Essentials of Strategic Management 5th Edition_3 potx

The concept that business must be socially responsible sounds appealing until one asks, “Responsible to whom?” A corporation’s task environment includes a large number of groups with interest in the activities of a business organization. These groups are called stakeholders because they are groups that affect or are affected by the achievement of the firm’s objectives. Should a corporation be responsible only to some of these groups, or does business have an equal responsibility to all of them? In any one strategic decision, the interests of one stakeholder group can conflict with another. For example, a business firm’s decision to use only recycled materials in its manufacturing process may have a positive effect on environmental groups but a negative effect on shareholder dividends. Which group’s interests should have priority? To answer this question, the corporation may need to craft an enterprise strategy—an overarching strategy that explicitly articulates the firm’s ethical relationship with its stakeholders. This requires not only that management clearly state the firm’s key ethical values, but also understand its societal context, and undertakes stakeholder analysis to identify the concerns and abilities of each stakeholder. 12 One approach to stakeholder analysis is to first categorize stakeholders into primary stakeholders, those who have a direct connection with the corporation and sufficient power to directly affect corporate activities, and secondary stakeholders, those who have only an indirect stake in the corporation, but who are also affected by corporate activities. Then estimate the effect on each stakeholder group from any particular strategic alternative. What seems at first to be the best decision because it appears to be the most profitable may actually result in the worst set of consequences to the corporation. What is the Role of Ethics in Decision Making? Ethics is defined as the consensually accepted standards of behavior for an occupation, trade, or profession. There is some evidence that ethics are often ignored in the workplace. For example, a survey by the Ethics Resource Center of 1,324 employees of 747 U.S. companies found that 48 percent of these employees had engaged in one or more unethical and/or illegal actions during the past year. 13 Some people justify their seemingly unethical positions by arguing that there is no one absolute code of ethics and that morality is relative. Simply put, moral relativism claims that morality is relative to some personal, social, or cultural standard and that there is no method for deciding whether one decision is better than another. Although this argument may make some sense in some instances, moral relativism could enable a person to justify almost any sort of decision or action, so long as it is not declared illegal. Following Carroll’s work, if business people do not act ethically, government will be forced to pass laws regulating their actions – with the usual result of increasing costs. For self-interest, if for no other reason, managers should be more ethical in their decision making. One way to do that is by encouraging codes of ethics. A code of ethics specifies how an organization expects its employees to behave while on the job. Developing codes of ethics can be a useful way to promote ethical behavior. Such codes are currently being used by over half of American business corporations. A code of ethics (1) clarifies company expectations of employee conduct in various situations and (2) makes clear that the company expects its people to recognize the ethical dimensions in their decisions and actions. A company that wants to improve its employees’ ethical behavior should not only develop a comprehensive code of ethics, but also communicate the code in its training programs, in its performance appraisal system, in policies and procedures, and through its own actions. A starting point for developing a code of ethics is to consider the three basic approaches to ethical behavior: • Utilitarian approach. This approach proposes that actions and plans should be judged by their consequences. People should therefore behave in such a way that will produce the greatest benefit to society and produce the least harm or the lowest cost. • Individual rights approach. This approach proposes that human beings have certain fundamental rights that should be respected in all decisions. A particular decision or behavior should be avoided if it interferes with the rights of others. • Justice approach. This approach proposes that decision makers be equitable, fair, and impartial in the distribution of costs and benefits to individuals and groups. It follows the principles of distributive justice (people who are similar on relevant dimensions such as job seniority should be treated in the same way) and fairness (liberty should be equal for all persons). The justice approach can also include the concepts of retributive justice (punishment should be proportional to the “crime”) and compensatory justice (wrongs should be compensated in proportion to the offense). Ethical problems can be solved by asking the following three questions regarding an act or decision: 1. Utility. Does it optimize the satisfactions of all stakeholders? 2. Rights. Does it respect the rights of the individuals involved? 3. Justice. Is it consistent with the canons of justice? 14 Discussion Questions 1. When does a corporation need a board of directors? 2. Who should and should not serve on a board of directors? What of environmentalists or union leaders? 3. What recommendations would you make to improve corporate governance? 4. Do you agree with economist Milton Friedman that social responsibility is a “fundamentally subversive doctrine” that will only hurt a business corporation’s long- term efficiency? 5. Is there a relationship between corporate governance and social responsibility? Key Terms (listed in order of appearance) corporation 17 corporate governance 17 board of directors’ responsibilities 18 board of directors’ continuum 18 inside directors 19 outside directors 19 agency theory 20 stewardship theory 20 interlocking directorate 21 lead director 22 Sarbanes-Oxley Act 22 top management responsibilities 23 executive leadership 23 social responsibility 24 stakeholders 27 enterprise strategy 27 ethics 27 moral relativism 27 code of ethics 28 Notes 1. 2009 Annual Report, General Mills, Inc., Minneapolis, Minn., p. 17; M. Conlin, J. Hempel, J. Tanzer, and D. Poole, “The Corporate Donors,” Business Week (December 1, 2003), pp. 92–96; I. Sager, “The List: Angels in the Boardroom,” Business Week (July 7, 2003), p. 12. 2. A. Demb and F. F. Neubauer, “The Corporate Board: Confronting the Paradoxes,” Long Range Planning (June 1992), p. 13. 3. A. Chen, J. Osofsky, and E. Stephenson, “Making the Board More Strategic: A McKinsey Global Survey,” McKinsey Quarterly (March 2008), pp. 1–10. 4. D. R. Dalton, M. A. Hitt, S. T. Certo, and C. M. Dalton, “The Fundamental Agency Problem and Its Mitigation,” Chapter One in Academy of Management Annals, edited by J. F. Westfall and A. F. Brief (London: Routledge, 2007). 5. 33rd Annual Board of Directors Study (New York: Korn/Ferry International, 2007), p. 11; T. Neff and J. H. Daum, “The Empty Boardroom,” Strategy + Business (Summer 2007), pp. 57–61. 6. 33rd Annual Board of Directors Study (New York: Korn/Ferry International, 2007), p. 17 and 30th Annual Board of Directors Study Supplement: Governance Trends of the Fortune1000 (New York: Korn/Ferry International, 2004), p. 5. 7. Dalton, Hitt, Certo, and Dalton, “The Fundamental Agency Problem.”; P. Coombes and S. C-Y Wong, “Chairman and CEO— One Job or Two?” McKinsey Quarterly (2004, No. 2), pp. 43–47. 8. M. C. Mankins and R. Steele, “Stop Making Plans, Start Making Decisions,” Harvard Business Review (January 2006), pp. 76–84. 9. M. Friedman, “The Social Responsibility of Business Is to Increase Its Profits,” New York Times Magazine (September 13, 1970), pp. 30, 126–127; and Capitalism and Freedom (Chicago: University of Chicago Press, 1963), p. 133. 10. A. B. Carroll, “A Three-Dimensional Conceptual Model of Corporate Performance,” Academy of Management Review (October 1979), pp. 497–505. 11. P. S. Adler and S. W. Kwon, “Social Capital: Prospects for a New Concept,” Academy of Management Journal (January 2002), pp. 17–40. Also called “moral capital” in P. C. Godfrey, “The Relationship Between Corporate Philanthropy and Shareholder Wealth: A Risk Management Perspective,” Academy of Management Review (October 2005), pp. 777–799. 12. W. E. Stead and J. G. Stead, Sustainable Strategic Management (Armonk, N.Y.: M. E. Sharpe, 2004), p. 41. 13. M. Hendricks, “Well, Honestly!” Entrepreneur (December 2006), pp. 103–104. 14. G. F. Cavanagh, American Business Values, 3rd ed. (Upper Saddle River, N.J.: Prentice Hall, 1990), pp. 186–199. [...]... scanning its industry, the corporation must assess the importance to its success of each of the following six forces: threat of new entrants, rivalry among existing firms, threat of substitute products, bargaining power of buyers, bargaining power of suppliers, and relative power of other stakeholders.5 WHAT IS THE THREAT OF NEW ENTRANTS? New entrants are newcomers to an existing industry They typically... low, substitutes may have a strong effect on an industry Tea can be considered a substitute for coffee If the price of coffee goes up high enough, coffee drinkers will slowly begin switching to tea The price of tea thus puts a price ceiling on the price of coffee Sometimes a difficult task, the identification of possible substitute products or services means searching for products or services that can... compete FIGURE 3.6 Mapping Strategic Groups in the U.S Restaurant Chain Industry What are Strategic Types? In analyzing the level of competitive intensity within a particular industry or strategic group, it is useful to characterize the various competitors for predictive purposes A strategic type is a category of firms based on a common strategic orientation and a combination of structure, culture, and... set of strategic groups is very useful to strategic managers as a way of better understanding the competitive environment Because a corporation’s structure and culture tend to reflect the kinds of strategies it follows, companies or business units belonging to a particular strategic group within the same industry tend to be strong rivals and more similar to each other than to competitors in other strategic. .. relationship Their (often ineffective) responses to environmental pressures tend to be piecemeal strategic changes By allowing Target to take the high end of the discount market and Wal-Mart the low end, Kmart was left with no identity and no market of its own Dividing the competition into these four categories enables the strategic manager not only to monitor the effectiveness of certain strategic orientations,... Competitive intelligence is a formal program of gathering information on a company’s competitors Sometimes called business intelligence, this is one of the fastest growing fields in strategic management Close to 80 percent of large U.S corporations currently report having at least a modest level of competitive intelligence activities According to a survey of 141 large American corporations, spending... earn greater profits In the short run, these forces act as constraints on a company’s activities In the long run, however, it may be possible for a company, through its choice of strategy, to change the strength of one or more of the forces to the company’s advantage FIGURE 3.4 Forces Driving Industry Competition Source: Adapted/reprinted with permission of The Free Press, an imprint of Simon & Schuster,... concerned with the intensity of competition within its industry Basic competitive forces, which are depicted in Figure 3.4, determine the intensity level “The collective strength of these forces,” he contends, “determines the ultimate profit potential in the industry, where profit potential is measured in terms of long-run return on invested capital.”4 The stronger each of these forces is, the more... closest to one another as one strategic group, varying the size of the circle in proportion to the group’s share of total industry sales Name each strategic group in the restaurant industry with an identifying title, such as quick fast food or buffet-style service Other dimensions, such as quality and degree of vertical integration, can also be used in additional graphs of the restaurant industry to... impact on the marginal producers who could not internally absorb all of these costs Do Industries Evolve Over Time? Most industries evolve over time through a series of stages from growth through maturity to eventual decline The strength of each of the six competitive forces described in the preceding section varies according to the stage of industry evolution The industry life cycle is useful for explaining . Is to Increase Its Profits,” New York Times Magazine (September 13, 1970), pp. 30 , 126–127; and Capitalism and Freedom (Chicago: University of Chicago Press, 19 63) , p. 133 . 10. A. B. Carroll,. substitute for coffee. If the price of coffee goes up high enough, coffee drinkers will slowly begin switching to tea. The price of tea thus puts a price ceiling on the price of coffee. Sometimes. opportunities to offer products and services to the growing number of “woofies” (well-off old folks—defined as people over 50 with money to spend). 3 Anticipating the needs of seniors for prescription