1. McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter 2 The Context of Strategic Management

3. Learning Objectives After reading this chapter, you should have a good understanding of:  The effects of globalization and business ethics on today’s organizations and on the nature of competition.  The sources of national advantage, that is, why an industry in a given country is more (or less) successful than the same industry in another country.  The potential benefits and risks of international expansion.  The vital role of corporate governance and stakeholder management as well as how “symbiosis” can be achieved among an organization’s stakeholders.  The importance of social responsibility, including environmental sustainability 2-3

4. The Global Economy: A Brief Overview  Opportunities and risks when firms diversify abroad  Trade across nations will exceed trade within nations  Rise of market capitalism around the world  Transfer of money from rich to poor countries Equity Bond Investments Commercial loans 2-4

5. The Global Economy: A Brief Overview  Why do some countries enjoy the fruits of global capitalism while others are mired in poverty?  Need of governments to have track records of business friendly policies  Invest in modern technology  Nurture local suppliers  Must manage broader economic factors  Interest rates, inflation, unemployment 2-5

6. Factors Affecting a Nation’s Competitiveness  Factor conditions  Nation’s position in factors of production Skilled labor Infrastructure – Transportation, communication, Utilities, Educational  Demand conditions  Nature of home-market demand Industry’s product Industry’s service 2-6

7.  Related and supporting industries  Presence or absence in the nation of internationally competitive Supplier industries Other related industries  Firm strategy, structure, and rivalry  Conditions in the nation governing how companies are Created, Organized, and Managed  Nature of domestic rivalry Factors Affecting a Nation’s Competitiveness 2-7

8. Factor Conditions  To achieve competitive advantage, factors of production must be created  Industry specific  Firm specific  Pool of resources at a firm’s or country’s disposal is less important than the speed and efficiency with which the resources are deployed 2-8

9. Demand Conditions  Demands that consumers place on an industry for goods and services  Demanding consumers push firms to move ahead of companies from other nations  Demanding consumers drive firms in a country to: Meet high standards Upgrade existing products and services Create innovative products and services 2-9

10. Example  The demand for gasoline in the United States has not fallen despite recent surges in gasoline prices.  An increased supply has eased the price of gasoline for consumers recently.  There are still several risks that could affect the demand conditions for gasoline  The high price of Ethanol  Volatility in the oil market Source: Business Week, June 5, 2006 2-10

11. Related and Supporting Industries  Enable firms to manage inputs more effectively  Strong supplier base adds efficiency to downstream activities  Competitive supplier base lets a firm obtain inputs using cost-effective, timely methods  Allow joint efforts among firms  Create the probability that new entrants will enter the market 2-11

12. Firm Strategy, Structure and Rivalry  Rivalry is intense in nations with conditions of  Strong consumer demand  Strong supplier bases  High new entrant potential from related industries  Competitive rivalry increases the efficiency with which firms develop, market, and distribute products and services within the home country 2-12

13. Firm Strategy, Structure and Rivalry  Competitive rivalry increases the efficiency with which firms  Develop within the home country  Market within the home country  Distribute products and services within the home country 2-13

14. Firm Strategy, Structure and Rivalry  Domestic rivalry provides a strong impetus for firms to  Innovate  Find new sources of competitive advantage  Domestic rivalry forces firms to look beyond national borders for new markets 2-14

15. Porter’s Diamond of National Advantage: As Applied to India Adapted from Exhibit 7.1 India’s Virtual Diamond in Software

16. A Company’s Motivation for International Expansion  Increase the size of potential markets  World population exceeds 6.5 billion  U.S. represents 5% of world population  China and India increased middle class  Attain economies of scale  Larger revenue and asset base  Advantage is spreading fixed costs over larger volume of production 2-16

17. A Company’s Motivation for International Expansion 2-17

18. A Company’s Motivation for International Expansion  Reducing the costs of R&D as well as operating costs  Attainment of greater purchasing power by pooling purchases  Extend the life cycle of a product  Four stages: introduction, growth, maturity, decline  Optimize the physical location for every activity in its value chain  Performance enhancement  Cost reduction  Risk reduction 2-18

19. Potential Risks of International Expansion  Political and economic risk  Social unrest  Military turmoil  Demonstrations  Violent conflicts and terrorism  Laws and their enforcement 2-19

20. Example - Example - 2006 CPI Corruption Perceptions Index  Reveals the most corrupt countries in the world  The five most corrupt countries in 2006 were: 1.Haiti (CPI Score: 1.8) 2.Myanmar (CPI Score: 1.9) 3.Iraq (CPI Score: 1.9) 4.Guinea (CPI Score: 1.9) 5.Sudan (CPI Score: 2.0) Source: Transparency International, 2006, www.transparency.orgwww.transparency.org 2-20

21. Risk Rankings 2-21

22. Potential Risks of International Expansion  Currency risks  Must constantly monitor exchange rate between its own currency and host country  Currency exchange fluctuations  Appreciation of the U.S. dollar  Exchange rates can significantly affect production costs or net profit 2-22

23.  Management risks  Culture  Customs  Language Symbols  Income levels  Customer preferences  Distribution system  Recent trend -- Dispersion of value chains of multinational corporations across different countries Potential Risks of International Expansion 2-23

24. Question When a firm decides to shift an activity that they were previously performing in a domestic location to a foreign location it is called: a)outsourcing b)contracting c)offshoring d)exporting 2-24

25. Outsourcing and Offshoring  Outsourcing occurs when a firm decides to utilize other firms to perform value-creating activities that were previously performed in-house.  Offshoring takes place when a firm decides to shift an activity that they were previously performing in a domestic location to a foreign location. 2-25

26. Outsourcing and Offshoring  Until 1960s, entire value chain was in one location  Production took place near customers to limit transportation costs  Rapid decline in transportation costs has enabled firms to disperse over multiple locations  Service industry followed manufacturing  Outsourcing low-level programming and data entry work 2-26

27. Corporate Governance and Stakeholder Management  Corporate governance: the relationship among various participants in determining the direction and performance of a corporation  Shareholders  Management (led by the CEO)  Board of Directors 2-27

28. Question  Briefly describe the role of board of directors in corporate governance. 2-28

29.  Board of Directors  Elected representatives of the owners  Ensure interests and motives of management are aligned with those of the owners Effective and engaged Board of Directors Shareholder activism Proper managerial rewards and incentives Corporate Governance and Stakeholder Management 2-29

30. Corporate Governance and Stakeholder Management 2-30

31. Example: New Rules for Directors  In light of numerous corporate scandals, the role and rules for board of directors are being redefined. Few areas of focus :  Numbers Knowledge  Strategy Focus  Time & Understanding  Watchdog Source: Tipsheet, Business Week, January 22, 2007 2-31

32.  Concerns about corporate governance led to the Sarbanes-Oxley Act in 2002  U.S. Corporations must abide by:  CEOs and CFOs must fully reveal off-balance-sheet finances and vouch for the accuracy of the information  Executives must promptly reveal the sale of shares in firms they manage and are not allowed to sell shares when other employees cannot  Corporate lawyers must report to senior managers any violations of securities laws within the organization Corporate Governance and Stakeholder Management 2-32

33. Governance Mechanisms: Aligning the Interests of Owners and Managers  Two primary means of monitoring behavior of managers:  A committed and involved board of directors that acts in best interests of shareholders  Shareholder activism: owners view themselves as shareowners Become actively engaged in governance of corporation  Managerial incentives called “contract-based outcomes” Goal is to craft incentive packages to align interests of management with those of stockholders 2-33

34. Governance Mechanisms: Aligning the Interests of Owners and Managers 2-34

35.  Business Roundtable describes BoD duties as:  Select, regularly evaluate, and if necessary, replace chief executive officer. Determine management compensation. Review succession planning  Review and, where appropriate, approve the financial objectives, major strategies, and plans of the corporation  Provide advice and counsel to top management  Select and recommend to shareholders for election an appropriate slate of candidates for BoD; evaluate board processes and performance  Review the adequacy of the systems to comply with all applicable laws/ regulations Governance Mechanisms: Aligning the Interests of Owners and Managers 2-35

36. Stakeholder Management  Two views of stakeholder management  Zero sum Stakeholders compete for attention and resources of the organization Gain of one is a loss to the other  Symbiosis Stakeholders are dependent upon each other Mutual benefits 2-36

37. Key Stakeholders 2-37

38. Question The expectation that businesses or individuals will strive to improve the overall welfare of society is called: a)social responsibility b)social ethics c)morals d)economic distribution 2-38

39. Social Responsibility  Social responsibility: the expectation that businesses or individuals will strive to improve the overall welfare of society  Managers must take active steps to make society better  Socially responsible behavior changes over time  Triple bottom line 2-39

40. Example: Social Responsibility Starbucks Coffee Company  Corporate social responsibility is embedded throughout the organization.  The following are some of the commitments they have made to be socially responsible:  Commitment to origins  Helping protect the environment  Starbucks in your community  Commitment to partners Source: www.starbucks.comwww.starbucks.com 2-40