McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 2
The Context of Strategic Management
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
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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
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Factors Affecting
a Nation’s Competitiveness
Factor conditions
Nation’s position in factors of production
Skilled labor
Infrastructure
Demand conditions
Nature of home-market demand
Industry’s product
Industry’s service
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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
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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
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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
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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
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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
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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
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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
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A Company’s Motivation for International Expansion
Increase the size of potential markets
World population exceeds billion
. 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
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A Company’s Motivation for International Expansion
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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
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Potential Risks of
International Expansion
Political and economic risk
Social unrest
Military turmoil
Demonstrations
Violent conflicts and terrorism
Laws and their enforcement
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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 . dollar
Exchange rates can significantly affect production costs or net profit
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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
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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.
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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
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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
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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
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Concerns about corporate governance led to the Sarbanes-Oxley Act in 2002
. 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
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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
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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
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Key Stakeholders
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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
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