also need to determine the likelihood that their firms will succeed when they compete in international markets by examining demand conditions, factor conditions, related and supporting industries, and strategy, structure, and rivalry among its domestic competitors. When a firm does venture overseas, a decision must be made about whether its international strategy will be multidomestic, global, or transnational. When leading a firm to enter a new market, executives can choose to manage the operation via exporting, creating a wholly owned subsidiary, franchising, licensing, and creating a joint venture or strategic alliance. 27
  • 80. Learning Objectives: Chapter 1 Identify the fundamental question of strategic management List and define the 5 P’s of strategy Contrast intended, emergent, and realized strategies Describe how strategic management evolved into a field of study Summarize the strategic management process 1-1 Strategic management process 2 What is strategic management? Examines how actions and events involving top executives (such as Steve Jobs), firms (Apple), and industries (the tablet market) influence a firm’s success or failure Formal tools that exist for understanding these relationships are not enough Creativity is just as important to strategic management 1-3 5 P’s of Strategy 4
  • 81. A business model should be a central element of a firm’s strategic plan. A business model describes the process through which a firm hopes to earn profits. 4 Strategies Intended strategies: Strategy that an organization hopes to execute Deliberate strategy: The parts of the intended strategy that an organization continues to pursue over time Emergent strategies: Unplanned strategy that arises in response to unexpected opportunities and challenges Realized strategies: The strategy that an organization actually follows. They are a product of both intended and realized strategies Non-realized strategy: The parts of the intended strategy that are abandoned 1-5 Intended, Deliberate, and Realized Strategy 1-6 6
  • 82. History of Strategic Management 1-7 7 8 Classic Military Strategy 8 Modern History of Strategic Management 1-9 9 Modern History of Strategic Management 1-10 Modern History of Strategic Management 1-11 Strategic Management Process
  • 83. Strategic management process: Building a careful understanding of how the world is changing and the a knowledge of how those changes might affect a particular firm Understanding strategy and performance Environmental and Internal scanning Strategy formulation Strategy implementation 1-12 Chapter 1: Key Takeaways Strategic management focuses on firms and the different strategies that they use to become and remain successful. Multiple views of strategy exist, and the 5 P’s described by Henry Mintzberg enhance understanding of the various ways in which firms conceptualize strategy. Most organizations create intended strategies that they hope to follow to be successful. Over time, however, changes in an organization’s situation give rise to new opportunities and challenges. Organizations respond to these changes using emergent strategies. Realized strategies are a product of both intended and emergent strategies. Although strategic management as a field of study has develop mostly over the last century, the concept of strategy is much older. Understanding strategic management can benefit greatly by learning the lessons that ancient history and military strategy provide. Strategic management is a process that requires the ability to manage change. Consequently, executives must be careful to monitor and to interpret the events in their environment, to take
  • 84. appropriate actions when change is needed, and to monitor their performance to ensure that their firms are able to survive and, it is hope, thrive over time. 13 13 Crafting Strategy (Mintzberg, 1987) 14 Imagine someone planning strategy. What likely springs to mind is an image of orderly thinking: a senior manager, or a group of them, sitting in an office formulating courses of action that everyone else will implement on schedule. The keynote is reason-rational control, the systematic analysis of competitors and markets, of company strengths and weaknesses, the combination of these analyses producing clear, explicit, full - blown strategies. Now imagine someone crafting strategy, A whole different image likely results, as different from planning as craft is from mechanization. Craft involves traditional skill, dedication, perfection through the mastery of detail. What springs to mind is not so much thinking and reason as involvement, a feeling of intimacy and harmony with the materials at hand, developed through long experience and commitment. Formulation and implementation merge into a fluid process of learning through which creative strategies evolve.
  • 85. 14 Chapter 6: Supporting Business-Level StrategiesUnderstand the various forms of competitive and cooperative moves Explain the importance of competitive intelligence Utilize concepts from chapter to offer recommendations for companies Page * Making Competitive MovesA first-mover advantage exists when making the initial move into a market allows a firm to establish a dominant position that other firms struggle to overcome. A first-mover cannot be sure that customers will embrace its offering, making a first move inherently risky.A disruptive innovation is one that conflicts with, and threatens to replace, traditional approaches to competing within an industry.A foothold is a small position that a firm intentionally establishes within a market in which it does not yet compete. * Making Competitive movesA blue ocean strategy involves creating a new, untapped market rather than competing with rivals in an existing market.Bricolage creates new markets by using whatever materials and resources happen to be available
  • 86. as the inputs into a creative process. Hypercompetition refers to a situation that involves very rapid and unpredictable moves and countermoves that can undermine competitive advantages. Under such conditions, it is often better to make a reasonable move quickly rather than hoping to uncover the perfect move through extensive and time-consuming analysis. Page * Responding to Competitors’ Moves © 2015 by Flat World Education, Inc. © Thinkstock Fighting brand: A lower-end brand that a firm introduces to try protect the firm’s market share without damaging the firm’s existing brands. * Responding To Competitors’ Moves 6-* Page * Competitive Intelligence A systematic and ethical program for gathering information about competitors and general business trends to further your own company’s goals
  • 87. Page * Why CI? Play the Game DifferentlyNew market opportunityNew customersDevelop/leverage new value chain strengthsNew strategies/tacticsNew “flow” of the game Figuring out what drives behavior Environment/industry drivers Organizational drivers Managerial drivers Playing the Game Better Focus on existing competitors/strategic position Leverage value chain strengths Incrementally improve existing strategies/tactics Page * Competitor Intelligence Pyramid Industry experts/analysts Industry publications Trade shows/conferences Advertisements/PR University research centers Financial Court documents/patents Suppliers/customers Newspapers Help wanted ads Reverse engineering labs *
  • 88. Chapter SummaryExecutives may choose to act swiftly by being a first mover in their market, and their firms may benefit if they are offering disruptive innovations to an industry.Executives may also choose a more conservative route by establishing a foothold within an area that can serve as a launching point or by avoiding existing competitors overall by using a blue ocean strategy. When firms are on the receiving end of a competitive attack, they are likely to retaliate to the extent that they possess awareness, motivation, and capability.When firms encounter a potentially disruptive innovation, they might ignore the threat, confront it head on, or attack along a different dimension. Rather than engaging in a head-to-head battle with competitors, executives may also choose to engage in a cooperative strategy such as a joint venture, strategic alliance, colocation, or co- opetition. Regardless of the decision executives make, in many cases any attempt to act on a viable road map will result in progress that will get the firm moving in the right direction. *