Chapter 2: 
Strategic Management

Corporate Mission, Goals

Questions for Chapter Two:

1.  What is a mission statement, and what are its component parts?

2. What is Abel’s Framework, and what is it useful for?

3. According to Harold Leavitt, what is it that US Corporations need to “fix” to be successful in the future?

4.  According to Merron, author of Riding the Wave, what is perhaps the KEY THING that organizations need to have in order to be effective?

5.  What kinds of problems are involved in meeting stakeholders’ needs?

6. What can we do to resolve difficulties in meeting stakeholders’ needs?

Strategic options are bounded by:

1.      The need to satisfy the claims of key stakeholder groups, and,

2.      The company’s mission statement

 Stakeholder Groups:

     Groups that have claim on a company.

 Stockholders provide capital, expect return on investment.

 Employees provide labor, expect income, satisfaction.

 Customers provide revenues, expect value for their money; and so on.

Are are all stakeholders equal?

Due to resource, time constraints, company often has to prioritize claims.

1.         What is a mission statement, and what are its component parts?

Mission indicates...

How organization views claims of stakeholders.

     a.  Defines business of organization

     b.  States basic goals

     c.  Guiding philosophies.

Business Definition

Defining the Business

Involves asking several questions:

 What is our business?

 What will it be?

 What should it be?

Latter (2) give room for growth.

2.         What is Abel’s framework, and what is  it useful for?

Derek Abell’s Framework:

            Tool for defining business.

            For single business, or division:

Who is being satisfied?

            (what customer groups)?

What is being satisfied?

            (what customer needs)?

How are customer needs being satisfied?

            (by what technologies)?

Diversified Companies . . .

Should identify how those business units are better off as part of the corporation (not separate entities).

Sample Business Definition:

     SUNY Brockport meets the undergraduate and graduate educational needs of qualified entrants by providing a high quality educational foundation and critical thinking skills.  It promotes scholarship and professional development of its student body by hiring highly qualified faculty, and by maintaining critical linkages with outside entities and professionals. 

WHO, WHAT, HOW

 Part 2 of Mission Statement:

Vision and Basic Goals

Vision and Basic Goals

Spell out what the organization is trying to achieve.

Give direction to the corporate mission statement.

What’s the difference between GOALS and OBJECTIVES?

Goals are open-ended.  They are general.

Objectives are NOT . . .  They are measurable.

BASIC Goal Statements articulate  how a company will pursue its strategy.

Maximizing stockholder wealth is overriding goal of many companies.

Stockholders are legal owners of company.

How do we maximize wealth?

One way:  Maximize ROI                                           

Result is focus on short-run ROI.

–   Long-run costs, e.g., research and development, may be cut.

Many claim this has lead to U.S. loss of competitiveness

Problem with ROI:

Can be EASILY manipulated.

Sensitive to depreciation write-off differences between divisions, for example.

Does not consider difficulty in setting transfer prices.

Strategy in Action 2.1

How did the short-term orientation of U.S. companies cost the United States leadership in active matrix liquid crystal display (AM-LCD) screens?

Liquid Crystal example:

RCA and Westinghouse pioneered this display technology in 1962.

Used in medical equipment, computer screens, camcorders.

Inventor left company, and company “flopped”.

Japanese “followed” in market and now have 95% of market, U.S. firms are nichers.

What was behind lack of interest in Liquid Crystal Displays
in U.S.?

Short term focus on returns.

Fear of development costs.

Japanese support of industry R&D

     NOTE:          Japan is backing away from this!

What can we do about shareholder wealth dilemma?

Drucker suggests that companies adopt multiple goals, balance short-run and long-run considerations.

May be easier said than done.

One way:              Use compensation plans that focus on both short run and long run. 

                                                                        MORE SOON. . .

Part 3 of Mission Statement:

Statement of Philosophy

Corporate Philosophy

Reflect basic beliefs, value systems, aspirations, philosophical priorities.

May include a creed that identifies distinctive outlook on business.

This creed forms the basis for developing the company's corporate culture.

3.    According to Harold Leavitt, what is it that U.S. Corporations need to “fix”    to be successful in the future?

Answer: 
Pathfinding Organizations:

Consider the setting of VISION to be primary.

Think about long term issues FIRST

4.            According to Merron, author of Riding the Wave, what is perhaps the KEY THING that organizations need to have in order to be effective?

Answer:

PURPOSE

5.         What kinds of problems are involved in meeting stakeholders’ needs?

Empire building (GREED) of managers

Claims of different stakeholder groups may conflict

     E.g., short/long term foci

     E.g., union claims for higher wages & consumer demands for reasonable Prices

6.   What can we do to resolve difficulties in meeting stakeholders’ needs?

Limitations on Self-Interest in Strategy Formulation

Stockholder meetings

Institutional  Investors have a lot of power!

Board of directors

Stock compensation policies

The takeover market

Takeover Constraint

Limits strategy formulation that does NOT maximize stockholder wealth.

–  If managers ignore stockholder interests, company will be purchased by another company, and they will lose their independence and maybe even their jobs.

Above fact is emphasized by corporate raiders.

Raiders

Raiders buy stock in a company either to:

     1.  Take over the business and run it more efficiently or,

3.      To precipitate a change in the top management.

4.       

Greenmail

When a raider sells stock BACK to company, or another party at a premium. 

Poison Pills, Golden Parachutes

Poison pills:   aim is to make it more difficult for a raider to acquire a company.

Golden parachutes: Severance contracts handsomely compensate top-level managers for loss of jobs in a takeover.

             "reward for failure" ?

Leveraged buyouts

A special kind of takeover.

Company's own executives often among the buyers in a raid.

Group typically raises cash by issuing bonds.

Thus LBOs involve a swap of equity for debt.

Benefits of LBOs (Jensen)

Limits waste of free cash flow by compelling managers to pay out excess cash to service debt payments, rather than spending it on empire-building projects with low or negative returns, excessive staff, indulgent perquisites, and other organizational inefficiencies.

Debt motivates managers to look for greater efficiencies.

(2) problems with LBOs:

1. Large loans forces focus on short term.

2.      Debt increases the risk of bankruptcy.

responsibility

Can be supported for its own sake simply because it is the right way for a company to behave.

In a company's self-interest.

A Place for it in Strategy?

Nobel laureate Milton Friedman says that concepts of social responsibility should not be a factor in strategic decision making.  “A business has only one kind of social responsibility:  to use its resources for activities that increase its profits.”