Strategic Management and Leadership 2022

Lecture Materials

Week 1: What is strategy and introduction to the course

 Anthony Henry – Understanding Strategic Management -
CH 1 + 11.4/11.5

Chapter 1: What is strategy?

1.1: What is strategy?

 Existed for many centuries, strategy was born out of military
conflicts and the use of a superior strategy enabled one warring
party to defeat another ensuring victory
 There is general agreement that the purpose of strategy is to help
organizations achieve a competitive advantage
 Competitive advantage is the configuration of an organization’s
activities which enable it to meet consumer needs better than its
rivals (whether it’s the design, markets, produces, etc.)
 An effective strategy allows managers to use the organization’s
capabilities to exploit opportunities and limit threats in the
environment
 Harvard professor, Michael Porter, asserts that strategy is about
being different
 A company can only outperform its rivals when the value it provides
to the consumer is difficult for them to imitate:
o (1) the company provides a differentiated product or service
which is more highly valued by customers, enabling it to
charge a premium price
o (2) the company provides products with the same quality as a
competitor offering, but charges a lower price
 Operational management is about performing similar activities
better than your competitors
 An organisation should select one strategic position that it can
claim as its own:
o Who should the company target as customers?
o What products or services should the company offer the
targeted customers?
o How can the company do this efficiently
 A company’s strategy describes the match between what it is
particularly good at doing and its relationship with its customers,
suppliers, and competitors
  However, strategy is not primarily concerned with every aspect of
business behaviour such as an employee motivation, accounting,
and inventory control
 Successful strategy is based on doing well what your competitors
cannot do or cannot easily do, distinctive capabilities
 The concept strategy is erroneously equated with success,
determination, ambition, inspirational leadership, and innovation
 Richard Rumelt describes good strategy as having an essential
logical structure which he calls the kernel
o The kernel of a strategy contains three elements: a diagnosis,
a guiding policy, and a coherent set of actions
o Diagnosis – defines or explains the nature of the challenge
o Guiding policy – overall approach
o Se of coherent actions – to carry out the guiding policy
effectively
 Organizations do not exist simply to survive in the marketplace, but
want to grow and prosper in a competitive environment

1.2: Strategic management

 The process of undertaking a strategy is strategic management
 Strategic management is about analysing the situation or
challenges facing the firm


 Analysis is easy but implementation is difficult
 Analysis, formulation, and implementation all need to be considered
if the organization’s strategy is to meet the needs of its
environment effectively
 Understanding the industry’s key success factors

Strategy analysis
 Deals with the organization; it allows managers to evaluate how
well the company is positioned to exploit opportunities and
mitigate threats

Strategy formulation
 Looks into the organisation and the needs of the environment, this
allows managers to assess where they can best achieve a strategic
fit between the two

Strategy implementation
  Effective implementation of strategies requires the organization to
be sufficiently flexible in its organizational structure and design
 Strategies need to be communicated, understood, and properly
coordinated with stakeholders inside and outside the organization

1.3: Vision, values, and mission

 A vision is often associated with the founder of an organization and
represents a desired state that the organization aspires to achieve
in the future
 Tends to not change over time unlike goals
 ‘Template style strategy’ - where organizations simply fill in their
unique vision of what the business will be like in the future
 A company will describe its values, making sure they are
noncontroversial
 An organization’s mission seeks to answer the question why an
organization exists
 Core ideology is made up of core values and purpose
o Core values are an organization’s essential and enduring
tenets, which will not be compromised for financial
expediency and short-term gains (do not shift as competitive
conditions change)
o Purpose represents the reasons an organization exists beyond
making a profit
 BHAGs are Big Hairy Audacious Goals used to stimulate progress
o A BHAG is clear and compelling, and it serves as a rallying cry
to all employees as to where their energies should be focused

The theory of the business

 Assumptions about markets, customers, competitors, and the
organization’s capabilities and weaknesses are referred to a
company’s theory of the business
 Every organization has a theory of the business, regardless of
whether it operates in the public, private, or not-for profit sector
 An organization’s theory of the business has four characteristics:
o (1) The assumptions about the environment, mission, and core
competencies must fit reality
o (2) The assumptions in all three areas have to fit one another
o (3) The theory of the business must be known and understood
throughout the organization
o 4) The theory of the business has to be continually tested
 In effect, the mental model a manager holds about an organization
must be subject to change if the organization is to meet changing
market conditions and survive
 There are preventive measures to ensure theory of business:
 o Abandonment: every three years a company can look at its
markets, products, and policies and ask itself: if we were not
already in it, would we still want to be in it now?
o Study what is happening outside the business, especially with
non-customers
 A theory of the business becomes obsolete when an organization
has achieved its original objectives

Business models
 The concept of business model is actually captured by Drucker in
‘the theory of the business’
 This is because a business model will include assumptions about
markets, customers, and the organization’s capabilities and
weaknesses
 If a business model is to remain relevant, managers must be open
to innovations

Types of strategy
 There are three basic forms of strategy which interest organizations.
These are corporate strategy, business strategy, and functional or
operational strategy
 Most organizations are concerned with business strategy and
corporate strategy
o Corporate strategy
 Corporate strategy is concerned with the broader issue
of which industries the organization wants to compete
in.
 Mergers and acquisitions and the allocation of resources
between the organization’s strategic business units
(SBUs)
o Business/competitive strategy
 Deals with how an organization is going to compete
within a particular industry or market
 It is concerned with how the organization will achieve a
competitive advantage over its rivals
o Functional/operational strategy
 This deals with decisions according to functional lines
such as research and development (R&D), marketing,
and finance
 Support of the business strategy
 Operational management

1.5: Changes in the approach to strategic management

 The changes in strategic management as a discipline reflect the
changing dynamics of modern economies
 During the 1960s organizations could rely on stable and expanding
market conditions with a customer emphasis on price, primarily
finance-based budgetary control systems
  In the 1970s the corporate landscape was focused on diversification,
in particular how to increase market share by capturing new
markets
 In the 1980s, the work of Michael Porter on industry analysis shifted
the emphasis to firms analysing the competitive forces inherent
within their industry as a means of gaining competitive advantage
 Different perspectives on strategy continued throughout the 1990s
such as benchmarking, RBV view, market positioning, etc.
 Richard D’Aveni coined the term hypercompetition to describe a
new competitive situation where firms must continually innovate,
developing new products or services for the customer
o Microsoft is an example of a hypercompetitive firm which is
forced to cannibalize its existing product each time it
introduces new software
 In the 1990s organizations began to see the benefits of
collaboration, cooperation, and joint alliances
 ‘Networking’ between corporations became the new buzzword

1.6: Different perspectives on strategy formulation

 We can identify two broad perspectives of strategy management
which at first reading may appear to be opposites: the rationalist or
design school and the learning school

The rationalist school

 The rationalist or design school is associated with the work of
Kenneth Andrews and Igor Ansoff
 An organization needs to match its strengths and weaknesses,
which derive from its resources and competences, with the needs of
its business environment
 The business environment comprises both threats and opportunities
 SWOT analysis
 Scenario planning allows managers to produce different, internally
consistent views of what the future might turn out to be
 The problem is, the model does not forecast reality in a way which
users find credible, nor can they understand the relationships
described by the model because of the complicated mathematical
models

The learning school

 Successful firms can pursue strategies which are opportunistic and
adaptive rather than being planned
 Richard Cyert and James March, argue that organizations should not
be viewed as entities with personalities and goals like individuals
 Rather, they are more appropriately viewed as shifting coalitions, in
which conflicting demands and objectives are imperfectly reconciled
 In contrast with the rationalist school, Mintzberg argues that a
rational approach to strategy fails to take account of how strategy
making occurs in reality
  Henry Mintzberg and James Waters suggest three approaches to
strategy formulation: intended, realized, and emergent strategies:
o (1) An intended strategy is one that the organization has
deliberately chosen to pursue and will therefore have been
worked out in detail
o (2) A realized strategy is the strategy that the organization
actually carries out
o (3) In such a case, managers will have to use their experience
and learning to develop an emergent strategy which meets
the needs of the changing environment. When this emergent
strategy is implemented it becomes the realized strategy
 The rationalist school views Honda’s success as part of a deliberate
strategy. Mintzberg, in contrast, argues that it results from an
emergent strategy

1.7: A strategic management framework

 A framework is useful to help us to structure our thoughts and
navigate around the different aspects of strategic management


o This is shown by the arrow emanating from values, which
determine the goals the organization sets. The goals, in turn,
will determine the resources and capabilities the company
requires to achieve them
o An organization’s goals will reflect its strengths and
weaknesses and the opportunities and threats within its
environment
o The organization will also require appropriate structures and
processes in order to coordinate and implement its chosen
strategy
o An organization’s values will also determine the relationship
with its stakeholders
o The two-way arrows positioned between strategy, the
organization, and the environment provide feedback on the
appropriateness of the intended strategy
  Stakeholders are those individuals and groups who are impacted
by the behaviour of the organization, and whose own behaviour can,
in turn, have an impact on the organization’s strategy
 Managers and employees are internal stakeholders, while suppliers,
shareholders, and the local community are external stakeholders

Chapter 11.4: The purpose of corporations

 A corporation is a mechanism established to allow different parties
to contribute capital, expertise, and labour, for the maximum
benefit of all of them
 It is generally agreed that a corporation is an organization owned by
its shareholders, but managed by agents on their behalf
 Elaine Sternberg argues that it is necessary to first understand what
business is (and is not) by disaggregating it from other forms of
activity
o Sternberg argues that the defining purpose of business (a
corporation) is ‘maximizing owner value over the long term by
selling goods and services’
 For Baukol, corporations exist because, unlike other institutions
such as government, the corporation provides economic
sustainability
o The corporation generates wealth for society and for its own
members
 The principal–agent problem refers to the separation of
ownership from control within corporations
 There is a tendency for an asymmetry of information to exist when
managers are running companies which are owned by numerous
dispersed shareholders

The purpose of corporations: Maximize shareholder value

 Economist Milton Friedman argues, ‘there is one and only one social
responsibility of business—to use its resources and engage in
activities designed to increase its profits so long as it stays within
the rules of the game, which is to say, engages in open and free
competition without deception or fraud’
 Friedman’s contention is that corporate executives act as agents
and, therefore, to engage in forms of corporate social responsibility
is using their position to spend someone else’s money for a general
social interest
 The effect of such activities is to impose a tax on the owners by
ensuring that they receive lower returns from their investment than
they otherwise would
 If the effect of such actions by corporate executives raises prices for
consumers, then this places a tax on consumers
 The context for Friedman’s ideas is the American Business Model
(ABM); often referred to as the Washington consensus
  This has been the dominant economic and political philosophy for
the past four decades. The ABM is based on four claims
o (1) Self-interest: It is self-interested materialism of individuals
that govern their lives
o (2) Market Fundamentalism: Markets must be allowed to
operate freely without any political interference This is on the
belief that the regulation of markets is invariably inefficient
o (3) A minimal role for the State: The economic role of the
government should be largely limited to the enforcement of
contracts and private property rights It should not be to
provide goods and services, or to own productive assets
o (4) Low Taxation: The use of taxation is to finance the
activities of a minimal state. And as a result, taxation should
be as low as possible. The tax system should not be used to
redistribute income and wealth within society
 The belief in the free market draws upon the work of Italian
economist, Vilfredo Pareto. He devised what is called a Pareto
efficient state. This describes an economic situation in which you
cannot make the circumstances of one person better off without
making another person worse off
 Therefore, were the Government to intervene in the allocation of
resources it would simply result in a Pareto inefficient state: it would
make things worse.
 Indeed, the only reason for the state to intervene in the allocation of
resources would be if it could achieve a Pareto improvement. A
Pareto improvement describes an economic situation in which you
can make someone better off, but without making anyone else
worse of
 John Kay offers an incisive critique of the ABM. Kay argues that
allowing maximum freedom in a framework of rules is bound to fail
and does fail. the integrity of an organization does not result from
its governance structure; it reflects the values of those who work
within it. Thus, the central tenet of the ABM, that business activity
can be successfully organized around self-regarding individuals
constrained by externally imposed rules, is misplaced
 Transparency allows shareholders to make informed decisions about
whether to invest in these companies
 Welch maintains that any short-term profits should be allied with an
increase in the long-term value of a company. As he states, ‘On the
face of it, shareholder value is the dumbest idea in the world

The agency problem

 The principal–agent framework has occupied economists since the
time of the Scottish economist Adam Smith.
 The agency problem arises because of the separation between
ownership of an organization and its control
 relationship between the providers of capital, referred to as the
principal, and those who employ that capital, referred to as the
agents
  Smith’s concern was that any given person will simply not watch
over another person’s money in the same way as they would watch
over their own money
 Agency costs can be seen to be the costs associated with
monitoring agents to prevent them acting in their own interests
 Berle and Means argue that the separation of ownership from
management has resulted in shareholders being unable to exercise
any form of effective control over boards of directors

The purpose of corporations: Meet the needs of stakeholders

 The primary role of corporations as a vehicle to create shareholder
value is contested by those who advocate a stakeholder approach
 Stakeholders may be separated into internal and external
stakeholders
o Internal stakeholders are those whose impact is felt inside the
organization, such as employees
o External stakeholders have their impact outside the
organization, such as shareholders
 Those who suggest that the corporation should serve stakeholders
accept that shareholders are the owners of the organization, but
reject the notion that this somehow makes them of greater
importance in the organization’s decisions
 Stakeholder theorists argue that many different stakeholders are
affected by an organization’s decisions and, therefore, the role of
management is to balance the needs of each stakeholder rather
than focus upon shareholders only
 The problem is that stakeholders may exhibit conflicting needs,
which makes the task of management in balancing these different
interests very difficult
 When Nike’s operations abroad did not conform to US health and
safety standards for their overseas workers, including minimum age
restrictions on employees, this caused an outcry and was reported
worldwide
 Those who adopt a stakeholder perspective expect that
organizations will actively pursue measures which result in a
net welfare gain to the environment and society


 However, trying to balance stakeholder needs or benefits is

unworkable
 This is because using Freeman’s definition of stakeholders leads to
an infinite number of stakeholder needs
 Importantly, no guidance is provided as to what weighting each
stakeholder group should have vis-à-vis other stakeholders
 Jensen proposes enlightened value maximization as a way in which
organizations might achieve a trade-off between the competing
needs of stakeholder

 "What is Strategic Purpose" Video

 Purpose is the most powerful and least leveraged weapon of
leadership
 Purpose is the underpinning and overriding reason an enterprise
exists
 It unifies its people and guides every action
 Enterprise purpose (Big P) -> more important and individual purpose
(small P)
 Purpose of excellence
o Harvard
 Purpose of discovery
 Altruistic purpose
o Walmart
 Heroic purpose
o Microsoft and ford
 Ex. Harvard Uni has a purpose of excellence, Steve Jobs is a warrior
 Walmart first goal was to help its employees but then lost its ground
and was disinterested of the environment and employees
 Later reinvented itself (became a ‘Nice giant’)
 Heroic purpose like Microsoft and Ford, making everybody comply to
your (technological) standard
  Microsoft became a standard software for every computer
 Carl Jung’ characters:
o Magician -> worry about ideas (big insights), rational yet
imaginative
 Steve Jobs
o Sovereign -> worry about directions, emotional and
imaginative
o Lover -> worry about relationships, pragmatic and emotional
o Warrior -> worry about results, rational and pragmatic
 Bill Gates
 Conflicts that arise in companies and meetings most often are
because people are not skilled in communicating with others who
have a different purpose


Week 2: External analysis

 Anthony Henry – Understanding Strategic Management -
CH 2 + 3

Chapter 2: Evaluating the macro-environment

 Changes that take place in the macro-environment may point to
trends that can substantially impact upon an organization’s
competitive environment
 These changes, which are referred to as disruptions, discontinuities,
or tipping points, fundamentally impact on the firm’s competitive
environment

2.1: The macro-environment

 The external environment facing the organization consists of both a
macro-environment and a competitive environment
 The competitive environment consists of the industry and markets
in which organizations compete
 The macro-environment, in contrast, is often referred to as the
general environment
 
 Changes in the competitive environment have the most direct
and immediate impact on the organization
 Organizations must continually scan and monitor their macro-
environment for signals, often weak or barely perceptible, which
might indicate a change in their competitive environment
o Ex. technological change from typewriters to personal
computers
 To scan and monitor their environment, organizations require
tools of analysis or models that will allow them to factor in the
changes in the macro-environment and evaluate their impact

2.2: Scanning, monitoring, and forecasting changes in the environment

 The purpose of scanning and monitoring the macro-
environment is to try to discern changes, however small, that have
the potential to disrupt an organization’s competitive environment
 Most environmental conditions facing organizations are complex,
uncertain, and prone to change
 Disruptive innovation refers to a process in which a smaller
company with fewer resources manages to successfully challenge
established incumbent businesses
o Ex. Amazon and Netflix, which have both taken advantage of
the Internet to change the way established products are
customized and delivered to end consumers
 A sustaining innovation allows an organization to enhance the
performance of its existing technology
o This sustaining innovation is usually adopted by incumbent
firms in the industry which will have invested substantial
financial and emotional capital in their current technology
 Fahey and Narayanan suggest three goals for an analysis of the
macro-environment:
 o First, the analysis should provide an understanding of current
and potential changes taking place in the environment
o Second, it should provide important intelligence for strategic
decision makers. Third, environmental analysis should
facilitate and foster strategic thinking in organizations
o Third, environmental analysis should facilitate and foster
strategic thinking in organizations
 Scanning is an opportunity for the organization to detect weak
signals in the macro-environment
o Weak signals refer to minor changes in the external
environment that an organization’s scanning of the
environment may barely register
 Monitoring can be seen as the activity that follows these initially
disparate signals and tracks them as they grow into more clearly
discernible patterns
o Monitoring allows an organization to see how these macro-
environment trends will impact on its competitive
environment
 The purpose of scanning and monitoring the macro-environment is
to aid the organization in developing viable forecasts of future
trends before they become a threat
 Kees van der Heijden, a former head of scenario planning at Shell,
identifies three main types of uncertainty:
o 1. Risks. This is where past performance of similar events
allows us to estimate the probabilities of future outcomes
o 2. Structural uncertainties. This is where an event is unique
enough not to offer evidence of such probabilities
o 3. Unknowables. This is where we cannot even imagine the
event
 Most managers can deal with risks
 An unknowable cannot be forecast and therefore the
organization must wait for the event to occur before it
can react to it
 Structural uncertainties have no probable pattern of
outcomes can be derived from previous experience

2.3: Scenario planning

 Scenarios help organizations recognize the weak signals that
signpost changes in its macro-environment
 If an organization is to remain proactive in its competitive
environment it must not allow the rules of the game to be changed;
that is, it must be capable of dealing with a tipping point
 Scenario planning is an approach (tool of analysis) to decision
making under conditions of uncertainty that helps to overcome
many of the shortcomings of traditional decision-making methods
o Scenario planning allows organizations to change several
variables at the same time without keeping other variables
constant
  Scenario planning is relevant to almost any situation in which a
decision maker needs to understand how the future of his or her
industry or strategic business unit might develop
 It divides our knowledge into two areas:
o (1) things we think we know something about – based on the
past and continuity
o (2) things we consider uncertain or unknowable – such as
future oil prices, interest rates, and the outcomes of political
elections
 A process for building scenarios is:
o 1. Define the scope
o 2. Identify the major stakeholders
o 3. Identify basic trends
o 4. Identify key uncertainties
o 5. Construct initial scenario themes
o 6. Check for consistency and plausibility
o 7. Develop learning scenarios
o 8. Identify research needs
o 9. Develop quantitative models
o 10. Evolve towards decision scenarios
 It is worth reiterating that scenarios are not intended to predict the
future
 They are designed to help managers deal with a highly
uncertain and dynamic environment

2.4: PEST analysis

 PEST analysis refers to political, economic, social, and

technological factors
o Sometimes as PESTLE, with an addition of legal and
environmental factors
 PEST analysis is simply another tool to help the organization
detect and monitor those weak signals in the hope of recognizing
changes taking place in the macro-environment
 The political factor of PEST deals with the effects of government
policy
o In as much as government policy is worked out through
legislation, it encompasses all legal elements of this analysis
o Government stability
 The changes in economic activity manifest themselves through
changes in interest rates, disposable income, unemployment rates,
retail price index (inflation), gross domestic product (GDP), and
exchange rates
o Scanning and monitoring the macro-environment for signs of
economic shifts very difficult
 Social factors include changes in demographics and culture
  Some of the major disruptions taking place in the macro-
environment are technological
o Technological factors include rates of obsolescence; that is,
the speed with which new technological discoveries supersede
established technologies
o The rate of change in technology and innovation

2.5: Introduction to SWOT analysis

 SWOT analysis refers to strengths, weaknesses, opportunities, and

threats
 Strengths and weaknesses refer to the organization’s internal
environment over which the firm has control
o Strengths are areas where the organization excels or has a
competitive advantage in comparison with its competitors,
while weaknesses are areas where the organization is at a
competitive disadvantage
 Opportunities and threats manifest themselves in the
organization’s external environment, over which it has less control
 SWOT analysis allows an organization to assess the relevance of its
current strategy in light of changes to industry conditions
 SWOT may be used in both the macro-environment and at the
industry level
 However, the unpredictable nature of events in the macro-
environment tends to make the use of SWOT analysis more
problematic

2.6: Macro-environment and industry Analysis

 By making the links between the macro-environment and industry

analysis explicit, an organization can conduct its analyses in more
depth by assessing its ability to deal with the impact of these trends
on its industries and markets
 The macro-environment factors require constant and structured
monitoring
 Both scenario planning and PEST have an important role to play in
identifying the disruptions that will have the greatest impact on an
organization’s competitive environment

Chapter 3: Industry Analysis

3.1: The background to Porter’s five forces framework

 Michael Porter’s ideas on competitive strategy include some of the
most pervasive analytical tools used in strategic management
  Porter recognized that an opportunity existed to bring thinking
about industrial organization into strategy and thinking about
strategy into industrial organization
 Porter’s contribution was to develop a framework for analysing
industries that could be generalized from a few core elements, in
this case five—hence the five forces framework
 The five forces framework is an attempt to capture the variation of
competition, while being pervasive and rigorous
 His insight is that organizations seeking above-average profits
should not just react to their competitive environment, but should
actively seek to shape it

3.2: Porter’s five forces framework

 An industry is a group of organizations producing a similar product
or service
 The analysis is best used at the level of an organization’s strategic
business unit (SBU)
 An organization thinking of entering an industry will need to know
that it can successfully compete with incumbents in the industry
 The five forces framework is an analytical tool for assessing the
competitive environment


 The five forces are:

o (1) threat of new entrants;
 The extent to which new competitors may decide to
enter an industry and reduce the level of profits being
earned by incumbent firms
 The easier it is for new organizations to enter the
industry, the greater the excess capacity and the more
intense the competition
 The existence of barriers to entry and the reaction of
existing competitors
 Product Differentiation
 Cost Advantages Independent of Size
o (2) bargaining power of buyers;
  Buyers can affect an industry through their ability to
force down prices
 Concentration of Buyers and High Volumes
 Purchases are Standard or Undifferentiated
 Threat of Backward Integration (to supply the product or
service themselves)
o (3) bargaining power of suppliers;
 Suppliers can exert bargaining power over participants
in an industry by raising prices or reducing the quality of
purchased goods and services
 Suppliers are Faced with few substitutes
 Threat of Forward Integration (suppliers competing with
buyers)
o (4) threat of substitute products or services; and
 The more attractive the price–performance ratio of
substitute products, the greater the restraint on the
prices that can be charged and therefore on an
industry’s profits
o (5) intensity of rivalry among firms in an industry
 Where a high degree of rivalry exists, this causes
industry profits to be reduced
 The five forces framework is based on an economic theory known as
the ‘structure–conduct–performance’ (SCP) model
o This states that the structure of an industry determines an
organization’s competitive behaviour (conduct), which in turn
determines its profitability (performance)
 SWOT analysis is company-specific, while Porter’s five forces is
industry-specific

3.3: Limitations of Porter’s five forces

 The five forces framework assumes a zero-sum game; that is,
competitors can only succeed at the expense of other players in the
industry
 The five forces framework is a static analysis which assumes
relatively stable markets
o It tells us little about how players in the industry interact with
each other and the effects of actual and anticipated
competitor moves on an organization’s decision making
 Organizations may develop an intended or deliberate strategy, but
unexpected changes in the environment may force them to
abandon that strategy
 In addition to the five forces are required. For example, the
government has been put forward as one possible candidate
 A revision of the five forces is required which brings us closer to a
dynamic theory of strategy

3.4: The value net

  Brandenburger and Nalebuff use game theory to capture the
dynamic nature of markets in their analysis
 They developed the value net that more closely represents the
complexity in an industry
 The value net represents a map of the industry, the players in the
industry, and their relationship to each other
 Since in business success for one player can also mean success for
another player, there can be win–win solutions
 The players in the game are the customers, suppliers, and
competitors (where competitors include rivals, threat of new
entrants, and substitute products or services)
 New player called a complementor, an organization is your
complementor if customers value your product more when they
have that organization’s product than when they have your product
alone
o Ex. Microsoft’s Windows software and Intel’s microprocessors
are complements


 By making products more valuable to the consumer, complementors

create greater value for the industry
 In essence, an organization needs to try to create value and a larger
market, which is best undertaken by cooperating with customers
and suppliers
 Co-opetition

A complementary sixth force

 The inclusion of complementors into Porter’s five forces makes the
framework more defensible because it adds a dynamic element to
the analysis
 This allows organizations in the industry to be more aware of their
interdependencies
 There is cooperation among suppliers, organizations, and customers
to create value, and competition in how this value is divided up
 

3.5: The industry life cycle

 The industry life cycle suggests that industries go through four
stages of development: introduction, growth, maturity, and decline
 The life cycle is frequently applied to product markets where a
product life cycle can be discerned which follows the same stages as
the industry life cycle
 The industry life cycle helps an organization to see how it is
positioned in terms of the development of its markets


 The introduction stage of the industry life cycle is characterized
by slow growth in sales and high costs as a result of limited
production
o During this stage profits will be negative, as sales are
insufficient to cover the capital outlay on R&D
 In the growth stage, sales increase rapidly as the market grows,
allowing firms to reap the benefits of economies of scale
o A goal for the firm is not merely to attract new customers, but
to ensure that customers repeat their purchases
 The maturity stage of the life cycle sees a slowing in sales growth
and profits as the market becomes saturated
 o Firms will begin to exit the industry, and low-cost competition
based on efficient production and technically proficient
processes becomes more important
o Rivalry becomes more intense within the industry
o During the maturity stage of the life cycle, it is conceivable
that a product may benefit from innovation or finding new
consumer market (rejuvenated)
 In the decline stage firms experience a fall in sales and
profitability. Consumer loyalty shifts to new products based on
newer technologies

3.6: Strategic groups

 In order to ascertain the boundary of an industry we need to identify
the relevant market for the firm
 If customers are willing to substitute among different makes of
automobiles, such as sports cars and luxury models based on their
relative price differences, we can say this constitutes a market
 Strategic group analysis is about identifying firms within an
industry who possess similar resource capabilities and are pursuing
similar strategies
 Strategic groups within an industry constitute a cluster and inform
us that just because competitors occupy the same industry does not
make them competitors
o In the US, Ford, General Motors, and Chrysler occupy the
same strategic group within the automobile industry
o In the UK, Morgan, a family-owned car company, and Ford are
in the same industry but do not compete with each other
 A strategic map is a useful tool for comparing the strategies of
organizations in an industry
o An organization selects two characteristics that can
differentiate firms within the industry and draws them on the
vertical and horizontal axes


 Mobility barriers inhibit movement between strategic groups
 o Essentially a limitation on replicability or imitation
 In undertaking strategic group analysis, an organization can better
understand its industry structure
 By mapping rivals following similar strategies into strategic groups,
an organization can ascertain their most direct competitors
 Track the direction in which competitor organizations are moving

3.7: Hyper-competition and disruptive innovation

 The term ‘hypercompetition’ was introduced by Richard D’Aveni

to explain a relentless mode of competitive behaviour that aims to
force competitors out of the industry
 Hypercompetition is defined as, ‘an environment characterized by
intense and rapid competitive moves, in which competitors
must move quickly to build advantage and erode the advantage of
their rivals’
 Often seen in the video games and software industry
 The driving force of competition is the pursuit of profit, which is
obtained by achieving competitive advantage
 In hypercompetitive industries such as consumer electronics,
competitive advantage requires an organization to risk a current
advantage for the promise of a new advantage
 Organizations aggressively position themselves against each other
to create new competitive advantages which make opponents’
advantages obsolete
 Disruptive innovation occurs when an incumbent organization
focuses on its most profitable upmarket segment leaving an entrant
free to nibble away at its low-end customers, unchallenged
o Incumbent firms are focused on the pursuit of higher profits in
the more demanding segments
o New entrants target the neglected segments by offering them
products with more suitable functionality, invariably at a lower
price
o The entrant gradually moves upmarket to acquire the
incumbent’s higher-end customers
o With big bang disruptions, the disruption of consumers is fast
and total, leaving the incumbent little or no time to react

 Brandenburger & Nalebuff (Game Theory)

 Business is a high-stakes game yet not about winning or losing,
nor how well you play the game
 All about value: creating and capturing it
 Business success lies in making sure you are playing the right
game
 Brandenburger & Nalebuff developed a framework that draws on
the insights of game theory -> to change the game of business
 Game theory was first published in 1994 and Nobel prizes were
awarded
 Von Neumann and Morgenstern distinguished two types of games:
o Rule-based -> players interact according to specified rules of
engagement
 Contracts, loans, or trade agreements
 Analysing how other players will react to your move to
be far ahead of your players
o Freewheeling games -> players interact without any external
constraints
 You cannot take away from the game more than you
bring to it
 Business is a complex mix of both types of games
 The primary insight of game theory is the importance of focusing
on others (allocentrism)
 Managers can profit by using game theory to design a game that
is best suitable for their companies
 Ex. Nintendo succeeded in changing the video game business by
taking control of software
 Successful business strategy is about actively shaping the game
you play, not just playing the game you find
 To encourage thinking about both cooperative and competitive
ways to change the game, the term coopetition was brought to
the table
o Looking for win-win as well as win-lose opportunities rather
than a lose-lose scenario
 Introduction of the value net -> a schematic map designed to
represent all the players in the game and the interdependencies
among them
 Interactions take place along two dimensions: vertically ->
company’s customers and suppliers. Horizontally -> players who
the company interacts but does not transact (substitutors and
commplementors)


 Substitutors are players from whom customers may purchase
products or to whom suppliers may sell their resources
o Coca cola and Pepsi are substitutors
 Complementors are players from whom customers buy
complementary products or to whom suppliers sell complementary
resources
o Hardware and software companies
 The value net describes the various roles of the players
 Along the vertical mix, there is a mixture of cooperation and
competition
 Along the horizontal, managers tend to only see half of the picture
o Substitutors are only seen as rivals, while complementors
are seen as friends
 According to game theory there are five parts: Players, Added
values, Rules, Tactics, and Scope
o None of the players are fixed, sometimes it is smart to
change who is playing the game
o Neither is the added values (either raise your own or lower
others)
o Rules determine how the game is played (the simplest rule
to one price to all), bringing a new rule would change the
game
o Tactics are moves used to shape the way players perceive
the game and how they play, some tactics work by reducing
misperceptions or creating uncertainty
o A scope describes the boundaries of the game. Can be
changed as well by either expanding or shrinking it


 Changing the game is hard due to potential traps

 Porter (5 Forces) video

 What the five competitive forces are?
 The basic idea starts with the notion that competition is often
looked at too narrowly by managers
 Companies are competing with direct competitors but also in a
fight for profit from buyers and suppliers
 A holistic way of understanding drivers of profitability and
competition
  Helps to understand the trends, where the constraints are
 Every industry is different
 Applying it to the airlines industry:
o Least profitable industry known, five forces help to
understand why that is the case
o Low barriers of entry – new constant airlines keep emerging
o Customers are fickle and price sensitive
o Suppliers have high bargain power
o Exclusivity of price
o Generic technology
o Various substitutes (ex. ferries, cars, trains, etc.)
o Rivalry is intense
o Powerful labour supply needed
o Mostly mediocre profitability, in the long term it has terrible
profitability
o Though it ought to be a ‘sexy industry’, no matter how
attractive the industry seems it has nothing to do with
profitability
 The concept can be applied to anything
 The problem with zero-sum competition is that consumer gets low
price, but they have no choice
 In a positive sum, companies can compete on different attributes,
services, features, and support
 Figuring what your industry structure is, how it changes, and
drawing your boundaries are important in making strategic
decisions

Week 3: Internal analysis

 Anthony Henry – Understanding Strategic Management -
CH 4 + 5

Chapter 4: The internal environment: Value-creating activities

4.1: Background to differential firm performance

 Should a company’s main focus be the characteristics of its industry
or the characteristics of its own organization?
 For Porter, industry characteristics are paramount -> this approach
is often referred as the positioning school
 Richard Rumelt argues that it is more to do with factors at the
individual firm level such as its resources and the strategy being
adopted -> resource-based view of strategy
4.2: Value chain analysis
 Value Chain analysis looks at the activities that go to make up a
product or service with a view to ascertaining how much value each
activity adds
 It was devised by Porter as a technique to help an organization
assess its internal resources
 The greater the difference between the organization’s revenue and
its costs, the greater the value it is adding
 It is increasingly recognized that organizations can also add value
through cooperation with their suppliers, customers, and distributors
o For example, a supplier’s value chain, referred to as upstream
value, will influence an organization’s performance
o Similarly, an organization’s product will ultimately become
part of a buyer’s value chain, providing downstream value
 We can see that an organization is a collection of activities which
aid it in the design, production, marketing, and support of its
product
 The activities contained within the value chain are classified by
Porter as primary activities and support activities
o Primary activities are activities which are directly involved in
the creation of a product or service
 Include: inbound logistics, operations, outbound
logistics, marketing and sales, and service
o Support activities are activities which ensure that the primary
activities are carried out efficiently and effectively
 The four generic support activities are procurement
(purchasing resource), technology development, human
resource management, and firm infrastructure

4.3: Evaluating the value chain

 In deciding which activities to include in the categories that make
up its value chain, an organization needs to be aware of their
contribution to its competitive advantage
o The Japanese car producers Honda and Toyota are well-known
examples of organizations which add value by working with
suppliers and distributors to identify ways in which their value
chains can be reconfigured to reduce lead times and cut costs
 o The use of just-in-time (JIT) and lean production methods
allows parts to be delivered only when they are ready for
assembly, thereby reducing lead times and cutting inventory
costs
 To be effective, value chain analysis needs to recognize and
understand the relationship or linkages between activities
 Porter suggests that linkages can lead to competitive advantage in
two ways: optimization and coordination
o For example, an organization may spend more on product
design and the quality of its materials to avoid greater
maintenance costs during the product’s use. By optimizing
these linkages between its activities an organization can
achieve competitive advantage
o Similarly, an organization can reduce its costs or improve its
ability to differentiate by better coordinating activities in its
value chain
 In seeking to influence the value chain of its suppliers, distributors,
and consumers, an organization needs also to address the make or
buy decision (whether they want to produce or outsource their
resources)

4.4: SWOT analysis

 SWOT analysis can be usefully undertaken once an audit of the
external environment and the organization’s internal environment
has been completed
 Strengths and weaknesses refer to the organization’s internal
environment over which the organization has control
 Opportunities and threats refer to the organization’s external
environment, over which the organization has much less control
 SWOT analysis becomes more complicated when existing strengths
can quickly become a weakness
 A SWOT analysis for Barclays Bank:

o
 It can provide useful signposts for the organization but, as with all
tools of analysis, it will not supply the strategic decisions
 Drawbacks:
 o Often produces lengthy lists which are each accorded the
same weighting. The reality is that not all threats facing the
organization will be weighted the same
o Strengths and weaknesses may not be readily translated into
opportunities and threats
o Ambiguity: the same factor can simultaneously be
characterized as both a strength and a weakness
o The analysis may be too focused within the industry boundary
and miss the weak signals, tipping points, or disruptive
innovations
 As a result of these limitations, TOWS analysis has been
introduced
 TOWS analysis allows managers to make strategy formulation
clearer by combining internal strengths and weaknesses to external
opportunities and threats
 The four TOWS strategies are Strength/Opportunity (SO),
Weakness/Opportunity (WO), Strength/Threat (ST), and
Weakness/Threat (WT)

4.5: Organisational performance

 To address performance, we must first address the fundamental
question: why do businesses exist?
 There is an assumption that the primary objective of organizations is
to maximize profits to benefit shareholders
 However, the profit-maximizing assumption was contested by
behavioural psychologists claiming that organizations consist of
shifting coalitions (stakeholders value)
 Mendelow proposed a model which ranks stakeholders according to
their power and interest
o Power refers to a stakeholder’s ability to influence an
organization’s objectives, while interest refers to their
willingness to influence the organization’s objectives
 o
 Measuring an organization’s performance is necessary to
understand whether the strategies being implemented actually add
value to the organization
 Some of the traditional financial measures used by corporations
to assess their performance:
o Return on capital employed (ROCE) is a performance ratio
commonly used by organizations. It is calculated by dividing
profit before interest and tax by capital employed
 Capital employed refers to the number of times the
assets are utilized


o The profit margin or return on sales (ROS) measures the
percentage return on sales (net profit per £1 of sales)


o Capital turnover measures the level of activity in the
organization as reflected by sales in relation to the capital
employed


o A business can improve its return on capital employed by
reducing costs and/or raising prices, which will improve its
profit margin
o Alternatively, it can increase its sales volume and/or reduce its
capital employed, which will improve its capital turnover
 The time value of money simply reflects the fact that there is
greater benefit to receiving a sum of money now rather than an
identical sum later
 Opportunity costs simply reflect that individual have alternative
uses for their funds
 The degree of uncertainty about different investments requires that
individuals also need to be compensated for different levels of risk
 To help managers choose between different investment decisions it
is useful if they can estimate the present value of future income
 streams - > One method a manager might use is discounted cash
flow (DCF)

o
 In order to take account of the cost of capital, economic profit
(EP) was introduced
 An organization makes an economic profit if it generates a return
greater than that required by the providers of finance given the risk
class of investment
o Economic profit = Operating profit before interest deduction
and after tax deduction - (Invested capital x weighted average
cost of capital (WACC))
 A major advantage of economic profit over the traditional
accounting profit is that it encourages managers to focus on
the cost of using capital in their strategic business unit (SBU)
 Economic value added (EVA) was developed by US consultants
Stern Stewart and Co., to address some of the shortfalls in EP
o EVA = Adjusted operating profit after tax - (Adjusted
investment capital x WACC)
o If the net present value of the resulting figure is positive, the
organization can be seen to be adding value for its
shareholders
o If it is negative, the organization’s resources could be usefully
employed elsewhere

4.6: A balanced scorecard

 The balanced scorecard was developed by Kaplan and Norton as
a means for organizations to measure their performance from a
wider perspective than traditional financial measures
 Their research identified two major problems with corporate
strategies:
o The first was that most companies measure their performance
using financial ratios
 These measures only provide a snapshot of how a
company performed in the past not the future
o A gap between an organization’s strategy and its
implementation by employees
 Many organizations simply issued strategic statements
that their employees failed to understand
 The balanced scorecard allows an organization to evaluate its
respective strengths and weaknesses from four different
perspectives:
o a customer perspective, how do customers view us?
o an internal perspective, what must we excel at?
 o a financial perspective, how do we look to shareholders?
o and a future perspective, can we continue to improve and
create value?
 Criticisms of the balanced scorecard coalesce around the
measurements it leaves out, such as employee satisfaction and
supplier performance
 Another problem is that many organizations suffer from information
overload as they go from measuring a few factors to measuring too
many factors

4.7: Benchmarking
 Benchmarking involves comparisons between different
organizations with a view to improving performance by imitating or,
indeed, improving upon the most efficient practices
 Not be limited to competitors within the same industry, but instead
be measured against any organization that has a reputation for
being the best in its class
 It can be a vehicle for empowering employees and optimizing their
creative potentials
 The downside is that some organizations may harbour unrealistic
expectations about what benchmarking can achieve
 Competitive parity is a goal to reach the same level of
performance as a competitor or industry average. This is
commonly done to reach a reasonable level of performance in an
area that is not core to your business.

Chapter 5: The internal environment: Value-creating activities

5.1: The resource-based view of strategy

 The resource-based view deals with the competitive environment
facing the organization, but takes an ‘inside-out’ approach; its
starting point is the organization’s internal environment
 Emphasizes the internal capabilities of the organization in
formulating strategy to achieve a sustainable competitive
advantage in its markets and industries
 The resource-based view of strategy is based on two assumptions
about the resources and capabilities that each firm possesses:
o Resource heterogeneity: this implies that different firms
competing in the same industry may possess different
resources and capabilities
o The second assumption is resource immobility. This implies
that the resource and capability differences that exist
between firms may continue over time
  Resources may be thought of as inputs that enable an organization
to carry out its activities
 Tangible and intangible resources
 It is an organization’s capability that allows it to deploy these
resources towards a desired task
 We can distinguish between threshold capabilities and distinctive
capabilities:
o A threshold capability is necessary for a firm to be able to
compete in the marketplace (every firm has this basic
knowledge)
o A prerequisite for a distinctive capability is that it must be
highly valued by the consumer and difficult for your
competitors to imitate
 To achieve competitive advantage an organization must
possess distinctive capabilities
 Core competencies -> the collective learning of individual
members within an organization and their ability to work across
organizational boundaries
 An organization’s architecture comprises the system of relational
contracts which exist inside and outside the organization
 Reputation as a source of distinctive capability
 An organization’s ability to innovate successfully is also a source of
distinctive capability that is sustainable and appropriable

5.2: The VRIO framework and sustainable competitive advantage

 In order to assess the extent to which a capability may provide an
organization with a sustainable competitive advantage, we can
make use of the VRIO framework
 The VRIO framework ask four questions with reference to a
capability’s Value, Rarity, Imitability, and Organization
o Organizational capabilities can only be a source of competitive
advantage or sustainable competitive advantage when they
are valuable
o If this capability is not rare then many organizations will also
be able to formulate and implement the same strategies
o If the organization is to achieve sustainable competitive
advantage it is necessary that competing organizations
cannot copy these capabilities (non-imitable)
o Organizational support is needed for a firm to be
sufficiently organized

5.3: Criticisms of the resource-based view

 Although the resource-based view encourages managers to focus on
strategies for exploiting firm-specific assets, it is not clear how firms
might create sustainable competitive advantage
  It says very little on the important issues of how existing resources
and capabilities can develop and change over time
 Danny Miller et al, introduced the term asymmetries to try to
explain how an organization might develop its capabilities
o Asymmetries are hard-to-copy ways in which a firm differs
from its rivals and which may ultimately provide competitive
advantage

5.4: A knowledge-based view of the firm

 The knowledge-based view of the firm views the organization as
a knowledge-creating entity
 Current thinking about resources and capabilities has been shaped
by an interest in knowledge management
 Organizations entering strategic alliances
 The creation of new knowledge always begins with an individual’s
personal knowledge, which is then transformed into organizational
knowledge valuable to the company
 Two very different types of knowledge:
o Explicit knowledge is objective and rational and can be
easily communicated and shared, for example, in product
specifications, scientific formulas, and manuals
o Tacit knowledge is highly personal, hard to formalize and
therefore difficult to communicate to others
 Deeply rooted in an individual’s commitment to a
specific context, for example, a craft or profession
 Explicit knowledge is so readily transferred that it requires some
form of protection, such as copyright or patent, if it is to remain
within the organization
 Tacit knowledge or ‘know-how’, in contrast, cannot be codified

5.5: Dynamic capabilities

 Dynamic capabilities as, ‘the firm’s ability to integrate, build, and
reconfigure internal and external competences to address rapidly
changing environments’
 Involves, ‘the firm’s processes that use resources . . . to match and
even create market change’
 Operational capabilities allow an organization to make a living in
the present
 Distinction between dynamic and operational capabilities is difficult
to define because:
o Change is always occurring to some extent
o The blurring of the boundary between radical versus non-
radical change
o Some capabilities can be used for both operational and
dynamic purpose
 See article from Hunt, S. D., & Morgan, R. M. (1997). The
Comparative Advantage Theory of Competition, Journal of
Marketing, 59(2): 1-15.
 The "comparative advantage theory of competition." argues that
this theory explains key macro and micro phenomena better than
neoclassical theory
 By "neoclassical theory" -> the theory of perfect competition
 Economies premised on competing firms are far superior to
economies premised on cooperating firms in terms of total wealth
creation, innovativeness, and overall quality of goods and services


 Neoclassical:
o As to consumer behaviour, neoclassical theory assumes that
demand is homogeneous for every industry's product
o The firm's objective is profit maximization
o The "factors of production" are assumed to be homogeneous
and perfectly mobile
o The firm's environment strictly determines its performance
(profits)
o They claim that the U.S. economy is close enough to perfect
competition to benefit from its efficiency-producing
characteristics
o Lack of signals from the market
o Though neoclassical theory can potentially contribute to
explaining the greater wealth-producing potential of market-
based economies on efficiency grounds
o It cannot explain their greater innovativeness or their goods
and services' superior quality
 Comparative advantage:
o Industry demand as significantly heterogeneous and dynamic
o Consumers have imperfect information concerning products
o Humans are motivated by constrained self-interest seeking
 o The firm's primary objective is superior financial performance
(than their rivals), pursues under conditions of imperfect
information
o Resources are the tangible and intangible entities available to
the firm
o Resources are both significantly heterogeneous across firms
and imperfectly mobile (not commonly brought or sold)
o When a firm has a resource that is rare among competitors, it
has the potential for producing a comparative advantage for
that firm
o Environmental factors only influence conduct and
performance
o Emphasis on competition

o
o Diversity in the industry
o Each firm is a unique entity
 The marketing function within organizations has been since the
1960s, associated with the marketing concept and the "four P's."
 Marketing has focused on decisions related to analysing and
selecting target markets, product and brand development,
promotion, and channels of distribution
o A market orientation involves a dual focus on both customers
and competitors

 See article from Hamel, G., & Prahalad, C. K. (1990). The

core competence of the corporation. Harvard Business
Review, 68(3), 79-91.
 Few companies have proven themselves adept at inventing new
markets, quickly entering emerging markets, and dramatically
shifting patterns of customer choice in established markets
 Core competencies are the collective learning in the
organization, especially how to coordinate diverse production
skills and integrate multiple streams of technologies
o Complex harmonization of individual technologies and
production skill
  If core competence is about harmonizing streams of technology,
it is also about the organization of work and the delivery of value
 Involves communication and many levels of people
 Core competence does not diminish with use unlike physical
assets
 Cultivating core competence does not mean outspending rivals
on research and development
 Should be difficult for competitors to imitate
 End product of core competencies is called core products
(physical embodiments of one or more core competencies)
o Ex. Honda’s engines are core products which linchpins
between design and development skills that lead to a
proliferation of end products
 To sustain leadership in their chosen core competence areas,
companies seek to maximize their world manufacturing share in
core products
 Another concept -> SBU


 Strategic architecture provides a logic for product and market

diversification

 See HBR Video

- https://hbr.org/video/5146717725001/the-explainer-
core-competence
 Core competence is important for companies and business
units with multiple product lines
 Imagine the diversified corporation as a large tree:
o The core products are the limbs and trunks
o Business units are smaller branches
o End products are the leaves
o Core competence is the root system (provides
nourishment and stability)
 o
 Most firms can identify 5-6 things that they do better than
others (core competencies)
 Requirements for core competencies:
o 1. Provide access to a wide variety of markets
o 2. Contribute to the benefits of the product as perceived
by the customer
o 3. CC should be hard for competitors to imitate
 CC can also produce new product lines
 Understanding the concept helps to create sustainable
advantage

Week 4: Strategy formulation

 Anthony Henry – Understanding Strategic Management -
CH 6,7,8

Chapter 6: Business strategy

6.1: What is business strategy?



6.2: Background to differential firm performance

6.3: A resource-based approach to strategy formulation

6.4: Blue Ocean strategy

6.5: Strategy formulation in turbulent markets

6.6: Disruptive innovation and strategy formulation

Chapter 7: Corporate strategy

7.1: Corporate strategy

7.2: Growth strategy

7.3: Related diversification

7.4: Unrelated or conglomerate diversification

7.5: Implementing growth strategies

7.6: Portfolio analysis

7.7: Corporate parenting

7.8: Strategic evaluation

Chapter 8: International strategy
8.1: Globalization or localization

8.2: International strategy

8.3: A globalization framework

8.4: Types of international strategy

8.5: Entry mode strategies

8.6: Porter’s diamond of national advantage

8.7: The myths of global strategy

8.8: The challenge of globalization

 See: Van Alstyne, M. W., Parker, G. G., & Choudary, S. P.

(2016). Pipelines, platforms, and the new rules of
strategy. Harvard business review, 94(4), 54-62.
  See: Adner, R. (2021). Sharing Value for Ecosystem
Success. MIT Sloan Management Review, 63(2), 85-90.

Week 5: Strategic leadership (intro)

 Anthony Henry – Understanding Strategic Management -
CH 10,11

Chapter 10: Strategic leadership

10.1: Leadership & management

 Peter Northouse defines leadership as, ‘a process whereby an
individual influences a group of individuals to achieve a common
goal’
 This view of leadership is made up of the following components: (a)
process; (b) influence; (c) groups; and (d) common goals
o leadership is seen as a transactional event that occurs
between the leader and the followers
 Management is all about coping with complexity, whereas
leadership is about dealing with change
o setting the direction for organizational change
o Management is also about controlling and problem-solving
 BHAGs—big hairy audacious goals (creating a unifying focal point of
effort)
 The respective leadership role is one of aligning (same direction)
 Leadership & management activities:
o

 Leaders perform three broad functions: organizational;

interpersonal; and decision making
o The organizational function requires the leader to try to get
participants in the organization to behave in a way that he or
she feels is desirable -> setting goals/visions
 o The interpersonal function requires the leader to ensure that
the morale of participants is maintained
o The decision function compels the leader to take decisions
which allow the organization to achieve its goals

10.2: The learning organization

 The only sustainable competitive advantage is the speed and ability
of an organization to learn
 In the past there were great leaders who ‘thought’ and ‘learned’ for
the organization (traditional hierarchical structures)
 Nowadays, organizations shift away from the leader and head
towards a solution that requires all levels of the organization to
participate actively
 Learning organization comprise both adaptive and generative
learning
o Adaptive learning is the ability to cope with changes in
one’s environment
o Generative learning is about creating change by being
prepared to question the way we look at the world
 The leadership role in a learning organization is one of designer,
teacher, and steward
o Designer - the building of the core values and purpose of the
organization
o Teacher - assist individuals in the organization to be aware of
their mental models and the assumptions on which these are
based
o Steward - stewardship for all the people in the organization
that the leader directs. The purpose and core values on which
the organization is based
 A need for the development of new leadership skills:
o Building a shared vision
o Surfacing and testing mental models - members of an
organization can differentiate between generalizations and the
observable facts
o Systems thinking

10.3: Emotional intelligence and leadership performance

 Goleman grouped capabilities into three categories:
o (1) Purely technical skills, such as accounting and business
planning
o (2) Cognitive abilities, such as analytical reasoning
o (3) Emotional intelligence, which manifests itself in an ability
to work with others
 Findings suggest that an organization’s success is linked to the
emotional intelligence of its leader -> better performance
 Goleman identified five components of emotional intelligence:-
o Self-awareness
 o Self-regulation
o Motivation
o Empathy
o Social skills

10.4: Narcissistic leaders and leadership capabilities

 In contrast with these leaders, Michael Maccoby identifies a different
type of leader who is equally effective in dealing with dynamic
change, but also has the potential for creating destruction
 Freud identified three main personality types:
o (1) Erotic personality types, who loving and being loved are
important. Typically, these are teachers, nurses, and social
workers
o (2) Obsessive personalities are self-reliant and conscientious.
They are always looking for ways to help people, listen better,
and find win–win situations
o (3) Narcissists are independent, aggressive, and innovative;
they want to be admired
 Narcissistic leaders can become destructive when they lack self-
knowledge and restraint, and pursue unrealistic and grandiose
dreams
 The weaknesses of a narcissistic leader can be seen as they become
more successful
o They are over-sensitive to criticism and become increasingly
poor listeners
 Can avoid self-destructive behaviour by forming a close partnership
with someone they trust

10.5 The impact of leadership on values and culture

 Hofstede was initially able to devise a model of culture based on five
separate dimensions:
 (1) power distance;
o Power distance is defined as the extent to which the less
powerful members of institutions and organizations within a
country expect and accept that power is distributed unequally
o high-power distance for Latin American, for India, France, and
Hong Kong
o Lower power distances exist in the UK, the US, and
Scandinavian countries
o Employees in high power distance countries have a preference
for leadership that involves an autocratic style -> more
dependent on their leaders
 (2) collectivism versus individualism;
o Individualistic employees believe that a job which leaves
quality personal time for family is important
o Collectivist individuals saw training opportunities to improve
learning as more important
 o The US, Australia, and the UK scored top on this index as the
most individualistic nations
 (3) femininity versus masculinity;
o Masculinity -> desirability of assertive behaviour. Men are
expected to be assertive and tough
o Femininity -> desirability of modest behaviour. Both men and
women are expected to be modest and caring
 (4) uncertainty avoidance
o Uncertainty avoidance is the extent to which people feel
threatened by uncertain or unknown situations
 (5) long-term orientation to life
o Nations with a long-term orientation value thrift, persistence,
and hard work

10.6: Leading strategic change

 The values of an organization will inevitably manifest themselves in
its core or dominant culture
 Even good ideas that conflict with the existing culture may be
difficult to implement
 Transformational leadership is concerned with improving the
performance of individuals and developing individuals to their fullest
extent
 Charismatic leaders can be effective change agents because they
seek to change the status quo and are gifted at building alliances
and making individuals feel valued
 Narcissistic leaders
 Theory E and theory 0 leaders
o A Theory E change strategy is based on achieving economic
value for shareholders and is characterized by downsizing and
restructuring -> found in American businesses
o Theory O adopts a softer approach which recognizes that if
change is to be constructive and endure, it must affect the
corporate culture and the way in which employees work ->
European and Asian businesses
 All corporate transformations can be compared according to six
dimensions of change: goals, leadership, focus, process, reward
system, and the use of consultants

Chapter 11: Corporate governance

11.1: What is corporate governance?

 Governance issues are about power and accountability
 Corporate governance involves a set of relationships between a
company’s management, board, shareholders and other
stakeholders
  is concerned with ensuring that the suppliers of finance (investors)
receive something back from the managers to whom they entrust
their funds

11.2: The origins of corporate governance

 The origins of corporate governance date back at least as far as
1600, when a Royal Charter was granted to The Company of
Merchants of London trading into the East Indies
 Cadbury argues that corporate governance issues are rooted in the
development of the corporation
 The corporate structure has continued to develop in response to
needs that were not being met by earlier corporate forms

11.3: The growth of modern corporation

 The spread and acceptance of the modern corporation is owed to
four characteristics:
o Limited Liability
 separation between the corporation and its owners and
employees
o Transferability
 an ability to transfer one’s holdings freely also provides
the shareholder with an acceptable level of risk
o Legal personality
 ensures that actions that would result in a negative
sanction for an individual have no such consequences
when the individual commits them as part of a
corporation
o Centralized management
 Board of directors

11.4: The purpose of corporations

 A corporation is a mechanism established to allow different parties
to contribute capital, expertise, and labour, for the maximum
benefit of all of them
 Is an organization owned by its shareholders, but managed by
agents on their behalf
 The principal–agent problem refers to the separation of
ownership from control within corporations
o There is a tendency for an asymmetry of information to
exist when managers are running companies which are owned
by numerous dispersed shareholders
 Maximize shareholder value
  The context for Friedman’s ideas is the American Business Model
(ABM); often referred to as the Washington consensus
 This has been the dominant economic and political philosophy for
the past four decades. The ABM is based on four claims
o (1) Self-interest: It is self-interested materialism of individuals
that govern their lives
o (2) Market Fundamentalism: Markets must be allowed to
operate freely without any political interference This is on the
belief that the regulation of markets is invariably inefficient
o (3) A minimal role for the State: The economic role of the
government should be largely limited to the enforcement of
contracts and private property rights It should not be to
provide goods and services, or to own productive assets
o (4) Low Taxation: The use of taxation is to finance the
activities of a minimal state. And as a result, taxation should
be as low as possible. The tax system should not be used to
redistribute income and wealth within society
 John Kay offers an incisive critique of the ABM
o Kay argues that allowing maximum freedom in a framework of
rules is bound to fail and does fail
o the integrity of an organization does not result from its
governance structure; it reflects the values of those who work
within it
 Transparency allows shareholders to make informed decisions about
whether to invest in these companies
 Welch maintains that any short-term profits should be allied with an
increase in the long-term value of a company. As he states, ‘On the
face of it, shareholder value is the dumbest idea in the world

The agency problem

 The principal–agent framework has occupied economists since the
time of the Scottish economist Adam Smith.
 The agency problem arises because of the separation between
ownership of an organization and its control
 relationship between the providers of capital, referred to as the
principal, and those who employ that capital, referred to as the
agents
 Agency costs can be seen to be the costs associated with
monitoring agents to prevent them acting in their own interests

The purpose of corporations: Meet the needs of stakeholders

 The primary role of corporations as a vehicle to create shareholder
value is contested by those who advocate a stakeholder approach
 Stakeholders may be separated into internal and external
stakeholders
o Internal stakeholders are those whose impact is felt inside the
organization, such as employees
o External stakeholders have their impact outside the
organization, such as shareholders
  Stakeholder theorists argue that many different stakeholders are
affected by an organization’s decisions and, therefore, the role of
management is to balance the needs of each stakeholder
rather than focus upon shareholders only
 The problem is that stakeholders may exhibit conflicting needs,
which makes the task of management in balancing these different
interests very difficult
 Those who adopt a stakeholder perspective expect that
organizations will actively pursue measures which result in a net
welfare gain to the environment and society


 However, trying to balance stakeholder needs or benefits is

unworkable
 This is because using Freeman’s definition of stakeholders leads to
an infinite number of stakeholder needs
 Jensen proposes enlightened value maximization as a way in which
organizations might achieve a trade-off between the competing
needs of stakeholder

11.6: Excessive executive play

 The issue is not one of high salaries per se, but the difference
between fair and excessive compensation
 In the UK, the Greenbury Report looked at investor concerns over
excessive directors’ pay
o Selected Chief executive officers’ role and responsibilities
remained the same but their substantial increase in pay
 Shareholders and institutional investors have become increasingly
vocal about what is seen as compensation for poor performance and
the setting of easy bonus targets
 The question the researchers seek to answer is whether the high
compensation for chief executive officers is a result of their talent or
their ability is to earn economic rent
o Economic rent is the difference between the minimum price
a seller would except and the market price
11.7: Is reform to corporate governance reform the answer?
 The first is that the existing system of corporate governance may
need some revision, but only around the edges
 Second, the system of corporate governance that assumes
shareholder primacy needs to be changed, albeit leaving
shareholders at the centre
 Third, the primacy of shareholders is itself open to question
 In the UK and US, discussions of corporate governance have
invariably put shareholders above stakeholders, such as employees

 Read: Kotter, J. P. (1990). What Leaders Really Do,

Harvard Business Review, 68(3):
103-111.https://hbr.org/2001/12/what-leaders-really-do
 What leaders really do is prepare organizations for change and
help them cope as they struggle through it
 Leadership and management are distinctive yet complement
each other
 Management is about coping with complexity, leadership is about
coping with change
 Without good management, complex enterprises tend to become
chaotic
 Good management brings a degree of order and consistency
o Planning and budgeting
o Organizing and staffing
o Controlling and problem solving
 Major changes in the industry is necessary for businesses to
survive
 Good leadership sets a direction for developing a vision of the
future
o Aligning people (communication)
o Motivating and inspiring

 Watch: Sergio Marchione Video

 Resurrecting Chrysler (automobile company)
 Heading towards collapse in 2009 but Sergio Marchionne saved
the company
 He was the CEO of fiat and saw potential of Chrysler
 Integrated the two companies (which complement each other
well, as Chrysler had Jeep, minivans, and light trucks while Fiat
had small cars technology and fuel-efficient engines)
  Took a $6 billion U.S. Treasury loan to form a partnership with a
promise to pay back in 2017
o Paid all back plus interests in 2015
 Chrysler did not have a good leader so Sergio came, struck a
deal, and took over
 Without his good leadership skills, the company would go
bankrupt
o Completely changed the management structure
o From overtly hierarchical to a systematic level of
organization
o Good executive decisions
o Good relationship with the employees
 Under Marchione, the quality of both companies’ products
improved dramatically
 Then he convinced consumers, invested in high-profile marketing
 He engages and manages both companies actively (Fiat and
Chrysler)
o Travelling between Italy & U.S.

Week 6: Organisational systems and change