Hill 8e Basic Ch11

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Theory of Strategic Management with Cases, 8e

Hills, Jones

Chapter Eleven Performance and Governance


Stakeholders and Corporate Performance

Stakeholders: Individuals or groups with an interest, claim, or stake in the company, in what it does, and in how well it performs.• Internal Stakeholders (e.g. employees,

stockholders, etc.)• External Stakeholders (e.g. customers,

creditors, governments, etc.)A company must consider stakeholder

claims in developing and implementing strategy


Stakeholders and the EnterpriseFigure 11.1


Identify stakeholders Identify stakeholders’ interests and

concerns Identify what claims stakeholders are

likely to make on the organization Identify stakeholders who are most

important, from the organization’s perspective

Identify resulting strategic challenges

Stakeholder Impact Analysis


Stockholders are a company’s legal owners and the provider of risk capital, a major source of capital to operate a business.

Maximizing long-run profitability & profit growth is

the route to maximizing returns to shareholders, as

well as satisfying the claims of most other stakeholder groups.

The Unique Role of Stockholders


Profitability, Profit Growth, and Stakeholder Claims

1. Participating in a market that is growing2. Taking market share away from competitors3. Consolidating the industry via horizontal integration4. Developing new markets

To grow profits, companies must be doing one or more of the following:

Stockholders receive their returns as: Dividend payments Capital appreciation in market value of shares


Agency Theory

Principal-Agent Relationships• Principal: person delegating authority• Agent: person to whom authority is delegated

The Agency Problem:• Agents and principals may have different goals• Agents may pursue goals that are not in the best

interests of their principals• Agents may take advantage of information asymmetries

to maximize their interests at the expense of principals• It is difficult for principals to measure performance• Trust • On-the-job consumption • Empire building

Agency relationships arise whenever one party delegates decision-making authority or control over resources to another.


The Tradeoff Between Profitability and Revenue Growth Rates

Figure 11.2Need to maximize long-run shareholder returns by seeking the right balance between company growth . . . and profitability and profit growth.


The Challenge for Principals

1. Shape the behavior of agents so that they act in accordance with goals set by principals

2. Reduce information asymmetry between agents and principals

3. Develop mechanisms for removing agents who do not act in accordance with goals and principals

Confronted with agency problems, the challenge for principals is to:

Principals try to deal with these challenges through a series of governance mechanisms.


Governance MechanismsGovernance mechanisms serve to limit

the agency problem by aligning incentives between agents and principals and by monitoring and controlling agents.

These mechanisms include:• The Board of Directors• Stock-Based Compensation• Financial Statements• The Takeover Constraint


Governance Mechanisms Inside a Company

Strategic control systems• To establish standards against which performance can

be measured• To create systems for measuring and monitoring

performance • To compare actual performance against targets• To evaluate results and take corrective actionsBalanced Scorecard model approach is used to drive

future performance Employee incentives

• Employee stock options and stock ownership plans• Compensation tied to attainment of superior efficiency,

quality, innovation, and responsiveness to customers

Internal agency problems can be reduced by:


A Balanced Scorecard ApproachFigure 11.3


Ethics and StrategyBusiness ethics are the accepted principles of right or wrong governing the conduct of businesspeople.

An ethical strategy is one that does not violate the accepted principles.

Ethical dilemmas occur when: • There is no agreement over what the accepted principles are• None of the available alternatives seem ethically acceptable

Many accepted principles are codified into laws:• Tort laws – governing product liability• Contract law – contracts and breaches of contracts• Intellectual property law – protection of intellectual property • Antitrust law – governing competitive behavior• Securities law - issuing and selling securities

Behaving ethically goes beyond staying within the law


Ethical Issues in Strategy Self-dealing Information manipulation Anticompetitive behavior Opportunistic exploitation Substandard working

conditions Environmental degradation Corruption


The Roots of Unethical BehaviorWhy do some managers behave unethically?No simple answers, but some generalizations:1. Personal ethics code: will have a profound

influence on behavior as a businessperson2. Do not realize they are behaving unethically:

by failing to ask the right questions3. Organization’s culture: de-emphasizes ethics

and considers primarily economic consequences4. Unrealistic performance goals: encouraging

and legitimizing unethical behavior5. Unethical leadership: that encourages and

tolerates behavior that is ethically suspect


Philosophical underpinnings of business ethics that can provide managers with a moral compass to help navigate through difficult ethical issues:The Friedman Doctrine Milton Friedman’s basic position is that the only social responsibility of

business is to increase profits, as long as the company stays within the law and the rules of the game without deception or fraud.

Utilitarian and Kantian Ethics The moral worth of actions is determined by its consequences – leading

to the best possible balance of good versus bad consequences. Committed to the maximization of good and the minimization of harm.

Rights Theories Recognizes that human beings have fundamental rights and privileges.

Rights establish a minimum level of morally acceptable behavior.Justice Theories Focus on the attainment of a just distribution of economic goods and

services that is considered to be fair and equitable.

Philosophical Approaches to Ethics


To make sure that ethical issues are considered in business decisions, managers should:1. Favor hiring and promoting people with a well-grounded

sense of personal ethics.2. Build an organizational culture that places a high value

on ethical behavior.3. Make sure that leaders not only articulate but also act in

an ethical manner.4. Put decision-making processes in place that require

people to consider the ethical dimension of business decisions.

5. Use ethics officers.6. Put strong corporate governance processes in place.7. Act with moral courage and encourage others to do the

same.

Behaving Ethically

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Hill 8e Basic Ch11