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Strategic Management Notes
Chapter 1
Strategic management (Originally called business policy ) is a set of managerial decisions and
actions that determines the long- run performance of a corporation. It includes environmental
scanning (both external and in- ternal), strategy formulation (strategic or long-range planning),
strategy implementation, and evaluation and control.
Phase 1: Basic Financial Planning( 1year)
The focus is on internal budgeting and control. Management creates annual budgets based on
simple extrapolations of the past. The primary questions are "What is our budget for next year?"
and "How do we stay within it?" It is reactive and inward-looking.
Phase 2: Forecast-Based Planning (3-5 years)
The focus expands to include multi-year forecasts. Managers use trends to project the future
further out, aiming for more complex goals like market share. However, it's still largely an
extrapolation of the past and doesn't fundamentally challenge the company's direction.
Phase 3: Externally Oriented (Strategic) Planning- Such top-down planning emphasizes formal strategy
formulation and leaves the implementation issues to lower management levels. Top management typically develops
five-year plans with help from consultants but minimal input from lower levels.
The focus shifts outward to the market. Managers conduct in-depth analysis of competitors,
customers, and the external environment (SWOT analysis). The goal is to allocate resources to
the most promising opportunities and adapt the business to the changing market, not just
extrapolate the past.
Phase 4: Strategic Management
This is a comprehensive, ongoing, and organization-wide process. The focus is on creating a
competitive advantage and managing for the long term. It involves all levels of management,
fosters a strategic culture, and is dynamic—constantly evaluating strategy, execution, and
controls to ensure the organization remains agile and successful.
A survey of nearly 50 corporations in a variety of countries and industries found
the three most highly rated benefits of strategic management to be:
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Clearer sense of strategic vision for the firm.
Sharper focus on what is strategically important.
Improved understanding of a rapidly changing environment.
Strategic planning can be formal or informal
• Informal strategic planning can begin with a few simple questions;
– Where is the organization now?
– If no significant changes are made, where will the organization be in
one year? Two years? Five years? Ten years? Are the answers
acceptable?
– If the answers are not acceptable, what specific actions should
management undertake? What are the risks and payoffs involved?
Impact Of Globalization
–
–
–
–
the integrated internationalization of markets and corporations
has changed the way modern corporations do business
can be a new avenue to achieve competitive advantage
formal trade agreements also altered how international business was conducted
Theories of Organizational Adaptation
1. Population Ecology
Core Idea: Organizations are largely unable to adapt. Like animals in nature, an organization is
built to succeed in a specific "niche." When that niche changes, the organization is trapped by its
own structure and culture (inertia) and dies off, replaced by new organizations born for the new
environment.
Analogy: The Dinosaurs. They were perfectly adapted to their world, but couldn't adapt to the
asteroid's impact (rapid environmental change), and mammals took over.
View of the Company: Passive and reactive. It's a victim of its environment.
Status: The text notes this theory is not well-supported by research.
2. Institution Theory
Core Idea: Organizations adapt by imitating successful peers. They copy the "best practices,"
strategies, and structures of other admired companies to gain legitimacy and survive.
Analogy: The Fashion Follower. When a trendsetting brand (like Zara) succeeds with a new
strategy, many other retailers quickly copy it.
View of the Company: Active but unoriginal. It's a follower.
Limitation: It doesn't explain who creates the successful new strategies in the first place.
3. Strategic Choice Perspective (The Dominant View)
Core Idea: Organizations are not just passive adapters; they are active shapers of their
environment. Management has the power and responsibility to make strategic choices that both
adapt to and influence the market.
Analogy: Apple. It didn't just adapt to the existing mobile phone market; it reshaped the entire
industry with the iPhone.
View of the Company: Proactive and powerful. It's a leader.
Support: Research shows that a company's management decisions are as important as the overall
industry it's in.
4. Organizational learning theory
an organization adjusts defensively to changing environment and uses knowledge offensively to
improve fit between itself and its environment
Population Ecology: We can't adapt; we die. ❌
Institution Theory: We adapt by copying the winners.
Strategic Choice & Organizational Learning: We adapt, learn, and actively shape our own
destiny. � (This is the preferred, modern approach.)
Creating a Learning Organization
1The Problem: Hypercompetition
The business environment is now so fast-changing that products and technologies replace each
other rapidly. This state is called hypercompetition.
Implication: You cannot simply define a position and defend it. You must be able to shift
quickly.
2. The Solution: Strategic Flexibility
This is the ability to shift from one dominant strategy to another.
– demands long-term commitment to development and nurturing of critical
resources
– also demands that the company become a learning organization
Example: Intel practices this by intentionally making its own products obsolete with periodic
new introductions.
3. The Engine: The Learning Organization
Strategic flexibility requires a company to become a learning organization. This is an
organization that is skilled at:
Creating, acquiring, and transferring knowledge.
Modifying its behavior based on new knowledge.
Examples: Hewlett-Packard, BP, and Siemens are cited for creating networks and systems to
share knowledge quickly across the company.
4. The Activities of a Learning Organization
They excel at four main activities:
Systematic Problem Solving
Experimentation with new approaches
Learning from their own and others' experiences
Rapid Transfer of Knowledge throughout the organization
In a Nutshell:
The old model of a rigid, 5-year plan is dead. To survive in today's hypercompetitive world, a
company must be flexible and adaptive. This is achieved by becoming a learning organization
where everyone contributes to a continuous process of learning and innovation, turning
collective knowledge into a sustainable competitive advantage.
Environmental Scanning
– the monitoring, evaluating and disseminating of information from the external and
internal environments to key people within the organization
SWOT analysis: simple way to conduct environmental scanning which breaks
these factors into four categories:
1)External Environment (Opportunities & Threats): Factors outside the company's
direct control.
Opportunities (O): External trends or conditions the company could exploit for an
advantage.
Threats (T): External trends or conditions that could harm the company.
2)Internal Environment (Strengths & Weaknesses): Factors inside the company
that it can control.
Strengths (S): Internal capabilities and resources that give the company an
advantage.
Weaknesses (W): Internal limitations that place the company at a disadvantage.
• Strategy formulation
– process of investigation, analysis, and decision-making that provides the company
with the criteria for attaining a competitive advantage
– includes defining the competitive advantages of the business, crafting the
corporate mission, specifying achievable objectives, and setting policy guidelines
Mission- is the purpose or reason for the organization’s existence
Vision - describes what the organization would like to become
Objectives(should be SMART) are the results of planned activity.
For example: “to increase the firm’s profitability in 2010 by 10% over 2009.”
A simple statement of “increased profitability” is thus a goal, not an objective, because it does not
state how much profit the firm wants to make the next year.
Strategy
A strategy of a corporation forms a comprehensive master plan that states how the corpo- ration
will achieve its mission and objectives. It maximizes competitive advantage and minimizes
competitive disadvantage.
The typical business firm usually considers three types of strategy: corporate, business, and
functional.
1. Corporate Strategy (The "What Business Are We In?" Strategy)
Level: The highest level, concerned with the corporation as a whole.
Key Question: "In which industries and markets should we compete to achieve our overall goals?"
Focus: The overall scope and direction of the entire corporation. It's about managing a portfolio of
businesses.
Decisions Involve: Diversification: Should we enter a new business? (e.g., Should a car company
start making electric scooters?)
Acquisitions & Mergers: Should we buy another company?
Allocation of Resources: How should we fund our different business units?
Divestiture: Should we sell or shut down a underperforming business unit?
2. Business Strategy (The "How Do We Compete?" Strategy)
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Level: The level of the individual business unit or product line. (Also called the
Competitive Strategy).
Key Question: "How do we gain a competitive advantage in this specific market or
industry?"
Focus: How to compete successfully and profitably in a particular market. It's about
creating a unique and valuable position.
Decisions Involve:
o Competitive
Advantage: Should
we
compete
on cost (being
the
cheapest), differentiation (having unique features), or by focusing on a niche
market?
o Market Positioning: How do we want to be perceived by customers in our
industry?
o Innovation: How will we innovate to stay ahead of rivals?
Also Business strategies may fit within the two overall categories, competitive and cooperative
strategies.
3. Functional Strategy (The "How Do We Support the Business?" Strategy)
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Level: The level of the operational departments within a business unit.
Key Question: "How can our department (like Marketing, Finance, HR) support the
business-level strategy efficiently and effectively?"
Focus: The short-term, day-to-day actions of the key functions of the business. It's about
maximizing resource productivity.
Decisions Involve:
o Marketing Strategy: Pricing, advertising, and distribution channels.
o Operations Strategy: Manufacturing, supply chain, and quality control.
o Human Resources Strategy: Recruitment, training, and compensation.
o R&D Strategy: Product improvement and new technology development.
Example:
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Company: Apple's iPhone business unit.
Functional Strategies:
o Marketing Strategy: Sleek, minimalist ads that highlight design and user
experience.
o
o
Operations Strategy: A highly efficient, global supply chain to manufacture at
scale.
R&D Strategy: Heavy investment in developing its own custom chips (like the Aseries) to maintain a performance advantage.
Policy is a broad guideline for decision-making that links formulation of a strategy with its
implementation. Companies use policies to make sure that employees throughout the firm make
decisions and take actions that support the corporation’s mission, objectives, and strategies.
Strategy Implementation is the action stage of strategic management. It's the process of
translating high-level strategies and policies into concrete actions, resource allocations, and daily
operations. While strategy formulation asks "What should we do?", implementation asks "How
will we do it, and who will do it?"
It often involves:
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Cultural or structural changes across the organization.
Being led by middle and lower-level managers (who handle day-to-day operations).
Making day-to-day decisions on resource allocation (money, people, time).
Three key tools used to make this happen: Programs, Budgets, and Procedures.
1) Programs is a set of specific, coordinated activities or steps designed to accomplish a
major plan or objective. A program turns a broad strategy into a concrete, action-oriented
project.
2) Budget is a statement of a corporation’s programs in terms of dollars
3) Procedures, sometimes termed Standard Operating Procedures (SOP), are a system of
sequential steps or techniques that describe in detail how a particular task or job is to be
done.
Evaluation and control is a process in which corporate activities and performance results
are monitored so that actual performance can be compared with desired performance. Managers
at all levels use the resulting information to take corrective action and resolve problems. Although evaluation and control is the final major element of strategic management, it can also
pinpoint weaknesses in previously implemented strategic plans and thus stimulate the entire
process to begin again.
Performance is the end result of activities.70 It includes the actual outcomes of the strate- gic
management process.
Feedback/learning process - revise or correct decisions based on performance.
Triggering event - something that acts as a stimulus for a change in strategy and
can include:
▪
▪
▪
▪
▪
new C E O
external intervention
threat of change of ownership
performance gap
strategic inflection point
What Makes a Decision Strategic
Core Definition
Strategic decisions concern the long-run future of the entire organization.
The Three Key Characteristics
A strategic decision is:
1. RARE
o
Unusual and have no precedent to follow.
2. CONSEQUENTIAL
o Commits substantial resources (money, people, time).
o Demands a great deal of commitment from people at all levels.
3. DIRECTIVE
o Sets precedents for future, smaller decisions and actions throughout the
company.
o It creates a path that the rest of the organization must follow.
o
Mintzberg’s Modes of Strategic Decision-Making
Entrepreneurial mode: Strategy is made by one powerful individual. The focus is on opportunities; problems are secondary. Strategy is guided by the founder’s own vision of di- rection
and is exemplified by large, bold decisions.
Adaptive mode: this decision-making mode is characterized by reactive solutions to existing
problems, rather than a proactive search for new opportunities. This mode is typical of most
universities, many large hospitals, a large number of governmental agencies, and a surprising
number of large corporations.
Planning mode: This decision-making mode involves the systematic gathering of appro- priate
information for situation analysis, the generation of feasible alternative strategies, and the
rational selection of the most appropriate strategy. It includes both the proactive search for new
opportunities and the reactive solution of existing problems.
Logical Incrementalism is the concept that effective strategy isn't always created as a perfect,
complete plan from the start. Instead, it emerges or evolves over time through a process of small
steps, experimentation, and learning. Advantage is that When the market, technology, or
customer preferences are shifting quickly, a fixed 5-year plan is obsolete before it's even
finished. Incrementalism allows for constant course correction.
Simple Analogy: Planning a Road Trip
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Planning Mode: You plan the entire trip before leaving: every route, every hotel, every
meal stop. You follow the plan exactly.
Adaptive Mode: You just start driving and only decide where to turn when you hit a
roadblock or see a sign for something interesting. You're purely reactive.
Logical Incrementalism: You know your destination is "California" (the objective).
You start driving west, but you take detours to see a cool national park you heard about,
you change your route based on traffic alerts, and you decide to stay an extra day in a city
you love. Your exact path emerges during the trip, but you never lose sight of your final
goal.
Strategic Decision-Making Process
1. Evaluate current performance results in terms of (a) return on investment,
profitability, and so forth, and (b) the current mission, objectives, strategies, and policies.
2. Review corporate governance—thatis,theperformanceofthefirm’sboardofdirectors and
top management.
3. Scan and assess the external environment to determine the strategic factors that pose
Opportunities and Threats.
4. Scan and assess the internal corporate environment to determine the strategic factors
that are Strengths (especially core competencies) and Weaknesses.
5. Analyze strategic (SWOT) factors to (a) pinpoint problem areas and (b) review and revise the corporate mission and objectives, as necessary.
6. Generate,evaluate,and select the best alternative strategy in light of the analysis conducted in step 5.
7. Implement selected strategies via programs, budgets, and procedures.
8. Evaluate implemented strategies via feedback systems, and the control of activities to
ensure their minimum deviation from plans.
Chapter 2
✅1. Board Responsibilities (Global Consensus — Top 5)
Based on international interviews (directors from 8 countries), boards of directors mainly do the
following in order of importance:
1.
2.
3.
4.
5.
Set corporate strategy, mission, vision, and overall direction
Hire and fire the CEO and top executives
Monitor, supervise, and control top management
Review and approve the allocation/use of resources
Protect and represent shareholder interests
These align with U.S. research from the National Association of Corporate Directors,
highlighting:
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Corporate performance
CEO succession
Strategic planning
Corporate governance
✅2. Legal Duties (Especially in the U.S.)
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No single U.S. national law — rules depend on the state of incorporation.
Many companies are incorporated in Delaware, so Delaware law influences most boards.
Boards must ensure management:
o Follows state and federal laws
o Adheres to regulations on securities, insider trading, and conflicts of interest
They must also consider other stakeholders (employees, communities, etc.) and balance
interests while protecting shareholders.
✅3. Duty of Care & Legal Liability
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Boards direct corporate affairs but do not manage day-to-day operations.
They are legally required to act with due care.
If they fail and the corporation is harmed, they can be personally liable.
o Example: Equitable Life (UK) board was sued for $5.4 billion.
Because lawsuits are common (40% of outside directors have faced legal claims),
companies use directors and officers (D&O) liability insurance to protect board
members.
✅4. How Boards Spend Their Time (McKinsey Global
Study)
Average board meeting time is divided roughly like this:
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24% → Strategy (designing and analyzing it)
24% → Execution (e.g., M&A, project priorities)
20% → Performance management (incentives, KPIs)
17% → Governance & compliance (audits, compensation, nominations)
11% → Talent management
✅5. Board’s Role in Strategic Management — 3 Main Tasks
➤ 1. Monitor (Minimum Level)
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Track internal and external developments
Alert management to risks or overlooked issues
Done mainly through committees
➤ 2. Evaluate & Influence (More active boards)
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Analyze management's decisions and proposals
Approve or reject plans
Advise and recommend alternatives
➤ 3. Initiate & Determine (Most active boards)
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Define mission and long-term direction
Propose strategic options themselves
Board of Directors’ Continuum
✅Why Active Boards Matter
Research shows that boards with high involvement in strategy have:
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Better financial performance
Higher credit ratings
More effective decision-making
Example: A McKinsey survey found:
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43% of boards had high influence in value creation
Boards with healthy debate and future planning were the most effective
✅Boards Want to Be More Involved
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73% of board members in one survey said they want more involvement in strategy, not
just oversight
64% of directors reported they are more active today than they were 5 years earlier
✅Real Companies with Active Boards
Examples of companies where boards are involved in strategic management:
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Target
Medtronic
3M
Whirlpool
Pfizer
General Electric
Texas Instruments
Bank of Montreal
Best Western
Target’s board example:
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Every year they select three strategic priorities
They dedicate specific meetings to each priority
They also have one full meeting to set strategic direction per division
✅When Are Boards Usually Less Active?
Boards tend to be passive when:
1. The company is very small or privately owned
o Founders own all the shares
o No conflict between owners and managers
o Board exists only for legal reasons
2. Friends and family dominate the board
o Founder is both CEO and Chairman
o Board members are loyal, not independent
o Often just approve the founder’s ideas
3. The company hasn’t gone public yet
o No outside shareholders to protect
Once outside investors join or company goes public, the board is expected to become more
strategic and independent.
✅Key Takeaways (Use These in Exams or Assignments)
✔ The board’s involvement ranges from phantom (passive) to catalyst (fully active).
✔ High-involvement boards improve performance and value creation.
✔ Most large public companies fall between nominal and active participation.
✔ Small or founder-controlled firms often have rubber-stamp boards.
✔ When ownership spreads (e.g., going public), boards must become more strategic.
MEMBERS OF A BOARD OF DIRECTORS
✅3. Why Increase the Number of Outside Directors?
Supporters argue:
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They are more objective
Less biased toward management
Better at enforcing accountability
This aligns with Agency Theory, which says:
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Managers (agents) don’t always act in shareholders’ best interests
Having more outsiders reduces self-interest, risk avoidance, and bad strategy
Examples:
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Manager-controlled firms (weak boards) often:
o Choose safer, short-term strategies
o Diversify into unrelated markets to justify higher pay
o Make decisions that hurt long-term performance
Firms with more outsiders:
o Do more international expansion
o Encourage innovation
o Show less illegal behavior/lawsuits
o Have better performance in family businesses
✅What Is the SEC?
SEC stands for the Securities and Exchange Commission.
It is a U.S. federal government agency responsible for regulating the stock market and protecting
investors. Its job is to ensure transparency, fairness, and accountability in publicly traded
companies.
The SEC creates rules that companies listed on stock exchanges (like NASDAQ or NYSE) must
follow.
✅Why Did the SEC Introduce These Rules in 2003?
After major corporate scandals such as Enron, WorldCom, and Tyco, there was a loss of public
trust. These failures happened partly because boards were weak, insiders had too much control,
and there was not enough oversight.
To prevent this, the SEC imposed stricter corporate governance rules.
✅SEC Requirements (Effective Since 2003)
To improve accountability and protect shareholders, the SEC required:
✅1. Majority of the Board Must Be Independent Outsiders
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Most board members cannot be company employees.
They must be independent, meaning they:
o Have no financial ties to the company.
o Are not suppliers, consultants, former executives, or family members.
This reduces the influence of insiders and promotes objectivity.
✅2. Key Committees Must Be 100% Independent Directors
The SEC mandated that three powerful board committees be made up ONLY of independent
outsiders:
a) Audit Committee
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Oversees financial reporting and controls.
Makes sure accounting is accurate and there is no fraud.
b) Compensation Committee
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Decides executive pay and performance incentives.
Prevents CEOs from setting their own salaries.
c) Nominating / Corporate Governance Committee
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Selects and evaluates board members.
Ensures ethical practices, proper board structure, and succession planning.
No insiders (like the CEO or other executives) can be part of these committees.
✅5. Counterargument: Why Some Prefer More Insiders
Supporters of insiders rely on Stewardship Theory:
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Managers care about company success
Long-term insiders identify with the company
They may be:
o More knowledgeable
o More loyal
o More available
Concerns about outsiders:
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Lack deep knowledge of the company
Limited availability (many sit on multiple boards)

May not be committed
� Research shows:

When directors sit on too many boards, firm performance drops
Only 40% of boards limit how many other boards directors can join.
✅6. Problem: Not All “Outsiders” Are Truly Independent
Three types of questionable outsiders:
1️⃣ Affiliated Directors
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Lawyers, suppliers, consultants, insurers — financially tied to the company
Conflicted and less objective
Banned by SEC, NYSE, NASDAQ (after 2004 reforms)
2️⃣ Retired Executive Directors
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Former CEOs or execs who helped shape past strategy
Often biased toward the current CEO
Their involvement is declining (only 20%–31% of boards now include them)
3️⃣ Family Directors
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Descendants or relatives of founders with shares and personal agendas
May act in family interest over company interest
Example:
Schlitz Brewing couldn’t complete its turnaround because family board members forced the
company to be sold.
✅7. Who Are Most Outside Directors?
Common backgrounds:
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Current or former CEOs/COOs
Institutional investors
Academics
Former politicians
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Lawyers
Bankers
Consultants
Institutional investors (like mutual funds and pension funds) now own 66% of stock in major
U.S. and UK firms and are very active in governance.
Example:

TIAA-CREF monitors 4,000 companies it invests in, sends letters, visits companies, and
files shareholder resolutions if needed.
In Europe and Asia:

Banks (Germany) or investment firms (Scandinavia, Belgium, Italy) dominate board
seats.
✅10. Typical Inside Directors
Usually include:
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
CEO
COO or CFO
Occasionally presidents or VPs of major divisions
Lower-level employees almost never sit on boards.
✅What Is Codetermination?
Codetermination means giving employees a formal voice in corporate governance by placing
them on a company’s board of directors. Instead of only owners and executives influencing
major decisions, workers also participate in oversight and strategy.
✅Codetermination in the United States
In the U.S., codetermination is rare and usually happens only under special circumstances:
✅Examples:
1. United Airlines (UAL)
o
o
o
o
Workers accepted 15% salary cuts
In exchange, they gained 55% ownership through an ESOP
Employees received 3 out of 12 board seats
Here, employees sat on the board more as owners than just workers
2. Chrysler
o The United Auto Workers (UAW) union got a temporary board seat
o This came in exchange for reduced benefits and work rule changes
o It happened during a financial crisis in the late 1970s, when the company was
close to bankruptcy
3. Northwest Airlines, Wheeling-Pittsburgh Steel
o Similar arrangements under union negotiations or ESOPs
✅In the U.S., this trend has not grown significantly, except through employee stock
ownership plans (ESOPs).
❌Concern: Conflict of Interest
Critics point out a major issue:
Can someone fairly serve on the board while also representing employees or unions?
Possible conflicts:
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A board member must act in the company’s long-term interest
A union leader’s job is to fight for workers' wages and benefits
Having access to confidential company information may create ethical and
accountability issues
✅Codetermination in Europe: Much More Common
Unlike the U.S., Europe strongly embraces codetermination.
� � Germany: The Pioneer
Germany developed a two-tier board system in the 1950s:
1. Supervisory Board
o Includes representatives elected by both shareholders and employees
o Sets strategy and approves major decisions
2. Management Board
o
o
o
Composed of top executives
Handles daily operations
Appointed by the Supervisory Board
In many large German firms, up to 50% of the supervisory board can be employee
representatives.
� � � � � � � � Other Countries with Laws Supporting Codetermination:
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Sweden
Denmark
Norway
Austria
� � � � � � � � Countries Using Worker Councils:
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France
Italy
Belgium
Netherlands
Luxembourg
Ireland
These councils give workers a voice even without board seats.
✅Key Takeaway



In the U.S.: Codetermination is limited and usually tied to union deals or ESOPs.
Conflict of interest concerns make expansion unlikely.
In Europe: Codetermination is legally established and widely accepted as part of
corporate governance.
Here’s a short summary paragraph explaining codetermination and its presence in the
U.S. and Europe:
Codetermination refers to the practice of including employees on a company’s board of directors.
In the United States, this model is rare and typically occurs only when employees gain board
representation through special arrangements, such as union agreements or Employee Stock
Ownership Plans (ESOPs). Examples include United Airlines, where workers secured three
board seats after trading wage concessions for majority ownership, and Chrysler, where the
United Auto Workers union temporarily gained a board seat during a financial crisis. However,
critics argue that having employees on the board can create conflicts of interest, especially when
directors must balance confidential corporate responsibilities with their obligations to union
members. Unlike the U.S., many European countries widely accept codetermination. Germany
leads with a two-tier board system where employees and shareholders elect a supervisory board
that oversees top management. Other European nations—such as Sweden, Denmark, Austria,
Norway, and France—also involve employees in corporate governance through board seats or
worker councils. Overall, codetermination remains limited in the U.S. but is an established part
of corporate governance in much of Europe.
✅What Are Interlocking Directorates?
Interlocking directorates happen when the same individuals serve on the boards of multiple
companies. There are two types:
1. Direct Interlock


When two companies share a board member.
Or when an executive from Company A sits on the board of Company B.
2. Indirect Interlock

When two companies don’t directly share a board member, but their board members
both serve on the board of a third company (e.g., a bank).
✅Legal Situation
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
Clayton Act and Banking Act of 1933 prohibit interlocks between companies that
compete in the same industry.
BUT—interlocking still widely exists, especially in large corporations.
✅Why Do Interlocking Directorates Happen?
They are strategically useful for companies to:
✔ Gain Information
Directors get inside knowledge about:

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Market changes
Competitors
Regulations

Risks and uncertainties
✔ Access Expertise
Companies gain advice from experienced executives of other firms.
✔ Build Relationships & Influence
Interlocking creates networks with:




Financial institutions
Suppliers
Partners
Investors
Example:
Venture capital firm Kleiner Perkins places executives on boards of startup companies it invests
in. They call this interconnected network a “keiretsu”, inspired by Japanese corporate structures.
✅How Common Is It?



11 out of the 15 largest U.S. corporations share at least two board members with other
companies.
20% of the 1,000 largest U.S. firms share at least one board member.
Many firms are interlocked with banks and financial institutions.
✅Family-Owned Companies vs. Public Companies


Family-owned firms avoid interlocks to protect control.
Corporations with dispersed ownership are more open to interlocking to gain expertise
and credibility.
✅Concerns About Interlocking
Some interlocks raise red flags:
❌Risk of Collusion


Especially when CEOs or board chairs sit on each other’s boards.
Example: Chairs of Anheuser-Busch, SBC Communications, and Emerson Electric
all served on each other's boards.
❌Loss of Independence

Directors might protect each other rather than shareholders.
❌Overlapping Power Networks

CEOs typically now limit themselves to only 1 other board (used to be 2 or more).
✅Benefits Despite Concerns
Studies show that:
✔ Firms with interlocks often perform better
✔ They are better at handling competition
✔ They access capital, knowledge, and partnerships faster
Nomination and Election of Board Members:
✅Traditional Process



Historically, the CEO decided who joined the board.
Shareholders typically just approved the CEO’s choices via the annual proxy statement.
Result: Boards often became CEO-friendly and passive, especially if members served
long terms (up to 20 years for some boards).
✅Risks of CEO Control
1. Lack of independence: Directors nominated by the CEO may feel obligated to support
management rather than oversee it.
2. Long service terms: Average U.S. board member serves 3 three-year terms; longerserving boards are often less effective.
o Least effective boards: ~9.7 years average tenure
o Most effective boards: ~7.5 years average tenure
3. Low turnover and accountability: Only 7% of directors reported term limits, though
~60% of boards in the U.S. and Europe have a mandatory retirement age (~70).
✅Modern Improvements
1. Nominating Committees



Boards increasingly use nominating committees to select outside directors.
Purpose: Reduce CEO dominance and improve board independence.
Adoption rates:
o U.S. large corporations: 97% use nominating committees
o Europe: 60% use nominating committees
2. Staggered Boards





Board terms are divided into classes, so only part of the board is elected each year.
Pros:
o Provides continuity
o Protects against sudden takeover attempts
Cons:
o Reduces shareholder power to remove CEO-friendly boards quickly
63% of U.S. boards currently use staggered boards
Some shareholder initiatives aim to replace staggered boards with annual elections for
all members.
✅Criteria for a Good Director
Research and surveys identify key qualities in effective directors:
Quality
% of directors rating it important
Willing to challenge management when necessary 95%
Has special expertise important to the company
67%
Available outside meetings to advise management 57%
41%
Expertise on global business issues
Quality
Understands key technologies and processes
Brings external contacts valuable to the firm
Has detailed industry knowledge
High visibility in their field
Can represent firm to stakeholders
% of directors rating it important
39%
33%
31%
31%
18%
✅Organization of the Board
The organization and structure of a corporate board determine how effectively it governs,
oversees management, and supports strategic decisions.
✅Board Size




Definition: The total number of directors serving on a corporate board.
U.S.:
o Large, publicly held corporations: ~10 directors
o Small, privately held corporations: 4–5 directors
International Averages:
o Japan: 14 | Non-Japan Asia: 9 | Germany: 16 | UK: 10 | France: 11
Importance: Board size affects diversity of perspectives, decision-making speed, and
governance effectiveness.
✅Combined Chairman & CEO





Definition: One person holds both the roles of Chairman of the Board and Chief
Executive Officer.
CEO Role: Focus on corporate strategy, planning, operations, and external relations.
Chairman Role: Ensures the board and its committees perform their functions, schedules
board meetings, and presides over shareholder meetings.
Concerns:
o Conflict of interest; board may struggle to oversee top management effectively.
o Financial impact: stock price and credit ratings may respond negatively.
o Fraud risk higher if CEO stock options are absent.
Countries Separating Roles: Germany, Netherlands, South Africa, Finland (UK and
Australia considered similar laws).
✅Lead Director



Definition: An outside director elected to coordinate board affairs, serve as liaison with
the CEO, and oversee CEO evaluation.
Purpose: Mitigates conflict of interest when the Chairman and CEO roles are combined.
Usage: Very popular in the UK; in U.S. companies with combined roles, 96% have a lead
director.
✅Executive Sessions



Definition: Board meetings held without the CEO present.
Purpose: Allows directors to discuss management performance and governance
independently.
Trend: 94% of U.S. boards held regular executive sessions in 2006 (up from 41% in
2002).
✅CEO Influence on the Board



Directors may experience social pressure or ingratiation to support CEO proposals.
Long-tenured directors can influence new board members.
Even nominating committees of outsiders often seek CEO approval for candidates.
✅Board Committees



Definition: Subgroups of the board with authority to act on certain matters between full
board meetings.
Common Committees & Prevalence:
o Audit: 100%
o Compensation: 99%
o Nominating: 97%
o Corporate Governance: 94%
o Stock Options: 84%
o Director Compensation: 52%
o Executive: 43%
Executive Committee: 2 inside + 2 outside directors; handles urgent matters; acts as an
extension of the board.


Committee Composition: Usually staffed only by outside directors (except executive,
finance, investment).
Meeting Frequency: 4–5 times/year typically; audit committees averaged 9
meetings/year.
✅Key Takeaways




Board size and composition influence governance and decision-making effectiveness.
Combining Chair/CEO can create conflicts; lead directors and executive sessions help
maintain board independence.
CEO influence persists, but structured committees and outside directors enhance
objectivity.
Committees streamline work, provide expertise, and ensure continuous oversight between
board meetings.
Sarbanes-Oxley Act (SOX) Overview


Definition: U.S. federal law passed in 2002 to protect shareholders and improve
corporate governance after major corporate scandals (Enron, Tyco, WorldCom, Adelphia,
Qwest, Global Crossing).
Purpose: Increase board independence, improve financial oversight, and prevent
accounting/audit fraud.
✅Key Provisions
1. Board and Audit Committee Independence



Audit committee members must be independent directors.
Outside directors may receive no fees other than for their service as directors.
Loans to corporate officers are banned.

Firms must identify a “financial expert” on the audit committee who is independent of
management.
2. CEO/CFO Accountability


Both the CEO and CFO must certify financial statements.
Prevents executives from falsifying or manipulating accounting information.
3. Auditor Restrictions

Auditors cannot provide both internal and external audit services to the same
company, reducing conflicts of interest.
4. Whistleblower Protections

Employees reporting accounting or auditing irregularities (whistleblowers) are protected
from retaliation.
✅Costs and Benefits



Implementation Cost: $8.5 million for large firms in the first year; later $1–$5 million
annually.
Examples of Savings:
o Pitney Bowes saved $500,000 by consolidating accounts receivable offices.
o Cisco and Genentech realized similar efficiency gains.
Benefit: More reliable financial statements, fewer manipulations (e.g., unusual charges,
post-dated stock options).
✅SEC and Stock Exchange Requirements


SEC (2003):
o Companies must disclose a code of ethics for CEO and principal financial officer.
o Audit, nominating, and compensation committees must be staffed entirely by
outside directors.
NYSE & NASDAQ:
o Nominating/governance committees must have independent outside directors.
o Director nominations must be approved by committees of independent outsiders.
✅Impact on Board Practices



Directors spending more time on governance (60% overall):
o 85% more on company accounts
o 83% more on governance practices
o 52% more on financial monitoring
Increase in outside directors with financial experience (from 1% in 1998 → 10% in
2003).
Stock ownership requirements for directors: 78% in U.S. boards (vs. 36% Europe, 26%
Asia).
✅Evaluating Corporate Governance



Rating agencies: S&P, Moody’s, Morningstar, ISS, GMI, The Corporate Library.
S&P evaluates 4 main areas:
1. Ownership Structure and Influence
2. Financial Stakeholder Rights and Relations
3. Financial Transparency and Disclosure
4. Board Structure and Processes
Effect: Well-governed firms are nearly twice as likely to receive investment-grade
credit ratings.
✅Avoiding Governance Rules


Some companies adopt strategies to circumvent SOX requirements:
o Going private or creating multi-class stock structures to limit outsider influence.
 Example: Comcast CEO Brian Roberts owns “superstock” giving him 1/3
of voting power with only 0.4% of shares.
o “Controlled company” exemptions: Companies with >50% controlled voting
shares can bypass independent board requirements (NYSE/NASDAQ).
Risk: Majority shareholders may dominate minority shareholders, weakening
governance.
✅Quick Recap Table
Aspect
Purpose
Key Points
Protect shareholders, prevent fraud, improve oversight
Aspect
CEO/CFO
Audit Committee
Auditor Rules
Whistleblower Protections
Costs
SEC/NYSE/NASDAQ
Rules
Board Practices
Governance Ratings
Avoidance Tactics
Key Points
Must certify financial info
Must be independent; include a financial expert
Cannot provide internal & external audit
No retaliation allowed
$8.5M first year; $1–5M later; savings possible through
efficiency
Code of ethics, outside directors on key committees
More time on accounts/governance; more qualified outside
directors
S&P, Moody’s, ISS, etc.; better governance → higher credit
rating
Going private, multi-class stock, controlled company exemptions
SUMMARY:
The Sarbanes-Oxley Act (2002) was enacted in response to major corporate scandals to
strengthen board oversight, financial transparency, and shareholder protection. It requires
that audit committee members be independent and include a financial expert, prohibits loans
to corporate officers, ensures CEO and CFO certification of financial statements, and protects
whistleblowers from retaliation. The SEC, NYSE, and NASDAQ reinforced these requirements,
mandating outside directors on key committees and codes of ethics for top executives. While
implementation initially increased costs, firms gained more reliable financial reporting and
improved governance practices, with directors spending more time on monitoring and oversight.
Independent governance evaluations (e.g., S&P, Moody’s) show that strong governance
correlates with higher credit ratings. However, some companies circumvent these rules using
multi-class stock or controlled company exemptions, which can limit outsider influence and
potentially weaken board effectiveness.
✅Evaluating Governance
To help investors assess corporate governance, independent rating services have been
established. These include:





S&P (Standard & Poor’s)
Moody’s
Morningstar
The Corporate Library
Institutional Shareholder Services (ISS)

Governance Metrics International (GMI)
✔ How They Work


S&P, Moody’s, Corporate Library – use a wide mix of data and research.
ISS and GMI – mainly use public records and checklists, and have been criticized for
simplicity.
✔ S&P Corporate Governance Scoring System Focuses On:
1. Ownership Structure and Influence – who controls and influences decisions.
2. Financial Stakeholder Rights and Relations – protections and relations for
shareholders and creditors.
3. Financial Transparency and Information Disclosure – clarity and reliability of
reporting.
4. Board Structure and Processes – composition, committees, and governance
effectiveness.
Research shows that moving from the poorest to the best governance category almost doubles
the chance of getting an investment-grade credit rating.
✅Avoiding Governance Improvements
Some companies try to circumvent stricter governance because they fear restrictions on
management. Methods include:
1. Going Private

More companies have gone private since Sarbanes-Oxley to reduce oversight by
outsiders.
2. Multiple Classes of Stock



Insiders (like founders) get shares with extra votes, while others get limited-vote stock.
Example: Brian Roberts, CEO of Comcast – owns 0.4% of stock but controls 1/3 of
voting power.
Multiple-class stock use increased to 11.3% in 2004 from 7.5% in 1990.
3. Controlled Company Status


Companies where a single group controls >50% of voting shares can be exempt from
requirements for independent boards and committees.
Examples: Google, Infrasource Services, Orbitz, W&T Offshore.

Risk: Majority shareholders can dominate and ignore minority interests.
SUMMARY:
Independent rating services like S&P, Moody’s, Morningstar, The Corporate Library, ISS,
and GMI help investors evaluate corporate governance. They assess factors such as ownership
structure, stakeholder rights, financial transparency, and board processes, with research
showing that firms with higher governance scores are more likely to receive investment-grade
credit ratings. However, some companies avoid these governance improvements, fearing
restrictions on management control. Common tactics include going private, issuing multiple
classes of stock to concentrate voting power with insiders, and designating themselves as
controlled companies where a majority shareholder holds over 50% of voting shares. While
these strategies protect insiders’ control, they raise concerns about minority shareholder
influence and reduce the effectiveness of independent oversight.
TRENDS IN CORPORATE GOVERNANCE
✅Overall Direction


Boards are becoming more active and strategic, not just supervisory.
Good corporate governance is viewed as a competitive advantage tied to:
o Better long-term performance
o Lower risk of scandals or failures
o Higher investor confidence
✅Investor Influence & Stock Impact



Investors are willing to pay 16% more for companies with strong governance.
Reasons:
1. Better performance over time
2. Reduced risk of corporate trouble
3. Governance now seen as a strategic issue
Institutional investors (pension funds, mutual funds, insurance firms):
1. Take more active board roles
2. Push management for higher performance
3. Must publicly disclose proxy votes (SEC rule)
✅Board Composition & Membership Changes





More outside (non-management) directors
o Outsiders gain influence and power
o They lead annual CEO evaluations
Women and minorities are joining boards in increasing numbers
Smaller boards
o Fewer insiders
o More directors with specialized expertise
Mandatory retirement ages
o Typically set around age 70
Board & Director Evaluations
o Boards assess both overall board performance and individual directors
✅Ownership & Compensation Expectations


Shareholders expect directors and executives to hold real stock, not symbolic amounts
Boards with equity ownership:
o Use measurable criteria to evaluate CEOs
o Compensation committees with real shareholders:
 Pay less fixed salary
 Offer more performance-based incentives
✅Leadership Structure Changes

Boards are:
o Splitting CEO and Chairperson roles
o OR appointing a Lead Independent Director
✅Governance Reforms & Defensive Measures

Boards are removing old anti-takeover mechanisms, such as:
o Staggered boards
o Poison pills
(Example: in one year, 66 boards removed staggered terms and 25 eliminated poison pills.)
✅Globalization & Expertise

Companies are seeking board members with international experience.
✅Shareholder Rights Expansion

Movement toward allowing shareholders to nominate board members, not just vote on
management’s picks
o Proposed by SEC in 2004 (not adopted)
o Strongly backed by AFL-CIO
o Prevents directors from ignoring shareholder interests
✅Social & Environmental Accountability



Boards are expected to balance:
o Profit goals with
o Social responsibility
Topics now reaching board level:
o Workforce diversity
o Environmental sustainability
Special interest groups increasing pressure and expectations
Top management responsibilities
✅Core Purpose of Top Management (Especially the CEO)


Their role is to achieve corporate objectives by working through others
They focus on the overall welfare of the entire organization, not just one department
✅Nature of the Job



Multidimensional — involves leadership, coordination, planning, and implementation
Company-specific — tasks vary depending on:
o Mission
o Objectives
o Strategies
o Key activities
Responsibilities are usually shared across the top management team, not handled by
one person
✅Importance of Team Diversity
Research shows strong links between diversity in top management teams and company
performance:
✔️ Types of Diversity That Add Value:




Functional backgrounds (e.g., finance, marketing, R&D)
Experiences (different industries, roles, leadership levels)
Tenure (mix of old and new leadership)
International exposure
✔️ Outcomes of Diverse Teams:



Higher market share
Better profitability
More focus on:
o International growth strategies
o Strategic innovation
o Navigating uncertain business environments
✅Two Primary Responsibilities of the CEO (with the team’s
support)
1️⃣ Provide Executive Leadership & Strategic Vision


Set the direction
Inspire and align employees


Communicate goals and values
Represent the organization internally and externally
2️⃣ Manage the Strategic Planning Process



Oversee strategy formulation and execution
Ensure goals, resources, and actions align
Monitor performance and adjust when necessary
✅Summary Paragraph
Top executives, especially the CEO, play a vital role in steering the organization toward its
objectives by leading through others and focusing on the company as a whole. Since top
management tasks depend on the firm’s mission and strategies, responsibilities are shared across
a leadership team where diversity of background, experience, tenure, and international exposure
significantly improves profitability and market performance. Diverse leadership teams also drive
innovation and global growth, especially under uncertainty. Ultimately, the CEO—supported by
the team—must fulfill two major duties: offering strong leadership and a clear strategic vision,
and guiding the strategic planning process to ensure long-term success.
Executive Leadership and Strategic Vision
✅What Is Executive Leadership?





Definition: Directing activities to achieve corporate objectives.
Importance: Sets the tone and culture of the whole company.
Strategic Vision: Describes what the company can become in the future.
Communicated through mission and vision statements.
Only top management can define and spread this vision effectively.
✅Why It Matters



Employees want a sense of mission and purpose.
CEO enthusiasm or lack of it directly affects the entire organization.
Example quote: “A leader’s job is to define overall direction and motivate others to get
there.” — Steve Reinemund, former CEO of PepsiCo.
✅Traits of Successful CEOs / Executive Leaders
They are known for:
✔ A clear strategic vision
✔ Passion for the company
✔ Strong communication skills
✔ Being dynamic and charismatic (especially valuable in uncertain environments)
They often act as transformational leaders, meaning they drive change by inspiring people with
a compelling vision.
✅Examples of Transformational Leaders







Steve Jobs (Apple)
Bill Gates (Microsoft)
Richard Branson (Virgin)
Phil Knight (Nike)
Anita Roddick (The Body Shop)
Bob Lutz (GM)
Louis Gerstner (IBM)
These leaders energized organizations and shaped long-term strategy.
✅Three Key Characteristics of Transformational CEOs
✅1. They articulate a strategic vision



They see the company not as it is, but as it can become.
Their vision helps employees connect their roles to the bigger picture.
Example: Louis Gerstner shifted IBM from hardware to services.
Statistic: In a survey of 1,500 senior executives from 20 countries, 98% said the most important
CEO trait is conveying a strong vision.
✅2. They present a role others can follow




Lead by example in actions, behavior, and values.
They are relatable and consistent.
Example: Microsoft CEO Steve Ballmer personally fixed engineers’ tech problems under
tables.
Trust in leadership increases profitability and reduces employee turnover.
✅3. They communicate high expectations and inspire confidence




Set challenging performance standards, not easy goals.
Show belief in employees’ abilities.
Provide encouragement and coaching.
Example: Verizon CEO Ivan Seidenberg empowered top managers and trusted them with
major responsibilities, leading to loyalty and strong performance.
️ The Risk: CEO Hubris (Overconfidence)



Overconfidence can cause CEOs to ignore warning signs and pursue risky decisions.
Example: Overconfident CEOs often push for mergers and acquisitions, even though
many destroy shareholder value.
They believe outsiders undervalue the company and tend to expand aggressively,
especially without needing new stock financing.
✅Summary Paragraph
Executive leadership is about directing the organization toward its objectives while inspiring
others through a strong strategic vision. The CEO plays a central role in shaping this vision,
communicating it across the company, and motivating employees through passion, clarity, and
example. Transformational CEOs—like Jobs, Gates, and Branson—energize their companies by
envisioning a better future, modeling the right behavior, and setting high expectations backed by
confidence in their teams. However, excessive confidence can turn into hubris, leading leaders to
overlook risks and make poor strategic moves, especially in mergers and acquisitions. In essence,
effective executive leadership combines vision, influence, and empowerment with selfawareness and strategic judgment.
Managing the Strategic Planning Process
✅How Strategic Planning Starts



Learning organizations allow strategy ideas to emerge from any level of the company.
Survey of 156 large corporations:
o In two-thirds of firms, strategies are first proposed in business units, then sent to
headquarters for approval.
But—without top management support, strategic planning is unlikely to succeed.
✅Approaches to Strategic Planning
1. Bottom-Up Planning
o Business units/functional areas propose their own plans.
o Works best in multidivisional corporations in stable environments.
2. Top-Down Planning
o Corporate headquarters drafts the overall plan, and units build their own plans
within that framework.
o Works best in turbulent environments.
3. Concurrent Planning
o Units draft plans after receiving the organization’s mission and objectives.
o Creates better alignment between units and corporate goals.
✅Role of Top Management


Must manage the entire strategic planning process so unit plans align with corporate
strategy.
Key tasks:
✔ Evaluate unit-level plans
✔ Provide feedback
✔ Ensure objectives, strategies, and programs match overall corporate goals and
available resources
✅Example: Amazon’s “S Team”



Jeff Bezos’ S Team (“Senior Team”) meets weekly for ~4 hours to review strategy.
Once or twice a year, they hold a two-day strategy retreat to explore major ideas.
After deep discussion, they select a few big initiatives to pursue (“make bets”).
✅Common Practice in Large Firms


Most corporations do strategic planning annually.
Often done at off-site workshops with senior executives.
✅Role of Strategic Planning Staff


Usually small teams (<10 people) led by a Director of Corporate Development or
Chief Strategy Officer (CSO).
Responsibilities:
1. Identify and analyze company-wide strategic issues.
2. Suggest corporate strategy alternatives to top management.
3. Facilitate the planning process in business units.
✅Summary Paragraph
Managing the strategic planning process is a core responsibility of top management, ensuring
that unit-level strategies align with the corporation’s overall mission and objectives. Companies
may use bottom-up, top-down, or concurrent approaches depending on their environment, but in
all cases, top management plays a coordinating role—evaluating plans, providing feedback, and
integrating them into a unified corporate strategy. Examples like Amazon’s S Team illustrate
how continuous, structured discussions drive strategic direction, while most corporations conduct
formal planning annually in workshops. Supporting this process, a small strategic planning
staff helps analyze issues, suggest alternatives, and guide business units through the planning
cycle.
CHAPTER 3
Social Responsibilities of Strategic Decision Makers
• Social responsibility
– Proposes that a private corporation has responsibilities to society that
extend beyond making a profit
– Studies report positive association between a company’s social
performance and its financial performance
Friedman’s Traditional View of Business Responsibility
✅Friedman’s Core View: Profit Over Social Causes
Milton Friedman strongly opposed the idea that corporations should take on social
responsibilities beyond profit-making.
✅His Main Argument:
A company’s only responsibility is:
➡️ To use its resources to increase profits
➡️ As long as it follows the rules—no fraud, no deception, fair competition
He called corporate social responsibility a “fundamentally subversive doctrine.”
✅Why Friedman Rejects Corporate Social Responsibility
(CSR)
❌1. It Misuses Shareholders’ Money
When a manager spends company funds on:



Reducing pollution
Lowering product prices to fight inflation
Hiring disadvantaged people
…they are spending shareholder money on social goals that shareholders didn’t
necessarily choose.
❌2. It Reduces Business Efficiency
Friedman argues that serving social interests leads to:



Higher costs → which may raise prices
Delayed investments in research, innovation, and growth
Lower returns for shareholders
In the long run, the company becomes less competitive, harming not just the business but
society too.
✅Carroll’s Four Responsibilities of Business
Business managers have four main responsibilities: economic, legal, ethical, and discretionary.
They are prioritized in this order.
1. Economic Responsibilities
✦ Definition: Produce goods and services of value to society to repay creditors and satisfy
shareholders.
✦ Purpose: Ensure the survival and growth of the business.
✦ Key Idea: Profit is the foundation—without it, other responsibilities cannot be fulfilled.
2. Legal Responsibilities
✦ Definition: Obey the laws established by governments.
✦ Example: Hiring and promoting based on merit, not race, gender, or religion.
✦ Key Idea: Compliance with the law is mandatory for continued operation.
3. Ethical Responsibilities
✦ Definition: Act according to society’s generally accepted moral standards, even when not
required by law.
✦ Example: Working with employees and the community during layoffs.
✦ Key Idea: Ethical behavior builds trust and protects reputation.
4. Discretionary (Philanthropic) Responsibilities
✦ Definition: Voluntary activities that contribute to society beyond ethical obligations.
✦ Example: Philanthropy, day-care centers, training the unemployed.
✦ Key Idea: These are not expected by society but can enhance goodwill.
Responsibilities of a Business Firm
• Being known as a socially responsible firm may provide a company with
social capital
• Social capital
– the goodwill of key stakeholders, that can be used for competitive
advantage
– opens doors in local communities
– enhances reputation with consumers
There are numerous benefits of Being Socially Responsible including:
•
•
•
•
•
•
May enable firm to charge premium prices and gain brand loyalty
May help generate enduring relationships with suppliers and distributors
Can attract outstanding employees
More likely to be welcomed into a foreign country
Can utilize the goodwill of public officials for support in difficult times
More likely to attract capital from investors who view reputable firms as
desirable long-term investments
✅Sustainability: More Than Environmental
Sustainability is broader than just ecology—it includes economic, social, and environmental
concerns.
✦ Key Ideas



� Environmental: Protect natural resources, conserve wildlife, and reduce pollution.
� Economic: Ensure business practices benefit local communities, create jobs, and
support long-term economic stability.
� Social: Consider social impacts, like traffic congestion, community well-being, and
equitable opportunities.
✅Corporate Stakeholders
Stakeholders are groups that affect or are affected by a firm’s activities. Corporations must
ask: “Responsible to whom?”
✦ Key Stakeholder Groups





� Workers/Employees: Job security, fair pay, safe working conditions
🏘️ Communities: Local economic impact, environmental effects
� Shareholders: Profitability, dividends, long-term growth
� Environmental Groups: Sustainability, ethical production
� Other Groups: Suppliers, customers, government regulators
✅Stakeholder Analysis
Stakeholder analysis is the identification and evaluation of corporate stakeholders to
understand their needs, influence, and impact on the corporation. It is typically done in three
steps.
✦ Step 1 – Identify Primary Stakeholders


� Primary stakeholders: Directly connected to the corporation and can directly affect
corporate activities.
� Examples: Customers, Employees, Suppliers, Shareholders, Creditors
✦ Step 2 – Identify Secondary Stakeholders


� Secondary stakeholders: Indirectly affected by the corporation’s actions.
� Examples: NGOs (Greenpeace), Activists, Local Communities, Trade Associations,
Competitors, Governments
✦ Step 3 – Estimate Effects of Decisions




️ Evaluate impact of corporate decisions on each stakeholder group.
� For primary stakeholders → Often the focus, as their needs affect economic/legal
obligations.
� For secondary stakeholders → Must consider ethical and discretionary
responsibilities.
� Example: Assess who gains or loses and possible alternatives to mitigate negative
impacts.
This framework helps corporations balance stakeholder interests and make strategic decisions
that support both short-term goals and long-term sustainability.
✅Stakeholder Input
Once stakeholders and their impacts are identified, managers must decide whether to invite
stakeholder input into strategic decisions.
✦ Why Invite Input?

� Acceptance & Cooperation – Stakeholders are more likely to accept or help
implement decisions if they have input on the alternatives and their implementation.
✦ Example – Maytag Plant Closing




� Maytag decided to close its Galesburg, Illinois refrigeration plant.
🏘Management informed the community 3 years in advance, instead of the 60 days
required by law.
✅Benefit: Employees and community had more time to adjust to the closure.
️ Drawback: Created negative attention, but still more socially responsible than
minimal legal compliance.
✦ Key Takeaways



️ Managers should consider effects on all stakeholder groups before choosing an
alternative.
� A decision that appears most profitable may result in unintended negative
consequences.
� Stakeholder input can reduce conflict, improve acceptance, and enhance long-term
outcomes.
✅Ethical Decision Making
Some people joke that “business ethics” is an oxymoron because unethical behavior is
widespread in corporations. Research, surveys, and real-life examples confirm this concern.
✦ Employee Misconduct


� Survey (Ethics Resource Center) – 1,324 employees across 747 U.S. companies:
o 48% admitted unethical or illegal actions in the past year.
o Most common behaviors:
 ✂️ Cutting corners on quality – 16%
 🏘️ Covering up incidents – 14%
 � Abusing/lying about sick days – 11%
 � Lying to/deceiving customers – 9%
� 52% observed misconduct, but only 55% reported it.
Reasons for Unethical Behavior in Business
1️Lack of Awareness / Global Standards
✅Definition / Explanation:



Businesspeople may not realize they are acting unethically.
No worldwide standard of conduct exists.
Cultural norms and governance systems influence behavior.
� Example:


In some countries, small bribes are normal; in others, they’re illegal.
Governance systems:
o ️ Rule-based → transparent, less corruption
o � Relationship-based → less transparent, more corruption
2️Differences in Values
✅Definition / Explanation:


Conflicts arise when business priorities differ from stakeholder priorities.
Values shape perceptions of ethical behavior.
� Example:



Executives → prioritize economic/political values
Religious leaders/social groups → prioritize social/religious values
Industry conflicts:
o Tobacco, alcohol, gambling → companies argue freedom of choice; critics argue
social harm
o “Alcopops” → targeted at youth, criticized as ethically questionable
3️Pressures and Justifications
✅Definition / Explanation:

Unethical actions occur due to:
o Organizational performance pressures
o Ambiguous or outdated rules
o Peer pressure or “everyone does it” culture
� Statistics / Example:




74% → “Organizational performance required it”
70% → “Rules were ambiguous or outdated”
47% → “Pressure from others / everyone does it”
� Quarterly earnings manipulation: 82% of reports exactly matched or slightly
exceeded forecasts → sometimes “borrowed” from future quarters
4️Gradual Desensitization (“Frogs in Boiling Water”)
✅Definition / Explanation:

Slowly introduced unethical behavior may become normalized; people fail to notice until
it’s extreme.
� Example:


Enron employees participated in unethical accounting practices gradually.
� Analogy:
o Frog in boiling water → jumps out immediately
o Frog in slowly heated water → becomes lethargic, boiled
Moral Relativism in Business Ethics
✅Definition:


Moral relativism claims that morality is relative to personal, social, or cultural
standards.
There is no absolute code of ethics and no universal method for deciding whether one
decision is better than another.
� Key Note:


Managers often use moral relativism to justify questionable behavior.
Four main types exist: Naïve, Role, Social Group, Cultural
1️⃣ Naïve Relativism
✅Definition:


Morality is deeply personal; each person decides for themselves.
Often used as an excuse for inaction when observing unethical behavior.
� Example:

A manager sees a colleague lying or cheating but does nothing because “it’s their
choice.”
2️⃣ Role Relativism
✅Definition:


Moral obligations are tied to social or professional roles.
One must set aside personal beliefs and act according to the role’s responsibilities.
� Example:


Managers follow orders to benefit the company unit, even if actions conflict with
personal ethics.
Historical: Nazi war criminals claiming they were “just following orders.”
3️⃣ Social Group Relativism
✅Definition:


Morality is determined by the norms of a peer group.
Decisions are “legitimate” if common practice within the group, regardless of broader
standards.
� Example:

A businessperson justifies overcharging because “everyone in the industry does it.”
️ Danger: Misjudging what is truly common practice → unethical actions mistakenly
justified.
4️⃣ Cultural Relativism
✅Definition:


Morality is relative to a society, culture, or community.
One should understand but not judge other cultures; personal adherence to local norms
is acceptable.
� Example:


“When in Rome, do as the Romans do.”
Certain practices acceptable in one country may seem unethical elsewhere.
️ Caution:

Moral relativism can justify almost any action, as long as it is not illegal.
Kohlberg’s Levels of Moral Development
✅Definition:



Ethical behavior depends on a person’s level of moral development, personality traits,
and situational factors (job, supervisor, organizational culture).
Proposed by Lawrence Kohlberg, who identified three levels of moral development,
similar to Maslow’s hierarchy of needs.
Individuals progress from self-centeredness to concern for universal values.
1️⃣ Preconventional Level
✅Definition:


Behavior is guided by self-interest.
Decisions are based on avoiding punishment or expecting rewards (quid pro quo).
� Example:

A child or employee only follows rules to avoid being punished, not because it is “right.”
2️⃣ Conventional Level
✅Definition:


Behavior is guided by society’s laws and norms.
Actions are justified by external rules rather than internal principles.
� Example:

Most adults follow company policies because “that’s the rule,” not necessarily because
they believe it is morally right.
3️⃣ Principled Level
✅Definition:

Behavior is guided by internal moral codes and universal principles.

Individuals act according to what they believe is ethically right, even if it conflicts with
laws or norms.
� Example:

An employee refuses to falsify financial records, even if company policy pressures them
to do so, because it violates their personal ethical standards.
️ Important Note:



Most people are at the conventional level.
Fewer than 20% of U.S. adults reach the principled level.
Research shows people higher in moral development are less likely to make unethical
choices.
✅Encouraging Ethical Behavior
Managers should act ethically not only for morality, but also for self-interest — if they don’t,
governments impose costly regulations. Two main tools help encourage ethics:
1. ✅Codes of Ethics
2. ✅Guidelines for Ethical Behavior
✅1. Codes of Ethics
� Definition:
A code of ethics outlines how employees are expected to behave on the job.
✅Purposes:


✔ Clarifies company expectations for employee conduct
✔ Encourages employees to consider ethical dimensions in decisions
� Effective especially for:
People at Kohlberg’s Conventional Level (those guided by rules & norms)
� Usage:
Over 50% of U.S. corporations currently use codes of ethics.
� Problems & Solutions
️ Problem:
Managers often ignore codes when moral dilemmas arise.
✅Solution: Companies should:




�
�
�
�
Communicate ethics in training programs
Include ethics in performance appraisals
Enforce policies consistently
Lead by example
� Survey (Business Roundtable Institute, 2004): Companies made changes in handling
ethics:




✅33% Improved internal reporting & communication
✅17% Set up ethics hotlines
✅12% Improved compliance procedures
✅10% Increased board oversight
✅Supporting Whistle-Blowers
� Definition:
Employees who report illegal or unethical behavior.
️ U.S. Protections:


✅False Claims Act → whistle-blowers get 15–30% of recovered damages
✅Sarbanes–Oxley Act → forbids retaliation
️ Reality:
Despite laws, 82% of whistle-blowers reported being:



Ostracized
Demoted
Pressured to quit
✅2. Guidelines for Ethical Behavior
� Key Definitions:
✅Ethics: Accepted standards of behavior for a profession
✅Morality: Personal values based on religion or philosophy
✅Law: Formal codes that may not cover morality or ethics
To guide decisions, there are three main ethical approaches:
✅Approach 1: Utilitarian
� Definition:
Make the decision that creates the greatest benefit and the least harm.
✅Example:
A company must decide whether to close a polluting factory.


Keeping it open = jobs for 1,000 workers but high environmental damage.
Closing it = job loss but cleaner air and better health for 100,000 residents.
Utilitarian choice: Close the factory, since it benefits more people overall.
️ Problem Example:
A CEO cuts employee benefits to please major shareholders. Since investors hold more power
and visibility, their benefit is prioritized—even though employees suffer.
✅Approach 2: Individual Rights
� Definition:
Every decision must respect basic human rights.
✅Example:
An employer refuses to read employees’ private emails—even if it might reveal misconduct—
because it violates their right to privacy.
️ Problem Example:
Employees demand to work from home permanently, calling it a “fundamental right,” even if the
company can’t operate effectively that way.
✅Approach 3: Justice Approach
� Definition:
Make decisions that distribute costs and benefits fairly.
️ 1. Distributive Justice
Definition: Treat people equally when they’re similar in relevant ways.
✅Example:
Two employees with the same role and experience should receive the same salary, regardless of
gender or nationality.
️ 2. Retributive Justice
Definition: Punishment should match the level of wrongdoing.
✅Example:
An employee who steals $500 is suspended or fined—not sent to jail for 10 years.
️ 3. Compensatory Justice
Definition: Those harmed should be repaid fairly.
✅Example:
A company pollutes a town’s water supply and must pay for cleanup and medical costs of
affected residents.
⚡ Example Conflict: Affirmative Action vs. Reverse Discrimination
A company promotes a less-experienced minority candidate to increase diversity.


Supporters say it corrects historical injustice (compensatory justice).
Critics argue it’s unfair to more qualified candidates (distributive justice).
CHAPTER 4
✅What Is Environmental Uncertainty?
� Definition:
Environmental uncertainty = Degree of Complexity + Degree of Change in the external
environment of an organization.
Before an organization can begin strategy formulation, it must scan the external environment to identify possible
opportunities and threats and its internal environment for strengths and weak- nesses. Environmental
scanning is the monitoring, evaluation, and dissemination of information from the external and internal
environments to key people within the corporation.
• Environmental analysis
– the monitoring, evaluation, and dissemination of information
relevant to the organizational development of strategy
✅External Environmental Variables in Strategic Management
To scan the environment effectively, managers examine three major layers:
� 1. Natural Environment
These are physical and ecological factors that exist naturally on Earth:
✅Physical resources (e.g., water, minerals, land)
✅Wildlife and biodiversity
✅Climate and ecosystems
These elements form the ecological system that indirectly influences businesses—often through
resource availability and climate impacts.
� 2. Societal (Macro) Environment
These are broad, long-term forces that affect many industries but don’t directly impact day-today operations. They influence long-run strategy.
They include 4 main forces:
� Economic Forces
Regulate the flow of:
✔️ Money
✔️ Materials
✔️ Energy
✔️ Information
� Example: Inflation, interest rates, unemployment, economic growth
� Technological Forces
Generate new inventions and innovations that solve problems.
� Example: AI, automation, biotechnology, smartphones
️ Political–Legal Forces
Shape the rules of the game:
✔️ Laws
✔️ Regulations
✔️ Government policies
✔️ Power distribution
� Example: Tax laws, labor laws, trade policies
� Sociocultural Forces
Influence values, beliefs, norms, and lifestyles of society:
� Example: Demographics, education, attitudes toward health, diversity, consumption trends
� 3. Task Environment
These are the external players directly interacting with the corporation. They both affect the
firm and are affected by it.
Includes:
🏘️ Governments
🏘️ Local communities
� Suppliers
️ Competitors
� Customers
� Creditors
� Employees & labor unions
� Special-interest groups
� Trade associations
� This environment is often referred to as the industry, and its detailed study is called Industry
Analysis (popularized by Michael Porter).
� How These Environments Interact
✅Natural environment → Impacts resource availability & ecological conditions
↓
✅Societal environment → Influences laws, technology, and consumer behavior
↓
✅Task/Industry environment → Directly affects business operations, competition, and
strategy
Managers must monitor all three to identify strategic factors that could lead to success or
failure.
✅What is STEEP Analysis?
STEEP analysis is a tool used in strategic management to scan the external environment.
It helps companies understand big outside forces that can create threats or opportunities.
STEEP stands for:





S – Sociocultural
T – Technological
E – Economic
E – Ecological (Environmental)
P – Political–Legal
Companies use it to predict changes, adapt strategies, and stay competitive.
✅One Example for Each Factor (Based on your text):
1️⃣ Sociocultural
Example: Aging population in developed countries (e.g., Italy, Germany, Japan).
Impact: More demand for healthcare, retirement services, and fewer young workers.
2️⃣ Technological
Example: Rise of artificial intelligence, nanotechnology, and robots.
Impact: Automates tasks, increases efficiency, but kills some traditional jobs.
3️⃣ Economic
Example: Interest rates rising → fewer house purchases → fewer appliance sales.
Impact: Companies must adjust production, pricing, and forecasting.
4️⃣ Ecological (Natural/Environmental)
Example: Global warming and resource scarcity (e.g., fresh water availability).
Impact: Firms must reduce carbon footprint and adapt operations to regulations.
5️⃣ Political–Legal
Example: WTO trade rules and taxes affecting where companies operate.
Impact: High labor/tax costs in Western Europe push companies to relocate.
✅What Is Porter’s Five Forces Model?
Michael Porter argues that the profitability of any industry depends on five main competitive
forces. The stronger these forces are, the harder it is for companies to earn high profits. If the
forces are weak, companies have more freedom to set prices and gain profit.
The original 5 forces are:
1.
2.
3.
4.
5.
Threat of New Entrants
Rivalry Among Existing Competitors
Threat of Substitute Products or Services
Bargaining Power of Buyers
Bargaining Power of Suppliers
The text also adds a 6th force:
6. Other Stakeholders (e.g., government, communities, activists)
✅How to Interpret the Forces


High Force = Threat → reduces profit potential
Low Force = Opportunity → allows higher profitability
Companies can even influence some forces through strategy. For example:

Dell selling directly through the internet reduced the power of distributors
(buyers/suppliers).
✅Example: Athletic Shoe Industry (like Nike, Adidas)
The text rates the forces in this industry:
Force
Strength
Explanation
Rivalry among competitors High
Strong brands compete globally
Threat of new entrants
Industry is mature; high barriers
Low
Threat of substitutes
Sports shoes have no real alternatives
Low
Bargaining power of suppliers Medium ↑
Asian suppliers gaining power
Bargaining power of buyers Medium ↑
Customers can choose cheaper brands
Other stakeholders
Medium–High Governments & human rights pressure
Conclusion:
Competitive intensity is high, so profits and growth will stay modest.
✅In Short
Porter’s model helps companies:




Scan the industry
Rate each force as high, medium, or low
See where threats and opportunities are
Predict profitability
………………………………...
✅What Is “Threat of New Entrants”?
When a new company enters an industry, it brings:


New capacity
New competition

New resources
➡️ This puts pressure on existing firms.
But whether new firms can enter easily depends on entry barriers.
If barriers are high → Low threat
If barriers are low → High threat
Below are the main barriers to entry, each with a short explanation and example:
✅1. Economies of Scale
Meaning: Existing big firms can produce at lower cost because they operate on a large scale.
New firms would have higher costs.
Example:
Intel makes huge volumes of microchips at low cost—new companies can’t match that scale
easily.
✅2. Product Differentiation
Meaning: Strong brands build customer loyalty through advertising and marketing.
Example:
Tide (by P&G) and Cheerios (by General Mills) are so well-known that new brands struggle to
compete.
✅3. Capital Requirements
Meaning: Entering the industry requires a massive financial investment.
Example:
To compete with Boeing or Airbus, you’d need billions to build airplanes and factories—almost
impossible for newcomers.
✅4. Switching Costs
Meaning: Customers would face inconvenience, cost, or effort to change brands.
Example:
Offices using Microsoft Excel or Word don’t want to switch to another software due to retraining
costs.
✅5. Access to Distribution Channels
Meaning: New companies struggle to get shelf space or access to sales channels.
Example:
Small brands can’t easily get into supermarkets because big brands pay for prime shelf space.
✅6. Cost Advantages Independent of Size
Meaning: Existing firms may have unique advantages that new firms can’t copy.
Example:
Microsoft dominated due to MS-DOS and later Windows, becoming the default OS on 90% of
computers.
✅7. Government Policy
Meaning: Government rules or licenses can block new firms.
Example:
Oil drilling in protected areas requires government licenses—new companies can’t easily get
access.
✅Summary in One Line:
The threat of new entrants is LOW when any of these barriers exist.
Industries with high competition and weak barriers see more entrants; industries with strong
barriers (like aviation, software, energy) are protected.
……………………………….
✅What is Rivalry Among Existing Firms?
This force explains how intensely companies within the same industry compete with each
other.
When rivalry is high, companies:




Cut prices
Imitate products
Spend more on marketing
Launch products faster
This reduces profits for everyone in the industry.
Porter explains that rivalry becomes intense when certain conditions exist. Here are the main
ones:
✅1. Number of Competitors
Meaning: When there are many firms of similar size, they closely monitor each other and react
quickly.
Example:
Auto industry — Toyota, Ford, BMW, Mercedes, Honda all fight for market share with similar
capabilities.
✅2. Rate of Industry Growth
Meaning: When an industry slows down, the only way to grow is by stealing customers from
competitors.
Example:
In the airline industry, when passenger growth slows, companies start aggressive price wars.
✅3. Product or Service Characteristics
Meaning: If the product is a commodity with little differentiation, competition is based mostly
on price.
Example:
Gasoline — people choose gas stations based on location and price because they see all fuel as
the same.
✅4. Amount of Fixed Costs
Meaning: If companies must pay high fixed costs (even if sales drop), they lower prices just to
cover expenses.
Example:
Airlines must fly scheduled flights whether seats are full or empty — so they offer cheap standby
tickets to fill seats.
✅5. Capacity
Meaning: If increasing capacity requires big investments, firms tend to overproduce and flood
the market.
Example:
Paper manufacturers must build entire plants — once built, they produce a lot, lowering prices
across the industry.
✅6. Height of Exit Barriers
Meaning: If it’s hard or costly to leave the industry, companies stay and keep competing, even
when profits are low.
Example:
Breweries own specialized equipment that’s hard to use elsewhere — so they rarely exit the
industry.
✅7. Diversity of Rivals
Meaning: When companies have different business strategies, backgrounds, and goals, they
clash unknowingly.
Example:
Retail clothing—many brands open stores in the same area, leading to direct competition and lost
sales.
✅In Summary:
When these conditions exist, rivalry becomes intense, making it harder for all firms to earn high
profits.
…………………………………………………………
✅Threat of Substitute Products or Services
✅What is a Substitute?
A substitute product is something that looks different but satisfies the same customer need or
solves the same problem.
✔ Example:




Email → substitutes fax
Bottled water → substitutes cola
Nutrasweet → substitutes sugar
Streaming services → substitute video rental stores
✅Why Substitutes Matter (According to Porter)
Substitutes reduce how much companies in an industry can charge, because customers can
switch to alternatives if prices rise too high.
� Key Idea:
Substitutes create a price ceiling — a limit on how high companies can profitably price their
products.
Example:
If the price of coffee rises a lot, people might switch to tea.
So tea becomes a cap on how much coffee sellers can charge.
✅When Substitutes Are a BIG Threat:
The threat increases when:
✅1. Switching costs are low
Customers can easily move to another product.
✅2. The substitute offers similar performance
Even if it looks different.
✅3. The substitute is cheaper or more convenient
✅Challenge in Strategy:
Finding substitutes isn’t always obvious because they:



May look completely different
May come from a different industry
May not be traditional competitors
That's why companies must scan wider markets, not just direct rivals.
………………………………………………………………
What It Means
The bargaining power of buyers is all about how much influence customers have over a
business. When buyers have power, they can demand lower prices, better quality, or extra perks,
and companies often have to comply to keep them happy.
The more options the buyer has—or the more important the buyer is to the company—the
stronger this power is.
Key Points




Big buyers matter more: If one customer buys a lot, they can negotiate hard.
Easy to switch: If customers can go elsewhere quickly and cheaply, they have leverage.
Product is replaceable: If what the company sells isn’t unique, buyers can easily find
substitutes.
Price-sensitive buyers: If the product costs a lot for the buyer, they’ll shop around
aggressively.
Fresh Example
Industry: Coffee shops
Buyer: Local office buildings buying large daily coffee orders




An office building orders 500 cups of coffee every morning.
If one coffee shop raises its prices, the office can easily switch to a nearby competitor.
Because the office’s order is large, it can negotiate a lower price, free delivery, or extra
drinks.
The coffee shop has to accommodate the buyer’s demands or risk losing significant
revenue.
Result: The office building has strong bargaining power over the coffee shop.
…………………………………………………………..
Here’s the Bargaining Power of Suppliers explained in the same style:
What It Means
The bargaining power of suppliers is about how much influence suppliers (the people or
companies providing raw materials, components, or services) have over a business. When
suppliers have power, they can raise prices, reduce quality, or limit availability, and the company
buying from them may have little choice but to accept.
The fewer alternatives a company has for suppliers—or the more important the supplier’s
product is—the stronger the supplier’s power.
Key Points




Few suppliers: If only a few suppliers exist, they can demand higher prices.
Unique product: If the supplier provides something special that no one else offers, their
power increases.
High switching cost: If it’s expensive or complicated for the company to switch
suppliers, the supplier has leverage.
Essential for the product: If the supplied item is critical to the company’s business, the
supplier can control terms.
Fresh Example
Industry: Smartphone manufacturing
Supplier: Qualcomm (chips and processors)




A smartphone company needs Qualcomm processors to make high-performance phones.
Qualcomm is one of the few companies making chips with the speed and power the
phone requires.
Because the chip is essential and hard to replace, Qualcomm can charge premium prices
or set strict delivery schedules.
The smartphone company has limited options and must comply if it wants to keep
producing competitive phones.
Result: Qualcomm has strong bargaining power over the smartphone company.
………………………..………………………..………………………..
Relative Power of Other Stakeholders, using fresh examples so you understand it easily:
✅What Is It?
Besides buyers and suppliers, there are other important groups who can influence a company's
decisions and profits. These include:


Government & Regulators
Local Communities






Media
Environmental Groups
Unions
Activists
Shareholders
NGOs
These groups can pressure, restrict, or support the company — depending on the situation.
When their influence is strong, they can limit profits, delay projects, or force policy changes.
When their influence is weak, the company has more freedom.
✅Example 1: Government Regulation
Industry: Fast-food
Stakeholder: Government

If the government introduces a sugar tax or bans certain ingredients, McDonald's or
Coca-Cola must adjust recipes and pricing.
� This reduces company freedom & profits.
✅Example 2: Local Communities
Industry: Mining
Stakeholder: Town residents


A mining company wants to open a new site.
The local community protests because of pollution and land damage.
� The project is delayed or canceled.
✅Example 3: Environmental Activists
Industry: Fashion
Stakeholder: NGOs like Greenpeace


Zara or H&M may be pressured to stop using harmful dyes or plastics.
They may have to change suppliers or production methods.
� Increased cost, change in strategy.
✅Example 4: Media & Public Opinion
Industry: Tech
Stakeholder: Social media + journalists

If a company like Uber treats workers unfairly, news outlets and social media campaigns
can damage reputation.
� Company is forced to change policies.
✅Example 5: Labor Unions
Industry: Airlines
Stakeholder: Employees/Unions

If pilots strike for better wages, airlines like Lufthansa or Air France lose millions and
flights get canceled.
� Unions gain negotiation power.
✅Why It Matters in Porter’s Model?
These stakeholders can:
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Increase company costs
Control decisions
Create legal barriers
Damage reputation
Stop projects
So they act as an additional force that shapes how competitive and profitable an industry is.
……………………………………………………
Indusrty Evolution
• Fragmented industry
– no firm has a large market share, and each firm only serves a
small piece of the total market in competition with other
firms
• Consolidated industry
– domination by a few large firms, each struggles to
differentiate products from its competition
……………………………………………………………………………
…
1. Multidomestic Industries
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Definition: Industries where each country has its own largely independent market and
operations. Subsidiaries tailor products/services to the specific needs of that country.
Characteristics:
o Each country has its own production and distribution.
o Limited coordination between subsidiaries.
o Products/services customized for local tastes and regulations.
Examples: Retail chains (like Carrefour in France, Walmart in the U.S.), insurance
companies.
Pressure factors:
o High pressure for local responsiveness → must adapt to local markets.
o Low pressure for coordination → subsidiaries act independently.
2. Global Industries
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Definition: Industries where firms operate worldwide, coordinating operations across
countries and making only minor adjustments for local conditions.
Characteristics:
o Production and strategy integrated globally.
o Standardized products or services across countries.
o Competitive moves in one country affect operations in other countries.
Examples: Commercial aircraft (Boeing, Airbus), semiconductors, automobiles, watches,
tires.
Pressure factors:
o High pressure for coordination → efficiency and scale matter globally.
o Low pressure for local responsiveness → products are largely standardized.
3. Regional/Hybrid Industries
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Definition: Industries that are between multidomestic and global. Coordination occurs
within a region rather than worldwide.
Example: Major home appliances: Japanese companies dominate Asia but have limited
presence in Europe/America.
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Strategic Groups – Concept
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Definition: A strategic group is a set of companies within the same industry that follow
similar strategies using similar resources.
Purpose: Helps understand competition within the industry, because firms in the same
strategic group are usually closer rivals than firms in other groups.
Key Idea: Not all competitors in an industry are equally relevant—your main
competitors are usually in your strategic group.
Example in the Restaurant Industry
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McDonald’s and Olive Garden → Different missions and strategies → Different
strategic groups → Rarely compete directly.
McDonald’s, Burger King, Hardee’s → Similar strategy (high volume, low-priced
meals for families) → Same strategic group → Strong rivals, structured similarly to
compete efficiently.
. Strategic Types – Concept
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Definition: A strategic type is a category of firms based on a common strategic
orientation, combining structure, culture, and processes that support that strategy.
Purpose: Helps explain why companies facing similar conditions behave differently
and predict how they might act in the future.
Four Strategic Types (Miles & Snow)
Strategic
Type
Key Characteristics
Example
Narrow product line; focus on efficiency; improve existing
Lincoln Electric
operations; avoid innovation
Broad product lines; focus on innovation and new market
Prospectors
Rubbermaid
opportunities; creativity over efficiency
Mix of stable and dynamic product-market areas; efficient in IBM, Procter &
Analyzers
stable areas, innovative in variable areas
Gamble
Lack consistent strategy; respond to pressures piecemeal;
Most major U.S.
Reactors
often ineffective
airlines
Defenders
How it Works in Practice
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Defender: A local bakery focuses on perfecting its classic bread, keeps costs low, rarely
experiments with new products.
Prospector: A tech startup keeps launching new gadgets every year, prioritizing
innovation even if costs rise.
Analyzer: A consumer electronics company sells reliable products (stable) but also
invests in emerging smart devices (dynamic).
Reactor: An airline that keeps cutting routes or raising prices only in response to
competitors, without a long-term plan.
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Hypercompetition – Concept
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Definition: Hypercompetition occurs in industries experiencing rapid, aggressive, and
unpredictable competitive moves, where market stability is constantly disrupted.
Key Idea: Competitive advantages are temporary, and companies must continuously
innovate and adapt or risk losing their position.
Characteristics of Hypercompetitive Industries
1.
2.
3.
4.
Short product life cycles: Products become outdated quickly (e.g., smartphones).
Short design cycles: New models or designs appear frequently.
Rapid technology changes: Emerging technologies can quickly disrupt markets.
Frequent entry of unexpected competitors: Small, agile firms can challenge market
leaders.
5. Repositioning by incumbents: Established firms constantly adjust strategies to maintain
relevance.
6. Tactical redefinition of markets: Industries merge or boundaries shift, creating new
opportunities and threats.
7. Constant uncertainty and dynamism: Success requires fast learning and
responsiveness.
Example
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Smartphone Industry: Apple, Samsung, and Xiaomi continuously release new models.
o A company like Apple might replace its own iPhone model before competitors
do, keeping its edge.
o New entrants (like emerging Chinese brands) can suddenly capture market share.
o Tech and design trends change quickly, so companies must constantly innovate.
Key Takeaway: In hypercompetition, long-term competitive advantage is almost impossible,
and firms survive by being agile, innovative, and willing to disrupt themselves.
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Here’s a clear breakdown of what you just sent about competitive intelligence and
environmental scanning, explained in simpler terms with examples:
Environmental Scanning – Informal vs. Formal
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Informal scanning: Most companies start by casually gathering information from
everyday sources:
o Suppliers, customers, employees
o Industry publications and conferences
o Internet research
Example: An R&D engineer attending a conference might learn about a competitor’s
upcoming product, or a purchasing officer might hear about new pricing strategies from a
supplier.
Importance of customers: Many innovations come from customer feedback.
o Scientific instruments: 77% of innovations start from customer inquiries.
o Semiconductors/PCBs: 67% of innovations are triggered by customers.
Takeaway: Listening closely to customers and frontline employees is crucial for spotting
opportunities early.
Competitive Intelligence (CI)
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1.
2.
3.
4.
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Definition: A formal program to systematically gather, analyze, and use information
about competitors. Also called business intelligence.
Why it matters: Without it, companies may “fly blind” — learning about competitors’
moves too late to react.
o Example: Learning about a competitor’s price drop only after it hits the market.
Benefits:
Build industry awareness – understand trends and competitor behavior
Support strategic planning – make informed long-term decisions
Develop new products – identify gaps in the market
Create marketing strategies – target competitor weaknesses or differentiate products
Implementation:
o Some companies have a dedicated CI unit.
o Others integrate it into marketing, strategy, product development, or other
departments.
o Example: At General Mills, even janitors are trained to gather competitive
insights from suppliers—turning everyone into a potential source of intelligence.
Industry trend: Spending on CI has grown massively, e.g., U.S. companies’ CI budget
rose from $1 billion in 2007 to $10 billion in 2012.
Here’s a clear, structured explanation of the forecasting techniques section you sent, in simple
language with examples: elede onemli deil bu mence
What Forecasting Is
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Forecasting does not predict the future exactly—it only gives possible outcomes or
reasonable assumptions.
Its main purpose is to help managers plan by understanding what could happen in the
market or industry.
Key Forecasting Techniques
1. Trend Extrapolation
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What it is: Extend current trends into the future, assuming things change gradually.
Example: If a company’s smartphone sales have increased 10% every year for the last 5
years, trend extrapolation might predict a similar 10% increase next year.
Limitations: Sudden market changes, like a new competitor or technology, can make this
method inaccurate.
2. Brainstorming
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What it is: A group discussion to generate ideas about the future without judgment.
Example: A team of store managers brainstorms what customers might want in the next
5 years. They share “wild ideas” freely, like in-store VR experiences or drone delivery.
3. Expert Opinion
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What it is: Specialists predict future events based on their knowledge and experience.
Delphi Technique: Experts make predictions individually, then refine them through
rounds until consensus is reached.
Example: Automotive engineers forecast the rise of electric vehicles in the next decade.
4. Statistical Modeling
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What it is: Quantitative analysis using historical data to find patterns and relationships.
Example: Regression analysis predicts how sales of air conditioners increase with rising
temperatures.
Limitation: Works only if past relationships continue into the future.
5. Prediction Markets
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What it is: Employees or participants “bet” on future outcomes; market prices reflect
collective judgment.
Example: Google employees predict whether a new app feature will reach 1 million
users within 6 months.
Limitation: Best for short-term, measurable outcomes; not proven for long-term
planning.
6. Scenario Writing / Scenario Planning
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What it is: Creating detailed narratives of different possible futures. Combines multiple
forecasting methods to imagine several internally consistent scenarios.
Example: UPS might write scenarios about how urban delivery will evolve in 10 years—
drones, autonomous vehicles, or traffic restrictions—and plan strategies for each.
Process:
1. Examine societal and environmental trends.
2. Identify uncertainties in the industry (new competitors, substitutes, suppliers,
buyers, etc.).
3. Make plausible assumptions about future trends.
4. Combine assumptions into consistent scenarios.
5. Analyze industry situations under each scenario.
6. Identify competitive advantages in each scenario.
7. Predict competitor behavior.
8. Choose the scenarios most likely or impactful for strategic planning.
Key Takeaways
1. No method is perfect—each has strengths and limitations.
2. Trend extrapolation is the most common but limited by unexpected events.
3. Scenario writing is highly valuable for long-term strategy because it explores multiple
possible futures.
4. Combining techniques (quantitative + qualitative) provides the most reliable insights.
.
.
.
Here’s a clear explanation of the section on monitoring competitors for strategic planning,
broken down in a simple way with examples:
Purpose of Monitoring Competitors


Competitive intelligence (CI) is the process of gathering and analyzing information
about other companies that sell the same, similar, or substitute products/services.
The goal is to understand competitors’ strategies, anticipate their moves, and make
better strategic decisions for your own company.
Key Questions to Understand Competitors
1. Why do they exist?
o Are they profit-focused or just supporting another part of a larger company?
o Example: A small subsidiary of a tech giant may not aim to maximize profits but
to test new technology.
2. Where do they add value to customers?
o Through quality, price, credit terms, or service?
o Example: Amazon adds value through fast delivery and customer service.
3. Which customers are they targeting?
o Are they going after your best customers or a neglected segment?
o Example: A new coffee shop may target customers your premium café ignores—
like budget-conscious students.
4. What is their cost base and liquidity?
o How much cash do they have? How do they get their supplies?
o Example: A competitor with strong cash reserves may survive price wars longer.
5. Supplier relationships
o Are their suppliers better, more reliable, or cheaper than yours?
o Example: A competitor that sources high-quality materials at lower cost can make
a superior product at the same price.
6. Future plans
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