Strategic Management - Complete Outline PDF

**ABOUT STRATEGIC MANAGEMENT** It´s important that a firm´s strategy is aligned to the environment. Managers today face an ever-changing environment that is complex and hostile. Therefore, managers have to adopt a strategy that adapts and adjusts to a highly unstable environment. **STRATEGIC DECIS...

**ABOUT STRATEGIC MANAGEMENT** It´s important that a firm´s strategy is aligned to the environment. Managers today face an ever-changing environment that is complex and hostile. Therefore, managers have to adopt a strategy that adapts and adjusts to a highly unstable environment. **STRATEGIC DECISIONS** **THE CONCEPT OF STRATEGY** The concept of strategy was developed in the 1960s, and has evolved in step with management systems and their internal and external issues. [Andrews (1965):] \[\[\[\[the pattern of major objectives, purposes or goals, and essential policies and plans for achieving those goals, stated in such way as to define what business the company is in or aspires to be in, and the kind of company it is or aspires to be. \]\]\]\] [Chandler (1962)] [Ansoff (1965)] [Porter (1980)] \[\[\[\[\*The selection of long-term goals and the choice of programmes or plans for achieving them through the suitable allocation of resources. \*The actions, planes, programmes or approaches required for attaining the goals. \*The way of linking a firm to its environment; the need to focus attention on achieving competitive advantage and improving firm performance; the notion of change as consubstantial with strategy, both within the environment and inside the firm itself. \*A process through which a firm makes strategic decisions in order to achieve specific goals; a series of techniques for enhancing decision-making. \]\]\]\] [Ronda and Guerras (2012):] the dynamics of the firm´s relation with its environment for which the necessary actions are taken to achieve its goals and/or to increase performance by means of the rational use of resources. Although the environment influences a firm by conditioning its decisions, the firm is also part of its competitor´s environment, thereby conditioning them through its own decisions the strategy a firm chooses to compete not only seeks to respond to the environment but also aims to mold the environment in its favor. The strategy requires the presence of rivals, which are firms or agents that compete with the firm for resources, customers or for profitability and success. Therefore, the different strategic decisions share the common purpose of **improving its performance** (to be more competitive) \*Strategy is about taking decisions and actions that feed the problem/challenge addressed, based on the environment the firm lives in. **WHY DOES A FIRM SEEK TO IMPROVE ITS PERFORMANCE?** - The beneficiaries of a firm´s success are firstly its owners, who see an increase in the value of the investments they have made. - It may also have a positive impact on all the other groups of people that have dealings with the firm **stakeholders** (an individual, group or organization that´s impacted by the outcome of a project or a business venture). **CONTENT OF STRATEGIC DECISIONS:** - The **long-term direction** of a firm or organization, taking into account that the environment is changing (how applicable the strategy will be in the future). When establishing a strategy, the long term must be taken into account in order to ensure that it´s the best possible way (see the long-term consequences to assess whether the firm is in line with today´s strategy) - The generation, enhancement and exploitation of the resources and organization capabilities a firm has in order to **generate rents.** Set achievable expectations being aware of the resources and capabilities of the firm (what do I have and how to use it) - The **definition of the scope of the firm** (ámbito de la empresa) identifying the businesses in which the firm is going to compete (it will condition all other activities). What kind of product is the firm selling and how scalable it can be (whenever you are setting something, who and where are you setting it for). \*Agriculture industry it doesn´t make sense to sell lemons in Australia \*Tech company it can sell services in Singapore without being physically there **CHARACTERISTICS OF THE STRATEGIC DECISIONS:** 1. They are adopted under **conditions of high uncertainty**, given the more dynamic and complex nature of the environment. The firm normally takes several assumptions/hypothesis that it will have to review once it starts operating. 2. Their nature is essentially **complex** (true in large, diversified corporations operating in global markets) as it is always changing (social preferences, political tensions, regulations). 3. They require the organization to **adopt a holistic approach** (from what the firm thinks initially to what then is later on might be completely different)**.** The firm as a whole is the basic reference, and the generation of synergies is a key aspect. [What drives the firm?] - MISSION: where the firm wants to get - VISION: how the firms wants to get there - VALUES AND PRINCIPLES (a firm can´t have principles that clash with its values) 4. They **impact upon the sum of the firm´s decisions** at all levels. Therefore, they impact at operating levels, as they prevail over all other corporate decisions. 5. The **network of outside relations** the firm creates and maintains is the cornerstone for the strategy´s success (how the connections make a product or strategy better). The more the people are involved in the strategy, the more chances the firm has to be successful. 6. They tend to require **changes in organizations** that are not always easy to manage due to the baggage of resources and culture a firm generates and the ramifications changes may have for the interests of the various stakeholders involved. It´s important to be trained to work with something that is dynamic and is not going to be the same always. If a firm becomes too rigid, at some point the environment might break its strategy. **GOOD STRATEGIES:** - Fit with the context and are internally consistent - Are different from the competitor´s strategy - Are sustainable over time, thereby ensuring the firm´s long-term survival **REASONS THAT MAY CONDEMN FIRMS TO STRATEGIC FAILURE:** Sometimes firm fail and are forced to change their strategy, or go into liquidation. - **Poor analysis or diagnosis of the problem:** due to the complexity and uncertainty associated with strategic decisions, the limited rationality of the people making the decisions may lead to a wrong diagnosis or to the failure to identify or properly evaluate the different possible options. - **Mistake objective for strategy:** defining a strategic objective without specifying how it is to be achieved doesn´t automatically lead to success, however challenging or motivating it might be. - **Poor definition of strategic objectives:** either by establishing overly obvious objectives that lead nowhere or by defining such a sweeping array of objectives to please different stakeholders that it becomes impossible to set a clear and specific heading for focusing the organization´s efforts. - **Organizational inertia:** this stops the firm from adapting to the necessary changes. - The traditional way of doing things may block the consideration of strategic options other than those that have been in place in the past. - The fear of losing power among influential groups, such as top management, may put a hold on the necessary solutions. - **The Icarus paradox or "dying from success":** highly successful firms that have reached a dominant position in their industry are sometimes reluctant to change their strategy because they might lose that status, and they are unable to stop other firms doing so successfully, and ousting them from the market. - **Identifying the strategic process with a formal process** of simply doing the paperwork, yet without any real strategic thought process for identifying challenges, ways of resolving them and specific actions for overcoming them. **OTHER MAJOR CONCEPTS:** - **Opportunities:** those factors that favor the firm´s operations, and therefore its success. - **Threats:** those factors that obstruct the road to success. Both of them are beyond the firm´s short-term control, as they cannot be directly modified through its own decisions (challenges posed by the firm´s environment). The firm must adapt or indirectly influence their evolution over the medium or long term. - **Resources and capabilities:** principal assets a firm has for pursuing its business (in order to respond to the environment) - **Strengths:** activities the firm carries out especially well, normally informed by the availability of valuable or strategic resources and capabilities. They constitute the main tools for achieving success. - **Weaknesses:** activities that are important for success, but in which the firm is not in the best position to record an excellent performance. For a firm to build a successful strategy, it needs to rely on its strengths and corrects its weaknesses. In the medium term, it´s important to reinforce the strengths and remove or overcome the weaknesses to face the environment´s challenges. - **Competitive advantage:** characteristic that favorably distinguishes the firm from its competitors, and which these cannot obtain or imitate, at least in the short term. - **Profits, profitability and/or value creation:** how more worth a firm is on the market (the way to measure its performance or success)  The improvement in the firm´s performance benefits the various stakeholders it deals with: - [Shareholders] see how the value of their investments and the return on it improve. - Business success benefit [employees] through higher wages or job security - [Suppliers] benefit from a larger order portfolio - [Customers] enjoy the firm´s products or services. - [Society] at large also benefits from a firm´s success, as it generates wealth, job, taxes... **LEVELS OF STRATEGY:** **STRATEGY HIERARCHY,** whose responsibility befalls different people within the organization. The various levels don´t pose different issues for the firm that can be separated for their analysis and resolution, but rather different aspects of the same strategic problem close interaction between the various levels if the corporate strategy is to be successful. That means that there´s a need for information sharing and communication between those responsible at each level for coordinating the different strategies, and thereby ensuring their coherence and consistency with the mission and strategic goals. A. **CORPORATE STRATEGY:** typically focused on long-term objectives but may influence near term activities. [Purpose:] identify the activities or businesses the firm seeks to pursue (establish a firm´s general guidance). It involves a comprehensive understanding of the firm: - Its future orientation definition of the vision, missions, strategic goals and values - The search for opportunities for value creation - The manner in which the company intends to grow or develop in the future - The search for **synergies** the creation of value for the integration, complementarity and interrelationships of the sundry activities in the business portfolio beyond each business´s individual results. There are synergies when the whole is greater than the sum of its part. It refers to the decisions for gaining a foothold in different industries and to the actions used for channeling its diversified businesses. B. **COMPETITIVE STRATEGY:** defined at the segment, and emphasizes products or services and attaining competitive advantage. [Purpose:] how to compete more effectively in each one of the activities or businesses in which the firm operates. \*Important to create and sustain a competitive advantage, and the creation, improvement and exploitation of valuable resources and capabilities. A diversified corporation needs to define specific units of analysis other than those for the firm as a whole and for the traditional functional subsystems **strategic business units (SBUs).** It´s a homogeneous set of activities from a strategic perspective for which a common competitive strategy can be formulated, which is in turn different to the appropriate strategy for other activities and/or strategic units. This is because the firm doesn´t have an overall competitive positioning, but a market share for each business that is pursued within a specific competitive environment, with different competitors, depending on specific success factors and requiring different competencies it requires then a different competitive strategy. C. **FUNCTIONAL STRATEGY:** designs the approach for functions or departments (how marketing, supply chain, engineering should run their departments). [Purpose:] how to use and apply resources and capabilities within each operational area in each business unit, with a view to maximizing the productivity of those resources. This is the level at which resources and capabilities are generated and developed in order to achieve the goals defined in the previous level. Functional strategies, coordinated and mutually supporting each other, need to play their part in the achievement of the firm´s goals, and are essential to ensure higher-level strategies have the utmost impact. **THE PROCESS OF STRATEGIC MANAGEMENT AND ITS REPONSIBILITY** **PHASES OF THE STRATEGIC MANAGEMENT PROCESS** 1. **STRATEGIC ANALYSIS:** process of conducting research on a company and its operating environment to formulate a strategy. - Identifying and evaluating data relevant to the company´s strategy - Defining the internal and external environments to be analyzed - Using several analytic methods (Porter´s five forces analysis, SWOT analysis and value chain analysis) a. [Defining the firm´s future orientation] -- vision, mission, strategic goals and values -- seeks to lend consistency to business operations as a whole and to the process of strategic management. b. [External analysis]: aims to identify the *threats* and *opportunities* prevailing in the environment in which the firm is embedded. c. [Internal analysis]: used to perform a diagnosis of the firm, identifying the most significant internal variables and evaluating them to decide which ones are *strengths* and which ones are *weaknesses*. 2. **STRATEGIC FORMULATION:** process where organizations define clear objectives and develop a blueprint to achieve them. It necessitates the integration of insights from various functional areas (marketing, finance) and operations to craft strategies aligned with the organization´s mission and vision. The ultimate goal is establishing a [competitive advantage] (cost leadership and product differentiation) and fostering sustainable growth, ensuring the organization´s long-term viability and success. In strategy formulation, organizations meticulously analyze their internal and external environments, define clear mission and vision statements, set achievable goals and develop robust strategies. This process, grounded in comprehensive research and analysis. Once you understand the context, you know the rules, the market and the consequences you are going to play with (how the strategy will be relevant in that specific context). It´s also important to know the market segment in which the company operates. [Corporate strategies] are used to define a firm´s future directions of development (expansion, diversification), the types or methods of development (mergers, acquisitions and alliances) or the most appropriate level of internationalization and the suitable channels to be used accordingly. **Business Unit:** an organizational subsystem that has its own market, a set of competitors and a mission distinct from those of the other subsystems in the organization. 3. **STRATEGIC IMPLEMENTATION:** the act of executing a plan to reach the desired goal or set of goals (putting those strategies or plans into actions). It involves the assessment of strategies through the application of different criteria in order to identify the one that, at least a priori, appears to be the best possible alternative. It depends heavily on feedback and status reports to ensure the strategy is working and to rework any areas that may need improvement (establish measures to see if the strategy is successful). Strategy implementation is important because it involves taking action instead of simply brainstorming ideas. It helps show the team that the strategies discussed are viable. It´s also a great tool for team development because everyone can participate. It depends on thorough communication and the right tools to facilitate the strategy. - Definition of the [organizational support] -- organizational structure, leadership, human resources and organizational culture - Definition of the [administrative support] systems -- definition of the strategic plan and control systems **RESPONSIBILITY FOR STRATEGIC DECISIONS:** **TOP MANAGEMENT:** The main responsibility for the process befalls a firm´s top management, as strategic decisions impact upon the firm as a whole or upon a significant part of it, and have major long-term implications. This is because strategic decisions are made within an uncertain and complex context with possible conflicts of interest among the various groups involved. Top management ranges from the firm´s top executives ([CEO] directly responsible for corporate strategy) through to functional managers ([commercial] or [operations] [managers] define and align functional strategies). \*In diversified corporations it´s important the role played by the [supervisors] of each business unit, especially with regard to the formulation of the competitive strategy. Top managers are in charge of adopting the decisions designed to formulate and implement the strategy for the achievement of the overall goals, which include the following duties: - Align the strategy management process by defining the mission, vision and strategic goals, and overseeing the different phases involved - Obtain, develop and mobilise the firm´s resources and capabilities (tangible, intangible, financial and human), which require their coordination to ensure they´re available in the right amount, moment and place - Seek corporate returns create value for the capital invested in the firm - Handle conflicts of interest between the firm´s direct or indirect stakeholders - Liaise between the firm and the main agents in the environment in order to exploit the opportunities it provides and void the threats it poses **BOARD OF DIRECTORS:** It´s responsible for the overall supervision of the process and the evaluation and control of top managers in its strategic tasks to enhance its quality and defend shareholder´s interest in terms of value creation. This is done through Strategy Committees set up accordingly or through the Board as a whole. **STRATEGY AND CORPORATE DEVELOPMENT STAFF:** Group of specialists in charge of gathering information and then processing and analyzing it, with the drafting recommendations on major strategic decisions. In many cases, firms resort to the independent advice provided by strategy consultancy firms operating in the market. \*In large firms, there´s a specific body responsible for advising top management and the Board of Directors. \*Large corporations Chief Strategy Officer duties of internal consultancy, linked to the provision of advice when formulating strategies. It might also involve responsibilities of executive nature associated with the implementation of strategy in general, or with the orientation and execution of especially important strategies, as in the case of a merger or acquisition. - The distribution of responsibilities responds more closely to the structure of a large corporation. In the case of small and medium, the tasks associated with the process of strategic management are assigned to barely a handful of people or solely to the business owner or chief executive. - Whereas the responsibility for the phases of strategic analysis and formulation is highly concentrated in the bodies described. Responsibility for the implementation is much more widespread throughout the organization, also affecting line managers on all levels and the firm´s workforce as a whole. They all have a significant part to play in the success of the implementation and in the success of the strategy itself.  **FIT AND CHANGE IN THE STRATEGIC MANAGEMENT PROCESS:** There has to be a suitable fit between the different elements comprising the strategy to ensure its success strategic and organizational. **STRATEGIC FIT:** Necessary match between the context in which the strategy is to be developed and the chosen strategy itself. The context is defined by the environment, a firm´s specific characteristics in terms of resource and capabilities, and the strategic goals defined by management. There´s strategic fit when the chosen strategy leads us closer to our goals: - Exploiting opportunities in the environment and avoiding its threats - Drawing upon the firm´s strengths and eluding or mitigating its possible weaknesses In the absence of any of the above aspects strategy suffers and the risk of failure increases: - [Unsuitable strategy:] a firm that fails to adapt to the environment - [Unfeasible strategy:] a firm chooses a strategy for which it doesn´t have the necessary resources **ORGANISATIONAL FIT:** Match between the chosen strategy and the organizational characteristics of the firm in which that strategy is to be implemented. You have to get people passionate about your mission and vision. When a firm´s strategic goals, the environment or the allocation of resources and capabilities change, the existing fit will be broken and results will worsen. Unless this mismatch is corrected, it will lead to a downturn in the firm´s results. **STRATEGIC CHANGE:** A more or less radical or a more or less incremental modification of the strategy. When strategic change is undertaken successfully, the necessary fit between context and strategy is restored. **ORGANISATIONAL CHANGE:** The necessary modification of one or more of the organization´s characteristics. When the strategy is modified to adapt to the new context, the previous organizational fit is likely to be impaired (the characteristics of the organization in which the former strategy prevailed may not be the right ones for the success of the new strategy) changes of the organization´s characteristics to render it compatible with the new strategy. Strategy is not set in stone, so the requirements of an ever-changing context force managers to permanently assess the strategic fit and modify current strategy. Strategic change normally leads on to organizational change. **STRATEGIC MANAGEMENT AS A FIELD OF STUDY:** Strategic management, as an academic discipline, first appeared in 1960s. [Chandler (1962):] its work is considered to be the first academic research conducted on business strategy by seeking to establish an empirical link between firm´s growth strategies and the organizational structures they adopted. [Andrews (1965):] provided a definition of strategy that is applied today, and laid the foundations for internal and external strategic analysis. [Ansoff (1965):] tweaked the definition of strategy and identified the basic strategies of corporate growth and development. Strategic Management has emerged and been compiled over time based on the confluence of 3 different sources: academia, business practices and consultancies specializing in strategy **ABC Model** (Academic, Business, Consultants) ADVANTAGES: - Greater wealth of knowledge - Certain equilibrium between theoretical and practical considerations between the knowledge generated through scholarly research and that stemming from the practical solutions devised by firms or the consultancies advising them. PROBLEM: it´s not always easy to - Organize and systematically arrange the knowledge generated - Transfer know-how between the various players in the discipline´s history ACADEMIC CONTRIBUTIONS TO STRATEGIC MANAGEMENT: - [Economics:] Agency Theory and Transaction Cost Theory - [Industrial Organization] - [Organization Theory] - [Psychology:] individual behavior of managers Since its beginnings, strategic management has evolved considerably, becoming an increasingly more mature and consolidated discipline within the field of management. This journey toward maturity has been accompanied by an increase in the array of topics analyzed and in the methodologies used in their research. Today, Strategic Management is a consolidated discipline within the field of education and research. This is confirmed by the activity of conferences and publications promoted by academic societies: (The international academic community has been steadily growing in the number of researches and in the instances of cooperation among them) - Strategic Management Society - Strategic Management Division (Academy of Management) - Strategy Section (ACEDE Spanish Academy of Management) **APPROACHES TO STRATEGIC MANAGEMENT:** A key issue for strategic management involves the reasons for firm´s success or failure within a context of global competition. This implies identifying the factors of success. While scholars all share this goal, the way of actually achieving it is not quite so clear. Theories and approaches to provide a coherent explanation for business success: **THE RATIONAL APPROACH:** Based on economic logic, it´s of an eminently prescriptive nature concerned about **how** **strategies should be formulated**. Inspired by the rational decision model propounded by economic theory, it assumes that managers have considerable discretional leeway, and they are analytical, rational and can play comprehensively. The aim is to instruct senior managers on how to properly formulate the strategy that will maximize firm performance, based on a study of the environment´s possibilities and the firm´s capabilities. **THE ORGANISATIONAL APPROACH:** Centered on strategic processes, it analyses **how strategic decisions are made** within organizations. It´s of an eminently descriptive nature it sets out to show how and why strategies are rolled out and developed in firms (how strategies are actually formulated in practice). This approach furthers certain proposals of a regulatory nature on how to develop the strategic decision-making process. **THE HOLISTIC APPROACH:** The aim is to merge economic and organizational considerations (formulation and implementation), selecting the most interesting contributions from the 2 previous approaches. In a process of this nature, it´s assumed that a far-reaching search for data has been made, a reasonable number of alternatives have been considered, and these alternatives have been assessed according to objective criteria. The rational or synoptic process for selecting and implementing a strategy has been championed as an "ideal process" that benefits the firm. In a process of this nature, it´s assumed that a far-reaching search for data has been made, a reasonable number of alternatives have been considered, and these alternatives have been assessed according to objective criteria. Nevertheless, one needs to ponder the part played by rationality in the adoption of strategic decisions and what decides whether the process actually followed is more or less rational. The adoption of a rational strategic decision-making process has certain major advantages for senior management and for the success of the chosen strategy: - It caters a more systematic, logical and rational analysis of the decision to be adopted - It enables the firm to be more proactive than reactive when outlining its own future - It provides all the organization´s members with an understanding of what the firm expects to achieve - It helps to evaluate the less strategic decisions made by lower-level managers - It facilitates the assessment and control of the strategy´s progress in the future - It paves the way for the involvement of more people in the strategic management process Those firms pursuing a rational process will be expected to record better results. However, reality shows that this process doesn´t always unfold in this manner, and its monitoring doesn´t guarantee the strategy´s success. This is because the rational process takes place under conditions of uncertainty, complexity and conflict. - Objectives are often unclear and change over time - People frequently look for information and alternatives in a disorderly and opportunistic manner - The analysis of the alternatives may be incomplete - Decisions are often more a reflection of the use of standard operating procedures than a systematic and rational analysis This model of the rational process of strategic management tends to be criticized for: - The decision-maker´s bounded rationality doesn´t always involve the alternative that maximizes the results, but instead the one that simply satisfies the achievement of the goals proposed - The learning throughout the decision-making process - The political aspects of the process, and the role that luck, chance or the intuition of a brilliant idea may play in the choice of strategic options and their success or failure Generally speaking, the strategic decision-making processes are never wholly rational or totally political, but instead they are better understood in terms of the complementarity between rational and less rational aspects. The model in each organization will depend on: - Top management´s characteristics - The nature of the actual strategic decision to be adopted - The organization´s context the characteristics of the environment and of the firm FACTORS THAT FAVOR OR COMPROMISE THE RATIONAL NATURE OF THE STRATEGIC DECISION-MAKING PROCESS: - The presence or not of a credible competitive threat - The importance of the decision to be adopted - The existence or otherwise of independent control mechanisms - The existence or not of conflicting goals among stakeholders - The degree of uncertainty surrounding the strategic decision-making process - The size of the organization **TOWARDS A HOLISTIC VIEW OF STRATEGIC MANAGEMENT:** A **holistic view of strategic management** seeks to merge the rational and organizational approaches according to the key notion that both are valid insofar as they stem from the same reality. Focusing all one´s attention on one of them and ignoring the other may lead to a significant loss of information and capacity for analysis that may compromise the strategy´s success and the firm´s competitiveness and profitability. In order to develop a holistic view: - The distinction and complementarity between strategies that are deliberate or intentional and emergent ones - The consideration of the more organizational and less economic-rational aspects The model described (el de phases for strategic management processes) is a **deliberate strategy**. **Emergent strategies:** those that originate within the very heart of a firm, with no deliberate plan and informed by experience, from trying out a number of strategic actions, seeking to respond to an immediate problem or through serendipity they respond to the notion of converting into strategy something that works, without it necessarily having been planned. The [emergent model] focuses on non-deliberate aspects (on the strategic decision-making process itself) and on the problems an organization has to face when rolling out or implementing the strategy when the human resources involved in the process have different and sometimes conflicting goals. Both types of strategies are present in a firm strategy is the outcome of an intentional or rational process (deliberate) and of the result of the appearance of the responses a firm makes to the problems it faces (emergent). It´s important to integrate the 2 main pillars of strategy formulation (deliberate and emergent) to understand strategic management, in its twin facets of formulation and implementation. - A deliberate strategy is better when the cost of the venture´s failure is very high (decisions involving diversification, vertical integration, internationalization) - The emergent approach is more appropriate for the slow and gradual creation of valuable capabilities that provide the firm with a long-term competitive advantage In order to complete the holistic approach, it´s important to stress the necessary complementarity between the more economic-rational aspects of the strategic management process and those in which the organizational approach carries more weight strike a suitable balance between them to guarantee the strategy´s success. \*Organizational problems take on special significance in the definition of a firm´s mission and goals. The existence of different stakeholders generates a situation of potential conflict in objectives that needs to be resolved analysis of a firm´s governance, social responsibility or business ethics. At the strategy formulation phase **relational strategies:** involve seeking privileged relationships with sundry agents in the environment over and above the normal relations established within a market context protect the firm from its competition by looking for "safe zones" that remove part of the uncertainty from the environment. Regarding the evaluation and selection of strategies analyze the consequences they may have for the different stakeholder groups related to the firm, the possibility of conflict and the need to handle it properly. The implementation phase signals the appearance of key organizational problems for the strategies´ success: - The design of the organizational structure - Organizational change - The leadership role - Human resources policy - The role of organizational culture The importance that organizational aspects have in the strategy´s success has been growing in recent years as more attention has been paid to individual factors and the relationships between individuals (more attention is being paid to cognitive and emotional aspects, and to the social relationship among the people that make up the organization). These aspects have a bearing on how decisions are made within the firm, and therefore on the type of strategies chosen and, indirectly, on their outcomes. This is relevant when analyzing the role played by top management or the strategy leader in the strategies chosen and their success.  **FUTURE DIRECTION AND VALUE** **THE FIRM´S FUTURE DIRECTION:** It´s very important in the Strategic Management process to define the 4 basic concepts that guide a firm´s future operations: vision, missions, strategic objectives and values how are we going to do things (how would we like to do things) and, based on what we believe, what are the different actions/tactic and how are we going to make it happen. 1. **Vision:** it describes what a company desires to achieve in the long-run, generally in a time from 5 to 10 years, or sometimes even longer (depends on the industry the firm is). It shouldn´t be reviewed every year what you want to achieve should take even longer. 2. **Mission:** it constitutes the future picture of how you want the company to develop. It´s the management´s view of what the company wants to achieve in the future. \*Changing the CEO doesn´t necessarily force the firm to change the vision and mission. *Google:* the main point when searching in google was to search things you didn´t know about (to stay as little as possible in the google search) now they want to give you the information at the exact same moment. 3. **Strategic objectives:** high-level and measurable goals outlining what an organization wants to achieve, with a clearly defined deadline. 4. **Values:** a set of guiding principles and fundamental beliefs that help teams work toward a common business goal. For the effectiveness of this entire system of vision, mission, strategic objectives and values, it must involve all the organization´s members (from the most senior managers down to grassroots employees). The responsibility for achieving the vision is a reciprocal one (shared gains and shared sacrifice). **CORPORATE VISION:** The current perception of what a firm will or should be in the more distant future, and it lays down the criteria the organization has to apply to mark out the path to be followed [what will we be, what should we be and what do we want to be in the future?] It requires defining the firm´s strategic purpose, strategic intent or core project. One of the leader´s key roles is to define the vision. The vision should be a marker for each individual´s actions when faced with the different alternatives that may crop up in their everyday activity, they should be able to choose the ones that most closely match the established vision. The vision would single out the differences between the present situation and the one targeted map out the route the firm should take. A well-designed vision prepares a firm for the future and shapes the definition of the mission and strategic objectives that need to be in tune with it. BASIC REQUIREMENTS: - Incorporate a profound sense of success - Be stable over time - Make the workforce´s effort and commitment to its achievement worthwhile The vision should be a **realistic dream that is worth the collective effort** a realistic interpretation of what management would like the firm to be in the future. - It requires the creativity, instinct and intuition of top managers - It shouldn´t be unachievable or an idyllic situation that involves circumstances that are far removed from an attainable reality - It implies a suitable consideration of: - The market - Technological, economic and social conditions to be faced in the future - Skills and capabilities that are or should become available This prepares the organization to tackle the different challenges it faces. **!!**The definition of the vision shouldn´t be addressed in terms of profit or value creation for shareholders. These are necessary and general conditions for all firms, which ensure their very survival over the long term. Its design will depend on the type of firm involved and the ambition with which each one seeks to formulate it. Each of the formulations may be appropriate depending on each firm´s specific characteristics. Its definition in just a few words or in a succinct phrase tends to be more effective than a long-winded document. **CORPORATE MISSION:** It constitutes a firm´s identity and personality at the present time and as regards the future [what is the essence of our business and what do we want it to be?] It´s an important issue a firm needs to tackle when focusing and defining its future operations. - It considers firm´s reason for existing and how it understands its business - It constitutes a statement of principles through which the firm presents itself to society - It provides the firm and its members with a valid reference in terms of its own identity must be known by all the organization´s members, as it´s a way of identifying the firm´s beliefs and marshalling all its stakeholders - It tends to remain stable over time, though it evolves like the rest of the organization´s key features \*It may be reappraised in response to changes in the environment, manifest difficulties in effectively implementing it, or changes in the firm´s top management Any definition should contain the firm´s essence, being therefore specific to each company and underpinning its individuality, whereby firms in the same industries may often have different missions. Its definition involves the following variables: - **Definition of the scope of the firm** (the different business in which a firm operates or may operate in the future)**:** this definition is linked to the products or services provided, the markets served or the geographic sphere covered. Define a mission as the customers´ generic needs the firm satisfies through its operations. - **Identification of the core capabilities** a firm has developed or may develop in the future, which highlight the way it competes on the markets. Based on them, a firm achieves its sustainable competitive advantage. - **Values, beliefs and attitudes:** the mission can contain the sets of values and beliefs prevailing in the organization, the approach it adopts to its operations or the principles that govern its relations with its various stakeholders. \*[General missions] permit a large amount of leeway in a firm´s future development. Yet they may also lead to a certain degree of disorientation in terms of identifying what´s truly essential. \*[Specific missions] may restrict the possibilities of development, although it will help to focus an organization´s efforts on the achievement of its objectives. Although an explicit or formal exposition of the mission may seem convenient (rendering it readily understandable to all the organization´s members), its definition is often implicit and not written down, becoming part of the employee´s mindsets. \*When the option is taken to set it down in writing do it in a straightforward manner that is not overly long, making it clear and easy to understand. Identifying the mission may be more difficult in diversified firms where both the products and operating markets and the skills and expertise available are very different to one another. In this case, the aim is to find a common purpose that gives meaning to the firm as a whole. If this is achieved, it will pave the way for identifying and selecting possible strategic options for future development. Otherwise, it will be necessary to establish different missions for the various businesses or business units through which the firm operates. In such case, each one of these operating areas would have its own identity. **STRATEGIC OBJECTIVES:** The major gap between the future a firm pursues and its present reality means that a considerable effort may be required to achieve it. In order to overcome these shortfalls and proceed in the right direction, the organization should break the vision down into strategic objectives. These objectives (interim and less ambitious) are called **business challenges** [how will we become what we want to be?] They seek to establish concrete outcomes that are to be achieved in the short-to-medium terms. Their design, therefore, operationalizes the vision and provides the firm with signposts on the path being followed. Well-defined strategic objectives should have 4 key components: a. **A measurable attribute or characteristic** ("growth in the firm´s degree of internationalization"). If you don´t give a point of reference, people will get frustrated as they don't know how many resources or time they need for its achievement. b. **A yardstick for measuring the attribute** ("percentage of foreign sales over the total") c. **A target that is to be met** ("reach 50%") d. **A timeframe for its achievement** ("within 2 years") The set of objectives designed in this way forces the organization to improve and take the necessary steps to advance in the right direction towards the realization of its vision. The achievement of each one will act as a stimulus and motivation for creating new challenges that are progressively more ambitious. They may serve as a reference for strategic control, whereby any unforeseen deviations can be identified and corrected. They may serve as a reference for introducing a suitable reward system that galvanizes all the organization´s members into making the required effort. **SMART GOALS:** functional strategies (they need more work as they have to be more defined and brought down to the ground) - [Specific:] it´s concrete and tangible -- everyone knows what it looks like - [Measurable:] it has an objective measure of success that everyone can understand - [Attainable:] it´s challenging, but should be achievable with the resources available - [Relevant:] it meaningfully contributes to larger objectives like the overall mission - [Timely:] it has a deadline or a timeline of progress milestones. TYPES OF STRATEGIC OBJECTIVES: 1. **According to the nature of the objectives:** - [Financial:] linked to profitability and value creation (higher profits, share price, return on assets) - [Non financial (strategic):] related to the way the firm competes on the markets (new businesses, market share, cost-cutting, customer service) Whenever you start a business, you normally don´t focus on the financial aspects because you want to enter in a specific market. Then you care about the money. *GLOVO* had an initial strategy of having as many customers as possible. Once they entered in the market and built the brand, they started to focus on non-financial aspects. And, as it became more mature, the higher the priority for financial strategies are in order to have a sustainable business. 2. **According to the timeframe:** the preference between short and long-term objectives (though strategies can´t be changed every single year) - Managers normally tend to be subject to the posting of [short-term results] that fulfil shareholder´s interests - This shouldn´t interfere with the design of [longer term objectives] for ensuring the company´s good positioning in the future and the possibility of obtaining new income. 3. **According to the degree of precision:** - [Open-ended objectives:] improving from day to day. The expediency of an open-ended approach shouldn´t be underestimated, as it will never be fulfilled, and that is why it involves the continuous striving for improvement. - [Set targets]: annual growths. 4. **According to scope:** - [Ambitious: ] - ["Impossible":] the attempt to achieve them releases an additional energy and creativity that don´t appear if the objectives are readily achievable. 5. **According to the strategic level:** this constitutes a holistic system capable of lending consistency to the objectives and strategies of the company´s key parts and marshal the internal efforts for achieving the vision. - [Corporate: ] - [Competitive: ] - [Functional: ] [Problem] associated with setting strategic objectives possible proliferation of objectives for the same strategic level or for the same manager or team. In fact, objectives are not always compatible necessary to establish priorities and choose to pursue certain ones and discard or postpone others. \*Especially at the corporate level, a few key strategic objectives allow focusing the firm´s energy and resources and pushing more effectively toward the achievement of the corporate vision. \*If you don´t have clear objectives, you have nothing to achieve. Then you would have to analyze internal and external aspects to determine how are you going to achieve the strategy and the objectives. Just as this vision tends doesn´t tend to change over time, and the mission does so sporadically, strategic objectives are more sensitive to changes in the environment and to internal ones. It seems advisable to update them with some frequency. **FIRM PERFORMANCE: VALUE CREATION** A firm´s performance is an indicator of the quality of the endeavor made by management and the organization as a whole in pursuit of its success (better performance=greater level of success). USEFUL FOR: - It applies a criterion for guiding strategic decisions - Assesses the strategy´s degree of success or failure - Assesses the quality of the management team´s work PROBLEMS: - It´s difficult to pin down in terms of its measurement - Success or failure depends partly on how performance is defined and measured (an improvement in one of the possible measurement variables may involve a loss in another) - The choice of its definition and metrics is not irrelevant for stakeholders **MEASURING PERFORMANCE THROUGH PROFIT/RETURN:** Performance can be measured through accounting indicators or economic indicators) **ACCOUNTING PROFIT:** the difference between the income and the expenditure corresponding to a period of time; the difference between the book value of a firm´s capital at the beginning and end of the period in question. ACCOUNTING INDICATORS: \*[EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization):] the difference between the value of sales and their cost, deducting operating and administrative expenses. Deducting depreciations, amortizations and provisions from EBITDA gives the net operating income [EBIT (Earnings Before Interest and Tax)] Deducting interest and tax from EBIT gives net income ([NI]) indicator of a firm´s capacity for generating rents for its shareholders. This indicators don´t consider the resources used, making it difficult to compare firms of different sizes. Resolving this problem requires resorting to relative measures related to returns or profitability: [\*ROA (return on assets):] measure of the economic performance of assets ratio between operating income (EBITDA or EBIT) and the firm´s total average assets for a business year. [\*ROE (return on equity):] measure of financial performance dividing net income by the sum of equity. It´s an indicator of end performance it considers the result of the firm´s economic activity and the outcome of the financial structure designed. **ECONOMIC PROFIT:** It reflects the firm´s profit considering the cost of production factors, including that of equity. ECONOMIC INDICATOR: \*[EVA (Economic Value Added):] measure of profitability based on the concept of economic profit. It´s the difference between EBIAT (Earnings Before Interest and After Tax) and the product between the book value of the firm´s assets and the average costs of the capital invested including equity capital. It represents the surplus value a firm generates after taking into account the financial cost of its assets it integrates aspects of economic performance with aspects of financial performance. **MEASURING PERFORMANCE THROUGH VALUE:** A firm´s value for shareholders is given by its capacity to generate rents or earnings by the return on its productive assets by virtue of which someone is prepared to pay for their ownership. To know if a firm is creating value, its value needs to be determined at a given moment in time, which may be calculated on the basis of theoretical value and market value. **Firm´s theoretical value:** calculating the current net value of the future cash flows generated by the economic entity, discounted at an appropriate rate adjusted to inflation and risk a firm will create value when its theoretical value increases. **Firm´s market value or capitalization:** the product of the number of shares and the price of each one value is created when there are positive differences in capitalization at 2 different moments in time. From a shareholder´s perspective although the earnings from capital gains for shareholders involves the increase in the firm´s value over a year divided by its capitalization at the start of the year, this return is not the same thing as **value creation for the shareholder** (difference between the true return and the minimum acceptable Ke they require to invest in the firm)**.** This value creation only takes place when this return is higher than the shareholder´s minimum required rate of return (Ke) it will create value for shareholders when the return is higher than the Ke. In many instances shareholders may establish other benchmark criteria for estimating the return on their investment: - Whether the return obtained is positive - Comparing the return with a risk-free asset, with firms in the same industry or other stock market index **CORPORATE STAKEHOLDERS AND CORPORATE GOVERNANCE:** When establishing objectives: - Who establishes the objectives distribution of power within the firm (shareholders, managers) - The objectives and interests of the firm´s people and groups may come into conflict with those of the firm as a whole. Therefore, it´s important to analyze the way of resolving such conflicts. \[\[\[The principle of maximizing shareholder wealth has an economic-financial focus. However, it´s subject to certain limitations, which shareholders should take into account. These limitations stem from the presence in the firm of other stakeholders that call for the fulfilment of their own objectives that differ from those of shareholders. So there´s a need to assess the role played in the identification of the firm´s objectives by stakeholders. An especially prominent stakeholder group is the one formed by the firm´s [top management.] Today, the classical figure of entrepreneur as owner, managing director and supreme decision-maker in the firm has become redundant following the appearance of a professionalized managing class that governs the firm´s destinies without necessarily holding any of its stock. This managerial class normally has considerable decision-making power due to its greater knowledge, autonomy and permanent contact with the reality of the business world. This separation between ownership and management may raise a number of major issues for value creation, as top managers have specific interests in the firm, arising from their own utility function, which may come into conflict with the owner´s. Conflicts may also arise between different types of shareholders or between members of the board of directors. These conflicts of interest may undermine the achievement of the firm´s core objective. The study of the control mechanisms that regulate this kind of relationships **corporate governance.** In spite of these limitations, the firm´s objective can be formulated only in terms of the maximization of value. All decisions need to be taken with regard to that objective, whose achievement is measured and controlled by the financial markets, and it appears therefore as a general criterion of choice assessed from outside the firm.\]\]\] **CORPORATE STAKEHOLDERS:** People or groups of people related to a firm who have their own objectives, whereby the achievement of these objectives is linked to the firm´s operations the pursuit of these specific objectives is conditioned by the firm´s objective and performance. [Theory of Organizational Equilibrium:] a firm´s objectives are understood to be the result of a negotiation and adjustment process between the various stakeholders, whereby they all consider their own particular objectives have been fulfilled, at least at a sufficiency level. The conflict of objectives between stakeholders is due to the inability to meet all their expectations fully. Negotiation is used to strike a balance, setting an objective that goes some way to integrating the objectives of all those involved. Any imbalance or non-integration affecting each group´s interests leads to a bargaining process or confrontation between them, with the firm´s survival becoming a priority objective that is more important than individual or group interests. This means that all stakeholder groups have the same decision-making power and the same freedom to take part. In practice it doesn´t happen exactly. It should be accepted then that the group wielding the greatest power in the firm conditions all the other groups, imposing its objectives and restricting those of the other stakeholders. WHY STAKEHOLDERS ANALYSIS IS SO RELEVANT? - Firm´s resources are scarce difficult to simultaneously address different stakeholder objectives at the highest level, which creates a situation of conflict - If stakeholders aren´t satisfied with the objectives they´ve achieved, they may put pressure on top management and even withdraw their support. 1. **IDENTIFICATION OF STAKEHOLDERS AND THEIR OBJECTIVES:** - [Internal stakeholders:] shareholders, managers and the workforce/employees they influence within the company (they have to be aligned) \*Shareholders invest through equity (they own a percentage of the company) - [External stakeholders:] customers, suppliers, financial institutions, labor organizations, local community, social organizations and the state somehow you can have an influence on them When identifying stakeholders and their particular objectives: - Their influence is rarely manifested on an individual basis, being instead a collective force through the sharing of common interests - The same individual may belong to more than one stakeholder group, and its interests and behavior will depend on the one in which it´s included for the analysis. - The existence of these groups responds to formal criteria derived from the organization´s ordinary business (departments, business units), and concrete situations in which for sundry reasons (crisis, threats, special opportunities) they may spontaneously arise. 2. **EVALUATING EACH GROUP´S IMPORTANCE:** evaluation will inform the decisions made and actions finally taken, paying greater attention to one specific group or dismissing another. STAKEHOLDER MAP identify major stakeholders and classify them according to their importance and possible impact upon the firm´s objectives. a. [Power:] the real possibility of imposing one´s own objectives on other stakeholders. Such power may stem form a hierarchical position (*formal authority*) or from the ability to influence (*informal authority*) /Status of its members /Availability of basic strategic resources for the firm /Control of key external factors for its operations b. [Legitimacy:] the perception that a stakeholder´s objectives are socially desirable or accepted they fall in line with a social system´s rules, values or beliefs. Legitimacy is provided by the appraisal of other, not by each group to itself. c. [Urgency:] a stakeholder´s interest in exerting influence and adopting a hands-on approach in order to achieve its objectives, which depends on the importance it attributes to that achievement. Groups may be active or passive toward the achievement of their objectives - CRUCIAL STAKEHOLDERS: stakeholder that meets all three characteristics - it would have a great interest in influencing the firm´s objectives - it would be socially legitimated to do so - it would have the power mechanisms required to impose its own objectives - EXPECTANT STAKEHOLDERS: they meet 2 characteristics, which require a certain amount of attention from the firm´s management. - LATENT STAKEHOLDERS: they meet only one characteristic - NO STAKEHOLDER: without any of those characteristics. 3. **THE IMPLICATIONS FOR MANAGEMENT:** THE IMPORTANCE OF EACH STAKEHOLDER DETERMINES: - The degree of attention to be paid priority will be given to those objectives associated with the most relevant stakeholders - The effort made to attend and fulfil its objectives - The effort made to keep them informed about the firm´s performance - To strike a certain balance between the different objectives of relevant stakeholders failing to do so may jeopardise its very own survival - The possibility of wielding excessive power by any one group is limited by market conditions increasingly more competitive markets - Creating value as a requirement for survival **CORPORATE GOVERNANCE:** The fact that many companies separate ownership and management diverging interests and information asymmetry between these 2 groups. [Agency theory] considers the problems that may emerge in a business relationship when one person delegated decision-making authority to another one. It may be understood then how top managers don´t always proceed in a manner that is advantageous to shareholders, as they have different utility functions. Top manager´s interests, derived from their own utility function, have monetary components (remunerations, incentives) and non-monetary ones (promotion, autonomy, prestige, power), besides security and permanence in management. Consequently, the interests of top managers may easily come into conflict with shareholder´s objectives the maximization of shareholder´s wealth will be replaced by objectives that are more meaningful to managers. The issue arises of the control of management by shareholders in order to avoid the former acting alone when setting the company´s objectives and without suitably catering for the latter´s objectives compatibility between shareholder and management interests. The issue of shareholder control over management and the mechanisms available for exercising that control **corporate governance.** Each company will choose the governance mechanism it deems most suitable bearing in mind the cost (money, time and resources) each one involves as regards their efficacy. A. **INTERNAL MECHANISMS OF MANAGEMENT CONTROL:** Those originating within the company itself, which are designed by shareholders to exercise direct control over the company´s most senior managers, which pass on to the managers reporting to them. i. [DIRECT SUPERVISION: THE BOARD OF DIRECTORS: ] **Direct** supervision continuous control shareholders exercise over managers in order to ensure they conduct themselves in keeping with their interests. - **Control of the board of directors** body representing shareholders in decision-making. - Control of large shareholders (interested in avoiding any discretional approach by top management that may compromise their interests) - Hiring of independent auditors or consultants for performing control duties or holding internal audits in different areas of the firm. - Mutual observance between managers, stemming from the internal organizational hierarchy that favors the control of top managers over the rest. The board´s main remit involves general supervision: - Strategic responsibility orienting and driving company policy - Surveillance responsibility controlling the management echelons - Reporting responsibility acting as a go-between with shareholders TYPES OF DIRECTORS: a. **Inside directors:** those who are also top managers within the firm b. **Outside directors:** representing shareholders and not holding a management position. a.1) **Proprietary:** representing major o reference shareholders a.2) **Independent:** representing minority shareholders or the company´s floating capital Not involved in executive management they act on behalf of shareholders´ interests, especially independent ones , as they defend general objectives. In fact, inside directors end up controlling the board, whereby it fails to fulfil its key role of controlling management. Therefore, governments and stock markets have sought to redress this situation by adopting various measures (operating regulations or codes of good governance) to uphold the key role the board of directors plays in a company in the defense of shareholders´ interests. **CODE OF GOOD GOVERNANCE (2015):** based on 25 principles and 64 recommendations governed by the principle of "[compliance or explanation]" being applicable to all listed companies. Although their application is voluntary, firms are to explain the reasons for possible non-compliances. \*Section of recommendations includes criteria on corporate social responsibility. - **Restriction on voting:** the General Meeting of Shareholders shouldn´t restrict the maximum number of votes a single shareholder may cast, generally avoiding any measures that hinder a public offering of shares (Rec. 1) - **Regulations on the General Meeting of Shareholders:** transparency of information, right to attend and take part, and policies on attendance fees (Rec. 6-11) - **Size of the board:** no fewer than 5 members and no more than 15 to ensure its efficacy and participation (Rec. 13) - **Policy on the appointment of directors:** it is to be specific, objective and verifiable, favoring the diversity of knowledge, experiences and gender (Rec. 14) - **Composition of the board:** a clear majority of outside directors, with only the minimum required number of inside directors. A balance should be struck between directors representing major shareholders and independent ones. Public transparency is recommended regarding directors (Rec. 15-19) - **Chair:** to avoid the Chair accumulating too much power when this person is also the firm´s most senior executive, one of the independent directors will be appointed as coordinator director with special powers to convene meeting of the board, include points of the agenda, coordinate outside directors and head the board´s assessment of the Chair (Rec. 33-34) - **Remuneration of directors:** the appropriate remunerations are specified for each type of director, especially the variables linked to the firm´s performance, seeking to avoid the excessive assumption of risk and the rewarding of a poor performance (Rec. 56-64) The code of government also includes recommendations related to: - Reporting to shareholders - The equal treatment of shareholders - Restrictions on the dismissal and resignation of directors - The board´s ordinary business - The creation of special committees executive, auditing and appointment, and remunerations - The performance assessment of the board, its members and its various committees - The promotion of social responsibility policies ii. [INCENTIVE SCHEMES: ] To link top manager´s interests to those of shareholders through the arrangement of contracts that associate management´s own objectives with value creation. - **Systems of direct variable remuneration:** linking the manager´s salaries to the posting of profits or to value creation. They involve the achievement of management targets, firm performance or special bonuses. - **Systems based on shareholding:** through the delivery to top management of fully or partially paid-up stock, rights over increases in the value of stock, or [stock options] (important instrument when delivering shares in the company at a pre-set purchase price and date). Then, the greater the value creation, the greater a manager´s incentive to exercise the options at the preordained moment. - **Professional promotion:** by linking a professional career to the successes achieved in management or to the length of service in the company avoid the threat of dismissal if there´s no value creation. - **Other forms of remuneration:** - Payment in kind (provision of housing, cars) - Contributions to pension funds - Welfare services (medical insurance, life assurance) - Public acknowledgement of work well done B. **EXTERNAL MECHANISMS OF MANAGEMENT CONTROL:** Based on the disciplinary power sundry markets may exert on top management without shareholders having to assume any extra costs for their use. If these mechanisms are successful, shareholders will have a greater ability to control management they will have less discretionary power the objectives of both these groups will tend to converge. I. [THE MARKET FOR CORPORATE CONTROL: ] If managers don´t maximize a firm´s value due to the desire to achieve personal objectives at the expense of shareholders, and the firm´s financial performance doesn´t fulfil its full potential outside investors could be encouraged to purchase the firm and replace its current management (public takeover bids to gain control) II. [THE CAPITALS MARKET: ] If managers perform well, this will be mirrored in the capitals market by an increase in the company´s valuation (higher share price). If the market value is lower than it should be, the current shareholders may act to remove the firm´s top management or they may arrange changes in stock ownership through the market of corporate control in order to oust the present management. The debt capital market (DCM) also requires managers to obtain a minimum return to cover interest and the repayment of capital. III. [THE LABOUR MARKET FOR TOP MANAGEMENT: ] This market values the knowledge and experience of senior executives and how they apply themselves to value creation in the firms they are working for. Those managers who have made a significant contribution to the firm´s performance will tend to be more highly valued on the market, increasing their present and future earning power. However, senior executives tend to arrange "golden parachute" clauses in their contracts to protect themselves if they are fired, which limits shareholders´ punitive powers. IV. [THE MARKET FOR GOODS AND SERVICES: ] The sole option in a perfectly competitive market is the optimum assignment of the resources that maximize a firm´s value. When a firm operates in a competitive environment, the market´s competitive forces exert pressure on it so that its objective is the maximization of value. Therefore, if it´s not fulfilled, the firm´s very survival will be compromised. **CORPORATE VALUES:** Set of principles, beliefs, standards and commitments designed to steer a firm´s progress toward the achievement of its vision and mission (inform the way in which to do so). The basic adage is that the end doesn´t always justify the means the way in which the firm goes about its business conditions the validity of its vision and missions and renders its operation more or less appealing to its stakeholders. Its values have to be consistent with the vision and the mission because they are general guidelines for achieving them both. - They are operating guidelines that seek to influence the way in which the organization´s members conduct their business - They reflect the way in which the firm relates to its stakeholders. **CORPORATE SOCIAL RESPONSIBILITY:** A firm´s approach to the demands of a social nature made by society at large in response to its operations, to the evaluation and compensation of the social costs it generates, and to the extension of the scope of its objectives through the definition of the social role it should play. - **It transforms the classical governance formula** based on the bilateral relationship between shareholders and management into another multilateral one involving all stakeholders - **It modifies the decision-making process** by extending the criteria of economic efficiency to include the consideration of the environmental and social impact of the firm´s operations - It´s of **voluntary application** Some authors have maintained that a firm shouldn´t assume any kind of social responsibility because it´s incompatible with the classical principle of maximizing profits or value creation social responsibility is a self-imposition that reduces a firm´s earnings - [Friedman:] a firm´s overriding responsibility lies in providing the best possible returns for its shareholders, and any tendency that advocates its social responsibility is a substantially subversive doctrine capable of undermining the foundations of a free society In contrast, a firm has to be considered as a social institution that is not impervious to the political and social impacts of its environment the assumption of responsibility by a firm doesn´t need to be incompatible with the objective of value creation for shareholders. By adopting a criteria of social responsibility, a firm may advance its relationships with different stakeholders, reduce conflicts and improve the conditions of its environment more sustainable. This reinforces the legitimacy and reputation of the firm itself, which in the long-term may help to create more value. CONTENT OF CSR: a. **Economic-functional area:** related to the company´s normal operations in terms of the production of goods and services society requires. - Creation of direct and indirect employment - Generation of income and wealth - The occupational training of workers - The provision of funds for public policies through the payment of tax A firm´s economic activity contributes to society no contradiction between economic and social responsibility, with the economy being considered an essential and basic part of society. b. **Quality of life era:** related to how a firm is raising or lowering the general standard of living in society and what it´s doing to mitigate the negative externalities caused by its operations. - Produce high quality or socially accepted goods - Maintain proper relations with a firm´s employees, customers or suppliers - Measure the effort made to preserve the environment \*Environmental management and the notion of sustainable business activity are framed within this level. c. **Social action/investment area:** the degree to which a firm uses its financial and human resources to resolve issues in the community. - Sponsor education, culture, sports and art At this level, a firm transcends its function as the manufacturer of goods or the provider of services to become a partner in resolving the problems of society at large. Each company should choose its own levels of social responsibility, with its system of objectives incorporating those specific to shareholders and those of all the other social groups involved in it. The key question is whether the social responsibility is beneficial for companies and why companies in a market economy decide to embrace it. - [Legal factors:] legal influences are determined by respect for the laws and regulations with which society (through institutions elected for that purpose) chooses to furnish itself. \*The minimum threshold companies are required to observe. - [Political factors:] these stem from the need to consider a firm´s stakeholders, especially those adjudged to be the most significant ones. Regarding internal stakeholders employees tend to be the priority group Regarding external stakeholders consumers when they apply social, environmental or ethical criteria in their purchase decisions - [Strategic and competitive factors:] SR may enable a company to improve its competitive positioning and create value. Mechanisms through which a firm may generate value: - Create valuable intangible assets like legitimacy or reputation - Differentiate products and processes to imbue them with attributes or specifications that are positively valued by customers - Improve the competitive context within which the firm operates - Reduce risks in stakeholder relations and avoid the costs of socially irresponsible behavior - Access valuable resources in better conditions than other companies - [Ethical-moral factors:] SR is linked to a company´s values and the ethical behavior of its shareholders and management, as well as to those of the society in which it operates society´s ethical criteria tend to be more readily assumed by a company and exert pressure on it to perform in a socially responsible manner. IMPACT THAT SOCIAL RESPONSIBILITY HAS ON FIRM PERFOMANCE: [Orlitzky:] there´s a strong, positive relationship between social responsibility and performance. This relationship occurs in different industries and different geographical contexts. There´s a kind of virtuous cycle firms investing in social responsibility record a better long-term performance, which enables them to reinforce their investment. In spite of this, several authors note that there are objective difficulties for measuring social responsibility, which could explain the diversity of conclusions reached in the different empirical studies. When this relationship is positive a firm might be expected to be socially responsible out of its own interest, as it doesn´t conflict with value creation for shareholders. - There´s no reason for the market to penalize socially responsible firms - Managers may use social responsibility as another instrument at the service of strategy for improving performance - There would be no need for excessive interventionism on the part of the public authorities to force socially responsible behavior, as firms would conduct themselves in that manner out of choice. **BUSINESS ETHICS:** The professional or public behavior that identifies what is or is not considered acceptable by society (including the law) and by the conscience and values of stakeholders. There´s no agreement on what is or what is not considered acceptable in dealings with stakeholders, so each firm has to decide how far it wants to go in its relationship with them. Therefore, a firm´s level of ethical conduct may be a crucial differentiating factor for attracting customers and/or investors. **Business ethics**: moral fundaments that characterize the relationships that firms maintain with social agents or stakeholders (what is right or wrong, good or bad, damaging or beneficial regarding decisions and actions in business transactions) how people´s moral standards are applied to the firm´s operations and objectives. The pertinence of the study of business ethics lies in the rapid process of moral decline in public life, brought to light trough business scandals involving finances or corruption, and send shock waves through public opinion due to their scale and frequency. The need for an ethical approach to business is an issue that has been widely discussed. For some, partly as a result of the scandals, a firm can sometimes be perceived as an agent in a wild and adulterated world governed by the "minimal ethics" consisting of avoiding problems with the judicial and legal systems. From the opposite standpoint, it may be reasoned that without a high level of ethics, it´s impossible to gain the confidence of those stakeholders with whom the company has dealings, being a prerequisite for the high performance of business over the long-term. Ethical behavior also may save on many costs in terms of litigations and fines, and it may avoid the deterioration in relations with stakeholders. There´s a need to spell out the moral content of what is and what is not acceptable and implement the appropriate mechanisms for ensuring employee´s general conduct is ethical. To achieve this, it´s advisable to draw [ethical codes] or [codes of conduct] that include the firm´s commitments to its members and the latter´s commitments toward the firm itself, for fully upholding the law and ethics in their professional undertakings. The interest in their definition lies in the fact that all the organization´s members will be directly and explicitly capable of understanding their content. ETHICAL CODE: - **Behaviors expressly forbidden** for employees, pursuant to legal or contractual provisions. - The promotion of **positive values** that a firm may embrace and that express its culture and personality - **The procedural guidelines** for certain situations involving professional conduct or decisions that are bordering on the fringes of ethical principles - **Sanctions** (in the event of non-compliance) imposed both in-house (warning, demotion, dismissal) and by the courts (civil, criminal, administrative) Corporate governance, social responsibility and business ethics are closely interrelated issues with each other and with values. Governance is related to manager´s proper attitude toward the fulfilment of the main corporate objectives rendering it essential for top management to behave in an ethical manner. Thus, many codes of conduct seek to regulate this behavior in order to favor the firm´s general interests. While social responsibility sets out to satisfy stakeholder expectations in terms of their objectives, governance focuses its attention on the relationship between the interests of shareholders and management. A firm´s corporate social responsibility reports tend to include aspects of good governance along with information on the ethical values or codes of conduct implemented. Over and above codes of good governance and firm´s efforts in pursuit of sustainability, it´s the people working in them who need to embrace these values what a truly sustainable firm will do. Otherwise, the lack of consistency between the values expressed and its true behavior may compromise its relationship with its stakeholders and its business performance. **ENVIRONMENTAL ANALYSIS** **THE BUSINESS ENVIRONMENT:** **Environment:** everything over which a firm has no control as an organization. A [business environment] is made up of all those external factors that have a bearing on a firm´s decisions and performance. A firm can´t control those factor, but they may have a significant impact on the success of its strategy. Their analysis allows identifying that influence and decide upon the most appropriate way of responding to them. - [General environment:] external medium surrounding the firm from an overall perspective the socio-economic system within which it operates (situations that equally affect the rest of the competitors) - [Competitive environment:] part of the environment closest to the firm´s everyday operations the industry to which the firm belongs. The more dynamic, complex, diverse and hostile an environment is, the greater the uncertainty the firm has to face (globalization of economy, acceleration of technological change, removal of international trade barriers, changes in societies´ values). A firm´s management has to furnish itself with the best possible information on the nature of the environmental factors affecting it and the manner in which they do so: - **Opportunities:** factors that favor a firm´s operations - **Threats:** factors that constitute a hindrance **ANALYSIS OF THE GENERAL ENVIRONMENT:** Purpose of analyzing the general environment: identify variables that affect the firm´s operations from a dual perspective: - Those related to the general political, economic and social system surrounding the firm - Those linked to a firm´s localization in a specific country, region or geographical area (not all economic areas/systems are equally attractive; public policies; infrastructures; market´s regulatory framework; business culture) METHODS OF ANALYSIS: **THE PORTER DIAMOND:** Each country or nation has their own idiosyncrasies for explaining why some are more competitive than others and why certain industries within each country are more competitive than others. PURPOSE explain how belonging to a specific country and to a certain industry in that country influences the way a firm obtains an advantageous position for competing with firms from other countries. FACTORS WHOSE COMBINED EFFECT INFORMS A COUNTRY´S COMPETITIVENES: - Provision of relevant and specialized production factors - Conditions of domestic demand (if there´s no demand, unless you´re able to distribute your products/services digitally and globally, you need to generate that demand) - Highly competitive similar and auxiliary sectors - Strategy, structure and rivalry of existing firms As the implementation of the strategy will extend over a long period of time, it´s expedient to investigate how external factors (arising from the general and the competitive environment) will manifest themselves in the future. **PROSPECTIVE MEASURES:** For defining factors in a turbulent environment in which changes abound. These methods provide a more global vision of the future - Giving special importance to qualitative and subjective aspects - Assuming that the relationships between variables are dynamic and evolve over time - Accepting that the future depends upon the past and on the decisions made in the present - Adopting a proactive and creative attitude toward the future **SCENARIOS METHOD:** (future environment) [Scenario:] description of the circumstances, conditions or events that may depict the environment at a future moment in time (optimistic, pessimistic and as expected). A scenario is a teaching and learning instrument to understand better the way the future may unfold. Its design requires considering the relevant variables to be incorporated, their interrelation and the ramifications of strategic decisions in order to prepare management to adapt better to the environment´s contingencies (how to answer or deal with those results). \*You try to operate in the margin between those different scenarios. **THE ENVIRONMENT´S STRATEGIC PROFILE:** Used to conduct a diagnosis of the general setting. This profile is created in 2 stages: 1. Draft a list of what we have referred as key factors in the environment (identify the significant variables that should be analyzed) \*The key factors tend to be grouped according to different dimensions 2. Assess the impact those variable have on the firm´s business in order to single out the main opportunities and threats. There´s a prior need to define the boundaries of the analysis from a territorial perspective and according to the relevance of the variables themselves. This selection involves considering the possibility of its occurrence and the size of the impact on the firm if and when it does. VARIABLES TEND TO BE ORGANIZED INTO SEVERAL DIMENSIONS: - **Political and legal dimension:** government stability and policies that public administration follow (taxation, labor legislation, foreign trade, social welfare) - **Economic dimension:** affects the nature and direction of the economic system in which the firm operates and is given by its main economic indicators (macroeconomic variables: trends in GDP, interest rates, rate of inflation, unemployment) - **Demographic dimension:** main changes in the population´s structure (population pyramid, life expectancy, birth rate, ethnic diversity, migration) - **Socio-cultural dimension:** beliefs, values, attitudes and life-styles of the people who make up society and the (cultural, ecological, demographic, religious, educational, ethnic) conditions of the social system as a whole - **Technological dimension:** scientific and technological framework that defines the state of a system (R&D policy, information technologies, technological changes, technology transfer) - **Ecological dimension:** aspects that affect sustainability (availability of natural resources, renewable energies, climate change, recycling, waste management) When variables are defined, then there´s a rating of the behavior of each of the key factors on a [Likert scale] from 1 to 5; or very negative (VN) -- negative (N), neutral or indifferent (I) -- positive (P) -- very positive (VP). It can be used to observe and readily identify opportunities (scores toward the right) and threats (scores toward the left). Different managers or analysts might reach different conclusions (the rating is provided in a subjective manner depending on the perceive of the variables) the involvement of several people in the process might reinforce this perception if there´s convergence, or generate a different positioning regarding the same situation if there´s divergence. - Not all the variables on the general environment have a significant impact on a specific industry or firm the relevant factors have to be identified in each individual case - Similar characteristics of the general environment may have different effects in different industries - The impact the general environment has may vary significantly even among firms in the same industry **INDUSTRIAL DISTRICTS:** Numerous group of similar firms and institutions connected by the same economic activity and located in a specific geographical environment. A district includes those firms belonging to the main industry identifying it and those institutions/businesses related to it. TYPES OF AGENTS: - **Businesses dedicated to the same activity** which provide end products and services. It may sometimes involve a single large corporation that makes up the district. - **Different types of institutions** (public and private) which provide specialized technical support and information (universities, research centers, standards agencies, training centers, business associations, financial institutions, government agencies) - **Businesses located upstream and downstream of the main or focus product** suppliers of raw material, components, machinery and specialized services, or distribution companies and client businesses - **Business in related industries**, which provide products that supplement the main product Considering a district´s components, its boundaries will rarely coincide with the traditional classifications of economic sectors, as they include institutional agents and relationships between different industries. Its analysis is related to the general environment as the aim is to define the role that a firm´s location plays in its competitiveness. FACTORS THAT FAVOR A FIRM´S COMPETITIVENESS: - **Increase in productivity:** given the easy access to certain specialist resources in the district (suppliers, qualified labor, information, infrastructures, communications networks) made possible by geographical proximity. \*Having a bigger productivity you are able to test faster - **Boost for innovation:** given their closeness to research centers or due to their actual internal interrelations, the companies belonging to a district tend to perceive new customer needs and new trends in technology more quickly than their isolated competitors. Internal competitive pressure forces them to distinguish themselves in a more creative manner, increasing the onus on them to innovate. - **New start-ups:** the district favors the incorporation or entry of new companies that will join it to make it stronger and more competitive. - The entry barriers are lower, as they can gain easier access to the specialist human and material resources they require - The financing for setting up new businesses tends to be cheaper, as the risk premium required by financial institutions is lower because of the greater number of potential clients and the prior experiences of other existing companies. Industrial districts are a combination of competition and cooperation: - They generate direct rivalry between companies that compete with one another in the same type of business - They generate symbiotic relationships that are advantageous to all concerned because they are located in a common environment and because of the complementarities emerging between them **ANALYSIS OF THE COMPETITIVE ENVIRONMENT:** **DEFINING THE COMPETITIVE ENVIRONMENT:** Who are our business competitors? What are the boundaries of the industry I am competing with? The answer to these questions is not always obvious and it´s especially relevant because: - It delimits the arena that needs to be analyzed in order to identify opportunities, threats and key factors of success. - A poor definition of the competitive arena may mean the analysis omits firms from other industries or sector that may compete directly for some customers - It may compromise the definition of the most appropriate competitive strategy because it doesn´t consider all the agents involved. The answer to the above questions is related to the type of business the firm pursues the industrial sector in which it´s located. **Industry:** a group of companies offering products or services that are close substitutes for each other. Therefore, rivals are those firms that provide substitute products. This substitute nature may be measured by 2 criteria: (when products can be substituted for purchasers and producers alike) A. **Technological criterion:** (applied from the standpoint of supply) defines an industry as the sum of firms that use similar operating processes or raw materials in the manufacture of one or more products (degree to which these operating processes are interchangeable) B. **Market criterion:** (applied from the demand side) picks out the sum of firms manufacturing products that are closely interchangeable from the perspective of catering for customer´s needs. \*There are cases in which the degree of substitution differs substantially for one or the other. Besides the traditional concept of industrial sector, there´s a need to define others closely related to it. Following [Abell´s] approach, the competitive environment may be defined on the basis of 3 dimensions: - *Groups of customers served:* target consumers of products or services - *Functions the products or services cover for said customers:* closely related to the needs met - *Technology used (*how the product is supplied*):* the manner in which a function is covered CONCEPTS TO IDENTIFY AND DELIMIT THE COMPETITIVE ENVIRONMENT: - **INDUSTRY:** series of firms that, based on a specific technology, seek to attend to all their customer groups and cover all possible functions. This concept would delimit the industrial sector on the supply side.  - **A FIRM´S BUSINESS:** the specific selection each firm makes of the functions and customer groups it wishes to cater for. An industry may contain numerous firms. Each one of them decides, according to the technology chosen, to cater for one or more types of customer groups and cover one or more functions or needs. Also, a firm might dedicate itself to different businesses belonging to different industries. - **MARKET:** the industrial sector from the demand side. It includes the sum of companies that cover the same function for the same group of customers, irrespective of the industry in which they operate (the technology they use)  Defining the competitive environment is a key issue for strategic analysis (competitors, customer, suppliers). The concept of market is closer to the definition of competitive environment, as it includes competitors and customers. If it includes suppliers, then it would provide the competitive environment the firm needs to analyze. \*From a customer´s perspective, [replaceability] (products or services that cover the same basic need) is the key to defining a firm´s competitive environment. Once we have decided upon the concept of market, all that remains is to identify a firm´s competitors: - If an industry caters solely for one specific function for one particular group of customers and all the companies in that industry define their businesses in a highly similar way regarding the 3 basic dimensions, it won´t be difficult to identify the firm´s competitive environment (all rivals come from the same industry and cover the same set of functions for the same groups of customers) - Sometimes, companies from the same industry define their businesses differently. Many industries can be divided up into smaller competitive scopes through the identification of segments. - Companies from different industries seek to cover the same functions for the same customer groups (using different technological alternatives). Then, firms compete only in those activities in which they coincide because of the function covered and because of their target customer group **heterogeneous competitive environment** \*Companies in the same industry that aren´t direct rivals because they cover different functions for different customer groups (2 airlines that service different routes). \*Direct competitors that come from different industries (passenger transport between 2 cities airlines, railway companies, coach firms, customer´s own cars) the concept of industry on the supply side is irrelevant from a strategic perspective (it doesn´t help to identify competitors). Defining the competitive environment and identifying the main competitors constitute a difficult yet crucial issue for the outside analysis that requires prudence and, on occasions, imagination. These should be defined by managers based on the objective data available and on their own judgement depending on the purpose of each analysis and its context. \*There´s a need to establish certain boundaries that include the main rivals, distant competitors, potential ones or substitutes the definition of the boundaries not too broadly or too narrowly. **ANALYSIS OF THE INDUSTRY´S STRUCTURE:** The aim of analyzing the industry´s structure is to highlight the **opportunities and threats** it poses for a firm and which determine its capacity for returning profits, which constitutes the industry´s attractiveness **how do firms compete in the industry?** through prices: \- High prices (high margin) and low volume \- Low prices and high volume \- Price-quality \*The industry´s structure conditions the firm´s behavior and profitability. In an industry in a state of perfect competition, there are very few options available to a firm, being restricted to the application of the market price, with no capacity for influencing supply and demand. Those industries in a state of imperfect competition have possibilities with higher earnings (if the firm is capable of properly exploit opportunities and tackle threats) analytical model involving imperfect markets in which it´s possible to outperform one´s competitors. From this perspective: - Opportunities will be factors that reduce competition and allow above average earnings - Threats will involve aspe