Chapter 2

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McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 2
The Context of Strategic
Management
Learning Objectives
After reading this chapter, you should have a good
understanding of:





The effects of globalization and business ethics on today’s
organizations and on the nature of competition.
The sources of national advantage, that is, why an industry
in a given country is more (or less) successful than the
same industry in another country.
The potential benefits and risks of international expansion.
The vital role of corporate governance and stakeholder
management as well as how “symbiosis” can be achieved
among an organization’s stakeholders.
The importance of social responsibility, including
environmental sustainability
2-3
The Global Economy: A Brief Overview
 Opportunities and risks when firms diversify
abroad
Trade across nations will exceed trade within
nations
Rise of market capitalism around the world
Transfer of money from rich to poor countries
Equity
Bond Investments
Commercial loans
2-4
The Global Economy: A Brief Overview
 Why do some countries enjoy the fruits of
global capitalism while others are mired in
poverty?
Need of governments to have track records of
business friendly policies
Invest in modern technology
Nurture local suppliers
 Must manage broader economic factors
Interest rates, inflation, unemployment
2-5
Factors Affecting
a Nation’s Competitiveness
 Factor conditions
Nation’s position in factors of production
Skilled labor
Infrastructure – Transportation, communication,
Utilities, Educational
 Demand conditions
Nature of home-market demand
Industry’s product
Industry’s service
2-6
Factors Affecting
a Nation’s Competitiveness
 Related and supporting industries
Presence or absence in the nation of internationally
competitive
Supplier industries
Other related industries
 Firm strategy, structure, and rivalry
Conditions in the nation governing how companies are
Created, Organized, and Managed
Nature of domestic rivalry
2-7
Factor Conditions
 To achieve competitive advantage, factors of
production must be created
Industry specific
Firm specific
Pool of resources at a firm’s or country’s disposal is
less important than the speed and efficiency with
which the resources are deployed
2-8
Demand Conditions
 Demands that consumers place on an industry
for goods and services
Demanding consumers push firms to move ahead of
companies from other nations
Demanding consumers drive firms in a country to:
Meet high standards
Upgrade existing products and services
Create innovative products and services
2-9
Example
 The demand for gasoline in the United States
has not fallen despite recent surges in gasoline
prices.
 An increased supply has eased the price of
gasoline for consumers recently.
 There are still several risks that could affect the
demand conditions for gasoline
The high price of Ethanol
Volatility in the oil market
Source: Business Week, June 5, 2006
2-10
Related and Supporting Industries
 Enable firms to manage inputs more effectively
Strong supplier base adds efficiency to downstream
activities
Competitive supplier base lets a firm obtain inputs
using cost-effective, timely methods
 Allow joint efforts among firms
 Create the probability that new entrants will
enter the market
2-11
Firm Strategy, Structure and Rivalry
 Rivalry is intense in nations with conditions of
Strong consumer demand
Strong supplier bases
High new entrant potential from related industries
 Competitive rivalry increases the efficiency with
which firms develop, market, and distribute
products and services within the home country
2-12
Firm Strategy, Structure and Rivalry
 Competitive rivalry increases the efficiency
with which firms
Develop within the home country
Market within the home country
Distribute products and services within the home
country
2-13
Firm Strategy, Structure and Rivalry
 Domestic rivalry provides a strong impetus for
firms to
Innovate
Find new sources of competitive advantage
 Domestic rivalry forces firms to look beyond
national borders for new markets
2-14
Porter’s Diamond of National Advantage:
As Applied to India
A Company’s Motivation for International
Expansion
 Increase the size of potential markets
World population exceeds 6.5 billion
U.S. represents 5% of world population
China and India increased middle class
 Attain economies of scale
Larger revenue and asset base
Advantage is spreading fixed costs over larger volume
of production
2-16
A Company’s Motivation for International
Expansion
2-17
A Company’s Motivation for International
Expansion
 Reducing the costs of R&D as well as operating
costs
Attainment of greater purchasing power by pooling
purchases
 Extend the life cycle of a product
Four stages: introduction, growth, maturity, decline
 Optimize the physical location for every activity in
its value chain
Performance enhancement
Cost reduction
Risk reduction
2-18
Potential Risks of
International Expansion
 Political and economic risk
Social unrest
Military turmoil
Demonstrations
Violent conflicts and terrorism
Laws and their enforcement
2-19
Example - 2006 CPI
Corruption Perceptions Index
 Reveals the most corrupt countries in the world
 The five most corrupt countries in 2006 were:
1.
2.
3.
4.
5.
Haiti (CPI Score: 1.8)
Myanmar (CPI Score: 1.9)
Iraq (CPI Score: 1.9)
Guinea (CPI Score: 1.9)
Sudan (CPI Score: 2.0)
Source: Transparency International, 2006, www.transparency.org
2-20
Risk Rankings
2-21
Potential Risks of
International Expansion
 Currency risks
Must constantly monitor exchange rate between its
own currency and host country
Currency exchange fluctuations
Appreciation of the U.S. dollar
Exchange rates can significantly affect production
costs or net profit
2-22
Potential Risks of
International Expansion
 Management risks
Culture
Customs
Language
Symbols
Income levels
Customer preferences
Distribution system
 Recent trend -- Dispersion of value chains of
multinational corporations across different
countries
2-23
Question
When a firm decides to shift an activity that they were
previously performing in a domestic location to a
foreign location it is called:
a)
b)
c)
d)
outsourcing
contracting
offshoring
exporting
2-24
Outsourcing and Offshoring
 Outsourcing occurs when a firm decides to utilize
other firms to perform value-creating activities
that were previously performed in-house.
 Offshoring takes place when a firm decides to
shift an activity that they were previously
performing in a domestic location to a foreign
location.
2-25
Outsourcing and Offshoring
 Until 1960s, entire value chain was in one
location
 Production took place near customers to limit
transportation costs
 Rapid decline in transportation costs has enabled
firms to disperse over multiple locations
 Service industry followed manufacturing
Outsourcing low-level programming and data entry
work
2-26
Corporate Governance and Stakeholder
Management
 Corporate governance: the relationship
among various participants in determining the
direction and performance of a corporation
Shareholders
Management (led by the CEO)
Board of Directors
2-27
Question
 Briefly describe the role of board of directors in
corporate governance.
2-28
Corporate Governance and Stakeholder
Management
 Board of Directors
Elected representatives of the owners
Ensure interests and motives of management are
aligned with those of the owners
Effective and engaged Board of Directors
Shareholder activism
Proper managerial rewards and incentives
2-29
Corporate Governance and Stakeholder
Management
2-30
Example: New Rules for Directors
 In light of numerous corporate scandals, the role
and rules for board of directors are being
redefined. Few areas of focus :
Numbers Knowledge
Strategy Focus
Time & Understanding
Watchdog
Source: Tipsheet, Business Week, January 22, 2007
2-31
Corporate Governance and Stakeholder
Management
 Concerns about corporate governance led to the
Sarbanes-Oxley Act in 2002
 U.S. Corporations must abide by:
CEOs and CFOs must fully reveal off-balance-sheet
finances and vouch for the accuracy of the information
Executives must promptly reveal the sale of shares in
firms they manage and are not allowed to sell shares
when other employees cannot
Corporate lawyers must report to senior managers any
violations of securities laws within the organization
2-32
Governance Mechanisms: Aligning the
Interests of Owners and Managers
 Two primary means of monitoring behavior of
managers:
A committed and involved board of directors that acts in
best interests of shareholders
Shareholder activism: owners view themselves as
shareowners
Become actively engaged in governance of corporation
Managerial incentives called “contract-based outcomes”
Goal is to craft incentive packages to align interests of
management with those of stockholders
2-33
Governance Mechanisms: Aligning the
Interests of Owners and Managers
2-34
Governance Mechanisms: Aligning the
Interests of Owners and Managers
 Business Roundtable describes BoD duties as:
Select, regularly evaluate, and if necessary, replace chief
executive officer. Determine management compensation.
Review succession planning
Review and, where appropriate, approve the financial
objectives, major strategies, and plans of the corporation
Provide advice and counsel to top management
Select and recommend to shareholders for election an
appropriate slate of candidates for BoD; evaluate board
processes and performance
Review the adequacy of the systems to comply with all
applicable laws/ regulations
2-35
Stakeholder Management
 Two views of stakeholder management
Zero sum
Stakeholders compete for attention and resources of
the organization
Gain of one is a loss to the other
Symbiosis
Stakeholders are dependent upon each other
Mutual benefits
2-36
Key Stakeholders
2-37
Question
The expectation that businesses or individuals
will strive to improve the overall welfare of society
is called:
a)
b)
c)
d)
social responsibility
social ethics
morals
economic distribution
2-38
Social Responsibility
 Social responsibility: the expectation that
businesses or individuals will strive to improve
the overall welfare of society
Managers must take active steps to make society
better
Socially responsible behavior changes over time
Triple bottom line
2-39
Example: Social Responsibility
Starbucks Coffee Company
 Corporate social responsibility is embedded
throughout the organization.
 The following are some of the commitments
they have made to be socially responsible:
Commitment to origins
Helping protect the environment
Starbucks in your community
Commitment to partners
Source: www.starbucks.com
2-40
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