Strategic Management: Leadership and Analysis

• There are two perspectives on leadership: external control and the romantic view.
• External control suggests external forces determine an organization's success.
• The romantic view suggests the leader is a key driver of success.

Strategic Management

• Leaders should be proactive, aware, and anticipate change.
• Strategic management should be both a process and a way of thinking.
• Strategic management involves understanding efficiency and effectiveness trade-offs.
• Strategic management consists of three parts: analysis, formulation, and implementation.
• Analysis covers strategic goals and understanding the organization’s environment.
• Formulation includes where and how to compete.
• Implementation involves taking resources and action.
• Operational effectiveness improves efficiency, productivity, and cost reduction via best practices.
• Operational effectiveness alone is not enough to sustain a competitive advantage.
• Competitive advantage is a unique strategy that lets a firm outperform competitors in a sustainable way.
• Differentiation or cost leadership are difficult to copy.
• Brand loyalty, like the Apple ecosystem, can be a competitive advantage.
• The intended strategy is the original planned strategy.
• The realized strategy is the strategy executed after adjustments due to internal and external factors.
• The emergent strategy is unplanned decisions and adaptations due to changing conditions.

Potential Problems

• Lack of clarity, unrealistic vision, lack of leadership commitment, or resource allocation issues.
• Resistance to change and external disruptions can also cause problems.
• Firms need to clearly establish their vision, mission, and strategic goals.

Strategy Formulation Levels

• Strategy formulation is developed at different levels, based on strategy analysis.
• Business level: how to compete in a given business to attain competitive advantage.
• Successful firms develop bases for sustainable competitive advantage through cost leadership, differentiation, and focusing on narrow or industry wide markets.
• Corporate level: what businesses to compete in; how businesses can be managed to achieve synergy.
• Addresses a firm’s portfolio of businesses.
• It also raises the questions: What business should we compete in?, and How can we manage this portfolio of businesses to create synergies?
• International strategy: what strategies are needed as the business ventures beyond its national boundaries.
• Entrepreneurial initiatives: how can businesses create new value

Corporate Elements

• Corporate vision: inspiring goal/value long term.
• Mission statement: purpose of the company and basis of competition and competitive advantage.
• The mission statement can and should change when competition changes and is more specific than a vision.
• Strategic objectives: operationalize mission statement by providing guidance on how to fulfill the mission/vision.
• Strategic objectives should be realistic, timely, specific, and measurable.

Business Structures

• A business structure defines how a company is legally organized and operated.
• The structure determines ownership, liability, taxation, and governance.
• Sole proprietorship: a business owned and operated by one person, where the owner and business are legally the same entity.
• The owner has full control, unlimited personal liability, and pass-through taxation.
• General Partnership: Two or more people share ownership, management, and liability.
• Partnerships entail joint and several liability.
• Limited Liability Partnership: Some partners have limited liability, protecting them from debts beyond their investment.
• Limited Liability Company: a hybrid structure of corporation and partnership.
• Owners have limited liability protection and income is taxed as a pass-through entity unless the LLC elects corporate taxation.
• Corporation: a separate legal entity from its owners.
• Shareholders have limited liability.
• Corporations can be publicly traded or privately held.

Limited Liability

• Limited liability protects shareholders from personal responsibility for the corporation’s debts and lawsuits.
• Only the company’s assets are at risk if the corporation goes bankrupt or is sued, not the shareholders' personal assets.
• To reduce risk, lenders often require personal guarantees and collateral.
• Personal guarantees means the lender agrees to repay the loan if the business defaults.
• Collateral is tangible assets pledged as security.

Piercing the Corporate Veil

• The corporate veil is recognized as long as a corporation is legally formed, properly managed, and not committing fraud.
• Fraudulent activities, commingling funds, and undercapitalization may allow courts to hold owners personally liable.
• Failure to follow corporate formalities and not maintaining corporate records, bylaws weakens liability protection.
• Parent corporations and subsidiaries are legally distinct.
• Courts may pierce the veil and hold the parent company liable if the subsidiary is merely an "alter ego" of the parent.

Corporate Governance

• Corporate governance refers to the rules, practices, and processes by which a corporation is directed and controlled.
• It ensures accountability between shareholders, the board of directors, and management.
• Shareholders are the owners of the corporation.
• Shareholders elect the board of directors and approves share issuance as well as major decisions such as mergers.
• The board of directors oversees company direction and governance and appoints/hires management.
• The board also approves business strategies, major expenditures, and policies.
• Management handles daily operations and executes business strategies alongside day-to-day decision-making.

Public vs Private Corporations

• Public corporations are listed on stock exchanges, so anyone can invest.
• Private corporations are not publicly traded, and investment is restricted.

Accredited Investors

• Accredited investors are private individuals or institutions with high net worth or income.
• Private investments are riskier and less regulated.
• The SEC limits participation to protect nonprofessional investors.

IPO's

• IPO (initial public offering): when a private company sells shares to the public for the first time.
• IPO's raise capital for expansion.
• Primary Market: shares are sold directly by the company.
• Secondary Market: shares are traded among investors (stock exchange).

Bought Deal

• Bought deal: investment banks (underwriters) buy shares from a company and resell them to investors.
• Underwriters play a key role in pricing and selling IPO shares.
• Regulatory agencies such as the SEC enforce transparency through reports.
• The goal is to protect investors from fraud and misinformation.

Principal Agent

• Principal: person that delegates authority (shareholders)
• Agent: person making decisions on behalf of principal (managers/directors)
• Stock options give managers ownership stakes to align incentives.
• Performance-based pay allows bonuses tied to financial targets.
• Dismissal for poor performance means the board of directors can replace executives failing shareholder interests.

Fiduciary Duty

• Managers & directors have a fiduciary duty to act in the best interests of shareholders.
• Includes duty of care, the duty of loyalty and the duty of good faith.
• Duty of care: make informed decisions.
• Duty of loyalty: avoid conflicts of interest.
• Duty of good faith: belief to mean well.

Breach of Duty

• If a manager/director violates fiduciary duty, shareholders have the right to sue for fraud, self-dealing, or negligence.
• Directors and managers must act in good faith and make informed decisions based on all reasonably available information.
• Failure to do so can lead to legal liability if shareholders prove gross negligence in decision making.
• The CEO negotiated a merger without informing the Board of Directors, who approved the sale in a brief meeting without fully reviewing financial analyses in the TransUnion case.
• The Supreme Court ruled the Board of Directors breached their duty of care by approving the merger without due diligence. They must carefully evaluate major corporate transactions.
• Boards should demand proper analysis, documentation, and independent advice before making critical decisions.

Protection from Breach

• Corporations can include a provision in their articles of incorporation that limits or eliminates a director’s liability for breaching duty of care.
• An exception: directors cannot be protected from liability for fraud, bad faith, or breaches of the loyalty duty.
• Amending this clause requires a shareholder vote.
• Inside director: member of the Board who is also a current executive/employee of company.
• Ex: Mark Zuckerberg, CEO serving on the board.
• Unity of command theory: provides continuity, expertise, and direct knowledge of company operations.
• This allows faster decision-making, streamlining communication between management and the board.
• Principal Agent Conflict: Inside directors may put their own interests over those of the shareholders.
• Lack of independence can lead to biased decision-making and the rubber stamping of management actions.

Dual CEO

• A dual CEO role reduces accountability.
• Many companies separate these roles to improve oversight.
• Ceo's with substantial voting power can override board decisions.
• This limits checks and balances and makes it harder for other shareholders to challenge poor management.
• Golden parachute: a large financial package given to an executive if they are forced to leave the company, usually after a merger, acquisition, or corporate takeover.
• Includes severance pay, stock options/bonuses, and perks.
• Golden parachutes attract top talent, encourage objectivity in mergers, and discourage hostile takeovers.
• Cons may include excessive payouts and misaligned incentives.

Business Judgement

• Business Judgement Rule: Tells if a manager/director is following their fiduciary duties.
• Tender Offer: direct proposal to shareholders to sell their shares at a premium price, usually above market value.