International management summary Section 3: Strategic management and corporate governance Economic contributions to strategic management What is Strategic Management about: * The systematic study of strategy in a business context ;k Seawater is about obtaining sustainable profitability (While respecting standards Of decency) ;k How is sustainable profitability achieved? * Doing things well (operational efficiency) but the same way as the others erodes profits > * Strategy is essentially about doing things differently (Porter 1 996), choosing different sets of activities What are the fundamental choices to be done?
Where to compete? > Corporate Strategy How to compete? > Competitive Strategy The field of strategic management has a normative (what firms should do) and descriptive (what firms actually do) part, The literature on strategic management may be tether divided into contributions that focus on the process and the content of strategic management, although the content is hard to divide into normative and descriptive. Strategic planning is the component of strategic management that aims at the formulation of a firm’s strategy.
It is argued that the process to strategic planning should consist of a logical sequence of steps. Origins of Strategic Management ;k Strategic management was born (in the ‘ass) as a tool to assist practitioners in the process of strategic planning, i. E. , in the formulation of deliberate strategies * Today we acknowledge that strategies can be emergent as well as deliberate (Integers and Quinn 1991) * We also acknowledge that besides the content Of strategy, the process of strategy formulation and implementation is important. Economics has contributed mostly to issues of content and of deliberate strategy The bricks of strategy As strategy is about choosing in order to be different and profitable, the common elements n strategy are: * Goals what do we want to be and to do? * External / Competitive environment ;k Which environment holds more promise? * How do we differentiate from others in that environment? * Resources / internal environment * Do we have what is required to do vat eve purpose to do?
Analyzing the external environment ;k Environmental influences are manifold * From the point Of view Of strategy, the important ones are those that impact on the firm’s capability to make profits * The core of the business environment is formed by relations with three groups of players: customers, suppliers, competitors The firm’s proximate environment is the set of these three groups, its industry environment. The S-C-P framework S-C-P (structure-conduct-performance): one theoretical framework: Structure raters to characteristics of the industry.
Conduct refers to behavior or strategies of firms in the industry. * developed by industrial economists dominant from the sass’s until the asses * argues that industry structure ;k influences firms’ conduct * influence industry performance ;k According to the SSP paradigm, the structure of an industry determines the conduct of firms that in that industry and, in turn, conduct determines industry references. Structure * Numbers and size distribution Of sellers and buyers. ;k Barriers to entry. Production differentiation. Cost structures. * Price elasticity. Conduct * Collusion * Pricing strategy * Product strategy Research and development * Advertising performance ;k Industry profitability * Growth and output ;k Employment * Technological advance S-C-P: one theoretical framework ;k the relation of structure on performance also frequently investigated ;k empirical findings: weak relationship between concentration (structure) and market power (performance) Why? k data problems: market power difficult to measure nonentity: the explanatory variable may be affected by firms’ conduct and by performance ; Current industrial organization tries to explicitly capture conduct Of firms Porter’s Five Forces model (FEM.): an offspring of the SSP paradigm FM, the intensity of competition within an industry is determined by 1. Bargaining power of suppliers 2. Bargaining power of buyers 3. Threat of new entries into the industry 4.
Threat to substitute products S. Competition from industry incumbents (which depends on * In the concentration, diversity of competitors, product differentiation, excess capacity, exit barriers, fixed costs) Analyzing competitors Firms belonging to the same industry can still differ in many respects. They differ along dimensions such as pricing strategy, advertising levels, degree of vertical integration and so on. Such disparities may be due to differences in information.
When a firm has chosen its Strategy and already did invest in that Strategy, it cannot change the seawater because then it has to invest in assets that probably decline the firms value. Another reason for the disparities are the rules Of thumb that a company uses (organizational routines). Firms do not maximize but satisfies, this means if a strategy satisfies a firm Will not seek for a better one. In many industries can more than one strategy can survive.
Competition is not just a mediating variable between structure and performance (as in the SCM framework); rather, it is often a process of complex interactions between a few, well identified companies Game theory provides us * concepts to describe a competitive situation predictions of the outcomes of a competitive situation Industry groups Firms in the same industry differ along certain key variables. Those key variables are the strategic dimensions of that industry.
It seems likely that those differences persist for several years because there are mobility barriers between he strategic groups. If both propositions are true, then an industry can be viewed as being composed of groups of firms, each group consisting of firms following similar competitive strategies. The competitive strategy of a firm is that firm’s choice with regard to the strategic dimensions of its particular industry. Examples of strategic dimensions are advertising levels and product differentiation.
Groups of firms following similar competitive strategies are called strategic groups. Firms within a strategic group closely resemble one another. Profitability differences between firms in the same strategic group are likely to be small. However, profitability differences between firms in different groups may be large. Thus, strategic planners can use the concept Of strategic groups to construct a map showing the competitive strategies of their own company and those Of their competitors.
Competitive strategy Many competitive strategies are possible, however two successful competitive strategies can be identified: Cost leadership vs.. Product differentiation Porter (1985) Cost leadership (firm tries to manufacture and distribute products at the lowest possible unit cost, is often attained trough economies of scale or experience): requires doing things more efficiently greatly benefits from economies of scale ; narrow-line, standardized offering * it is almost the only way to concrete in commodities ;k erodes easily as the environment changes (e. G. Ford’s model T) ;k requires more than incremental efficiencies, benefits from fundamental rethinking of the activities in which the firms engages, in order to detect linkages between activities (Business process Reengineering * Product differentiation ;k defined as providing something unique that is more valuable to customers than the cost of providing it ;k less vulnerable to being overturned by changes in environment (e. G. By changes in exchange rates) ;k more difficult to replicate * it may involve physical differentiation (e. G. Shorter delivery times Of Dell’s computers) or * intangible differentiation (e. . The aura that surrounds Louis Button’s plastic bags) * requires deep understanding of why customers buy a product or service * These strategies tend to be regarded as alternatives (“do not get stuck in the middle T) In practice markets leaders are often found among firms that master both aspects (e. G. Toyota, Canon, Dell) Resource-based-view of the firm A competitive advantage is always based on the possession or access to certain sources, The extent to which a competitive advantage is sustainable depends on how difficult or costly it is for other firms to obtain the same resources.
Resources are the productive assets of a firm and they can be tangible, intangible or human. A resource can be the basis of competitive advantage only if that resource has certain properties: * Valuable ;k Rare * Inimitable ;k Non- substitutable Two criticisms: * ROB is to a certain extent tautological. It attempts to explain superior performance in terms of the use of particular valuable resources. At the same time, the question as to Whether or not resources are valuable has to e answered by reference to the performance they enable.
It is missing an independent selection mechanism that explains Which resources are valuable and which are not. * ROB is static. It assumes that resources simply exist and the firm’s task is to choose from among the existing resources, neither asked where these resources came from nor how they were developed and maintained over time. Dynamic capabilities Can be defined as the capacity of an organization to purposefully create, extent or modify its resource base. Dynamic capabilities can be distinguished from operational capabilities, which pertain to the current operations of an organization.
Thus, operational capabilities are any type to capability that the organization uses in its effort to earn a living in the present, Dynamic capabilities, by contrast, are aimed at change. They alter the resource base of an organization. Gorging alliances or making acquisitions are typical examples. Note, further, that trough dynamic capabilities the organizational resource base is purposefully created, extended or modified. That means there must be some degree of intent, either on the part of top management or at lower levels in the organization.
Furthermore there must be an alliance partner. Prom this respective, the strategic management of the organization therefore entails the purposeful application of dynamic capabilities to change the resource base Of the organization. The extension of ROB with the concept of dynamic capabilities also allows for the possibility Of delving deeper into the nature Of the resources and capabilities that generate sustainable competitive advantage. There are specific factors and circumstances that contribute to dynamic capabilities being valuable, rare or inimitable.
Some features include the following: * Co-specialization: meaning that assets are uniquely valuable only when used in combination. Asset orchestration: this term is used to denote the managerial search, selection and configuration/coordination of resources and capabilities. The term attempts to convey that, in an optimal configuration of assets, the whole is more valuable then sum of its parts. * Tacit knowledge: if capability is partly based on tacit knowledge, it is impossible to make it fully explicit. The capability can therefore not be dully articulated. It partly resides in people’s heads and behaviors.
Firm specificity: Dynamic capabilities are often dependent on the firm’s historical development and unique circumstances. They are usually developed in practice through learning by doing, * Isolating mechanisms: prevent other firms competing away the profit that a firm earns from its capability. Analyzing the ;k Firms must match the internal resources to the opportunities offered by the external environment ;k Amid increasingly unstable environments, resources and capabilities have been recognized as more reliable sources of competitive advantage than market focus * Capabilities (or competences): what the firm can do.
Individual capabilities do not confer competitive advantage. They must work together to Create organizational capabilities. Moue and counter move Commitment * Entry-deterring strategy: strategy that keeps competitors out Of competition. * Spatial commitment: firm shows that it is committed to a location and that deters competitors from entering. * Temporal commitment: for example a fixed contract. * Credible commitment: a commitment that the competitor believes. Competition Spatial competition: competition on locations. Product competition: same product but with little differences, * First mover advantages * The first mover is able to capture a resource that gives competitive advantages. The first mover is able to lock in customers or suppliers. K The first mover is able to benefit from learning. ;k The first mover is able to appropriate increasing returns: the first product is able to fetch a higher price than later copies, however, sometimes products exhibit increasing returns, -if your product becomes more valuable as more copies of it are sold (fax machine)get; this is called network effect or positive network externalities. k First mover disadvantage * The pioneer has to gain acceptance Of the new product. ;k The skills and competences necessary for invention are rather different from those necessary for innovation. * Past second strategy (marked and Georges 2005): strategy that is recommended for established firms, that is, allowing early movers to establish a niche market and then being the first to consolidate it into a mass market, this strategy needs to be really fast.
Corporate Strategy Corporate strategy is about the choice of where to compete. Three fundamental ways in which a firm can expand the portfolio of businesses where it competes: Vertical integration: moving into the production of previous stages or subsequent stages. * Technological interdependence Critical dimensions of transactions (asset specificity and uncertainty/ complexity). Diversification: extend the firms portfolio of businesses through diversification. Related: occurs when the new business is in some way related to the firm’s existing business, Reason for it > Economies of scope: joint production to two goods is less costly than the cost to producing those two goods separately. Common production factors leading to economies of scope are: specialized indivisible physical assets: assets that are specialized and difficult to sell * technological know-how: difficult to trade across markets because property rights may be ill defined and transfer of know how within a firm may be easier than across markets * organizational know-how: organizations know how to respond to external events. Rand names: it is usually cheaper to introduce a new product under an established brand name, * Unrelated: As Williamson has submitted, a firm with several unrelated fussiness units (conglomerate) may still have an advantage as it may be more efficient in allocating cash flow to high yield uses than is the external capital market. If a conglomerate firm adopts an m form Structure, it can realize all the advantages of the m form. The general offices of such conglomerate evaluates investment rapports from the business units and allocates cash flow to the most profitable proposals.
In comparison with the capital market the general office of a conglomerate is a solution to the in formation problem. * Multimillionaires: becoming involved in the same activities in another country> reason: the realization of economies of scale through the joint use of intangible assets: Technological know how Organizational know how Corporate governance Problem indication and definitions * Corporate governance: the system of laws, institutions, mechanisms, etc. Through which a corporation is directed, administered or controlled.
Corporation: a legal entity, separate from the persons that own it. * What alternatives legal torts are there to engage in complex and long-term enterprises? * sole proprietorships (one owner, unlimited liability) ;k partnerships (many owners, at least some with unlimited liability, termination at will, owners involved in management) * limited liability company (some owners, with limited liability, who often manage the company) ;k cooperatives (many owners, who share decision making authority) * What are the benefits of corporations? Many owners > possibility to gather large amounts Of resources. * legal resonantly > the corporation is the owner of assets >: protection of the enterprise from demands Of individual resource contributors. * limited liability > protection of owners from corporation’s liabilities beyond their investments. * no need for owners to be involved in costly decision making on uses Of resources. * Corporations are established in the interest of the enterprise, as well as of individual contributors of resources. * What are the limitations of this legal entity? 1. Gal personality ; the owner of the assets (the corporation) is different from the decision-maker (management) ; management may pursue its own interests ; a principal-agent problem. * Who is the principal? The corporation ; the agency problem exists also in the case when the manager is also a owner (the managing members may dilapidate the company: very common in the of family business! ) * The agency problem arises because there may be a lack to alignment between the desires and objectives of the CEO and those of shareholders and there is usually information asymmetry between a CEO and shareholders. k CEO will make decisions that maximize his own utility function and the shareholders want to make sure that the CEO makes sections that maximizes shareholder value. In what ways could the interest of the manager deviate from those of the corporation? * Investing the free cash flow in projects with negative NP (net present value) (hubris, empire building, compensations based on size__. ), because their reward scheme is tied to the size of the firm or simply the pure pleasure that comes with empire building.
The shareholders want the CEO only to invest in projects with positive NP. If the firm generates more cash flow than the amount it can invest in projects with a positive NP, the difference is called free cash flow and according to financial hero, free cash flow should be returned to the shareholders. * different attitude toward risk: cautious Coos many shun investments they perceive as risky while shareholders would undertake them * different time horizons: shareholders are entitled to all the company’s future cash flows, Without any time horizon.
Managers serve for a limited period of time. CEO may be biased towards projects with positive cash flow during his tenure, while overall NP is negative * On the job consumption Solutions to the agency problem: * improving the alignment of interests between principal and agent> question of alignment incentive contracts * improving the functioning of the market for managerial labor and/or the market tort corporate control tensions. Educing the information asymmetry of effective monitoring * internal monitoring (large shareholders and/or superiors board) external monitoring (stock market analysts, credit rating agencies, private equity firms) * increasing market pressure on the agent 2. Some owners may abuse other owners. Incentive contracts Contracts that bind remuneration to some indicator of the performance of the corporation * cash bonuses: extra money paid if goals have been met (typically associated to Management By Objectives).
However, when a managers realize that their level Of effort has only a limited influence on their total compensation, they might be motivated only slightly more than if they had just a fixed salary. If that is true, the money spent on the additional variable compensations may be a waste of money from the shareholders point of view. To cope with this problem is a way to make a more direct link between management performance and executive compensation.
For example to use a reference group, which is a group of similar companies, which the performances of the company will be measured with. Share plans: managers receive company’s shares (with restrictions on resale) and faces incentive to raise their value. However, the problem of managerial entrenchment may arise, which occurs when a manager performs poorly and shareholders want to get rid of him. It the manager is also a shareholder, he or she can use his or her voting power. Stock options: manager gets right to buy company shares at pre-specified price at a future date. Temporary contracts ;k Contracts with directors, including the CEO, should be of limited duration. (time span, limited number of re-election) * This does increase the problem of efferent time horizons. Limitations of incentive contracts * Do incentive contracts Not always! ;k CEO Peter Cartridge * Company: Calling (Gas-fired power plants) ;k 6 hrs tot return: -7%. * 6 hrs bag annual compensations: $13 ml $ ;k Problems * factors outside control area (e. G. Equines cycle) ;k Incentives to fraud (Enron, World, Aloud) * Bonuses and stock options reward gains but do not penalize risk excessive risk taking * Empirical evidence * scarce support for link stockholders – shareholders’ return Internal monitoring Who could be an internal monitor? * Shareholders the free riding problem: Suppose when the largest shareholder owns 6 percent of all outstanding shares, while remaining are owned by smaller investors. The largest shareholders knows that if he invests time and money monitoring, only 6 percent tooth benefits will accrue to him, while remaining benefits go to other investors.
As result, the largest shareholder will surely invest less time and money in monitoring than if she were the sole owner of the company. * more effective in family-owned companies ;k Board of directors * inside directors(executive officers) and outside directors(non executive erectors: the firm’s top manager is always member of the board. ;one tier board system * the two-tier board system (executive Board and supervisory Board) *The roles of the two boards: decision management (initiation and implementation) us. Session control (ratification and monitoring * Board functions: * TO act as shareholders’ agent With fiduciary responsibility * TO hire and evaluate management * setting Coo’s pay * To approve major operating proposals * TO approve major financial decisions * To offer expert advice to management * To make sure the firm’s activities and financial condition are accurately ported to its stakeholders * Board committee Most common sub-committees include: * Audit committee Compensation committee * Nomination committee Other sub-committees may include: * Executive committee ;k Finance committee * Community relations committee ;k Corporate governance committee * Stock options committee ;k Limits to internal monitoring effectiveness * Top managers have control on board memberships (through the proxy mechanism) ;k Often shareholders elect but do not nominate directors * Outside directors have difficulty understanding what management does * Inconclusive evidence on the relationship between board composition and firm External monitoring -k Who could be an external monitor? * auditing firms * appointed by the shareholders or by the supervisory Board * approve financial statements * restricted from doing consulting business for same firm auditors, however, also assist board member in their monitoring task> annual management letter. Stock analysts Debt holders (banks) * Rating agencies Markets External constraints on the agent * The product market: ;k if perfect competition prevails, no profits are realized, on-the-job institution threatens firm’s survival, * Managerial labor market: ;k the chance to land in a better-paying company provides incentives to managers to perform well * in reality: asymmetric information limits the capability of outsiders to evaluate managers * empirically: only the very poorest managers loose their jobs * The stock market: ;k poor firm performance hits stock market quotation, limits possibility to raise capital at attractive terms * The market of corporate control: ;k hostile takeovers typically result in top management being ousted -k However: many devices limit the feasibility Of hostile takeovers or its uniqueness for management (poison pills, golden parachutes, white knights) The first public company VOCE; not the first such trading company to be created, but its predecessors were usually financed in a way that we nowadays call project financing, in which entrepreneurs and investors combined a company to invest money in buying assets (a ship and its cargo) when the asset was out of production, it was sold and the investors were repaid their money together with a handsome profit. The VOCE started the trading in shares and received a permanent capital base; it became a public company.