McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 2
The Context of Strategic
Management
The Global Economy: A Brief Overview
 Opportunities and risks when firms diversify
abroad
Trade across nations will exceed trade within
nations
Rise of market capitalism around the world
Transfer of money from rich to poor countries
Equity
Bond Investments
Commercial loans
2-3
The Global Economy: A Brief Overview
 Why do some countries enjoy the fruits of
global capitalism while others are mired in
poverty?
Need of governments to have track records of
business friendly policies
Invest in modern technology
Nurture local suppliers
 Must manage broader economic factors
Interest rates, inflation, unemployment
2-4
Factors Affecting
a Nation’s Competitiveness
 Factor conditions
Nation’s position in factors of production
Skilled labor
Infrastructure
 Demand conditions
Nature of home-market demand
Industry’s product
Industry’s service
2-5
Factors Affecting
a Nation’s Competitiveness
 Related and supporting industries
Presence or absence in the nation of internationally
competitive
Supplier industries
Other related industries
 Firm strategy, structure, and rivalry
Conditions in the nation governing how companies are
Created, Organized, and Managed
Nature of domestic rivalry
2-6
Factor Conditions
 To achieve competitive advantage, factors of
production must be created
Industry specific
Firm specific
Pool of resources at a firm’s or country’s disposal is
less important than the speed and efficiency with
which the resources are deployed
2-7
Demand Conditions
 Demands that consumers place on an industry
for goods and services
Demanding consumers push firms to move ahead of
companies from other nations
Demanding consumers drive firms in a country to:
Meet high standards
Upgrade existing products and services
Create innovative products and services
2-8
Related and Supporting Industries
 Enable firms to manage inputs more effectively
Strong supplier base adds efficiency to downstream
activities
Competitive supplier base lets a firm obtain inputs
using cost-effective, timely methods
 Allow joint efforts among firms
 Create the probability that new entrants will
enter the market
2-9
Firm Strategy, Structure and Rivalry
 Rivalry is intense in nations with conditions of
Strong consumer demand
Strong supplier bases
High new entrant potential from related industries
 Competitive rivalry increases the efficiency with
which firms develop, market, and distribute
products and services within the home country
2-10
Firm Strategy, Structure and Rivalry
 Competitive rivalry increases the efficiency
with which firms
Develop within the home country
Market within the home country
Distribute products and services within the home
country
2-11
Firm Strategy, Structure and Rivalry
 Domestic rivalry provides a strong impetus for
firms to
Innovate
Find new sources of competitive advantage
 Domestic rivalry forces firms to look beyond
national borders for new markets
2-12
A Company’s Motivation for International
Expansion
 Increase the size of potential markets
World population exceeds 6.5 billion
U.S. represents 5% of world population
China and India increased middle class
 Attain economies of scale
Larger revenue and asset base
Advantage is spreading fixed costs over larger volume
of production
2-13
A Company’s Motivation for International
Expansion
2-14
A Company’s Motivation for International
Expansion
 Reducing the costs of R&D as well as operating
costs
Attainment of greater purchasing power by pooling
purchases
 Extend the life cycle of a product
Four stages: introduction, growth, maturity, decline
 Optimize the physical location for every activity in
its value chain
Performance enhancement
Cost reduction
Risk reduction
2-15
Potential Risks of
International Expansion
 Political and economic risk
Social unrest
Military turmoil
Demonstrations
Violent conflicts and terrorism
Laws and their enforcement
2-16
Potential Risks of
International Expansion
 Currency risks
Must constantly monitor exchange rate between its
own currency and host country
Currency exchange fluctuations
Appreciation of the U.S. dollar
Exchange rates can significantly affect production
costs or net profit
2-17
Potential Risks of
International Expansion
 Management risks
Culture
Customs
Language
Symbols
Income levels
Customer preferences
Distribution system
 Recent trend -- Dispersion of value chains of
multinational corporations across different
countries
2-18
Outsourcing and Offshoring
 Outsourcing occurs when a firm decides to utilize
other firms to perform value-creating activities
that were previously performed in-house.
 Offshoring takes place when a firm decides to
shift an activity that they were previously
performing in a domestic location to a foreign
location.
2-19
Outsourcing and Offshoring
 Until 1960s, entire value chain was in one
location
 Production took place near customers to limit
transportation costs
 Rapid decline in transportation costs has enabled
firms to disperse over multiple locations
 Service industry followed manufacturing
Outsourcing low-level programming and data entry
work
2-20
Corporate Governance and Stakeholder
Management
 Corporate governance: the relationship
among various participants in determining the
direction and performance of a corporation
Shareholders
Management (led by the CEO)
Board of Directors
2-21
Corporate Governance and Stakeholder
Management
 Board of Directors
Elected representatives of the owners
Ensure interests and motives of management are
aligned with those of the owners
Effective and engaged Board of Directors
Shareholder activism
Proper managerial rewards and incentives
2-22
Corporate Governance and Stakeholder
Management
 Concerns about corporate governance led to the
Sarbanes-Oxley Act in 2002
 U.S. Corporations must abide by:
CEOs and CFOs must fully reveal off-balance-sheet
finances and vouch for the accuracy of the information
Executives must promptly reveal the sale of shares in
firms they manage and are not allowed to sell shares
when other employees cannot
Corporate lawyers must report to senior managers any
violations of securities laws within the organization
2-23
Governance Mechanisms: Aligning the
Interests of Owners and Managers
 Two primary means of monitoring behavior of
managers:
A committed and involved board of directors that acts in
best interests of shareholders
Shareholder activism: owners view themselves as
shareowners
Become actively engaged in governance of corporation
Managerial incentives called “contract-based outcomes”
Goal is to craft incentive packages to align interests of
management with those of stockholders
2-24
Stakeholder Management
 Two views of stakeholder management
Zero sum
Stakeholders compete for attention and resources of
the organization
Gain of one is a loss to the other
Symbiosis
Stakeholders are dependent upon each other
Mutual benefits
2-25
Key Stakeholders
2-26
Social Responsibility
 Social responsibility: the expectation that
businesses or individuals will strive to improve
the overall welfare of society
Managers must take active steps to make society
better
Socially responsible behavior changes over time
Triple bottom line
2-27