Strategic Management CH 11

1. Chapter 11Chapter 11
CORPORATE PERFORMANCE,CORPORATE PERFORMANCE,
GOVERNANCE, AND BUSINESSGOVERNANCE, AND BUSINESS
ETHICSETHICS

3. 11 -11 -44
““There are worse things thanThere are worse things than
war; and all of them comewar; and all of them come
with defeat.”with defeat.” -Ernest Hemingway-Ernest Hemingway
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““I count him braver whoI count him braver who
overcomes his desires thanovercomes his desires than
him who overcomes hishim who overcomes his
enemies.”enemies.” AristotleAristotle

4. Stakeholders andStakeholders and
Corporate PerformanceCorporate Performance
o Stakeholders: Individuals/groups withStakeholders: Individuals/groups with
an interest/claim/or stake in companyan interest/claim/or stake in company
• Internal (e.g., employees, stockholders)Internal (e.g., employees, stockholders)
• External (e.g., customers, creditors,External (e.g., customers, creditors,
governments)governments)
o Company must consider stakeholderCompany must consider stakeholder
claims in developing & implementingclaims in developing & implementing
strategystrategy
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5. Stakeholders and the EnterpriseStakeholders and the Enterprise
Figure 11.1
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6. Identify:Identify:
o StakeholdersStakeholders
o Stakeholders’ interests/concernsStakeholders’ interests/concerns
o Claims stakeholders likely to makeClaims stakeholders likely to make
o Stakeholders most important fromStakeholders most important from
organization’s perspectiveorganization’s perspective
o Resulting strategic challengesResulting strategic challenges
Stakeholder Impact AnalysisStakeholder Impact Analysis
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7. Company’s legal owners and providers of riskCompany’s legal owners and providers of risk
capital, a major source of capital to operate acapital, a major source of capital to operate a
business.business.
Maximizing long-runMaximizing long-run
profitability & profitprofitability & profit
growth is route togrowth is route to
maximizing returns tomaximizing returns to
shareholders, as well asshareholders, as well as
satisfying claims of mostsatisfying claims of most
other stakeholder groups.other stakeholder groups.
Unique Role of StockholdersUnique Role of Stockholders
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8. Profitability, Profit Growth,Profitability, Profit Growth,
and Stakeholder Claimsand Stakeholder Claims
1)1) Participating in growing marketParticipating in growing market
2)2) Taking market share away from competitorsTaking market share away from competitors
3)3) Consolidating industry via horizontal integrationConsolidating industry via horizontal integration
4)4) Developing new marketsDeveloping new markets
To grow profits, companies must be doing oneTo grow profits, companies must be doing one
or more of the following:or more of the following:
Stockholders receive their returns as:Stockholders receive their returns as:
 Dividend paymentsDividend payments
 Capital appreciation inCapital appreciation in marketmarket value ofvalue of
sharesshares
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10. Agency TheoryAgency Theory
Principal-Agent RelationshipsPrincipal-Agent Relationships
PrincipalPrincipal AgentAgent
Agency Problem:Agency Problem:
• Agents & principals may have different goalsAgents & principals may have different goals
• Agents goals not in best interests of principalsAgents goals not in best interests of principals
• Agents may take advantage of informationAgents may take advantage of information
asymmetries to maximize interests at expense ofasymmetries to maximize interests at expense of
principalsprincipals
• Difficult for principals to measure performanceDifficult for principals to measure performance
Agency relationship - whenever one partyAgency relationship - whenever one party
delegates decision-making authority or controldelegates decision-making authority or control
over resources to another.over resources to another.
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AuthorityAuthority

11. Tradeoff Between Profitability &Tradeoff Between Profitability &
Revenue Growth RatesRevenue Growth Rates
Figure 11.2
Maximize long-run shareholder returns by seeking right balanceMaximize long-run shareholder returns by seeking right balance
between company growth . . . profitability and profit growth.between company growth . . . profitability and profit growth.
11 -11 -1212
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14. Challenge for PrincipalsChallenge for Principals
1.1. Shape behavior of agents to act inShape behavior of agents to act in
accordance with goals set by principalsaccordance with goals set by principals
2.2. Reduce information asymmetry betweenReduce information asymmetry between
agents & principalsagents & principals
3.3. Develop mechanisms forDevelop mechanisms for
removing agents not acting in accordanceremoving agents not acting in accordance
with goals of principalswith goals of principals
Confronted with agency problems:Confronted with agency problems:
Principals try to deal with these challengesPrincipals try to deal with these challenges
through a series of governance mechanisms.through a series of governance mechanisms.
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15. Governance MechanismsGovernance Mechanisms
Governance mechanisms limit agencyGovernance mechanisms limit agency
problem by aligning incentives betweenproblem by aligning incentives between
agents & principals - monitor/control.agents & principals - monitor/control.
Mechanisms include:Mechanisms include:
• Board of DirectorsBoard of Directors
• Stock-Based CompensationStock-Based Compensation
• Financial Statements &Financial Statements &
AuditorsAuditors
• Takeover ConstraintTakeover Constraint
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17. Governance MechanismsGovernance Mechanisms
Inside CompanyInside Company
o Strategic Control SystemsStrategic Control Systems
• Establish standards for performanceEstablish standards for performance
• Create systems- measure & monitorCreate systems- measure & monitor
performanceperformance
• Compare actual against targetsCompare actual against targets
• Evaluate results- take corrective actionsEvaluate results- take corrective actions
o Employee IncentivesEmployee Incentives
• Stock options and ownership plansStock options and ownership plans
• Compensation tied to attainment ofCompensation tied to attainment of
superior efficiency, quality, innovation, andsuperior efficiency, quality, innovation, and
responsiveness to customersresponsiveness to customers
Internal agency problems can be reduced by:Internal agency problems can be reduced by:
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18. Balanced Scorecard ApproachBalanced Scorecard Approach
Figure 11.3
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22. Ethics and StrategyEthics and Strategy

24. Rogue Gallery

31. Ethics and StrategyEthics and Strategy
Ethics- accepted principles of right/wrongEthics- accepted principles of right/wrong
governing conduct ...governing conduct ...
o Ethical dilemmas:Ethical dilemmas:
• No agreement over accepted principlesNo agreement over accepted principles
• None of available alternatives seem acceptableNone of available alternatives seem acceptable
o Many accepted principles codified in laws:Many accepted principles codified in laws:
• Tort – product liabilityTort – product liability
• Contract– contracts/breaches of contractsContract– contracts/breaches of contracts
• Intellectual property– protection of intellectual propertyIntellectual property– protection of intellectual property
• Antitrust law – competitive behaviorAntitrust law – competitive behavior
• Securities law – issuing/selling securitiesSecurities law – issuing/selling securities
o Behaving ethically=beyond staying within lawBehaving ethically=beyond staying within law
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32. An ethical strategy isAn ethical strategy is
one that does notone that does not
violate the acceptedviolate the accepted
principles.principles.
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33. Ethical Issues in StrategyEthical Issues in Strategy
 Self-dealingSelf-dealing
 Information manipulationInformation manipulation
 Anticompetitive behaviorAnticompetitive behavior
 Opportunistic exploitationOpportunistic exploitation
 Substandard workingSubstandard working
conditionsconditions
 Environmental degradationEnvironmental degradation
 CorruptionCorruption
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34. 1.1. Personal ethics code- profound influence onPersonal ethics code- profound influence on
behaviorbehavior
2.2. Don’t realize behaving unethically- failing to ask rightDon’t realize behaving unethically- failing to ask right
questionsquestions
3.3. Organization culture- doesn’t emphasize ethics; onlyOrganization culture- doesn’t emphasize ethics; only
considers economic consequencesconsiders economic consequences
4.4. Unrealistic goals- encourage/legitimize unethicalUnrealistic goals- encourage/legitimize unethical
behaviorbehavior
5.5. Unethical leadership- encourages/tolerates behaviorUnethical leadership- encourages/tolerates behavior
that is ethically suspectthat is ethically suspect
Roots of Unethical BehaviorRoots of Unethical Behavior
Why do some managers behave unethically?Why do some managers behave unethically?
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35. 1.1. Hire/promote people with sense of personal ethics.Hire/promote people with sense of personal ethics.
2.2. Place high value on ethical behavior and ingrain inPlace high value on ethical behavior and ingrain in
the organizational culture.the organizational culture.
3.3. Ensure leaders articulate and act in ethical manner.Ensure leaders articulate and act in ethical manner.
4.4. Require that ethics be part of decision-makingRequire that ethics be part of decision-making
process.process.
5.5. Use ethics officers.Use ethics officers.
6.6. Enforce strong corporate governance processes.Enforce strong corporate governance processes.
7.7. Act with moral courage- encourage others to do so.Act with moral courage- encourage others to do so.
To make sure ethical issues are considered in businessTo make sure ethical issues are considered in business
decisions, managers should:decisions, managers should:
Behaving EthicallyBehaving Ethically
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36. ““Conscience is the inner voiceConscience is the inner voice
that warns us somebody maythat warns us somebody may
be looking.”be looking.” - H. L. Mencken- H. L. Mencken
““A company’s ethical conduct isA company’s ethical conduct is
something like a big flywheel. It mightsomething like a big flywheel. It might
have a lot of momentum, but it willhave a lot of momentum, but it will
eventually slow down and stop unlesseventually slow down and stop unless
you add energy.”you add energy.” - William Adams- William Adams
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