Welcome to Class 2Welcome to Class 2Overview

&&Corporate Governance

Chapter 1Chapter 1

Overview of Course & TextbookOverview of Course & Textbook

Course is divided into

Concepts and ActivitiesConcepts and Activities

Concepts are divided into

Management issues and Strategy issues Management issues and Strategy issues

Activities are divided into

Research and Evaluation Research and Evaluation

The Management book presents TMT Competencies,

Strategy Concepts, and Methods for Researching and Assessing Corporate Performance

Book available only as an “E” book:Book available only as an “E” book:

Online: http://www.campus-hq.com/ Online: http://www.campus-hq.com/ Research, Analyze, and Report

Raymond K. Van Ness

ManagementStrategy & Performance

ManagementStrategy & Performance

5th Edition5th Edition

The Management Textbook is divided into three distinct segmentsThe Management Textbook is divided into three distinct segments

Governance & Governance &

Nature of StrategyNature of Strategy

Top Management Top Management Teams (TMT)Teams (TMT)

(1)(1)

Business Environments Business Environments (2)(2)

Creating Value Creating Value

(3)(3)

Corporate Boards Corporate Boards

(4)(4)

Nature of Corporate Nature of Corporate Performance Performance

Introduction to Introduction to Corporate Research Corporate Research

(5)(5)

Research Research Methodologies Methodologies

(6)(6)

Qualitative Research Qualitative Research (7)(7)

Financial Research Financial Research (8)(8)

Demystification of Financial Data; Demystification of Financial Data; Measuring, Assessing, & Reporting Measuring, Assessing, & Reporting

Stakeholder Perspective Stakeholder Perspective

(9)(9)

Financial Demystification Financial Demystification

(10)(10)

Performance Scorecard Performance Scorecard

(11)(11)

Measurements & Meanings Measurements & Meanings

(12)(12)

Performance Scoring & Report Drafting Performance Scoring & Report Drafting (13)(13)

Formalizing The Performance Report Formalizing The Performance Report

(14)(14)

Ch 1, 2, 3, 4 Ch 5, 6, 7, 8 Ch 9,10, 11,12, 13,14

Each Chapter addresses specific questions Chapter 1: Chapter 1: Who is running the company and what should they know

and do?Chapter 2: Chapter 2: What is the business climate and what must firms do to

compete successfully?

Chapter 3: Chapter 3: How do firms add value & whom must they satisfy?

Chapter 4: Chapter 4: What are the mechanisms for overseeing TMT behavior and decision-making?

Chapter 5: Chapter 5: What is corporate research?

Chapter 7: Chapter 7: How do “we” research the social side of performance & TMT’s strategic planning?

Chapter 6: Chapter 6: How can “we” do corporate research and why is it important?

Chapter 8: Chapter 8: What do “we” need to know to investigate financial performance?

Each Chapter addresses specific questions

Chapter 9: Chapter 9: Why do different people assess a firm’s performance differently?

Chapter 10: Chapter 10: Why are financial reports confusing and how can they be made understandable?

Chapter 11: Chapter 11: What is a functional tool for standardizing financial reports?

Chapter 12: Chapter 12: What do all the ratios mean and how can they be used effectively?

Chapter 13: Chapter 13: What is an easy and effective way of quantifying a firm’s performance?

Chapter 14: Chapter 14: What is an easy and effective way for reporting a firm’s performance?

Each person must purchase their own individual online text & analysis software.You MUST have your own copy.

Note: Note: A security code will be provided by the publisher that MUSTMUST be included on your be included on your final final semester project.semester project.

The PSC software will be provided by the publisher when you The PSC software will be provided by the publisher when you acquire your online textbook package.acquire your online textbook package.

5th Edition

Research, Analyze, and Report

Raymond K. Van Ness

ManagementStrategy & Performance

ManagementStrategy & Performance

A Closer look ….

Corporate

Governance

Corporate GovernanceCorporate Governance

Corporate GovernanceCorporate Governance 1. Consists of t1. Consists of the processes, customs, policies, and proceduresprocesses, customs, policies, and procedures of a firm as well as the governing body governing body that is responsible for its direction, management, and control.

2. Should balance the interests of: Customers, employees, Customers, employees, managers, owners, and other stakeholders managers, owners, and other stakeholders

GOVERNING BODY consists of:GOVERNING BODY consists of: 1. Stockholders1. Stockholders 2. Management2. Management 3. Board of Directors 3. Board of Directors

Corporate Governance

Governance: Anchor Points

VMSVMS

• VISION• MISSION

• STRATEGY

Vision and Mission

The Vision and Mission statements are anchors that:

1. Communicate "what a firm wants to be"

2. Communicate "what the firm does.“

3. Provide a stable identity analogous to a nation's constitution.

4. Are an expression of a firm’s values and beliefs about its responsibility as a corporate citizen.

5. Clarify the purpose of the organization, help employees bond with the firm, and set a context for understanding management decisions and actions.

Vision

A Vision Statement should be inspiring and highlight a firm's aspirations and values.

It should be uplifting and evoke positive emotions.

It defines "what a firm wants to be."

Mission

The firm's mission statement clarifies where the firm will focus its attention and highlights its core values and beliefs.

It may emphasize how and why the company plans to compete in specific areas.

In brief, it clarifies "what a firm does."

Strategy

A firm's strategy is the TMTs "how to" plan for fulfilling the organization's mission and accomplishing its goals and objectives.

The strategic plan is an detailed document outlining specific courses of action each with precision and an exact timeline.

It is the map for achieving competitiveness.

It emphasizes its Performance ObjectivesPerformance Objectives

Performance Performance ObjectivesObjectives

TMTs guide their firms to the achievement of Performance Objectives by:

Motivating the firm's employees

Energizing & leveraging value-producing resources

Developing basic, core, and distinctive competencies

Performance Objective LadderPerformance Objective Ladder

1. Strategic Competitiveness

Strategic Competitiveness Strategic Competitiveness is the result of unique business competencies that enable the firm to perform activities more effectively and efficiently than rivals.

It is the first rung first rung on the performance objective ladder

It means the firm is able to earn disproportionally higher profits than its competitors.

It suggests a firm has a competitive advantage over rival firms.

2. Sustainable Competitive Advantage

Achieving a Sustainable Competitive Advantage means a firm has discovered a method for continuouslycontinuously performing its value generating activities more effectively and efficiently than its rivals.

Sustainable competitive advantage is the second rung second rung on the competitive ladder – it means "commercial staying power."

3. Recurrent Above Average Returns [3. Recurrent Above Average Returns [RAARRAAR]]

Above Average Returns are desirable to investors since they indicate the firm is a better than "average" investment.

Above average returns are those that exceed what investors would normally expect to achieve on similar risk investments.

The ultimate objective is to implement a strategy that enables these AAR to be recurrent.

RAAR is the third rung third rung on the performance objective ladder.

Recurrent Above Average Returns Recurrent Above Average Returns are earned only by firms that have

ACHIEVED ACHIEVED and

SUSTAINED SUSTAINED a competitive advantage for

an extended period of time.an extended period of time.

Remember: Remember: SustainableSustainable = Recurrent = Recurrent PotentialPotential Sustained Sustained = Recurrent = Recurrent AchievementsAchievements

Above Average ReturnsAbove Average Returns&&

Strategic LevelsStrategic Levels

Competitive Advantage, Above Average Returns, and Competitive Advantage, Above Average Returns, and Strategic LevelsStrategic Levels

BUSINESS BUSINESS levellevel::

Competitive Advantage and above average returns at the “business” strategic level = high profits + satisfied customers.

CONGLOMERATE CONGLOMERATE levellevel::

Competitive Advantage and Above Average Returns at the “conglomerate” strategic level = successful & synergistic subsidiary successful & synergistic subsidiary businessesbusinesses. (Portfolio of businesses)

Conglomerate level strategy is also called corporate level strategy

Performance: Performance: Theoretical ModelsTheoretical Models

Performance: Theoretical ModelsPerformance: Theoretical Models

Is Performance primarily dependent upon a firm’s competencies and leadership?

Or

Is Performance primarily related to the industry in which a firm competes?

  The conflicting ideas are categorized as: (1) The Resource-based View, and (2) The Industry/Organizational View

Conflicting Theories aboutConflicting Theories aboutThe Primary Factors Dictating a Firm’s Success or FailureThe Primary Factors Dictating a Firm’s Success or Failure

In achieving RAARIn achieving RAAR

(1) Resource-based View (R/B Model)(1) Resource-based View (R/B Model)

Assumptions of the R/B modelR/B model:1. Performance objectives are dictated by the firm’s unique

resources and capabilitiesresources and capabilities

2. The internal environment: A firm’s physical, financial, intangible, intellectual, and leadership resources will determine the degree of its success.

In other words, it is not so much the industry that dictates the firm’s ability to produce above average returns as it is the ability to compete within that industry.

(2) Industry/Organizational View (I/O Model)

Assumptions of the I/O modelI/O model:1. External environment imposes pressures and constraintsExternal environment imposes pressures and constraints that

determine strategies leading to above-average returns

2. Most firms competing in an industry control similar strategically relevant resources and pursue similar strategies

3. Resources used to implement strategies are highly mobile across firms

4. Although a firm’s physical, financial, intangible, intellectual, and leadership resources are important, it is primarily the industry in which it competes that will determine the degree of its success

In other words, it is the industry that dictates the firm’s ability to produce above average returns.

TMT TMT – CompetenciesCompetencies

From the R/B Model to the I/O Model –

Competent TMTs are essential

Literacy = Knowledge

Managerial literacy at the TMT level suggests a highly refined knowledge of managing people and strategies.

TMT literacy encompasses knowledge of contemporary theories and practices for the effective deployment of intellectual, physical, and financial resources.

TMTs are expected to have an extensive knowledge of corporate finance and accounting.

[Understand Concepts]

8 Specific spheres of business literacy

• (1) Human resources

• (2) Corporate cultures

• (3) Industry-specific customs, practices, and procedures

• (4) Accounting and finance

• (5) Techniques for the effective utilization of corporate resources

• (6) Systems for assessing progress (qualitative and financial

performance monitors)• (7) Analysis methods (feedback loops)

• (8) Tactical and Strategic planning

Manage = Skills

Management skills or skills-set refers to the technical know-how and the degree of proficiency with the three methods of persuasion.

The TMT must be able to apply what they know – there are many business managers who are considered “knowledgeable" yet they are ineffective.

Inept leaders often have theoretical knowledge but are lacking in one or more of the following management skills:

1. Communication Skills

2. Implementation Skills

3. Interpersonal Skills

4. Persuasion Skills

[Can Apply Concepts]

Skills of PersuasionSkills of PersuasionManagement skills or skills-sets refer to both technical competence Management skills or skills-sets refer to both technical competence

and skills of persuasion. Good managers must not only demonstrate their and skills of persuasion. Good managers must not only demonstrate their knowledge but also master the skills of persuasion. knowledge but also master the skills of persuasion.

AristotleAristotle, the Greek philosopher, identified three methods of persuasion , the Greek philosopher, identified three methods of persuasion and good managers have mastered each:and good managers have mastered each:

•Logos = Persuasion by reasoningLogos = Persuasion by reasoning•Pathos = Persuasion by emotional appealPathos = Persuasion by emotional appeal•Ethos = Persuasion by CharacterEthos = Persuasion by Character

•In other words, even though an individual may be business literate at the highest level, if they cannot persuade, they have not achieved the minimum level of necessary administrative skills.

Ability = Critical Thinking

Critical thinking requires:Intellectual discipline

Elimination of bias

Visualizing situations from a variety of perspectives

Reflecting, reasoning, and communicating conclusions in clear and logical manner.

[Can Apply Concepts with great expertisegreat expertise]

TMT – Responsibilities Embrace the organization's vision and mission

Meticulously analyze the internal and external environments

Set realistic goals and objectives

Craft, implement, and manage tactics and strategies for the continuous achievement of above average returns

The TMT must The TMT must expertlyexpertly execute execute 5 Strategic Management Activities5 Strategic Management Activities

TMT Strategic Management Activities 1. (1. (SWOT)SWOT)

Analyze the (internal & external) environments to assess the firm’sa)a) StrengthsStrengths

b)b) WeaknessesWeaknesses

c)c) OpportunitiesOpportunities

d)d) ThreatsThreats

2. (2. (Strategic IntentStrategic Intent))ReaffirmReaffirm or reestablishreestablish short & long-term goals and objectives

3. (Strategy Formulation)Translate goals and objectives into tactical & strategic action plans

4. (4. (Strategy ImplementationStrategy Implementation))Communicate and activate the tactical and strategic plans

5. (5. (Strategy ManagementStrategy Management) ) Assess interim successes & failures and adjust course as conditions merit

1. Scanning 2. Monitoring 3. Gathering Competitive Intelligence

Core Operating Levels

• Business Level Models (11stst Level Level)

versus

• Conglomerate Level (22ndnd Level Level)

Strategies are significantly different at Strategies are significantly different at different core operating levelsdifferent core operating levels

Core Operating Models Core Operating Models

1.1. First-level Corporations First-level Corporations (business-level model)

Value creating and competitive advantage through: Marketing products and/or services.Marketing products and/or services.

2. Second-level Corporations 2. Second-level Corporations (conglomerate-level model)

Value creating and competitive advantage through: Management of a portfolio of subsidiary companies.

Business-level model Business-level model (First-level)(First-level)Achieving sustainable competitive advantage at the business-level means firms offer products and/or services that are distinctive** and provide profit maximization opportunities.

DISTINCTIVENESS:

1. Provides customers a motive to purchase from a specific firm

2. Proves difficult for competitors to duplicate or imitate.

Four common methods of achieving DISTINCTIVENESSDISTINCTIVENESS:1. Uniqueness of product/service2. Added or special components3. Lower cost levels4. Preferential delivery

1. Low-Cost leadership (perceived as least expensive or best value provider)

2. Differentiation

(providing a unique product or service)

3. Narrow Market Catering [NMC] (offering a product or service not easily available anywhere else)

(often referred to as niche or focus strategy)

Business level strategic formulation is Business level strategic formulation is guided by the firm’s guided by the firm’s competitivecompetitive model. model.

Competitive Models:Competitive Models:

Conglomerate-level model Conglomerate-level model (Second-level)(Second-level)

Competing and achieving sustainable competitive advantage at the conglomerate-level means:

Producing “above average returns” by creating a portfolio of Producing “above average returns” by creating a portfolio of

synergistic businesses that have synergistic businesses that have eacheach achieved competitive achieved competitive advantage at the business-leveladvantage at the business-level

Subsidiary companies benefit other companies in the portfolio when they provide synergistic benefits such as:

(1) Shared knowledge

(2) Operating systems

(3) Facilities

(4) Contact networks, etc.

Conglomerate-level strategists have options such as:

1. Joint ventures

2. Corporate partnering

3. Other types of collaborative activities

HoweverHowever, the most common strategy involves

acquisitions and divestitures acquisitions and divestitures of operating companies.

The strategists can change the basic composition of the parent company simply by diversifying into new lines of business.

Conglomerate-level strategies involve an Conglomerate-level strategies involve an extensive array of options.extensive array of options.

1. Related Diversifications 1. Related Diversifications (Those that are closely related closely related to companies currently in the portfolio)

2. Unrelated Diversifications 2. Unrelated Diversifications (Those that are significantly different significantly different from previously owned subsidiaries)

Corporate diversifications through Corporate diversifications through acquisitions are divided into:acquisitions are divided into:

Homework:Homework:(1)(1) Read Read Chapter 2Chapter 2 in your online textbook in your online textbook(2)(2) Elect team officers: President, VP, SecretaryElect team officers: President, VP, Secretary(3)(3) Study online lecture notes!!!!Study online lecture notes!!!!

Point of emphasis:Point of emphasis:1. Core Operating Models are Business-level and Conglomerate-level

2. Competitive Models relate to Business-level companies and include strategies such as cost leadership, differentiation, and niche marketing

3. 3. GoalsGoals are a general are a general description of a performance aimdescription of a performance aim

4. 4. Objectives are the specificObjectives are the specific target within a goal or set of goals. target within a goal or set of goals.

End Corporate GovernanceEnd Corporate Governance