Title: Strategy, Process, Content, Context, an international perspective
Authors: Bob de wit en Ron Meyer
Third edition
Chapter 6,7,8 and 11 (each chapter also contains two readings)
Chapter 6 Corporate level strategy
Firms have a lot of growth options, while staying within the boundaries of a single business or
broaden their scope even further through venturing into other lines of business and becoming
multi-business corporations.
Vertical integration: when a firm enters other businesses upstream or downstream within its
own industry column. It can strive for backward integration by getting involved in supplier
businesses or it can initiate forward integration by entering the businesses of its buyers.
Horizontal integration: if the firm integrate related businesses at the same tier in the industry
column.
(Horizontal) diversification: if a firm expands outside of its current industry.
The issue of corporate configuration: the issue of deciding on the best array of businesses
and relating them to one another. Determining this can be disentangled into two main
questions:
1. What business should the corporation be active in? (corporate composition.
2. How should this group of business be managed? (corporate management).
Corporate composition
This can be divided into:
- corporate scope (how many businesses)
- corporate distribution (the relative size of the activities in each business are covered)
A common way of depicting the corporate composition is to plot all of the businesses in a
“portfolio matrix”.
Portfolio: the set of business activities carried out by the corporation. The intention of a
portfolio matrix is not merely to give an overview of the corporate scope and distribution. But
also to provide insight into the growth and profitability potential of each of the corporation‟s
business activities and judge the balance between the various business activities. There are
different types of portfolio matrices, two most well known are:
1 The Boston Consulting Group matrix (BCG matrix)
2 General Electric business (GE business screen)
Both have the same analytical format. Each business activity is mapped along two
dimensions. One measuring the attractiveness of the business itself (external opportunity), the
other measuring the strength of the corporation to compete in the business (internal strength).
Corporate management
This can be divided into:
- Integration (how are synergies realized)
- Management (who ensure synergies are realized)
The corporation can be divided into business units with the intent of focusing each on separate
business areas, but this differentiation must be offset by a certain degree of integration to be
able to address common issues and realize synergies. Three key integration mechanisms can
be distinguished:
1 Centralization, bringing resources and activities together into one unit.
2 Coordination, creating a common norm across business units for resources,
activities and/or product offerings.
3 Standardization, orchestration of different business units in terms of resources,
activities and/or product offerings.
It are the tools available to managers to achieve a certain level of harmonization between the
various parts of the corporate whole. Basically there are two organizational means available to
secure the effective deployment of the integration mechanism:
1 Control
- Financial control style (SBU‟s are highly autonomous from the corporate center)
- Strategic control style (SBU‟s have a closer relationship with the corporate center)
- Strategic planning style (SBU‟s have relatively little autonomy from the corporate
center)
2 Cooperation
The paradox of responsiveness and synergy
Synergy: more than the sum of the parts
According to Porter entering into another business (by acquisition or internal growth) can
only result in increased shareholders value if three essential tests are passed:
1 The attractiveness test, firms should only enter businesses where there is a
possibility to build up a profitable competitive position.
2 The cost-of-entry test, firms should only enter new businesses if it is possible to
recoup the investments made.
3 The better-of test, firms should only enter new businesses if it is possible to create
significant synergies.
The areas of relatedness that have the potential for creating synergy can be organized into
three categories; resource relatedness, product offering relatedness and activity relatedness.
Figure Business framework
Synergy by levering resource
- Achieving resource reallocation
- Achieving resource replication
Synergy by aligning positions
- Improving bargaining position
- Improving competitive position
Synergy by integrating activities
- Sharing value adding activities
- Linking value adding activities
Vertical integration is also referred to as “internalization” because firms decide to perform
activities inside the firm, instead of dealing with outside suppliers and buyers. In general,
companies will strive to integrate upstream or downstream activities where one or more of the
following conditions are deemed important:
- Operational coordination
- Avoidance of transaction costs
- Increased bargaining power
- Learning curve advantages
- Implementing system-wide changes
Responsiveness: the ability to respond to the competitive demand of a specific business area
in a timely and adequate manner
Major problems at the moment encountered by multi-business firms are the following:
- High governance costs
- Slower decision-making
- Strategy incongruence
- Dysfunctional control
- Dulled incentives
Perspectives on corporate level strategy
The portfolio organization perspective
Strategists who believe that multi-business firms should be viewed as portfolios of
autonomous business units in which the corporation has a financial stake. They argue that
business responsiveness is crucial and that only a limited set of financial synergies should be
pursued.
The integrated organization perspective
Strategists who believe that corporations should be tightly integrated, with a strong central
core of shared resources, activities and/or product offerings keeping the firm together. They
argue that corporations built up around these strong synergy opportunities can create
significantly more value than is lost through limitations to responsiveness.
Chapter 6 Portfolio Core Competence
Emphasis on Responsiveness Synergy
View of Competition Firms Compete Corporations Compete
Within a Business Across Businesses
Competitive Strategy at Business Level Corporate Level
Key Success Factor Responsiveness Competence Leveraging
to Business Demands
Corporate Composition Potentially Unrelated Shared Competence-base
(Diverse) (Focused)
Multibusiness Synergy Cash Flow Optimization Rapid Competence Building
Task of Corporate Center Capital Allocation to SBUs Create & Use Competences
Position of Business Units Highly Autonomous Highly Integrated
(Independent) (Interdependent)
Coordination Between SBU's Low, Incidental High, Structural
Corporate Control Style Setting Financial Objectives Joint Strategy Development
Diversification Acquisitions Simple to Accommodate Difficult to Integrate
Reading 6.1 strategy and the business portfolio
Barry Hedley
Hedley is a proponent of the portfolio perspective. His argument is based on the premise that
a complex corporation can be viewed as a portfolio of business, which each has their own
competitive arena to which they must be responsive.
The importance of market growth is twofold:
1 Easier en lower cost to gain market share
2 It provides the opportunity for investments
The growth-share matrix (the business portfolio)
The essence of the portfolio approach is therefore that strategy objectives must vary between
businesses. This is depicted in figure 6.3.
Figure The business portfolio or growth-share matrix
Stars: high growth, high share. Growing rapidly, they use large amounts of cash to maintain
position.
Cash cows: low growth, high share. Have an entranced superior market position and low
costs.
Dogs: low growth, low share. Their poor competitive position condemns them to poor profits.
Question marks: high growth, low share. Have the worst cash characteristics of all. Only two
strategy alternatives. The first one is to make whatever investments are necessary to gain
share, tot try to fund the business to dominance so that it can become a star and, ultimately a
cash cow when the business matures. The other alternative strategy is divestment. Question
marks are costly.
The cash generated by the cash cows should be used as a first priority to maintain or
consolidate position in those stars which are not self-sustaining. Virtually all companies have
at least some dog businesses. It is essential that the fundamentally weak strategic position of
the dogs be recognized for what they are.
Reading 6.2 The core competence of the corporation
C.K. Prahalad and Gary Hamel
The diversified corporation is a large tree. The trunk and major limbs are core products, the
smaller branches are business units; the leaves flowers, and fruit are end products. The root
system that provides nourishment, sustenance, and stability is the core competence.
Figure Competencies as the roots of competitiveness
Building core competencies is more ambitious and different than integrating vertically,
moreover. Managers deciding whether to make or buy will start with end products and look
upstream to the efficiencies of the supply chain and downstream toward distribution and
customers. They do not take inventory of skills and look forward to applying them in
nontraditional ways.
At least three tests can be applied to identify core competencies in a company, a core
competence:
1 Provides potential access to a wide variety of markets.
2 Should make a significant contribution to the perceived customer benefits of the
end product.
3 Should be difficult for competitors to imitate.
Core products: are the components or sub-assemblies that actually contribute to the value of
the end products
Three levels of competition:
1 Core competence
2 Core products
3 End products
Disadvantages of the SBU mindset:
- Underinvestment in developing core competencies en core products, when the
organization is conceived of as multiplicity of SBU‟s, no single business may feel
responsible for maintaining a viable position in core products or be able to justify the
investment required to build world leadership in some core competence.
- Imprisoned resources, SBU managers are not only unwilling to lend their competence
carriers but they may actually hide talent to prevent its redeployment in the pursuit of
new opportunities.
- Bounded innovation, if core competencies are not recognized, individual SBUs will
pursue only those innovation opportunities that are close at hand (marginal product-
line or geographic expansions).
Strategic architecture: a road map of the future that identifies which core competencies to
build and their constituent technologies.
Corporate level strategy in international perspective
A number of factors that might be of influence on how the paradox of responsiveness and
synergy is managed in different countries:
1 Functioning of capital and labor markets
Even in the group of developed economies, various degradations of capital market efficiency
seem to exist, suggestion various degrees to which corporations can create value by adopting
the role of investors. The same argument can be put forward for the efficiency of „managerial
labor‟ markets. Different degrees of labor market flexibility exist, suggesting that corporations
in some countries might be able to create more value as developers and allocators of
management talent than in other countries.
2 Leveraging of relational resources
The clustering of business around key external relationships and power bases will vary
strongly across nations. In some countries relational resources are more important than in
others.
3 Costs of coordination
In many countries coordination is not an unfortunate fact of life, but a natural state of affairs.
It is reasonable to expect a stronger preference for the portfolio perspective in countries that
favor mechanistic organizations.
4 Preference for control
Preference for control depends on how managers deal with the paradox of competition and
cooperation (chapter 7).
Chapter 7 Network level strategy
Where two or more firms move beyond a mere transactional relationship and work jointly
towards a common goal, they form an alliance, partnership or network. Their shared strategy
is referred to as a network level strategy. In such a case, strategy is not only „concerned‟ with
relating a firm to its environment, but also with relating a network to its broader environment.
All firms must necessarily interact with other organizations (and individuals) in their
environment and therefore they have inter-organizational (or inter-firm) relationships.
Four aspects of inter-organization relationships:
1 Relational actors (Who are the possible partners for interactions?)
The four main categories of relationships between the firm and other industry parties are the
following:
- Upstream vertical (supplier) relations
- Downstream vertical (buyer) relations
- Direct horizontal (industry insider) relations
- Indirect horizontal (industry outsider) relations
Besides relationships with these industry actors, there can be many contacts with condition-
setting parties in the broader environment. Employing the classic SEPTember distinction, the
following rough categories of contextual actors can be identified:
- Socio-cultural actors
- Economic actors
- Political/legal actors
- Technical actors
Figure The firm and its web of relational actors
Suppliers
Upstream Vertical
Relations
Socio-Cultural Actors Economic Actors
(community groups, (tax offices, central
media, opinion leaders, banks, stock
religious organizations) exchanges, unions)
Industry Outsiders Indirect Direct Industry Insiders
Horizontal Firm Horizontal
(Complimentors) (Competitors)
Relations Relations
Political/Regulatory Technological Actors
Actors (patent offices,
(governments, lobbyists, universities, research
regulators Downstream institutes, standardization
Vertical Relations bodies)
Buyers
2 Relational objectives (Why do they want to interact?)
Relations oriented towards leveraging resources:
- Learning, exchange knowledge and skills
- Lending, lend resources for better use
Relations oriented towards integrating activities:
- Linking, exchange product/services
- Lumping, similar activities (economies of scale)
Relations oriented towards aligning positions
- Leaning, improve bargaining position with other industry actors
- Lobbying, gain a stronger position with contextual actors
3 Relational factors (What factors influence those relationships?)
- Legitimacy, written and unwritten codes of conduct give direction to what is
viewed as acceptable behavior
- Urgency, time pressure
- Frequency, current interaction and expectations of future interactions
- Power, the ability to influence others‟ behavior
One way of measuring relative power in a relationship is portrayed in the following figure,
where a distinction is made between the closeness of the relationship (loose vs. tight) and
the distribution of power between the two parties involved (balanced vs. unbalanced).
Figure Relative power positions in inter-organizational relationships
4 Relational arrangements (How is the relationship structured?)
Within a firm coordination is achieved by means of direct control, leading transaction cost
economies to refer to this organizational form as a „hierarchy‟. In a hierarchy a central
authority governs internal relationships and has the formal power to coordinate strategy
and solve inter-departmental disputes. In the environment, relationships between firms are
non-hierarchical, as they interact with one another without any explicit coordination
dispute settlement mechanism. This organizational form is referred as “market”. In reality,
however, there are many organizational forms between markets and hierarchies.
The paradox of competition and cooperation
Competition: the act of working against others, where two or more organizations‟ goals are
mutually exclusive. Where one‟s win is the other‟s loss. To be competitive an organization
must have the power to overcome its revivals and it must have the ability and will to use its
power.
Cooperation: the act of working together with others, where two or more organizations‟
goals are mutually beneficial. Both sides need each other to succeed. Organizations must be
willing to behave as partners, striving towards their common good. Trust on both sides of a
relationship is very important.
Perspectives on network level strategy
The discrete organization perspective: strategists who believe that is best for companies to
be primarily competitive in their relationships to all outside forces. They argue that firms
should remain independent and interact with other companies under market conditions as
much as possible. These strategists emphasize the discrete boundaries separating the firm
from its competitive environment.
The embedded organization perspective: strategists who believe that companies should
strive to build up more long-term cooperative relationship with key organizational in their
environment. They argue that firms can reap significant benefits by surrendering a part of
their independence and developing close collaborative arrangements with a group of other
organizations.
Chapter7 Discrete Organization Embedded Organization
Emphasis on Competition Cooperation
Structure of env. Discrete Firm Embedded Firm
(atomistic) (networked)
Firm boundaries Distinct Fuzzy
Preferred position Independence Interdependence
Interaction outcomes Mainly zero-sum Often positive-sum
(win/lose) (win/win)
Source of advantage Bargaining power Specialization & coordination
Multi-Firm strategy No Yes
Use of co-operation Temporary Durable partnerships
(tactical) (strategic)
Basis of co-op Power & calculation Trust & reciprocity
Structure of co-op Limited, well-defined, Broad, open,
contract-based relationship-based
Reading 7.1 Collaborate with your competitors-and win
Gary Hamel, Yves Doz and C.K. Prahalad
The authors of this reading basically take the same stance as Porter, in assuming that inter-
firm relations are largely competitive and governed by power and calculation.
Companies that benefit most from competitive collaboration adhere to a set of simple but
powerful principles:
- Collaboration is competition in a different form
- Harmony is not the most important measure of success
- Cooperation has limits
- Learning from partners is paramount
There‟s a certain paradox. When both partners are equally intent on internalizing the other‟s
skills, distrust and conflict may spoil the alliance and threaten its very survival.
There are certain conditions under which mutual gain is possible, at least for a time:
- The partners’ strategic goals converge while their competitive goals diverge.
- The size and the market power of both partners is modest compared with industry
leaders.
- Each partner believes it can learn from the other and at the same time limit access
proprietary skills.
Companies must carefully select what skills and technologies they pass to their partners. The
must develop safeguards against unintended, informal transfers of information.
- Companies must take steps to limit transparency.
- Limit the scope of the formal agreement.
- Specific performance requirements.
- Not too much collegiality.
Enhance the capacity to learn:
- To learn, one must want to learn
- Learning begins at the top
- Competitive benchmarking
Japanese companies learn more from their western partners than vice versa, because western
companies approach them with the attitude of teachers and the Japanese companies are the
students.
Whether a company controls 51 percent or 49 percent of a joint venture may be much less
important than the rate at which each partner learns from the other.
Reading 7.2 Creating a strategic center to manage a web of partners
Gianni Lorenzoni and Charles Baden-Fuller
In the view of the authors, a group of firms that work closely together can form a „virtual
company‟. This type of network can benefit from most of the advantages of being a large
vertically integrated company, while avoiding most of the pitfalls of integration. But that it is
necessary for a network of firms to have a strategic center that can act as builder and
coordinator.
Three dimensions of the strategic center:
1 As a creator of value for its partners
The main features of this role are:
- Strategic outsourcing (subcontract), collect partners who contribute to the system.
Roles are clearly defined in a positive en creative way. In strategic networks, partners
are more than doers or actors; it is the norm rather than an exception for partners to be
innovators.
- Capability, help partners develop core competencies. High competitiveness force them
then to share their expertise with the network.
- Technology, borrow ideas from others which are developed and exploited to create and
master new technologies (borrow-develop-lend).
- Competition, encourage rivalry inside the network in a positive way.
2 As leader, rule setter, and capability builder
Central firms have to develop some critical core competencies (these are, in general, quite
different from those stressed by most managers in traditional firms):
- The idea, creating a vision in which partners play a critical role
- The investment, a strong brand image and effective systems and support
- The climate, creating an atmosphere of trust and reciprocity
- The partners, developing mechanisms for attracting and selecting partners
3 As simultaneously structuring and strategizing
The most difficult battle is the battle between firms adopting different strategies and different
approaches to the market. In these battles, the winners are usually those who use fewer and
different resources in novel combinations. Marketing and information sharing is very
important. Learning races create a sense of competition and rivalry, but within an overall
common purpose. But they can be destructive rather than constructive if the partners do not
have the skills and resources.
Durable partnerships between multiple firms is not easy, but if this interdependence can be
managed well, it can give the group a strong competitive edge against others.
Network level strategy in international perspective
Many authors suggest that there are recognizable national inclinations, even national styles.
A number of characteristics are possible influences on how the paradox of competition and
cooperation is dealt with in different national settings.
1 Level of individualism
More individualist cultures (English-speaking countries) accentuate the position of each
single person as a distinct entity, while more collectivist cultures (Japan) stress people‟s
group affiliation.
2 Type of institutional environment
German Cooperative capitalism
Japan Group capitalism
French Bureaucratic capitalism
Italy Familial capitalism
U.S. Managerial capitalism
U.K. Personal capitalism
3 Market for corporate control
Where horizontal and vertical integration is difficult to achieve (no stock exchange, closed
market), but working together is still beneficial, potential acquirers often only have
collaborative arrangements as an alternative.
4 Type of career paths
In countries (such as Japan and Germany) where stable, long-term employment is still
common, individuals are in a better position to build up durable personal relationships with
people in other firms.
Chapter 8 The industry context
The key issue in this chapter is how industry development takes place.
Dimensions of industry development:
- Convergence - divergence
- Concentration - fragmentation
- Vertical integration – fragmentation
- Horizontal integration – fragmentation
- International integration – fragmentation
- Expansion – contraction
Patterns of dominant business model development:
1 Gradual development, in an industry where one business model is dominant for a
long time and is slowly replaced by an alternative that is slight improvement.
2 Continuous development, in an industry where changes to the dominant business
model are more frequent, but still relatively modest.
3 Discontinuous development, in an industry where one business model is dominant
for a long period of time and is then suddenly displaced by a radically better one.
4 Hypercompetitive development, in an industry where business models are
frequently pushed aside by radically better ones.
Figure Patterns of dominant business model development
A large number of factors can contribute to rigidity, thereby inhibiting industry development.
Some of the most important ones are the following:
- Underlying conditions, some structural industry factors, for example economies of
scale, can be inherent to the industry and resist any attempt to change them.
- Industry integration, some industries can be locked in to a specific structure for a long
period of time because of the complex linkages between various aspects.
- Power structures, powerful industry incumbents have often much to lose and little to
gain when the „rules of the game‟ change.
- Risk averseness, how rigid an industry is, will be dependent on how risk avers the
various parties are.
- Industry recipes, the common understanding of the „rules of the game‟ can limit
people‟s openness to rule changers.
- Institutional pressures, firms can experience strong pressures from all kind of
institutions prescribing behavioral standards.
The paradox of compliance and choice
On the one hand, managers must be willing to irreverently transgress widely acknowledged
industry rules, going against what they see as the industry recipe. On the other hand,
managers must respectfully accept many characteristics of the industry structure and play
according to existing rules of the competitive game.
Where firms cannot influence the structure of their industry, compliance to the rules of the
game is the strategic imperative. Under these circumstances, the strategic demand is for
managers to adapt the firm to the industry structure. Where firms do have the ability to
manipulate the industry structure, they should exercise their freedom of choice to break the
industry rules. In such case, the strategic demand is for managers to try to change the terms of
competition in their own favor.
Perspectives on the industry context
The industry dynamics perspective: strategists who argue that industry development is an
autonomous process, which individual firms can hardly hope to shape. They believe that
compliance to shifting industry characteristics is mandatory – adjust or risk being selected
out. This perspective is often referred as the industry evolution perspective, due to the strong
parallel with the biological evolution (survival of the fittest).
The objective of a firm should be to co-evolve with its environment, instead of trying to
conquer it.
The industry leadership perspective: strategists who believe that the industry context can be
shaped in an infinite variety of ways by innovative firms. Therefore, industry development
can be driven by firms willing and able (innovative companies) to take a leading role. It is up
to the strategist to identify which rules of the game must be respected and which can be
ignored in the search for new strategic options.
Chapter 8 Industry Evolution Industry Creation
Emphasis On Compliance Choice
Industry Changes Uncontrollable Controllable
Evolutionary Processes Creation Processes
Change Dynamics Env. Selects Fit Firms Firm Creates Fitting Env.
Firm Success Due to Fitting Ind. Demands Manipulating Ind. Demands
Industry Malleability Low, Slow High, Fast
Normative Implication Play by the Rules Change the Rules
(Adapt) (Innovate)
Firm Profitability Industry-dependent Firm-dependent
Point of View Deterministic Voluntaristic
Reading 8.1 Industry evolution
Michael Porter
Porter is strongly affiliated with the industry dynamics perspective, but who is not fully in
their camp, because he also believes that firms can have some influence on the evolution of
the industry structure. Industry evolution should not be greeted as a fait accompli to be
reacted to, but as an opportunity.
There‟s a need for analytical techniques that will aid in anticipating the pattern of industry
changes we might expect to occur (predict evolution). Two analytical techniques:
1 The product life cycle
The product life cycle has attracted some legitimate criticism:
- The duration of the stages varies widely from industry to industry, and it is often not
clear what stage of the life cycle an industry is.
- Industry growth does not always go through the S-shaped pattern at all
- Companies can affect the shape of the growth curve through product innovation and
repositioning, extending it in a variety of ways
- The nature of competition associated with each stage of the life cycle is different for
different industries.
The real problem with the product life cycle as a predictor of industry evolution is that it
attempts to describe one pattern of evolution that will invariably occur.
2 A frame work for forecasting evolution
- Initial structure
- Potential structure
There are some predictable (and interacting) dynamic processes that occur in every industry in
one form or another, though their speed and direction will differ from industry to industry:
- long-run changes in growth
- changes in buyer segments served
- buyer‟s learning
- reduction of uncertainty
- diffusion of proprietary knowledge
- accumulation of experience
- expansion (or contraction) in scale
- changes in input and currency costs
- product innovation
- marketing innovation
- process innovation
- structural change in adjacent industries
- government policy change
- entries and exits
An industry is an interrelated system. There is no one way in which industries evolve.
However, there are some particularly important relationships in the evolutionary process:
- Industry concentration and mobility barriers move together
- No concentration takes place if mobility barriers are low or falling
- Exit barriers deter consolidation
- Long-run profit potential depends on future structure
Reading 8.2 The firm matters, not the industry
Charles Baden-Fuller and John Stopford
Baden-fuller and Stopford are advocates of the industry leadership perspective. Their
conclusion is that the given industry circumstances are largely unimportant, it‟s how a firm
plays the game that matters.
The role of the industry in determining profitability
Old views New views
Some industries are intrinsically more There is little difference in the profitability of
profitable than others one industry versus another
In mature environments it is difficult to There is no such thing as a mature industry,
sustain high profits only mature firms; industries inhabited by
nature firms often present great opportunities
for the innovative
It is environmental factors that determine Profitable industries are those populated by
whether an industry is successful, not the imaginative and profitable firms; unprofitable
firms in the industry industries have unusually large numbers of
uncreative firms
Recent statistical evidence does not support the view that the choice of industry is important.
The correct choice of strategy appears to be at least five times more important than the correct
choice of industry.
Market share and profitability
Old views New views
Large market share brings lower costs and Large market share is the reward for
higher prices and so yields greater profits efficiency and effectiveness
Small-share firms cannot challenge leaders If they do things better, small-share firms can
challenge the leaders
The dynamics of competing in traditional industries
Old views New views
Competition is based on firms following The real battles are fought among firms
well-defined traditional (or generic) taking different approaches, especially those
approaches to the market that counter yesterday‟s ideas
The industry context in international perspective
A number of factors that might be of influence on how the paradox of compliance and choice
is viewed in different countries:
1 Locus of control
People with an internal locus of control believe that they largely control their own fate. People
with an external locus of control believe that their fate is largely the result of circumstances
beyond their control. In countries where the culture is more inclined towards an internal locus
of control, it is reasonable to expect that the industry leadership perspective will be more
widespread and in cultures with a strong emphasis on external locus of control, the industry
dynamics perspective is likely to be more predominant.
2 Time orientation
In countries with a future-orientation is it most likely that they have a stronger inclination
towards the industry leadership perspective. In past-oriented and present oriented cultures, the
industry dynamics perspective is more likely to be predominant.
3 Role of government
In countries where government has a proactive role, the industry dynamics perspective is
pronounced and in countries with a less active government role, the industry leadership
perspective is pronounced.
4 Network relationship
In countries where the discrete organization perspective is predominant and firms are not
entangled in a web of long-term relationships, they are better positioned for rule breaking
behavior (every firm can make a difference). In these countries, the industry leadership
perspective is more prevalent. In nations where firms are more inclined to operate in
networks, each individual firm surrenders a part of its freedom in exchange for long-term
relationships. In these countries, the industry dynamics perspective is more prevalent.
Chapter 11 Organizational purpose
Where managers have a clear understanding of their organization‟s purpose, this can provide
strong guidance during processes of strategic thinking, strategy formation and strategic
chance.
Corporate mission: „sending the firm in a particular direction‟ by influencing the firm‟s
strategy. The overall purpose of the organization.
- Why does the organization exist?
- What business are we in?
Vision: the desired future state of the organization (in its environment). The aspirations on
which strategists are trying to focus attention.
Objectives:
usually quantitative or at least more precise targets. Relatively concrete
milestones/benchmarks in line with the goals.
Figure Corporate mission and strategic vision
While the purpose of an organization is at the heart of the corporate mission, three other
components can also be distinguished:
- Organizational beliefs
- Organizational values
- Business definition
Figure Elements of a corporate mission
A corporate mission can provide:
- Direction, defining the boundaries within which strategic choices and actions must
take place.
- Legitimization, convince stakeholders (inside & outside) that the firm is pursuing
valuable activities in a proper way.
- Motivation, inspiring individuals to work together in a particular way.
Three important corporate governance functions can be distinguished:
1 Forming function, shaping and communicating the fundamental principles that will
drive the organization‟s activities.
2 Performance function, contributing to the strategy process to improving the future
performance of the corporation.
3 Conformance function, make sure the corporation sticks to the stated mission and
strategy.
Currently, each country has its own system of corporate governance and the international
differences are large. In designing a corporate governance regime, three characteristics of
boards of directors are of particular importance:
1 board structure
Internationally, there are major differences between countries requiring a two-tier board
structure, an one-tier board structure and countries in which companies are free to choice.
- Two-tier system: there is a formal division of power, with a management board made up
of the top executives and a distinct supervisory board made up of non-executives with the
task of monitoring and steering the management board.
- One-tier (or unitary) board system: executive and non-executive (outside) directors sit
together on one board.
2 board membership
The composition of boards of directors can vary sharply from company to company and from
country to country (for example min. 50% labor or shareholders)
3 board of tasks
The tasks and authority of board of directors also differ quite significantly between
companies.
Figure Structure of corporate governance
The paradox of profitability and responsibility
The demand for economic profitability
Business organizations must be profitable to survive. Profitability is not only a result, but also
a source, of competitive power. Profitability provides a company with the financial leeway to
improve its competitive position and pursue its ambitions.
The demand for social responsibility
Companies are more than just „economic machines‟ regulated by legal contracts. They are
also networks of people, working together to a common goal. Once there is enough trust
between people, they can engage in productive teamwork and invest in their mutual
relationships.
Perspectives on organizational purpose
The shareholder value perspective: those people who argue that corporations are established
to serve the purpose of their owners. Generally, it is in the best interest of a corporation‟s
shareholders to see the value of their stocks increase through the organization‟s pursuit of
profitable business strategies. Emphasizing profitability, what means subjecting all
investments to an economic rationale (socially responsible behavior should only be
undertaken if the net present value of such an investment is attractive or there is no legal way
of avoiding compliance).
The stakeholder values perspective: those people who argue that corporations should be
seen as joint ventures between shareholders, employees, banks, customers, supplies,
governments and the community. All of these parties hold a stake in the organization and
therefore can expect that the corporation will take as its responsibility to develop business
strategies that are in accordance with their interests and values. Emphasizing responsibility,
what means subjecting all activities to a moral and/or political rationale (asking who has a
legitimate and pressing claim to be included as a beneficiary of the activities being
undertaken, which can severely depress profitability).
- Stakeholder management is instrumental, where is it primarily viewed as an approach or
technique for dealing with the essential participants in the value-adding process.
- Stakeholder management is normative, if it is based on the fundamental notion that the
organization‟s purpose is to serve the stakeholders.
Chapter 11 Shareholder Value Stakeholder Values
Emphasis on Profitability Responsibility
Organizations seen as Instruments Joint-ventures
Org. purpose=To serve owner all parties involved
Measure of success Share price, dividends Satisfy stakeholder
(shareholder value) (stakeholder values)
Major difficulty Get agent to pursue Balance interests of
principal's interests various stakeholders
Corporate governance Independent outside Stakeholder
directors with shares representation
manage Stakeholder Means End and means
Social responsibility Individual matter, Both individual
not organizational and organizational
Society best served by Pursuing self-interest Pursuing joint-interests
(economic efficiency) (economic symbiosis)
Reading 11.1 Shareholder value and corporate purpose
Alfred Rappaport
Rappaport‟s argument is straightforward; the primary purpose of corporations should be to
maximize shareholder value.
The interest in shareholder value is gaining momentum as a result of several recent
developments:
- The threat of corporate take-overs by those seeking undervalued,
undermanaged assets.
- Impressive endorsements by corporate leaders who have adopted the approach.
- The growing recognition that traditional accounting measures such as EPS and
ROI (return on investment) are not reliably linked to increasing the value of the
company‟s shares.
- Reporting of returns to shareholders along with other measures of performance
in the business press (such as Fortune‟s annual ranking of the 500 leading
industrial firms).
- A growing recognition that executives‟ long-term compensation needs to be
more closely tied to returns to shareholders.
It is important to recognize that the objectives of management may in some situations differ
from those of the company‟s shareholders. Managers, like other people, act in their self-
interest. But the mangers must work for the owners instead of act in self-interest (the
principle-agent problem).
There are at least four major factors that will induce management to adapt a share holder
orientation:
1 A relatively large ownership position
2 Compensation tied to shareholder return performance
3 Threat of take-over by another organization
4 Competitive labor markets for corporate executives
The preferred solution of Rappaport is not to change corporate government structures, but to
more tightly align the interests of both groups (managers and shareholders).
Reading 11.2 Stockholders and stakeholders: A new perspective on corporate governance
Edward freeman and David Reed
Freeman and Reed have a strong preference for the stakeholder concept what is largely based
on the pragmatic argument that, in reality, stakeholders have the power to seriously affect the
continuity of the corporation.
In 1977, when stakeholders were getting a more important role in strategic management
processes, the Warton School began a stakeholder project. To date the project has explored
the implications of the stakeholder concept on three levels:
1 As a management theory
Two problems at this level. The first one is the actual definition of stakeholder
Two definitions:
- Wide sense: any identifiable group of individual who can effected the
achievement of an organization‟s objectives or who is affected by the
achievement of an organization‟s objectives.
- Narrow sense: any identifiable group of individual on which the organization
is dependent for its continued survival.
Second issue: the generation of perspective propositions which explain actual cases and
articulate regulative principles for future use, for example:
- Generalize the marketing approach
- Establish negotiation processes
- Establish a decision philosophy
- Allocate organizational resources based on the degree of importance of the
environmental turbulence
2 As a process for practitioners
Stakeholder concepts have been used in the following strategy formulation processes:
- The stakeholder strategy process: a systematic method for analyzing the
relative importance of stakeholders and their cooperative potential and their
competitive threat.
- The stakeholder audit process: a systematic method for identifying
stakeholders and assessing the effectiveness of current organizational
strategies.
3 As an analytical framework
An analytical device depicts an organization‟s stakeholders on a two-dimensional grid-map.
- The first dimension is one of „interest‟ or „stake‟.
- The second dimension of a stakeholder is its power. By economic power they mean
the ability to influence due to marketplace decisions, and by political power they mean the
ability to influence due to use of the political process.
Figure Classical grid
Of course, each organization will have its own individual grid, but in the real world the grid
looks more like the next figure than the classical grid.
Figure Real world stakeholder grid
The debate on corporate governance and, in particular corporate democracy has recently
intensified. Corporate democracy has come to have at least three meanings over the years,
which prescribe that corporations should be made more democratic by:
1 Increasing the role of government
2 Allowing citizens or public participation in the managing of its affairs via public
interest directors and the like
3 Encouraging or mandating the active participation of all or many of its
shareholders