STRATEGIC MANAGEMENT. Strategic Management BUSINESS the art of making irrevocable decisions based on...

Strategic Strategic ManagementManagement

BUSINESS the art of making

irrevocable decisions

based on

insufficient knowledge

STRATEGYInsight into

how to

create value

Insight into

how to

create value

STRATEGIC MANAGEMENT

managerial decisions and actions that determine the long-run performance of a

corporationEmphasizes monitoring and evaluating

environment (external)(external)

HISTORICAL PHASES OF STRATEGIC PLANNING

Basic Financial Planning

Forecast-Based Planning

Externally-Oriented Planning

(Strategic Planning)

Strategic Management

STRATEGIC MANAGEMENT MODEL

Environmental Scanning

Strategy Formulation

Strategy Implementation

Evaluation and Control

EnvironmentalScanning

StrategyFormation

StrategyImplementation

Evaluationand Control

Ex ter na lEx ter na l

SocietalSocietalE nvironmentalGeneral Forces

T askT askE nvironment

Industry A nalysis

Mission

Process tomonitorperformanceand takecorrect iveaction

Reason forexistence

O bjectives

W hat resu ltstoaccomplishby when

Strategies

Plan toachieve th emission &object ives

Po licies

Broadgu idelinesfor decisionmaking

In tern a lIn tern a l

Structu r eStructu r eChain of Command

Cultu r eCu ltu r eBeliefs,

E xpectations,Values

Resou r cesResou r cesAssets, Sk il ls,Competencies ,

Knowled ge

Programs

Activ itiesneeded toaccomplish ap lan

Budgets

Costs of theprograms

Procedures

Sequence ofsteps neededto do the job Performance

Feedback/Learning

We will not be doing much in this area in this course.

What you have been doing in most

other courses.

Examine andEvaluate theCurrent:* Mission* Objectives* Strategies* Policies

EvaluateCurrentPerformanceResults

ReviewCorporateGovernance* Board of Directors* Top Man- agement

Scan andAssessExternalEnvironment* Societal* Task

Scan andAssessInternalEnvironment* Structure* Culture* Resources

AnalyzeExternalFactors:* Opportun- ities* Threats

AnalyzeInternalFactors:* Strengths* Weak- nesses

SelectStrategicFactors(SWOT)in light of CurrentSituation

Review andRevise asNecessary:* Mission* Objectives

GenerateandEvaluateStrategicAlternatives

SelectandRecommendBestAlternative

ImplementStrategies:* Programs* Budgets* Proceedures

Evaluate andControl

STRATEGIC DECISION MAKING PROCESS


how to

create value

Insight into

how to

create value

Corporate GovernanceCorporate Governance

Separation of Ownership and Managerial Control

Basis of the modern corporationBasis of the modern corporation– shareholders reduce risk by holding diversified shareholders reduce risk by holding diversified

portfoliosportfolios– shareholders purchase stock, becoming shareholders purchase stock, becoming residual residual

claimantsclaimants– professional managers are contracted to provide professional managers are contracted to provide

decision-makingdecision-making Modern public corporation form leads to efficient Modern public corporation form leads to efficient

specialization of tasksspecialization of tasks– risk bearing by shareholdersrisk bearing by shareholders– strategy development and decision-making by managersstrategy development and decision-making by managers

Corporate Governance

Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.

Refers to the relationship among the board of directors, top management, and shareholders in determining the direction and performance of the corporation.



•Own company

•Elect Board of Directors

•Received residual profits

Shareholders

Corporate Governance•Setting corporate strategy, overall direction, mission or vision

•Hiring and firing the CEO and top management

•Controlling, monitoring, or supervising top management

•Reviewing and approving the use of resources

•Caring for shareholder interests

Board of Directors


•Manage OrganizationPlanningLeadingOrganizingControlling

CEO

Organization of the Board

Size– Determined by charter and bylaws– Average for publicly-held, large

firm is 11 directors– Average for small/medium private

firms is 7 to 8 directors

Board of Directors

Board of Directors

Nominations & Elections

Traditional Approach:– CEO invites members to serve – Shareholders approve in annual

proxy statement – All nominees are usually elected

(Survey, 1999)

75% of boards have at least 1 female director

25% of boards have two female directors 60% of boards have at least one minority

member

Board of Directors

Members:Inside directors

– “Management directors”– Officers or executives employed by

corporation

Outside directors– “Non-management directors”– May be executives of other firms but not

employed by board’s corporation

Board of Directors

Board of Directors

“Outsider” overly simplistic term --

Some outsiders are not truly objective and could be considered insiders.

Examples: Affiliated Directors Retired Directors Family Directors

• Firm ownersFirm owners

Agency Relationship: Owners and Managers

ShareholdersShareholders(Principals)(Principals)

• Decision makersDecision makers


ManagersManagers(Agents)(Agents)



• Risk bearing specialist (principal) Risk bearing specialist (principal) pays compensation topays compensation to

• A managerial decision-making A managerial decision-making specialist (agent)specialist (agent)


An AgencyAn AgencyRelationshipsRelationships

ManagersManagers(Agents)(Agents)


• Decision makersDecision makers


Agency Theory Problem The agency problem occurs when:The agency problem occurs when:

– the desires or goals of the principal and agent the desires or goals of the principal and agent conflict and it is difficult or expensive for the conflict and it is difficult or expensive for the principal to verify that the agent has behaved principal to verify that the agent has behaved appropriatelyappropriately

Solution:Solution:– principals engage in incentive-based principals engage in incentive-based

performance contractsperformance contracts– monitoring mechanisms such as the board of monitoring mechanisms such as the board of

directorsdirectors– enforcement mechanisms such as the managerial enforcement mechanisms such as the managerial

labor market to mitigate the agency problemlabor market to mitigate the agency problem

Stewardship Theory

Executives tend to be more motivated to act in the best interest of the corporation than their own self-interests.

Theory argues that over time, senior executives tend to view the corporation as an extension of themselves.

Codetermination– The inclusion of a corporation’s

workers on its board of directors.

Board of Directors

Interlocking Directorates

Direct Interlocking Directorate –– When two firms share a director or when

an executive of one firm sits on the board of a second firm.

Board of Directors

Indirect Interlocking Directorate –– When two corporations have directors

who also serve on the board of a third firm.

Board of Directors

No consistent link between board membership, leadership, structure, and financial performance of firm

Investors pay more for a firm’s stock when positive toward good corporate governance—

Belief that• Good governance leads to better performance

over time• Reduces risk of company finding itself in trouble• Governance is a major strategic issue

Governance Mechanisms

OwnershipOwnershipConcentrationConcentration

• Large block shareholders have a strong incentive to monitor management closely

• Their large stakes make it worth their while to spend time, effort and expense to monitor closely

• They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)


Boards ofBoards ofDirectorsDirectors

Recommendations for more effective Board Governance:

• Increase diversity of board members’ backgrounds

• Strengthen internal management and accounting control systems

• Establish formal processes for evaluation of the board’s performance




ExecutiveExecutiveCompensationCompensation

• Salary, bonuses, long term incentive compensation

• Executive decisions are complex and non-routine

• Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes





• Stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their control

• Incentive systems do not guarantee that managers make the “right” decisions, but do increase the likelihood that managers will do the things for which they are rewarded





Market forMarket forCorporate ControlCorporate Control

• Firms face the risk of takeover when they are operated inefficiently

• Many firms begin to operate more efficiently as a result of the “threat” of takeover, even though the actual incidence of hostile takeovers is relatively small

• Changes in regulations have made hostile takeovers difficult

• Acts as an important source of discipline over managerial incompetence and waste


Board of DirectorsTrends in Corporate Governance

Boards more involved in reviewing, evaluating, and shaping strategy

Institutional investors active on boards; pressure on CEO for firm performance

Shareholders demand directors own more than token amounts of the firm’s stock

Non-affiliated outside directors increasing

Board of Directors

Trends in Corporate Governance

Boards becoming smaller Boards taking more control of board functions Corporations becoming more global;

international experience needed Societal expectations that boards balance

profitability and social responsibility Diversity of board members

Board of DirectorsNominations & Elections

Staggered Board Approach:Corporations whose directors serve terms of more than one year, divide the board into classes, and stagger elections so that only a portion of the board stands for election each year.

Corporate GovernanceRole of the Board in strategic management

– MonitorDevelopments inside and outside the

corporation

– Evaluate & InfluenceReview proposals, advise, provide suggestions

and alternatives

– Initiate & DetermineDelineate corporation’s mission and specify

strategic options

Responsibilities of Top Management:

• Provide executive leadership and a strategic vision

• Manage the strategic planning process


International Corporate Governance:

Owner and manager are often the same in private firms

Public firms often have a dominant shareholder, frequently a bank

Frequently there is less emphasis on shareholder value than in U.S. firms, although this may be changing

GermanyGermany

Medium to large firms have a two-tiered board– vorstand monitors and controls managerial

decisions– aufsichtsrat selects the Vorstand– employees, union members and shareholders

appoint members to the Aufsichtsrat


GermanyGermany

Obligation, “family” and consensus are Obligation, “family” and consensus are important factorsimportant factors

Banks (especially “main bank”) are highly Banks (especially “main bank”) are highly influential with firm’s managersinfluential with firm’s managers

Keiretsus are strongly interrelated groups of Keiretsus are strongly interrelated groups of firms tied together by cross-shareholdingsfirms tied together by cross-shareholdings


JapanJapan

Other characteristics:Other characteristics:– powerful government interventionpowerful government intervention– close relationships between firms and close relationships between firms and

government sectorsgovernment sectors– passive and stable shareholders who exert passive and stable shareholders who exert

little controllittle control– virtual absence of external market for virtual absence of external market for

corporate controlcorporate control


JapanJapan


how to

create value

Insight into

how to

create value

Strategic Strategic ManagementManagement













Evaluate andControl

STRATEGIC DECISION MAKING PROCESS













Evaluate andControl

Societal EnvironmentT a sk /In d u s tr y E n v ir o n m e n t

S o c io c u ltu ra l Economic

Political-Legal Technological

I n t e r n a lE n v i r o n m e n t

Shareholders

Governments

SpecialInterestGroups

Customers

Creditors

Communities

Suppliers

Employees/Labor Unions

Competitors

Trade Associations

Structure

Culture

Resources

The layer of the The layer of the external external environment environment that affects the that affects the organization organization indirectlyindirectly..

The layer of the external The layer of the external environment that environment that directlydirectly influences the influences the organization’s operations organization’s operations and performance.and performance.













Evaluate andControl

SWOT Analysis

SWOT ANALYSIS

STRENGTHS

WEAKNESSES

OPPROTUNITIES

THREATS

are within the organization itself and not usually within the short run control of managementare outside the organization, general factors and trends in the societal environmental and specific factors in the task/industry environment

4-6 of each

Internal

External

Societal ForcesTask

Elements

Economics123

Technological123

Political-Legal123

Sociocultural123

Communities

Competitors

Cre ditors

Customers

Employees/Unions

Governments

Special-interest groups

Shareholders

Su ppliers

Tra de associations

TREND ANALYSISENVIORNMENTAL ANALYSIS

POTENTIAL ENTRANTS Economies of scale Product differentiation Capital requirements Switching costs Access to distribution channels Cost independent of size Government policy

FORCES DRIVING INDUSTRYPorter

RIVALRY Number of competitors Rate of industry growth Product characteristics Amount of fixed costs Capacity Height of exit barriers Diversity of rivals

SUBSTITUTES BUYERS

STAKEHOLDERS SUPPLIERS

TASK/INDUSTRY ANALYSIS

VALUE CHAIN ANALYSISp. 87

Firm Infrastructure(general management, accounting, finance, strategic planning

Human Resource Management(Recruiting, training, developing)

Technology Development(R&D, product and process improvement)

Procurement(Purchasing of raw materials, machines, supplies

Inbound

Logistics(raw materials

handling and

warehousing)

Operations

(machining,

assembling,

testing)

Outbound

Logistics(warehousing and

distribution of

finished product)

Marketing

and Sales(advertising,

promotion,

pricing, channel

relations)

Service

(installa tion,

repair, parts,

ENVIORNMENTAL ANALYSIS

Prentice Hall, 2000 Chapter 1 80

Levels of Strategy

Corporate

Corporation’s overall direction and the management of its businesses

Business

Emphasizes improving the competitive position of a corporation’s products or units

What business should we be in?

How will we compete?

Formulating Formulating Corporate StrategyCorporate Strategy

What Business What Business Should We Be IN?Should We Be IN?

GENERIC CORPORATE STRATEGIES

GROWTH

STABILITY

RETRENCHMENT


GROWTH (p. 134)

Vertical Integration

Horizontal Integration

Related Diversification (Concentric)

Unrelated Diversification (Conglomerate)

Up & down the value chain

Up & down the value chain

Backward - Forward

Backward - Forward

Increasing Increasing Geographic locationsGeographic locations

Range of productsRange of products

Unrelated Unrelated

Related industriesRelated industries


STABILITY(p.143)

Pause/ Proceed with CautionNo Change

RETRENCHMENT(p. 185-188)

TurnaroundDivestmentLiquidation

MODELS OF CORPORATE STRATEGIES Business Strengths/Competitive Position

Strong Average Weak

Attractiveness

High

Med

Low

1 Growth

Concentric via Vertical Integration

2 Growth

Concentration via Horizontal Integration

3 Retrenchment

Turnaround

4 Stability

Pause or Proceed with caution

5 GrowthConcentration viaHorizontal Integration-------------------------- Stability No Change or Profit Strategy

6 Retrenchment Captive Company or Selling out

7 Growth

Concentric Diversification

8 Growth

Conglomeration Diversification

9 Retrenchment

Bankruptcy or Liquidation

MODELS OF CORPORATE STRATEGIES Business Strengths/Competitive Position

Strong Average Weak

Attractiveness

High

Med

Low

1 Growth

Concentric via Vertical Integration

2 Growth

Concentration via Horizontal Integration

3 Retrenchment

Turnaround

4 Stability

Pause or Proceed with caution

5 GrowthConcentration viaHorizontal Integration-------------------------- Stability No Change or Profit Strategy

6 Retrenchment Captive Company or Selling out

7 Growth

Concentric Diversification

8 Growth

Conglomeration Diversification

9 Retrenchment

Bankruptcy or LiquidationXX

XX

Formulating Formulating Business StrategyBusiness StrategyHow Will We Compete?How Will We Compete?

Porter's Competitive Strategies

Differentiation

Cost Leadership

Focus

Unique/differentComponents of

value chain

Competitive/market segment


p. 8






Strategy ImplementationProgramsBudgets Procedures

Evaluation and Control Performance

How will we know it is working?

Societal EnvironmentP. 11

T a sk /In d u s tr y E n v ir o n m e n t

S o c io c u ltu ra l Economic

Political-Legal Technological

I n t e r n a lE n v i r o n m e n t

Shareholders

Governments

SpecialInterestGroups

Customers

Creditors

Communities

Suppliers

Employees/Labor Unions

Competitors

Trade Associations

Structure

Culture

Resources


GROWTH

STABILITY

RETRENCHMENT


how to

create value

Think Think StrategicallyStrategically

how to how to create valuecreate value

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