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What is Strategic
Management? Introduction
By Prof. Balázs Hámori
bhamori@uni-corvinus.hu
&
Prof. Katalin Szabó
katalin.szabo@uni-corvinus.hu
http://www.youtube.com/watch?v=dhk1IPExjnk
http://www.youtube.com/watch?v=xz3x4006l1k
Outline
What is strategy?
Strategy and tactics
What is strategic management and how it is to develop?
The main building blocks: strategic analysis, strategy
development & strategic decisions and strategy
implementation
Two basic models of strategic approach: the I/O model and the
Resource Based Model
Problems of strategy implementation and monitoring
Q
There Isn‘t a Generally Accepted
Definition
• The different authors
provided different
definitions of strategy
• They give selective
attention to certain
issues relevant to
strategy definition
Alfred Chandler
1918-2007
Michael Porter,1947
http://www.youtube.com/watch?v=dhk1IPExjnk
Definitions of Business Strategy
• Chandler (1962):"Strategy is the determination
of the basic long-term goals of an enterprise,
and the adoption of courses of actions and the
allocation of resources necessary to carry out
these goals.‖ ( p.13)
• Porter (1966):"Competitive strategy is about
being different. It means deliberately choosing a
different set of activities to deliver a unique mix
of value" (p. 64).
• Henry Mintzberg (McGill University) defined
strategy as "a pattern in a stream of decisions"
to contrast with a view of strategy as planning.
The common elements of numerous
definitons
• The time horizons for strategy: is long term (calculated in
more years)
• Determining direction of the firm or organization, choosen
among consciously-evaluated alternatives ( E.g.Disney:
from cartoons to diversified entertainments)
• Organization: strategy is crucially concerned with the
boundaries of organization, solving problems differently
within and outside the organization
• Porter (1968):Most of definitions treat strategy as (a)
explicit, (b) developed consciously and purposefully, and
(c) made in advance of the specific decisions to which it
applies. In common terminology, a strategy is a "plan".
Q
The Origin of Strategy
o Strategy derives from the
ancient Greek
word strategos which was
used to describe the
leadership created by the
council of generals in
planning how to deploy their
army (stratos) to achieve
their objectives
o The military association
continued in the very
different society of ancient
China where Sun Tzu wrote
his Art of War
Sun Tzu
544 BC- 496 BC

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Strategies in the Past and in 21th
Century
Be extremely subtle, even to the
point of formlessness. Be
extremely mysterious, even to
the point of soundlessness.
Thereby you can be the
director of the opponent's fate.
Sun Tzu
Example: Conglomerates in the
70s
The biggest risk is not taking any
risk... In a world that changing
really quickly, the only strategy
that is guaranteed to fail is not
taking risks.
Mark Zuckerberg
Mark Zuckerberg
Example: microfinancing
Yunus
Strategy as an Emergent Process
o Strategy making in an unpredictable world
creates the necessity for flexible strategic approaches
o Serendipity and strategy
Accidental discoveries and happenstances can have
dramatic effects on strategic direction (Shale gas)
o Strategy making by lower-level managers too
Strategy evolves through autonomous action
o Intended and emergent strategies
Realized strategies are combinations of intended and
emergent strategies
The Purpose of the Strategy
The strategy
• is likely to be concerned with scope of an organization‘s
activities,
• is to do with the matching of activities of an organization
to the environment in which it operates
• is also to do with the maching of the organization‘s
activities to its resource capability,
• has major resource implications for the organization,
• is likely to affect operational decisions,
• will be affected by values and expectations of those
who have power in and around the organizaton,
• is likely to affect the long term direction of an
organization.
What is not strategy?
• Operational
effectiveness
• Tactics
• Pursuing short term
success (Blitzkrieg or
Napoleon)
Operational Effectiveness Isn‘t Strategy
• The Japanese firms are
very good at operational
effectiveness, but rarely
develop distinct strategic
position (Except of the
largest companies, just
like Sony, Canon and
Sega and a few others)
The Strategy and Tactics by Clausewitz
The tactics: using the
army to win the battle.
The strategy: using the
battles to win the war.
Carl von Clausewitz
1780-1831

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Difference between Strategy and Tactic
• Strategy is the overall plan
for deploying resources to
establish a favorable
position
• Tactic is a scheme for a
specific maneuver
„Casual use of the term
[strategy] to describe
nothing more than ―what we
would like to do next‖ is
inappropriate and belies the
complexity of true strategy
and strategic thinking.‖
Strategy Tactic
Planning Doing
Large
scale
Smaller
scale
Long time Short time
Why How
Difficult to
copy
Easy to
copy
Q
What Makes a Difference between Strategy and
Tactics? Examples
• Strategy: Improve
retention of top 10% of
company performers
• Strategy: Connect with
customers while in our
store in order to increase
sales
• Tactics: Offer best in market
compensation plan with
benefits as well as
sabbaticals to tenured top
performers, source ideas
from top talent.
• Tactics: Offer location based
mobile apps on top three
platforms, and provide top 5
needed use cases based on
customer desire and usage
patterns.
Strategy is Not a Quick Victory
• Initial success is hardly
ever decisive… If you win
power, you still have all
the problems of trying to
govern; if you have a run
of success with some
great products or an
innovative business
model, it does not mean
you will stay on top for
ever. Strategy, it turns
out, is really about trying
to work out in a sensible
way how to get from one
stage to the next
Nokia‘s founders
Source:www.economist.com nov 2, 2013
B
Q
Strategic Management –Defined
Art & science of
formulating,
implementing, and
evaluating, cross-
functional decisions
that enable an
organization to
achieve its long term
objectives
Different Types of Managerial Problems
Categories Urgent problems Not urgent problems
Important
problems
Crisis
management
(I have to do..)
Strategic management
(I really must get around to
doing)
Not
important
problems
Tactical
management
(I always seems to
get trapped doing..)
Operational
management
(I’ll probably end up just
doing..)
The Difference between the Strategic and
Operational Management
Strategic management Operational management
Ambiguity, complexity,
non-rutine decisions
Simple models, and
routinised decisions
Organization-wide Operationally specific
Fundamental, and
significant change
Small-scale change
Environment or
expectation driven
Resource driven

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Strategic Management as Practice and
as Theory
•Set of decisions and actions
that result to the formulation
and implementation of plans
designed to achieve a
company‘s objectives
•Study of why and how some
firms outperform others
Advantages of Strategic Management
o Strategy formulation activities enhance the firm‘s ability to
prevent problems
o Group-based strategic decisions are likely to be drawn
from the best available alternatives
o The involvement of employees in strategy formulation
improves their understanding and, thus, heightens their
motivation
o Gaps and overlaps in activities among individuals and
groups are reduced by participation in strategy formulation
in different roles.
o Resistance to change is reduced.
Strategic Vision, Intent & Mission
Strategic Vision
A written declaration of an organization's core purpose
and focus that normally remains unchanged over time.
Strategic Intent
Winning competitive battles by leveraging the firm‘s
resources, capabilities, and core competencies
Strategic Mission
An application of strategic intent in terms of
products to be offered and markets to be served
Examples for vision
Amazon:
• Our vision is to be earth's
most customer centric
company; to build a place
where people can come
to find and discover
anything they might want
to buy online."
• To have our
product in every
home in the United
States
Mission statements (Examples)
Microsoft
"to create a family of devices and
services for individuals and
businesses that empower people
around the globe at home, at
work and on the go, for the
activities they value most
Starbucks
Our mission: to inspire and
nurture the human spirit – one
person, one cup and one
neighbourhood at a time.
W
Writing assignments ( 5
minutes)
Please formulate a vision
and a mission statement
For your own company or a company known
for you
___________
Pease indicate the company profile(main
activity ) and
Size (number of employees)

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Strategy formulation: from Vision to Implementation
• Define the organization vision
• Formulate the mission statement
• Map the element of outer environment around (threats and
opportunities)
• Taking into account the inner conditions (Strengths and
Weaknesses)
• Determine strategic alternatives
• Formulate strategy (long term)
• Implement strategy through tactics (short term)
Strategic
Position
(analysis)
Strategy
implementation
Strategic
choices
Basic Model of the Strategic Management
Process
The Strategic Analysis
The strategic analysis is concerned with understanding the
strategic position of an organization.
The main factors of the strategic analysis related to
organization.
• The environment: provide on one hand threats upon the
firm, and the same environment provides opportunities
• The resources: provide tools to answer the environmental
challenges, and determine strengths and weaknesses of
the organizations
• Culture and expectations: determine values and
expectations of those who have power in and around the
organization,
The Strategic Choice and Decision
The strategic choice is concerned with the strategic
options, and a series of strategic decisions.
The main factors of the strategic choice:
• Identifying and generating strategic options,
• Evaluate of the strategic options in the context of the
strategic analysis to assess their relative merits
• Selection of new strategy, selecting those option which
the organization (and the main stakeholders) will pursue
The Strategic Implementation
The strategic implementation is concerned with the
translation of strategy into action, projects, and
programs.
The main factors of the implementation process:
• Planning and allocating resources, and set up the control
systems
• Re-form the organizational structure, design a new
culture if it needed.
• Managing strategic change

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Intended
strategy
Unrealised
strategy
Realised
strategy
Imposed
strategy
Strategy
as outcome
(of cultural and
political
processes)
Strategy Development Routes
Continuity Incremental Flux Transformational
Patterns of Strategy Development
Strategic decisions
Product launch
Acquisition
Divestment
Overseas expansion
Strategies evolve and inform
strategic decisions, which in
turn consolidate strategic
direction
Evolving
strategic
direction
Strategic Evolution and Consolidation
K
Q
Two Approaches to the Strategy
The Theoretical Foundation
o The first one is rooted in Industrial Organization (I/O)
theory, and focuses on the external environment of
competitors within an industry. The I/O approach is
embedded in Economics, and it was through I/O that
Strategy was born. I/O examines with the structure of an
industry, such as size, growth, and profitability. From this
perspective, competitive advantage derives from an
organization‘s relative position within an industry (Porter,
1981)
o The second approach, called Resource Based Approach
focuses on the internal environment. Competitive
advantage depends on an organization‘s unique
resources and/or capabilities add value, are rare, difficult
to duplicate and can be exploited by the firm
Strategy dictated by the
external environment
of the firm (what
opportunities exist in
these environments?)
Firm develops internal
skills required by
external environment
(what can the firm do
about the
opportunities?)
General
Environment
Global
Technological
External Environments
Industry
Environment
Competitor
Environment
1. A Conventional Approach of Strategic
Management : The I/O Model Assumptions of the I/O Model
o Pressures and constraints from the external
environment determine the strategies that would result in
above-average returns
o Most firms competing within a certain segment of a
particular industry and having similar relevant
resources and pursue similar strategies adequate to the
resources
o Resources are highly mobile across firms
o Decision makers are assumed to be rational and acting
in the firm‘s best interests, directed by profit-maximizing
behaviors

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I/O Model of Strategy
Superior returns: earning
of above-average returns
The External Environment
An Attractive Industry
Strategy Formulation
Assets and Skills
Strategy Implementation
Superior Returns
External environment in I/O model
• The organization
• Competiors
• Industry(sector)
• Macro environment
Study the external environment, especially the industry
environment, economies of scale, barriers to market
entry, diversification, product differentiation, degree of
concentration of firms in the industry
Choosing an attractive industry
o Locate an attractive
industry with a high
potential for above-
average returns
o Attractive industry: one
whose structural
characteristics suggest
above-average returns
The 10 Best Industries for 2013 (U.S.)
• Social networking sites (a projected 51 percent
increase in jobs. Social networking sites account for
about 20 percent of the time people spend online and
are just beginning to attract major ad revenue)
• Social network game development (36 percent
increase).
• Video game publishing (35 percent)
• Voice over IP (28 percent)
• Sustainable building materials (26 percent)
• Online payment processing software (22 percent)
• Green building construction(22 percent)
• Home builders(14 percent).
• Remodeling (12 percent)
• Wire and cable manufacturing(11 percent)
I/O Model:Skills and Assets
o Develop or acquire assets
and skills needed to
implement the strategy
Assets and skills: those
assets and skills required to
implement a chosen
strategy
2.Resource-based Model of Strategy
Rooted in the Resource Based Theory of
Firm
• The resource-based view (RBV) argues that firms
possess resources, a subset of which enable them to
achieve competitive advantage, and a subset of those
that lead to superior long-term performance
• Resources that are valuable and rare, can lead to the
creation of competitive advantage. That advantage
can be sustained over longer time periods to the
extent that the firm is able to protect against resource
imitation, transfer, or substitution
• Facts and empirical researches have strongly
supported the resource-based view

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Penrose, the Forerunner of the Resource-
Based Approach
• It is widely
acknowledged that
Penrose (1959) is
one of the more
influential books of
the second half of
the twentieth
century.
• Other big name in
the RB Theory:
Barney, 1991.
Edith Penrose
1914 – 1996
Select a strategy, that
best allows the firm to
utilize its resources
and capabilities-
relative to
opportunities in the
external environment
Strategy formulation
and implementation:
strategic actions taken
to earn above average
returns
Resource-based Model of Strategy
1.Resources
2.Capability
3. Competitive Advantage
4. Attractive Industry
5.Strategy for/Implementation
6. Evaluation and Control
1.Identify the firm‘s resource-
strengths and weaknesses
compared with competitors
2.Determine the firm‘s
capabilities--what it can do
better than its competitors
Capability: capacity of an
integrated set of resources to
integratively perform a task
or activity
Resource-based Model: Resource and
Capability
The nature of
competition is changing
Competitive Landscape
Dynamics of strategic
maneuvering among
global and innovative
combatants
Price-quality
positioning, new
know-how, first
mover
Protect or invade
established product
or geographic
markets
Hypercompetitive environments
Challenges of global economy
Locate an attractive industry
An attractive industry:
industries with high
profitability, high growth, or
other attractive characteristics
An industry with opportunities
that can be exploited by the
firm‘s resources and
capabilities
Resource-based Model of Strategy:
Looking for an Attractive Industry
Resource-based Model
Strategy Formulation &Implementation
Select a strategy that best allows the
firm to utilize its resources and
capabilities relative to opportunities in
the external environment
Implementation of selected strategy
through strategic actions leads to
earning above average returns
During the implementation process
the management may encounter
unanticipated obstacles
Consequently the managers may
need to modify the original strategic
plan to effectively move past the
obstacle or to decide the best route
to take
B

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What is strategy implementation?
The process of putting strategies and policies into
action through the development of:
• Programs - statements of activities or steps
needed to accomplish a single-use plan
• Budgets - statements of a corporation‘s
programs in financial terms
• Procedures - systems of sequential steps or
techniques that describe in detail how to perform
particular tasks or jobs.
Strategic Flexibility is needed
Organizational
slack
Strategic
reorientation
Learning capacity
Strategic
flexibility
Organizational Slack Q
• Organizational slack can be defined as the
excess capacity or resources of the organization
• They represent under utilised and hidden spare
energies within a company that may be
recaptured and employed for a variety of tasks
• It is the failure of an organization to work with the
full efficiency. High efficiency would be
impossible with a considerable excess of
resources above what is strictly necessary
Consciously generated slack for
innovation and flexibility
• 3M provide it‘s scientists with time to work on their own
projects of interest, and Googlers have also found out
how valuable and profitable slacking can be with their
Innovation Time Off program.
• Google encourages its engineers to spend 20 percent of
their time on projects that interest them, and the 50
percent of new product launches originated from the
above 20 percent time
• Several services provided by Google such
as Gmail, Google News, Orkut and AdSense were
originally created by employees in their work time, which
they could use freely.
What Leads to Formulating a New
Strategy?
Triggering
events
New CEO
External intervention
Threat of change in
ownership
Performance gap
Strategic inflection
point
Stimulus
for change
in
strategy
Q
Strategic re-orientation:The Nokia story (1)
• The predecessors of the modern Nokia
were the Nokia Company (Nokia
Aktiebolag), Finnish Rubber Work
Ltd) manufacturer of galoshes and
other rubber products
• The first big strategic re-orientation: In
1967 Nokia form a new industrial
conglomerate, that was involved in
many industries, producing paper
products, car and bicycle tires, footwear,
communications cables, televisions and
other consumer electronics, personal
computers, electricity generation
machinery, robotics, plastics, aluminum
and chemicals. This paved the way for
Nokia's future as a global corporation
The Nokia-founder,
Eduard Polón
(1861-1930)

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Strategic reorientation :The Nokia story
(2)
• The second big strategic re-
orientation: In 1987, Nokia
introduced one of the world's first
handheld phones. Nokia launched
its handset in 2003, with over 200
million units shipped, was the
best-selling mobile phone of all
time and the world's top-selling
consumer electronics product
• Nokia was one of the key
developers of GSM, the second
generation mobile technology
which could carry data as well as
voice traffic.
From the galoshes to GSM
Monitoring and Control
• The core of
monitoring process
corporate activities
and performance is
that actual
performance can be
compared with
desired performance
Strategic Decision-Making Process: Summarizing
model
Review and
Revise as
Necessary:
Mission
Objectives
Generate
and
Evaluate
Strategic
Alterna-
tives
Select
and
Recommend
Best
Alternative
Implement
Strategies:
Programs
Budgets
Procedures
Evaluate
and
Control
Strategy
Implementation
Step 7
5(b) 6(a) 6(b) 7 8
Analyze
External
Factors:
Opportun-
ities
Threats
Scan and
Assess
Internal
Environment:
Structure
Culture
Resources
Analyze
Internal
Factors:
Strengths
Weak-
nesses
Select
Strategic
Factors
(SWOT)
in Light of
Current
Situation
Scan and
Assess
External
Environment:
Societal
Task
Evaluate
Current
Performance
Results
Examine and
Evaluate the
Current:
Mission
Objectives
Strategies
Policies
Review
Corporate
Governance:
Board of
Directors
Top Man-
agement
Strategy
Formulation:
Steps 1 – 6
3(a)
1(a) 1(b) 2 5(a)
4(a)
3(b)
4(b)
Evaluation
and
Control:
Step 8
Problems in Strategic Management
• The energies that managers devote to the strategic
management may have a negative impact on fullfilling
their operational task
• If the creators of strategy are not involved in its
implementation, they may shirk their individual
responsibility for the decision
• Strategic managers may handle in a problematic
manner the disappointment of participating
subordinates over unattained expectations.
Issues to Discuss in the Course
• What is Strategy? What is Strategic Management? Introduction
• The Five Competitive Forces that Shape Strategy
• The Core Competence of the Corporation
• Corporate Governace
• Strategic Decisions Making in Companies, Using Balanced Sorecard
• Internal and External Methods of Firms Development
• General Principles of Organization Design
• Innovation models
• Strategies of global expansion
• Corporate culture and the stakeholders
• Implementation of strategy
Environmental
Analysis
Porter‘s Model of Competitive
Forces
by Prof. Balázs Hámori
&
Katalin Szabó

11. 07/07/2014
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“An industry‘s profit potential
is largely determined by the
intensity of competitive rivalry
within that industry.‖
Michael Porter
Motto
Outline
• PESTEL analysis
• Definition of Competitiveness
• The Five Competitive Forces
• Threat of Entry and Entry Barriers
• Typology of Entry Barriers
• Innocent or structural versus strategic
• Tangible or psychological
• Powerful Suppliers and Buyers
• The Threat of Substitute Products or
Services, and
• The Jockeying among current contestants.
Trend extrapolation Decentralisation
Delphy analysis
Experience
and learning
Scenario
planning
ENVIRONMENTAL
CONDITIONS
Static
Dynamic
ENVIRONMENTAL
CONDITIONS
Simple Complex
Approaches to Making Sense of the Environment
Strategic analysis
This type of strategic analysis examines the external environment
and the global factors that may affect a business. It can provide a
quick and visual representation of the external pressures facing a
business, and their possible constraints on strategy. It is usually
divided into four external influences on a business
P – Political
E – Economic
S – Social
T – Technological
E – Environmental
L – Legal
PESTEL Analysis
Q
PESTEL analysis: POLITICAL
This is concerned with how political developments,
regionally, nationally and internationally might
affect a business‘s strategy.
Govenment stability
Taxation policy: Example: Flat rate
Foreign trade and capital investment regulation
Social welfare policy
Example:Tobacco shops in Hungary
PESTEL analysis: ECONOMIC
This involves the analysis of a wide variety of economic
factors and their effects on a business. They include:
Economic growth and rising living standards
Low/high levels of inflation
Low/high levels of unemployment
Balance of payments
(value of imports vs exports)
These factors can further be broken down into
macro-economical and micro-economical
factors.

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PESTELAnalysis: SOCIAL
What competitive advantage might a business gain by
social changes taking place outside of the
business?
Aging population, reduced birth rates, longer life
expectancy
Changing role of women in the workplace
Improved education--better skilled workers
Early retirement, more leisure time
Rising divorce rates, more “single” households
Job security
Immigration creating a wider range of consumer tastes
Example:
 16% of all care workers are migrant workers in the U.K.
Without them, the range of care provision would be less
Aging in the U.S. The share of
population over 65
Why not addapt the companies to
aging?
 In Germany only
4.5% of the
characters in 656
ads were 60 years
or older.
 In May 2011, MSNBC reported on a
US study showing the disconnect
between fashion magazines and their
aging readers.
 ―An analysis of editorial and
advertising images reveals that
despite proportions of older readers
ranging as high as 23%, fashion
magazines portray women over 40
sparingly, if at all.‖
PESTEL analysis: TECHNOLOGICAL
The impact of technological advancement on business
strategy
 Business Software applications (word processing,
spreadsheets, database, accounting systems,
inventory systems)
 Computer-aided design
 Computer-aided manufacturing
 Internet/Intranet
 Rates of technological obsolescence
 New discoveries
 Govt and Industry focus on tech
 Govt spending on research
PESTELAnalysis: ENVIRONMENTAL
People‘s perception and reaction to environmental
issues can affect a business
Environmental protection law
Waste Disposal
Energy consumption
PESTELAnalysis: LEGAL
Competition protection
unfair trade practices, monopoly,
mergers & takeovers
Employment Law
Health and Safety
Product safety
Strength of the rule of law

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Example: PEST- analysis
Heineken
Political
Government has a
negative view on alcohol
due to the negative social
and health
consequences
All governments levy
higher taxes on beer
while foster to export
alcohol
 Economic
Unemployment around the
world is rising. Money for
leisure spending will decrease
for everyone globally
PEST- analysis Heineken
Sociocultural
 Beer isn‘t just for men anymore.
More and more women are
enjoying beer for the taste
 The new lifestyle of the newest
generation is face paced.
 This leads to less time to drink
beer; at home or at a bar.
 The growing population in China
leads to more leisure time for
people to drink.
 The more health conscious
America becomes leads to less
drinking.
 Apps appers in the beer
industry
 One, called Batch. It, is
a cloud-based solution
built with the brewer in
mind and keeps track of
all of the logistics
involved with managing
a brewhouse like
batches in fermentation,
inventory stores,
completed beers, etc.
That product will be out
in the first quarter of
2014.
Technological
The Five Competitive Forces
• The threat of new
entrants
• The bargaining power
of customers
• The bargaining power
of suppliers
• The threat of substitute
products or services,
and
• The jockeying among
current contestants.
Michael Eugene
Porter (1947)
is the Bishop William
Lawrence University
Professor at the
Institute for Strategy and
Competitiveness, based
at the Harvard Business
School.
He is a leading authority
on competitive strategy
and the competitiveness
and economic
development of nations,
states, and regions.
Five-plus forces of competition
The First Competitive Force: Threat of Entry,
Entry Barriers and entry Deterrence
 If firms in an industry are
profitable, there are likely
to be potential entrants
Successful entry will
lower profits for
existing/incumbent
firms
Therefore existing firms
will want to impede
(deter) entry
• Question: what kinds of
entry barrier exist? Hint:
some are ‗tangible or
semi tangible‘ and some
are based on beliefs
(psychological)
Q
Basic Asymmetry between Incumbents and Entrants
Sunk costs represents
investments put at risk by an
entrant uncertain of its ability to
successfully establish its in the
market
Established relationships with
customers and suppliers are not
easy to replicate
Learning curve effects
Switching costs for the customers

14. 07/07/2014
14
Two important concepts
Incumbent: referred to as a company that is powerful
and has a large market share, as in, "the dominant
incumbent software company." In business, the
incumbent is typically the largest player in a given
industry
Sunk costs: is a retrospective cost that has already
been incurred and cannot be recovered. Sunk costs are
sometimes contrasted with prospective costs, which are
future costs that may be incurred or changed if an
action is taken
Tipology of entry barriers
Innocent or structural
barriers
Exogenous. Due
to changes in
technology,
consumer
preferences or
government
intervention
These types of
entry is
unintentionally
erected as a
side effect of
normal profit
maximization
Strategic or
behavioral barriers
Endogenous.Du
e to purposeful
action by
incumbents
A strategic entry
barrier is
conciously erected
to reduce the
possibility of entry.
There are eigth major sources of barriers to entry
•Economies of scale
•Product differentiation
•Capital requirements
•Cost disadvantages
independent of size
•Ownership a key scarce* resource
•Access to distribution channels
•Network effects*
•Switching costs*
•Government policy
* These barriers
weren‘t
mentioned in the
original book of
Porter
Structural or Natural Barriers to
Entry: Economies of Scale
 Economies of
scale These
economies deter
entry by forcing the
aspirant either to
come in on a large
scale or to accept a
cost disadvantage.
 Examples:These can
occur in manufacturing
(eg Siemens, ABB, GE),
marketing (eg. Vodafone,
ABInBev), purchasing,
financial (larger
companies tend to benefit
from a lower cost of
capital) and managerial
(larger companies can
hire more specialised
workers).
Q
Structural or Natural Barriers to
Entry: Product differentiation
• Brand identification creates
a barrier by forcing entrants
to spend heavily on
marketing
• This can be seen most
clearly in the branded
consumer goods industry
(eg. Coca-Cola, LVMH).But
it also occurs in any industry
where the end product is
both essential and relatively
technologically unique (eg.
pharmaceuticals, defence
hardware)
In these cases consumers
may be willing to pay a
premium price for a
relatively cheap physical
good due to either loyalty or
the intangible connotations
attached to being seen with
such a product.
With unique essential
technology, a company can
become a legal monopolist,
but only so long as the
product is not superseded
Structural or Natural Barriers to
Entry: Capital requirements
 This type of entry barrier is
arguably a consequence of
economies of scale rather
than a separate barrier in its
own right.
 Where economies of scale
exist, new competitors need
to enter a market ―in size‖,
committing large amounts of
capital to purchase fixed
assets, to finance inventory
and receivables and to
finance initial operating
losses.
 Higher capital
requirements
mean the pool of
potential entrants
is much reduced,
limiting the threat
of entry

15. 07/07/2014
15
Structural Barriers: Cost
disadvantages
Cost disadvantages
independent of size --
Entrenched companies may
have cost advantages not
available to potential rivals
High set-up costs deter initial
market entry. Many of these
costs are sunk costs
High R&D costs. When firms
spend money on R & D, it is
often a signal to potential
entrants that they have large
financial reserves
In order to compete, new
entrants will have to match, or
exceed, this level of spending in
order to compete in the future. It
is widely found in oligopolistic
markets such as
pharmaceuticals and the
chemical industry.
Such advantages include
experience (eg. many medium-
sized companies in the German
& Japanese manufacturing
industries) access to unique
assets: eg. proprietary
technology (Nippon Electric
Glass)
Structural or Natural Barriers to Entry:
Network effects
• A network effect is that
multiple users have on the
value of a good or service to
other users.
• The greater the number of
people using the specific good
or service the greater the
individuals benefit
• If a strong network already
exists it may limit new entrants
who fail to gain sufficient
numbers of users to create a
positive network effect.
Examples
Telephone in 20th century
Social media in 21st century
Structural or Natural Barriers to Entry:
Ownership scarce resource and switching costs
Ownwership and control
Owning scarce resources,
which other firms could
use, creates a
considerable barrier to
entry, such as an airline
controlling access to an
airport.
.
Such advantages
include access to
unique assets (eg.
particular raw material
deposits in the mining
industry), proprietary
technology
Access to distribution channels
• For many consumer
goods, the supply-chain
is controlled by a small
number of participants in
each segment, which
often includes the
retailers and existing
product
manufacturers. This can
prevent new entrants
from getting their
products to market
• The newcomer must,
of course, secure
distribution of its
product or service
Structural or Natural Barriers to Entry:
Government Policy
• In certain industries, governments award either monopoly or preferential rights to particular operators.
• Governments can limit or even foreclose entry to industries with such controls as license requirements and limits on access to raw
materials etc.
• Utilities in most countries would fall into this category. Sometimes this happens by accident rather than on purpose, as heavy
government regulation
Examples can be found in
the financial sector and the
healthcare sector acts to
create a high cost of entry
for potential new
competitors
Blockaded Entry
• Entry is considered
to be blockaded
when the incumbent
does not need to
take any action to
deter entry
• Existing structural
barriers are effective
in deterring entry
90
arkets

16. 07/07/2014
16
Strategic Barriers to Entry
• Strategic entry barriers
are barriers created and
maintained by the
incumbents
• Incumbents can erect
strategic barriers by
expanding capacity
and/or resorting to limit
pricing, predatory
pricing and other means
in order to keep off the
rivals.
91
Deterred Entry by predatory pricing
• Entry deterring strategies
are effective in discouraging
potential rivals and are cost
effective
• Deterred entry is the only
condition under which the
incumbents should engage
in predatory acts applying
predatory pricing
92
Predatory pricing is an act
of setting prices below the
average cost of production
attempting to eliminate the
competition. This sort of
pricing is illegal as it makes
markets vulnerable to a
monopoly
Limit pricing
 A limit price is a price, or pricing strategy, where products are
sold by a supplier at a price of which is somewhere around the
average cost of production. Incumbent discourages entry
before the entry itsef occurs
 If a monopolist set its profit maximizing price (where MR=MC)
the level of supernormal profit would attract new firms into the
market
 Therefore, the monopolist may decide to set a price below this
profit maximizing level, but still enable it to make higher
profits than in a competitive market
 For limit pricing to be effective, the monopolist needs to
increase output up to the level where a new firm will not be
able to make any profit on entering the market
What is the difference between limit
pricing and predatory pricing
Predatory pricing is when incumbent charges a
price deeply below average cost in order to
make a loss in the short run and force rival firms
out of the industry
Limit pricing is when you reduce your prices to
just above average costs and make sure that
any new entrant would make a loss. Monopoly
does this as they enjoy economies of scale and
so they can keep their monopoly status in the
industry
When Deterrence failed:
Accommodated Entry
• Accommodated
Entry: Exists if
structural entry
barriers are low and:
• entry-deterring
strategies will be
ineffective; or
• the cost to the
incumbent of trying to
deter entry exceeds
the benefits it could
gain from keeping
the entrant out.
• When the condition
accommodated entry,
the incumbents should
not bother to deter entry
• This condition is typical
of markets with growing
demand or rapid
technological change
• Structural barriers may
be low and strategic
barriers may be
ineffective in deterring
entry or simply not cost
effective
95
Typology of Entry Barriers
Intention/Materiali
zation
Tangible or
Semi-tangible
Psychological
Innocent/natur
al
• Economies of scale
• Cost disadvantages
• Product differentiation
• Network effect
• Control of resources
• Access to distribution
channels
• Legal factors(certification
and patents)
• Government policy
• Switching costs
• Customer loyalty
Strategic/Purp
oseful
Product development, product
bundling, loss leaders, limit
pricing, predatory pricing,
lock-in due to compatibility
Goodwill and reputation
brands
Aggressive response to
entry – fighting is a
credible threat even if
costly for the incumbent

17. 07/07/2014
17
The Second Competitive Force:
Powerful Buyers
Buyer power should be defined as the ability of a
buyer to depress the price it pays a supplier or
obtain more favorable nonprice terms
Unlike the textbook definition of monopsony
power, this definition recognizes that powerful
buyers may seek not only price reductions from
their suppliers but nonprice concessions as well
Buyer Power: Supermarket Chains
 Although large buyers like
Wal-Mart, Aldi or Tesco
occupy important positions in
the economy, most of the
analysises focus on the
conduct of sellers
 The power of important
supplier or buyer group
depends on the market
situation and on the relative
importance of its sales or
purchases to the industry
compared with its overall
business.
 A company's choice of
suppliers to buy from
or buyer groups to sell
to, should be viewed
as a crucial strategic
decision.
• It is concentrated or purchases in large volumes.
• The products it purchases from the industry are standard or
undifferentiated.
• The products it purchases from the industry form a
component of its product and represent a significant fraction
of its cost
• It earns low profit margins, which create great incentive to
lower purchasing costs.
• The industry‘s product is unimportant to the quality of the
buyers‘ products or services.
• The industry‘s product does not save the buyers money.
• The buyers pose a credible threat of integrating backward to
make the industry‘s product.
Buyer power is likely to be high when:
The Source’ of Buyers’ Power Examples for the given
source
It is concentrated or purchases in large
volumes
Example: automotive manufacturing
industry, which purchases many
relatively undifferentiated components
from suppliers who have few – if any –
other customers
The products it purchases from the
industry are standard or
undifferentiated.
Example: Paper and packaging
industry, as most market participants
manufacture identical or relatively
standardized products
The products it purchases from the
industry form a component of its
product and represent a significant
fraction of its cost. .
Example: Supermarkets. Cost of
goods sold represents the bulk of a
supermarket‘s cost and are sold-on to
the customer at relatively low margins
The Source’ of Buyers’ Power Examples for the given
source
It earns low profit margins, which
create great incentive to lower
purchasing costs.
The industry‘s product is unimportant
to the quality of the buyers‘ products
or services.
Example: Business support services
such as the provision of office-cleaning
and waste removal both fall into this
category.
The industry is not an important
customer of the supplier group
The industry‘s product does not save
the buyer money.
Example:This statement applies to the
entire cost of goods sold for a retailer.
Reducing the costs of such inputs
allows the buyer to pass the savings
on to customers
The Third Competitive Force:
Powerful Suppliers
• Some industries are dominated
by a few companies and is more
concentrated than the industry it
sells to.
• The power of each important
supplier group depends on the
market situation and on the
relative importance of its sales
or purchases to the industry
compared with its overall
business.

18. 07/07/2014
18
Supplier Power is Likekly to be High
• It is dominated by a few companies and is more
concentrated than the industry it sells to.
• Its product is unique or at least differentiated.
• Switching costs exist.
• It poses a credible threat of integrating forward
into the industry‘s business.
• The industry is not an important customer of the
supplier group.
The Source Suppliers’
Power
Examples for the given
source
Their industry is
concentrated than the
industry it sells to
Example: iron ore industry
BHP Billiton, Rio Tinto etc.
Their product is unique
or at least differentiated
Example :ARM Holdings,
which designs the chip-set
used in the Apple iPod,
iPhone and iPad
The Source Suppliers‘ Power(1)
The Source Suppliers‘ Power(2)
The Source Suppliers’ Power Example for the given source
Switching costs exist Examples: changing software
provider (eg. SAP and Oracle benefit
in this way)
It poses a credible threat of
integrating forward into the
industry‘s business
An example here is the bulk
chemicals industry, as participants in
the downstream oil industry could
easily integrate forward if they so
chose
The industry is not an important
customer of the supplier group
The Fourth Competitive Force:
The Threat of Substitute Products
Substitutes often come rapidly
into play if some development
increases competition in the
industries and causes price
reduction or performance
improvement.
Examples of substitute include
e-mails, instant messages,
faxes, and digital delivery for
document delivery companies
or
video teleconferences instead
of airline travel to meetings or
conventions.
• The companies need to
identify products and services
which can perform essentially
the same functions as the
given industry‘s products and
services. ―Blinder mentalities‖
about their own industries
prevent the timely
identification of disruptive
substitutes that are offering
somewhat similar products at
much lower price.
Pressure from Substitute Products
• Firms in an industry are also affected by competition from
related markets. The availability of substitutes influences
the ability of a firm to raise prices, or to change the
attributes of its products
• Identify possible substitute products by asking: ―What set
of products constrains the ability of firms in this industry to
substantially increase prices ?
• Substitute products become particularly important in times
of rapidly increasing demand, and in industries with few
competitors (making it difficult to increase supply quickly)
Forms of Substitutes
Forms of substitutes Examples for the given type
Product substitution
A new product may render a product
superfluous.
Substitutes may also be thought of as
those competing for discretionary
expenditure.
Pepsi & Coke are a similar kind of
product, both fizzy and sweet and
one can be drunk instead of the
other. Hence substitutable.
Refrigerator manufactures
competes for other household
expenditure with
Substitution of need
People redirect themselves towards
opportunity.
Better toothpaste reduces the need
for dentists.
Quicker trains substitute the flights
Generic substitution
The dispensing of a chemically
equivalent but less expensive drug in
place of a brand-name product that
has an expired patent
Crestor or Lipitor, both very potent
cholesterol lowering drugs. The
difference here is only the brand.
Doing without Tobacco

19. 07/07/2014
19
The Fifth Competitive Force: Jockeying for
Position. Competitors‘ Threat
The product or service
lacks differentiation or
switching costs, which
lock in buyers and protect
one combatant from raids
on its customers, by
another.
Intense rivalry is related to the
presence of a number of
factors:
• Fixed costs are high or the
product is perishable,
creating strong temptation to
cut prices
• Capacity is normally
augmented in large
increments.
• Competitors are numerous or
are roughly equal in size and
power
• Industry growth is slow,
precipitating fights for market
share that involve expansion-
minded members
Jockeying for Position(1)
Condition for Jockeying Examples
Competitors are numerous or are
roughly equal in size and power.
The packaging industry suffers from
this characteristic.
Industry growth is slow, precipitating
fights for market share that involve
expansion-minded members.
Although incomes are growing in the
developed world, the marginal
pound of income is generally spent
on services (healthcare etc),
meaning the market for packaging
grows only in the low single digits (it
is not economical to transport
packaging)
The product or service lacks
differentiation or switching costs
which lock in buyers.
In the paper industry the product is
homogenous and switching costs
are zero (indeed, most large printers
will source their paper from a
number of suppliers)
Jockeying for Position(2)
Fixed costs are high or the product is
perishable, creating strong temptation
to cut prices
Capacity is normally augmented in
large increments. Such additions, as
in the chlorine and vinyl chloride
businesses, disrupt the industry‘s
supply – demand balance and often
lean to periods of overcapacity and
price-cutting.
Exit barriers are high. Exit barriers,
like very specialized assets or
management‘s loyalty to a particular
business, keep companies competing
even though they may be earning low.
Example: the airline industry.
As any empty seats perish as
soon as the plane takes-off,
while the marginal cost of
carrying an additional
passenger is almost zero.
Consequently, small declines in
customer demand can lead to
large declines in industry pricing
Establishing a strategic agenda
• To establish a strategic agenda for
dealing with these forces and to
grow despite them, a company
must understand how they work in
it‘s own industry and particular
situation.
• What makes them vary?
• The essence of strategy
formulation is coping with the
specific kinds of competition
experienced.
The Core Competences
of the Corporation and the Value
Network
Prof. Balázs Hámori
bhamori@uni-corvinus.hu
&
Prof. Katalin Szabó
katalin.szabo@uni-corvinus.hu
Outline
Definition of core competency and basic terms
related to it: resources, competences,
capabilities
Core capability and core rigidity
Value chain and value network. Porter‘s value
chain analysis
Customer value
SWOT analysis 114

20. 07/07/2014
20
Corporation Similar to a Large Tree
Leaves= End Products
Trunk and Major Limbs = Core Products
Roots = Core Competency
115
Basic Terms 1: Resources
 Resources – what a firm possesses. Resources
have three main characteristics: Utility, limited
availability and potential for economic
exploitation.
 Tangible assets (machines & equipments) E. g. Glaxo
Smith Kline‘s research laboratory or Google‘s power
station feeds its servers
 Intangible assets (people, brand name, that in most
cases inaccessible in the market) Examples: Intel‘s
excellent management or Coca-Cola‘s brand name
See: Hitt, Ireland and Hoskisson (2007)
116
Debt/ EquityDebt/ Equity
Classification And Indicators of Resources
117
Some Less Known Concepts
Brand equity: The value premium that a company realizes from a
product with a recognizable name as compared to its generic
equivalent
Turnover:
1. In accounting, the number of times an asset is replaced during
a financial period.
2. The number of shares traded for a period as a percentage of
the total shares in a portfolio or of an exchange.
Royalty: A payment to an owner for the use of property, especially
patents, copyrighted works, franchises or natural resources. In
most cases, royalties are designed to compensate the owner for
the asset's use, and are legally binding.
118
What Makes a Resource
Valuable?
Scarcity Appropriability
Demand
119
Audit Resources--Core Resources
Necessary
Resources
Unique
ResourcesResources
Easy to
imitate
Difficult to
imitate
Same as
competitors
Better than
competitors
Define core resources
Core
resources
120

21. 07/07/2014
21
Easy to Imitate:
Cash
Commodities
Can be Imitated (but may
not be):
Capacity Pre-emption
Economies of Scale
Difficult to Imitate:
Brand Loyalty
Favorable cost position
Employee Satisfaction
Reputation for Fairness
Cannot be imitated:
Patents
Unique location
Unique assets
(e.g. Mineral rights)
Source: Collis and Montgomery, Corporate Strategy: Resources and the Scope of the Firm (1996).
Resource Imitability
121
Basic Terms 2: Capabilities
 Capabilities describe the firm‘s ability to create,
deploy, modify, reconfigure, and leverage resources.
Valuable capabilities permit resources to be
combined in unique ways
 Core capabilities embodied in the staff‘s knowledge,
in technological systems, managerial systems, and
the institutionalized values. The above factors and
systems form evident practice of the organization.
 Unique combinations of the resources and
capabilities evolves core competencies 122
FUNCTION CAPABILITY EXEMPLARS
Corporate
management
Financial management, Strategic
control
Coordinating business units
Managing acquisitions
Exxon Mobile, GE,
IBM, Samsung, BP,
P&G, Citigroup,
Cisco
MIS Speed and responsiveness through
rapid information transfer
Wal-Mart, Dell,
Capital One
R&D Research capability
Development of innovative new
products
Merck, IBM, Apple,
M3
Manufacturing Efficient volume manufacturing,
Continuous improvement
Flexibility
Briggs & Stratton,
Nucor, Harley-D,
Zara, Four Seasons
Identifying Organizational Capabilities:
A Functional Classification (1)
123
FUNCTION CAPABILITY EXEMPLARS
Design Design capability Apple, Nokia
Marketing Brand management,
Quality reputation,
Responsiveness to
market trends
P&G, LVMH,
Johnson & Johnson
MTV, L‘Oreal
Sales,
Distribution and
Service
Sales Responsiveness,
Efficiency and Speed of
Distribution,
Customer Service
PepsiCo, Pfizer,
LL Bean, Dell,
Singapore Airlines,
Caterpillar
Identifying Organizational Capabilities:
A Functional Classification
124
Strategic Capability – Key Points
 Benchmarking
establishes relative
performance and
challenges
assumptions
 Management of
strategic capabilities
involves stretching
capabilities and
building dynamic
capabilities 125
Stretching and Adding Capabilities
 Extending best practices
 Adding and changing activities
 Stretching competences
 Building on apparent
―weaknesses‖
 Ceasing activities
 Trade-offs
 External capability development
 Trade-offs:A technique of reducing
or forgoing one or more desirable
outcomes in exchange for increasing
or obtaining other desirable
outcomes in order to maximize the
total return or effectiveness under
given
 Building on weaknesses. But the
best leaders realize that in order for
real achievements to become a
reality they must focus not only on
the pre-eminent attributes of
employees, but also on their
weaknesses, initiating efforts to both
buoy and leverage those
shortcomings to achieve greater
success.
126

22. 07/07/2014
22
Building Dynamic Capabilities
 Promote a learning
organisation
 Recognise intuition of people
 Accept conflicting ideas
 Experimentation as the norm
 Add activities to support
learning, e.g. ―venturing‖
business units
 Manage organisational
knowledge
 Need right culture and
structure
 Develop spiral of interaction
between tacit and explicit
knowledge
127
Benchmarking Strategic Capability
 Historical – performance compared to previous
years
 Industry/sector – comparative performance of other
organisations (strategic groups)
 Best in class – wider search for best practice
 Increased expectations due to improved
performance in another sector
 Breaking the frame about performance standards
to be achieved
 Spot opportunities to outperform incumbents in
other markets – stretch core competences 128
Competences
 How an organisation employs and
deploys its resources due to its
capabilities
 Efficiency and effectiveness of
physical, financial, human and
intellectual resources
 How they are managed
 Cooperation between people
 Adaptability
 Innovation
 Customer and supplier relationships
 Learning 129
The Differences Between Resources
and Competences
Resources Competences
Partly Tangible Intangible
Measureble Mostly difficult to
measure
Easy to identify the
„owners”
Difficult to identify
the „owners”
You can buy and sell You can acquire by
„learning by doing”
130
Definition of Core Competence
 The central idea is that over
time companies may develop
key areas of expertise which
are distinctive to that company
and critical to the company's
long term growth
 The main ideas about core
competences were developed
by C. K. Prahalad and G Hamel
through a series of articles in
the Harvard Business Review
followed by book - Competing
for the Futures.
C. K. Prahalad (1941-2010)
G. Hamel (left) Born: 1954
131
Characteristics of Core Competencies
 Combine multiple kinds of
abilities
 One business unit may
have several core
competencies
 Provide potential access to
a wide variety of markets
 Makes a significant
contribution to the
consumers‘ utility
 Difficult for competitors to
imitate
Example:
Apple‘s unique competence
seems to be its product design
process. With the iPod, Apple
combined the elements of
jukebox software, which could
organize a large amount of
songs, and MP3 players, which
held lots of songs. Apple
combined these elements in a
way that was simple to use.
Simplicity turned out to be the
core attribute that made the iPod
a revolutionary product, one that
changed consumer expectations.
132

23. 07/07/2014
23
Hard to Imitate
Miniaturization
Fastest and most extended
search
133
Identifying Core Competencies
(3 Tests)
 Provides potential access to
a wide variety of markets
 Makes a significant
contribution to the perceived
customer benefits of the end
product
 Difficult for competitors to
imitate
Competence Adhesives 134
Unique Resources and
Core Competences
 Unique resources
Critically underpin
competitive advantage
and cannot be imitatedc
or obtained by others
 For example, two core
competencies of FedEx® is
that FedEx® can deliver
packages faster and more
reliably than anyone else.
135
Competitors Are Also Challenging
FedEx: UPS
UPS has been very aggressive.: "UPS used to be a trucking company
with technology. Now it's a technology company with trucks." Largely
responsible for this transformation of UPS is the $11 billion the firm
poured into technology in the last decade. These funds were used to
buy a host of products-mainframe computers, a vast array of
networked PCs, handheld computers, wireless modems, and cellular
networks, among others-and to hire and support 4,000 programmers
and technicians. Founded in 1907, UPS relies on several core
competencies, including those of operational efficiency and
uniformity, to deliver over 3 billion parcels and documents annually.
UPS has formed a core competency in operational efficiency through
the development and consistent application of 340
precise methods that truck drivers are taught to use
when delivering customers' products
136
Benefits of Core Competency
 Provides opportunity for market
leadership
 Creates competitive advantage
 Gives chances for quick and
flexible adjustment to emerging
markets
 Helps to explore new markets
and creating customer value
137
Factors, Influencing Decisions about
Capabilities, and Core Competencies
 Uncertainty regarding current/future characteristics of
the general and industry environments
 Complexity - the interrelationship among factors that
shape a firm‘s environment(s), and top management
perceptions of these environments
 Intraorganizational conflicts among people making
and affected by resource allocation decisions 138

24. 07/07/2014
24
How Core Competences Change Over
Time: The World Wutomobile Industry
Market acess
o Global network
o Overseas plants
Quality/Reliability
o Production process
o Supplier management
Product features
(at low volume)
o Life-style niche marketing
o ‚Agile‘ production
???
139
Core Capability and
The Danger of Rigidity
 Core capability may
become rigidity (Gilbert,
2005). Too much slack
resources reduce re-
investment and are bad
for innovation (Nohria &
Gulati, 1996).
 Existing routines for
providing satisficing
solutions prevent
organizations from
outsourcing or initiating
changes.
The Rise and Fall of Eastman Kodak, an
Emblem of American Business Excellence140
Core Rigidity
 Introduced by Leonard-
Barton, 1992.
Flip side of core competen
ces, and caused by
overreliance on any
advantage(s) for too long.
While a successful firm's
management relaxes its
improvement efforts, others
keep on getting better and
obsolete its competitive
adventage.
 Example: General Motors
General Motors Founded in
1908, began selling their
vehicles in several countries
and grew rapidly.
Throughout most of the 20th
century GM has been at the
forefront of innovation and
technology.
GM today however, is no
longer the market leader
141
Causes, Led to the GM‘s Fiasco
External and internal factors came into place for GM’s reputation to go down:
1. Increase in costs -supplies, fuel, healthcare, and pension payouts
2. Over-dependence on the US market
3. Organizational structure
4. Their inability to keep up with the alternative energy movement.
During the late 90's early 2000's the automotive industry began to shifting to the
smaller more compact fuel efficient vehicles, and/or vehicles powered by
alternative energy, i.e. hybrids. This was the result of both the continuing rise in
gas prices, as well as the environmental issues that we now know of. GM
however did not develop a hybrid vehicle until 2004, five years after the release
of Honda's Insight Hatchback.
By inevitably having difficulties of avoiding core rigidity, General Motors have
fallen from top to bottom line.
Source:http://www.123helpme.com/core-rigidity-view.asp?id=164353
142
Rigidity types
 Creativity-lagging environment
 ―Unsharing‖ knowledge
 Engineering/sales cultural
discrepancy
 Reinventing the wheel
 Exploding knowledge maze
 Path dependency in innovative ideas 143
Hacklin, Inganäs ,
Plüss and Marxt
(2005
144
Creativity-lagging: Lack of team, methodology and transparency of idea
assessment; challenge, resource allocation and idea selection with filtering
―Unsharing‖ knowledge: not effective sharing of existing knowledge; challenge,
structure
Engineering/sales cultural discrepancy: EX Two different cultures; challenge,
collaboration internal and external
Reinventing the wheel: reinventing instead of innovating; challenge, structure
of project closing
Exploding knowledge maze: anonymous and difficult to find knowledge;
challenge, management of meta-knowledge
Path dependency in innovative ideas: conservative thinking; challenge,
sources for radical ideas
Source: Hacklin, Inganäs,Plüss and Marxt. (2005) Core rigidities in the
innovation process: a structured benchmark on knowledge management
challenges
Definitions of Some Concept

25. 07/07/2014
25
Value Chain and Value Network
The main roles of the value chain analysis:
 To diagnose strategic capability
 To understand how value is created or lost in
terms of the activities undertaken
The value chain describes the activities within
and around an organisation which together
create a product or service
145
Value Chain Elements
 Customer value added
 Margin orientation
 Primary activities
 Inbound logistics
 Operations
 Outbound logistics
 Sales and marketing
 Service and support
 Support Activities
 Human resources
(general and admin.)
 Tech. development
 Procurement
146
Main Areas of Primary Activities
 Inbound logistics: concerned with receiving, storing, and
distributing inputs,
 Operations: transformation the inputs into final products
and services,
 Outbound logistics: moving the product ti buyer
(including warehousing and distributinon) ,
 Marketing and sales: bringing the product to buyers and
inducing them to buy and use it,
 Services: activities to enhence or maintain the value of
product and service (installing, repairing, maintenace,
training, and other services)
147
Main Areas of Supporting Activities
 Procurement: process for acquiring resources
and input
 Technology development: covering product,
process and raw material development and
„know how‖
 Human resource management: recruitment,
training, motivating, development, and rewards
 Management infrastructure: strategic, and
operational decision-making problem-solving,
financial planning, leading
148
Using the Value Chain
 Helps you to stay out of the ―No Profit Zone‖
 Presents opportunities for integration
 Aligns spending with value processes
 Identifies areas for cost improvement
 Provides for reconfiguration of the value chain
 outsourcing
 off-shoring
 co-location with customers or suppliers
 redesign for efficiency
 Involves chain partners: customers & suppliers 149
The Porter‘s Value Chain model
Source: Porter, M. (1985). Competitive Advantage
150

26. 07/07/2014
26
Value Chain and the QCT
Triangle
 VC allows alignment of
processes with
customers. This
generates a quality
advantage.
 VC focuses cost
management efforts.
 VC provides for efficient
processes which
improves the timeliness
of operations. 151
Value Chain and the TBC
Triangle
 Technical:
 Increases knowledge of no profit zones
 Increases knowledge of forward and/or backward integration
opportunities
 Identifies value processes
 Identifies win-win alliance opportunities
 Behavioral:
 Focus shifts to ―the customer‖
 Focus shifts from conflict to partnering with customers & suppliers
 Cultural
 Creates externally focused mindset
 Generates information sharing environment with respect for
confidentiality 152
153
Steps of Value Chain Analysis (1)
 Document the activities
 Understand the cost and margins at each step.
 Use Activity Based Costing
 Map the value chain to the industry value chain
 Look for core competencies
 Map the cost structure
 Note that external values drive cost advantages
154
Steps nof Value Chain Analysis (2)
 Identifies clusters of activities providing
particular benefit to customers
 Highlights activities which are less efficient and
which might be de-emphasised or outsourced
 Requires managers to think about the role of
such activities
 Can be used to identify the cost and value of
activities 155
0
5
0
10
15
20
25
%
100%
Share of industry revenue
Auto
loans
Warranty
Gasoline
Auto
insurance
Aftermarket
parts
Auto
rental
Auto
manufacturing
New car
dealers
Used car dealers
Service & repair
Vertical Segmentation & Industry Profit Pools
—The US Auto Industry
156

27. 07/07/2014
27
Channel
value chains
Organisation's
value chain
Supplier
value chains
Customer
value chains
The Value System of An Industry
157
Customer Value Analysis
Rich and meaningful customer feedback is critical to understanding
the needs of the market, and to assess your company‘s and
competitor‘s performance on those needs.
Customer value is created by:
1) Pinpointing the most crucial value drivers
2) Developing a value proposition based on those factors that
matter most AND that you
are capable of providing
3) Setting product/service pricing at a level commensurate with the
level of perceived
value provided
Customer Value Questions
What are the most crucial buying factors?
158
The Most Important Questions in
Customer Value Analysis
 What are customer value, satisfaction,
and loyalty, and how can companies
deliver them?
 What is the lifetime value of customers?
 How can companies cultivate strong
customer relationships?
 How can companies both attract and
retain customers?
 What is database marketing?
159
Determinants of Customer Perceived
Value
Image benefit Psychological cost
Personal benefit Energy cost
Services benefit Time cost
Product benefit Monetary cost
Total customer benefit Total customer cost
160
Loyality and Measurement of
Customer Satisfaction
Loyalty is a deeply held
commitment to re-buy
or re-patronize a
preferred product or
service in the future
despite situational
influences and
marketing efforts having
the potential to cause
switching behavior.
 Periodic surveys
 Customer loss rate
 Mystery shoppers
 Monitor competitive
performance
161
Maximizing Customer Loyality: CRM
CRM is the process of carefully
managing detailed information
about individual customers and all
customer touchpoints to maximize
customer loyalty.
Goal of the CRM
 Identify prospects and customers
 Differentiate customers by needs
and value to company
 Interact to improve knowledge
 Customize for each customer
 Reduce the rate of
defection
 Increase longevity
 Enhance share of wallet
 Terminate low-profit
customers
 Focus more effort on
high-profit customers 162

28. 07/07/2014
28
Who Provides CRM?
 Traditional giants such as
IBM, Oracle and PeopleSoft
 Siebel Systems, which now
has a 21% share of the
CRM market
 E.piphany
 e-mail specialist Kana
Communications,
NetGenesis
 instant chat provider
LivePerson.com,
Broadbase, Quintus and
Firepond
 plus many others. 163
Customer Retention
 Acquisition of customers
can cost 5 times more than
retaining current customers
 The average customer loses
10% of its customers each
year
 A 5% reduction to the
customer defection rate can
increase profits by 25% to
85%
 The customer profit rate
increases over the life of a
retained customer. 164
The Value Network – Key Questions (1)
 Where are cost and value created?
 Which activities are vital to an organisation?
 Retain direct control of core capabilities
 Outsource less important activities
 Where are the profit pools?
 Potential profits at different parts of the value network
 Availability of competences to compete in these areas
165
Value Network Map of
A Technology Provider
166
SWOT Analysis (1)
 Summarise of the strategic position of the
organizations
 Made by providing analysis of
 Business environment
 Opportunities and threats
 Strategic capabilities
 Strengths and weaknesses
 Used for comparison with competitors
 Focuses on future choices and capability of
organisation to support them
167
SWOT Analysis (2)
 Strengths: internal resources in which you have
advantage to competitors,
 Weaknesses: internal resources in which you
have disadvantages to comeptitors,
 Opportunities: environmental factors which
favorable for your organization,
 Threats: environmental factors which
unfavorable for your organization
168

29. 07/07/2014
29
169
Simple
SWOT
Matrix (3)
Extended SWOT Matrix (4)
Strenghts
1,
2,
3,
Weaknesses
1,
2,
3,
Opportunities
1,
2,
3,
SO strategic
projects:
1,
2,
WO strategic
projects:
1,
2,
Threats
1,
2,
3,
ST strategic
projects:
1,
2,
170
171
When to Use SWOT Analysis?
172
SWOT is used during strategic planning for the
following purpose:
o Exploring avenues for new initiatives
o Making decisions about execution strategies for a
new policy
o Identifying possible areas for change in a program
o Refining and redirecting efforts mid-plan
o The SWOT analysis is an excellent tool in organizing
information and presenting solutions, identifying
roadblocks and emphasizing opportunities.
Benefits and Limitations of
SWOT Analysis
173
BENEFITS
Understand your
business better,
address weaknesses,
deter threats,
capitalise on opportunities,
take advantage of your
strengths,
develop business goals and
strategies for achieving
them.
LIMITATIONS
A SWOT analysis may be
limited because it:
doesn't prioritise issues,
doesn't provide solutions or
offer alternative decisions,
can generate too many ideas
but not help you choose which
one is best,
can produce a lot of
information, but not all of it is
useful.
SWOT Analysis (5)
 Problems of SWOT
analysis
 Can generate long
lists: need to focus on
key issues
 Danger of over-
generalisation: not a
substitute for rigorous
strategic analysis
 It create illusion: we
have a strategy
174

30. 07/07/2014
30
Internal Analysis based on
corecompetencies
Identifying Core
Competencies
Resources
• Tangible
• Intangible
Capabilities
Core
Competencies
Identify
sustainable
competitive
advantages
Strategic
Competitiveness
Four Criteria
of Sustainable
Advantage
• Valuable
• Rare
• Imitation/Substitutes = costly
• Organized properly
Value
Chain
Analysis
• Flexsource
decisions
175
Corporate governance
Prof. Balázs Hámori
bhamori@uni-corvinus.hu
&
Prof. Katalin Szabó
katalin.szabo@uni-corvinus.hu
Outline
What is corporate governance and how it has developed to
its contemporary form?
The ownership and the modern corporation
Structure of corporate governance
Bodies in the corporate governance
The Board and the commitees
Control over the corporate business activity and the
management
Part 1
Corporate Governance and Ownership
Corporate governance
• Primarily concerned with
public listed companies,
but corporate
governance applies to
all types of
organisations, not just
companies in the private
sector
• Examples are NGOs,
schools, hospitals,
pension funds, state-
owned enterprises
As a subject, corporate
governance is the set of
processes, customs, policies,
laws, and institutions affecting
the way a corporation is
directed, administered or
controlled.
Corporate governance also
includes the relationships
among the many stakeholders
involved and the goals for
which the corporation is
governed.
Corporate Governance Framework
The corporate governance is a
framework, that determines the
following characteristics of the
corporation
Whom the organisation
serves?
How the purposes and
priorities should be
decided?
How the organisation
should function?
How the power is distributed
among stakeholders?

31. 07/07/2014
31
Characteristics and crucial elements of
corporate governance
o Authority – the right to
make decisions and carry
out tasks
o Span of control – the
number of people a
superior is responsible for
o Chain of Command – the
relationship between
different levels of
authority in the business
o Hierarchy – shows the line
management
in the business and who
has specific responsibilities
o Delegation – authority to
carry out actions
passed from superior to
subordinate
o Empowerment – giving
responsibilities to people
at lower levels of the
business to make decisions
Business EthicsCorporate Governance
Organisational purposes
Stakeholders Cultural context
Who should the organisation
serve?
How should purposes be
determined?
Which purposes should
be prioritised?
Why?
Mission
Objectives
Which purposes are
prioritised?
Why?
Whom does the
organisation
serve?
Influences on organisational purposes
A corporate stakeholder can affect or be affected by the actions of a business
as a whole. The stakeholder concept was first used in a 1963 at the Stanford
Research Institute. It defined stakeholders as "those groups without whose
support the organization would cease to exist. Any action taken by any
organization or any group might affect those people who are linked with them in
the private sector. For examples these are parents, children, customers,
owners, employees, associates, partners, contractors, and suppliers, people
that are related or located nearby.
Primary Stakeholders - usually internal stakeholders, are those that engage in
economic transactions with the business. (For example stockholders,
customers, suppliers, creditors, and employees)
Secondary Stakeholders - usually external stakeholders, are those who –
although they do not engage in direct economic exchange with the business –
are affected by or can affect its actions. (For example the general public,
communities, activist groups, business support groups, and the media)
Company stakeholder mapping
Stakeholders
Early Concepts of the Corporation
o Municipalities, universities
o First joint stock
companies,17th century,
Britain, Holland
o Private sector
o The corporate form became
the governments‘ ally. The
level of independence of
corporate form made more
acceptable the authority of
governments‘.
The shipyard of the
Dutch East India
Company in Amsterdam,
circa 1750.
Evolution of the Modern Corporation
The business
environment
Organizational
consequences
Strategic
changes
Late
19th
century
Early
19th
century
Early
20th
century
Local markets Firms specialized & Small firms.
Transport slow focused on local Simple manage-
Limited mechanization markets ment structures
Introduction of Geographical and Functional structu-
railroads, telegraph vertical expansion res. Line/staff
industrialization separation. Accoun-
ting systems
Excess capacity in Product & Development of
distribution. Growth multinational multidivisional
of financial institut- diversification corporation
ions & world trade
What Is Ownership?
Definition: Ownership is a combination of
rights and responsibilities with respect to a
specific property.
„Ownership‖ of a „Property‖ includes 4
elements:
o has the right to use P
o has the right to regulate use of P
o has the right to transfer rights to P
o is responsible for non-damaging with P

32. 07/07/2014
32
Main forms of ownership
• State owned
• Privately owned
• Employee owned (ESOP,
MRP in Hungary)
• Foreign ownership
• Professional investors
• Institutional investors
Basic Types of Investors
o Types of Investors
– Individual Investors
– Invest for personal financial
goals (retirement, house)
o Institutional Investors
– Paid to manager other people‘s
money
– Typically manage large
amounts of money
– Include: banks, life insurance
companies, mutual funds and
pension funds
Institutional investors
Institutional investors
include
o Pension funds (also known
as superannuation funds)
o Mutual Funds
o Hedge funds
o Exchange-traded funds
o Financial institutions
Insurance
companies
Banks trusts
o Universities and foundations
o The significance of institutional
investors varies substantially
across countries. In developed
Anglo-American countries
(Australia, Canada, New Zealand,
U.K., U.S.), institutional investors
dominate the market for stocks in
larger corporations.
o While the majority of the shares in
the Japanese market are held by
financial companies and industrial
corporations, these are not
institutional investors if their
holdings are largely with-on group.
A mutual fund is a type of
professionally managed
collective investment scheme
that
pools money from many
investors to purchase
securities. It gives small
investors access
to professionally managed,
diversified portfolios of equities,
bonds and other securities,
which would be quite difficult (if
not impossible) to create with a
small amount of capital
Hedge funds are generally
distinct from mutual funds as
their use of leverage is not
capped by regulators and from
private equity funds as the
majority of hedge funds invest
in relatively liquid assets.
Hedge funds are managed
much more aggressively than
their mutual fund counterparts.
They are able to take
speculative positions in
derivative securities such as
options and have the ability to
short sell stocks.
Mutual Fund and Hedge Fund
Shortcomings of institutional investors
o Institutional investors play a key
role in the capital allocation
process (size/power)
o Theory suggests ‗rational‘
investors can exploit
inefficiencies created by
‗irrational‘ investors and market
inefficiencies
o BUT growing evidence of
behavioural biases suggests
theory does not adequately
explain investor behaviour
o Institutions fall short of
achieving their stated
goals/objectives
Classical rights of shareholders
• The right to sell the
stock
• The right to vote
the proxy
• The right to bring
suit for damages if
the managers or
directors fail to
meet their
obligations
• The right to have
certain information
from the company

33. 07/07/2014
33
Separation ownership and control (I)
Owner
Intangible interest
in
Intangible entity
HIGH TRANSFERABILITY OF SHARES!
Rights of contemporary shareholders
• Control and economic rights
no longer attach to the same
individual or group.
• The shareholder
surrendered control over his
wealth.
• The shareholder is a
supplier of capital and a risk
taker.
• Ultimate responsibility and
authority of ownership is
attached to stock ownership
Separation of Ownership and Control
in modern corporations
• Exclusive control of stocks by shareholder
• Shareholders‘ communities interest limited to the
price of the stock
• Control rights of corporation‘s properties
delegated to management
• Certificate of proportional share of corporation.
The corporation itself is the owner of its own
property!!!
Fractionated ownership
Other differences
between notions of
traditional and modern
share ownership:
- numerical
- legal
- functional
- personal
Types of Shareholders
• Active: interested in the
operation of corporation
too, not only in the profit
(professional investors,
majority owners)
• Passive: interested in
simply the income (divident
or bonus on shares,
e.g.profit)

34. 07/07/2014
34
Part 2
Structure of corporate governance and
decision making
Level of governance:
Corporate strategy,
Corporate reponsibility,
Mission of the corporation
Level of the management:
Organizing activities
Implemetation of strategy
Controling day-to day
activities
Board
Management team
Supervisory Board
Independent
external auditor
CEO
Chairman
General Assembly
Employees
Structure of corporate governance and decision making
Four Pillars of Corporate Governance
o Accountability:
1. Ensure that management is accountable to the Board and
2. the Board is accountable to shareholders
o Fairness:
1.Protect Shareholders rights.
2.Treat all shareholders including minorities, equitably.
3.Provide effective redress for violations
o Transparency:
1.Ensure timely, accurate disclosure on all material matters,
including the financial situation, performance, ownership and corporate
governance
o Independence:
1. Independent Directors and Advisers i.e. free from the influence of
others
Key Forms of Corporate Governance :
The Bodies
What is „a‖ body?
Body is a team, members created by
delegation, nomination or election (voting)
Body has a leader (heading), named
chairperson
Bodies have legal background
Body has a bylaw
Bodies have responsibilities by law or by the
status of the body
Bodies in the corporate governance
o General Assembly, the body
of owners (shareholders)
o Board; members are elected
by the General Assembly. (In
Germany board members are
elected by the Supervisory
Board)
o Supervisory Board;
members are elected by the
General Assembly. (In US/UK
no Supervisory Board)
o Management team (not
defined by law)
Key Actors of Bodies
• Chairwoman/chairman of the General Assembly,
elected by the owners
• Chairperson of the Board/Supervisory Board,
elected by body members
• Board Committee leaders, nominated by the Board
• Top management (executives), nominated by the
Board
• Independent external auditor, contracted by the
management or the Board, accepted by the
General Assembly

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Governance – management by
bodies
The corporate governance is
• Collective
• Democratic
• Responsible
• Legally framed
• Well structured
management
Collective Responsibilities of Owners
(General Assembly)
o Creation and change of the Incorporation
Charter, Deed of Foundation (strictly regulated
by Corporate Act)
o Voting for Board (Supervisory Board) members
o Creating discussion issues of General Assembly
o Accepting (or not) Board‘s reports
o Electing the chairperson of the General
Assembly
Duty and Responsibility
o Duty is a legal
(official) obligation, a
job what must to do
o Responsibility is a
moral category with a
lot of legal
consequences
Evolution of the corporate-governance
structure
1800 1900 1950 2000
Owner-
manager
Investors
General
Assembly
Owners’s
representative
s
Executive
management
Investors
General
assembly
Board
(Directors)
Executive
commity
Beneficiaries
Trustees of funds
Investment funds
General
assembly
Board
Executive
managers
Managers
Market for Corporate Control
• Definition: Shares of
public firms are traded,
and in large enough
blocks. This means
control over corporations
is traded.
• That puts some pressure
on managers to perform,
otherwise their
corporation can be taken
over, and they will be
fired.
The takeover era I
Limited liability + trading with shares =
loosening connection between ownership
+control
Issuing millions of shares
Result: ‖THE WALL STREET RULE‖
Wall Street Rule. On investments: Sell a stock rather than
try to change the company's policies.

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The Contemporary Takeover
Era II
Waves of takeovers. Instead of previous checks
and balances, no system of checks and Corporate
Government got out of balance. Reason:
institutional investors stepped in.
The Chain of Corporate Governance
Primary functions of the Board
• Select (CEO, management compensation)
• Review and approve (financial objectives,
strategic plan, adequacy of the system to law)
• Advice and counsel (to the top management)
• Evaluate (board processes, performance)
• Others („umbrella definition)
Board level decisions
The Board – as the highest
level decision making
body of the corporation –
sets direction, vision,
strategy.
Makes decisions in major
investment, financial,
organizational, market
questions and appoints
the very leading persons
of management.
Responsibility of the Board of Directors
• The Board is the operational and strategic
management body of the Corporation (firm)
• Election of Board‘s Chairperson
• Nomination of management (President, CEO,
etc.)
• Creation reports to General Assembly,
presenting the Annual Report
• Sharing all duties with the management – bylaw
regulation
• Representing officially the Corporation
Typical board of today
• The structure and composition
of boardrooms have changed
little in 100 years.
• Average board size has
remained at about 15
members.
• Board committees have great
importance:
- Social committee
- Assessment committee
- Nomination committee
- Compensation committee
- Financial committee, etc.
• Written guidelines
• Board meeting
• Scope of decision making
activity (duties)
• Relationship with
management
• Separation of CEO and
chairman (conflict of
interest in performance
assessment!)
• Board is „served‖ by
management

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37
Committees of the Board
• Executive C.
• Financial C.
• Audit C.
• Nominations C.
• Remunerations C.
• Strategic C.
• Assessment C.
• Social C.
• Ad Hoc C. (e.g. for
project, Megers &
Acqusitions)
Responsibility of Board‘s Committees
• Committee is not a decision making body
• Consulting, foundation of business
decisions, controlling function
• Committee members are Board members
and experts
• Analysis for the Board and General
Assembly
Recommendations for The Future
Proposals to improve the performance of the Board:
o improving directors‘ compensation (stock options)
o increasing authority of independent director
o separation of CEO and Chairman positions
o Sarbanes – Oxley (Public Company Accounting
Reform and Investor Protection Act)
o more executive session meeting
o more independence and transparency in decisions
o closer connection with the performance of company
Who is An Independent Director
An Independent Director
(also sometimes known as
a outside director) is a
director (member) of a
Board of Directors who does
not have a material or
pecuniary relationship with
company or related persons,
except sitting fees.
Independent Directors do
not own shares in the
company
Responsibility of the Supervisory Board
• Control over the Board
and Management team
in order to save and
preserve the owner‘s
interests
• Control the legal
conformity of the firm
and they activity with
laws, rules and
prescriptions
• Not a decision making
body
New Corporate Governance Rules between 1994-
2006
The different rules 1994 1998 2002 2006
Renumeration pay by performance May May MUST MUST
Renumeration disclosure May May May MUST
Audit committee creation May MUST MUST MUST
Audit committee independence May MUST MUST MUST
Board independence May MUST MUST MUST
Removal of cross-shareholding May May MUST MUST
Liability of the Board May May May MUST
Comply or explain May May May MUST
Separation of Chairman and CEO May May May May

38. 07/07/2014
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Two sides of the governance: business
judgement rule and checks/balances
• Rule granting directors of publicly listed companies‘ immunity
from liability if their actions were executed in good faith, using
sound business judgment and exercised with reasoned care
• It also refers to the defense of corporate sovereignty, which
means that courts do not intervene into company‘s affaires until
the decisions of the company are in accordance with good faith
and reasoned care
• On the other hand there are rules and processes for
governance and control of private sector companies, which
balance the autonomy
The Balancing Institutions
• The most important
balances are the corporate
governance rules, and
bodies, and structures
• The other types of
important balances are
rules determining fair
behavior in business
relations:
– The code of ethics, and
– The business culture
The stories of corporate disasters
Ineffective board
Dominant CEO
(„one man” show)
Disaster
Greed, hubris,
irresponsibility
Poor strategy
Ill-judged acquisitions,
over-expansions
Inadequatecontrolenvironment
Accidental external
trigger
Inadequatecontrolenvironment
Conformist culture
Security System over Corporate
Governance - Internal Securities
o Supervisory board
o Internal audit, audit
committee
o Management
control
o Bylaws, rules
o Corporate code of
governance
o Corporate code of
ethics 226
Security System Over Corporate
Governance – External securities
o Ability to publicity (higher
requirement for public
corporations)
o Stock exchange norms,
rules and Codes of
Responsible Corporate
Management
o Investment and Creditor
Defense Act
o Competition law
o State supervisory and
controlling system over
accounting, securities
operations
o State financial and tax
supervision
227
oCourt of registration
oObligatory legal advisory service
over critical documents (e.g.
statutes, written agreements,
articles of incorporation must meet
some criteria)
oPre-forming corporation – special
Hungarian form of business, living
corporation before registration
oExternal audit, conformity with tax
and accounting rules, GAAP
oCivil responsibility of directors (by
civil law)
oOfficial obligatory forms of
documents
Governance checklist
1. Beware dominant chairman or
CEO
2. Majority of truly independent
directors
3. Effective Board and
committee structure
4. Responsibilities, authorities &
accountabilities defined
5. Ethical standards prescribed
6. Effective Board and
committee process
7. Agenda focussed on right
priorities
8. Quality of Board papers and
executive input
9. Conflict of interest provisions
clear and effective
10. Securities trading by directors
strictly controlled
11. Rigorous annual evaluation of
Board performance
12. Individual directors of high
calibre (acumen & integrity)
13. Effective mix of expertise,
experience and perspective
14. Diligent attention to Board
renewal

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The Board‘s Relationship to the
Management Responsibility of Management
• Shared responsibility with the Board
• Management of day-to-day operation
• Functional and structural organization of business
• Management of key processes and functions (e.g.
production, marketing, controlling, logistic, human
resources, sales, finances, organizational development)
• Expertise for the Board and General Assembly
Decision making tree (sample)
Owners
Board of Directors
Management (ExCo)
Directors
Head of Departments
Group leaders
etc.
Decison Making in
Companies
The Balanced Scorecard
By Prof. Balázs Hámori
bhamori@uni-corvinus.hu
&
Prof. Katalin Szabó
katalin.szabo@uni-corvinus.hu
Main types of decisions at the
corporations
 Short term – medium term – long
term
 Strategic – operational
 Business (economic) – „political‖
 National – international ( regional,
cluster, etc.) – Global
 Related to business and support
processes
The basic documents of the corporation
regulate exactly the decision making
processes and mechanisms.
232
Hierarchy of decisions
Decision of the Board is the
manifestation of common
will and power.
The board-level decision is
a „product‖ of collective
action.
 Resolution
 Case of resolution
 Standpoint
 Individual opinion
 Proposal
 Recommendation
 Remark
 Understanding
 Veto
 Review
233
What are the goals and objectives?
Objectives: desired outcomes for individuals, groups, and
entire organizations.
Why organizations set up objectives?
Enviroment orientation
Guide actions
Hierarchy linkage
Coordinate decisions
Basis for control
Why peoples set up objectives:
Personal challenges,
Integration of personal objectives
Fostering of motivation
234

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40
Objectives need to meet five specifications
 An objective should be clear, single, specific topics (It sould not
be stated in vague form)
 An objective should relate to a result, not to an activity to be
performes (The objective is a result of an activity, not to
performing the activity)
 An objective should be measurable (An objective should be
stated in quantitive terms whenever feasible)
 An objective should contain a time deadline and a responsible
person of its achievement
 An objective should be challenging but achievable.
235
The hierarchy of
objectives and their
place in the strategy
process
The starting point is a
comprehensive,
complex picture about
the corporate strategy
236
The Nature of Responsibility
Responsibility is a need to
answer (responder)
Some sort of responsibilities:
 Moral responsibility
(conscience)
 Status responsibility
(consequence of the position)
 Professional responsibility (the
art of profession)
 Legal responsibility (by
regulation)
 Situational responsibility (acting
in the event)
237
Moral responsibility - An Example:
Affymetrix (California)
o A person or an agent or a party is morally responsible for a
negatív event, fact or development, if 1) they caused it, 2)
they knew what they were doing, and 3) they could have
prevented it.
o The Affymetrix technology, for example, can put 6.5 million
discrete pieces of genetic information on a single chip. It
can be used for a lot of great things, and it can probably be
used for a few bad things.
o The company has taken a proactive approach to these
concerns, setting up an Ethics Advisory Committee to
address moral and ethical issues.
o The committee consists of seven external participants who
have varied backgrounds, including law, anthropology,
genetics, bioethics, and sociology.
238
What kind of responsibility?
 Personal, individual
responsibility
 Collective and joint
responsibility
 Shared responsibility
 Special opinion
 Nonconformity with a decision
239
Some other aspects
 Decisions and responsibility
 Decisions + pressure + lobby
activity
 Decisions and follow up
 Decision-power tree
 Decisions and committees
(anglo-saxon practice)
 Corporate decision table
240

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Strategy formation toolkit: Suitability –
Strategic position which helps the decisions
Concept To understand Strategy must address
PESTEL Growth/decline
Changes in industry structure
Industry convergence
Scenarios Uncertainty/risk Contingency plans
5-forces Competitive forces Barriers to new entrants
Strategic
Groups
Attractiveness of groups, Mobility
barriers, strategic spaces
Repositioning
Core
Competence
Industry threshold standards
Basis of competitive advantage
Eliminate weaknesses
Exploit strengths
Value chain Opportunities for vertical
integration/outsourcing
How to integrate (e.g.
merger/alliance)
Stakeholders Acceptability to stakeholders
Power and interest
Effect on stakeholders
Manage power/interest241
Important term
A Strategic Group is
defined as a group of
corporations that
employ the same or
similar strategies in a
particular industry.
Example: „Luxury Car
Strategic Group‖
„Economy Car
strategic Group‖
242
Criteria for Acceptability
Criteria To Understand Examples Limitations
Return
Profitability Financial return on
investments
ROCE
Payback period
DCF
Apply to discrete
projects
Only tangible
costs/benefits
Cost-benefit Wider costs/benefits
(incl. intangibles)
Major
infrastructure
projects
Difficulties of
quantification
Real options Sequence of
decisions
Real options
analysis
Quantification
Shareholder
value analysis
Impact on
shareholder value
Mergers and
acquisitions
Technical detail
often difficult243
Some important terms
ROCE: A financial ratio that measures a company's profitability and the
efficiency with which its capital is employed. Return on Capital Employed
(ROCE) is calculated.
DCF: A valuation method used to estimate the attractiveness of an investment
opportunity. Discounted cash flow (DCF) analysis uses future free cash flow
projections discounts them (most often using the weighted average cost of
capital) to arrive at a present value, which is used to evaluate the potential for
investment. If the value arrived at through DCF analysis is higher than the
current cost of the investment, the opportunity may be a good one.
Real Option: An alternative or choice that becomes available with a business
investment opportunity. Real options can include opportunities to expand and
cease projects if certain conditions arise, amongst other options. They are
referred to as "real" because they usually pertain to tangible assets such as
capital equipment, rather than financial instruments. Taking into account real
options can greatly affect the valuation of potential investments. 244
Criteria for Acceptability
Criteria To Understand Examples Limitations
Risk
Financial ratio
projections
Robustness of
strategy
Break-even
analysis
Impact on
gearing/liquidity
Sensitivity
analysis
Test assumptions/
robustness
What if? analysis Tests factors
separately
Stakeholder reactions
Political dimension Stakeholder
mapping
Game theory
Largely
qualitative
245
What is GAP-Analysis
The evaluation of the difference
between a desired outcome and
an actual outcome. This difference
is called a gap. Strategic gap
analysis attempts to determine
what a company should do
differently to achieve a particular
goal by looking at the time frame,
management, budget and other
factors to determine where
shortcomings lie. After conducting
this analysis, the company should
develop an implementation plan to
eliminate the gaps 246

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1. Step of the GAP planning
Assumption of the unchanging environmemt
Present
Performance
Time
247
2. Step of the GAP planning
Present
Performance
Time
Unfavorable
conditions
Favorable conditions
Unchanged conditions
Assumption of the different – favorable, or
unfavorable - environmental conditions.
248
3. Step of the GAP planning
Strategic goals based on mission
Present
Performance
Time
Favorable condition
Goals based on mission
Unchanged conditions
249
4. Step of the GAP planning
Strategic goals based on mission, and actions fitted
to enhanced goals
Present
Performance
Time
Favorable condition
Goals based on
mission
Unchanged conditions
Gap what you have
to fill with actions
250
What Is a Balanced Scorecard?
A
Measurement
System?
A
Management
System?
A
Management
Philosophy?
A toolkit of management for
Translating strategic goal to
organization‘s practicein order to
reach better performance
It is an useful answer to the question: How to
Measure, Maximize and Maintain Alignment and
Get the Bus Moving in the Right Direction (Michael Taylor)
251
Definition of Balanced Scorecard
The balanced scorecard is a method that is used
extensively in business and industry, government,
and nonprofit organizations worldwide to align
business activities to the vision and strategy of the
organization, improve internal and external
communications, and monitor organization
performance against strategic goals.
It was originated by Robert Kaplan (Harvard Business
School) and David Norton as a performance
measurement framework that added strategic non-
financial performance measures to traditional
financial metrics to give managers and executives a
more 'balanced' view of organizational performance.
Source: Balanced Scorecard Institute
252

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Balanced Scorecard: four basic
perspective of a company
Based on „Balenced Scorecard‖ (BC) four perspectives are
seen to affect the long term economic value of a company:
o Financial perspective: This includes consideration of
factors such as the return on capital employed, cash flow
o Customer perspective: This requires the company to set
specific goals besides price, that are important to the
customers, qualitiy, performance, and service
o Internal perspective: This includes consideration of factors
such as capacity, and cost connected with effectiveness
o Innovation, and learning perspective: This includes the
generation of new business from innovation, and staff
attitudes and morale 253
The Balanced Scorecard
(Based on Kaplan & Norton)
254
Perspectives Apply to Organizations
by Balanced Scorecard
What must we do to satisfy
our financial contributors?
What are our fiscal
obligations?
Who is our customer? How
can the circle of the customers
be widened?
What internal processes must
we excel at to satisfy our fiscal
obligations, our customers
and the requirements of our
mission?
How must our people learn
and develop skills to respond
to these and future
challenges?
Profit Driven Mission Driven
What must we do to satisfy
our shareholders?
What do our customers
expect from us?
What internal processes
must we excel at to satisfy
our shareholder and
customer?
How must our people learn
and develop themselves in
order to increase the
efficiency their work
Financial
Perspective
Customer
Perspective
Internal
Perspective
Learning &
Growth
Perspective
255
Balanced Score Card
256
The Balanced Scorecard
Key Performance Indicators (KPIs)
Financial perspective
e.g. Operational view
Cost reduction
Sales growth
e.g. Shareholder view
ROCE
EVA
Customer perspective
e.g. Customer satisfaction
Customer retention
Customer loyalty
Acquisition of new customers
Financial perspective
e.g. Operational view
Cost reduction %
Sales growth %
e.g. Shareholder view
ROCE %
Customer perspective
e.g. Customer satisfaction
Customer retention %
Customer loyalty %
Acquisition of new customers %
Internal Perspective
e.g. Assess quality
of people & processes
Training & development
Job turnover %
Product quality
Stock turnover /
Innovation & learning
e.g. Continuous
improvement
Quality circles
e.g. Research&Development
Speed to market / months
257
.
The Balanced Scorecard Focuses on
Long-Term Value
o Traditional financial reports
look backward
o Reflect only the past:
spending incurred and
revenues earned
o Do not measure creation
or destruction of future
economic value
o The Balanced Scorecard
identifies the factors that
create long-term economic
value in an organization
Processes
Customers
People
258