Vertical integration is going backward on an industry's value chain

Strategic Management Questions

1. Issues on innovation and technology influence both external and internal environmental scanning. How should a corporation scan the external environment for new technological development?

2. Suppose you are the owner of a small business, who is currently facing a serious problem (any problem). (a) How could you make a decision to resolve this problem? Explain your decision-making process to resolve this problem. (b) How would you transfer of power and wealth in a family business if you have a plan to retire in the future?

3. What are major strategic issues of the Not-for-Profit Organizations? Are Not-for-Profit organizations less efficient than profit-making organizations? Why or Why not?

4. There are five major leadership theories including trait theories, behavioral theories, power and influence theories, contingency theories, and integration theories. Explain them shortly.

5. There have been arguments on strategic leadership by corporate executives and top management team. (a) What are those arguments? (b) There have been external and internal constraints on corporate executives. What are they, and how do they affect the leader's behavior?

6. The Strategic Management consists of three phases. The first phase is the evaluation of the current status, and the second phase is the strategic planning. What are the fundamental differences between the first and the second phases?

7. The Strategic Management consists of three phases. The second phase is the strategic planning, and the third phase is the strategy implementation. What are the fundamental differences between the second and the third phases?

8. In evaluation and control in strategic management, (a) explain primary measures of corporate performance; and (b) explain the importance of control and coordination in the process of strategic management.

9. How would you apply the tree phases of corporate strategic management for your personal career management in the long-run. Please assume that you are almost thirty years old, and your remaining life is sixty years.

10. What are the differences and similarities of the roles between the Board of Directors and the Chief Executive Officer in the corporation?

LECTURE NOTES #1

Chapter 1. Introduction to Strategic Management

I. Basic Concepts of Strategic Management

Strategic Management is combined efforts and decisions to maximize output of the organization with adjustment to the change of environments through feedback operations on the global range of space in the long period of time: evaluation, formulation, and implementation of strategies. If the leadership of an organization wants to remain unchanged – where the company is now – without any visionary ambition, strategic management would not be necessary. But if the leadership intends to expand or improve goals and values with vision and ambition, strategic management is necessary to evaluate potential strengths and weaknesses of the organization, to formulate new strategies for the change of environments, and to implement new strategies by proper adjustment of subsystems to the designated missions. Figure 1 introduces three phases of strategic management. At the first stage, the planning team evaluates the current status of the organization, its strengths and weaknesses, in order to know “where you are now” by analyzing external environment and internal elements of the system or subsystems. All information about the current status of the organization becomes the basis of analysis. Is the current mission from goals and values appropriate? Is the organizational structure efficient to achieve the mission? Is the manning and funding appropriate? Is the marketing and technology sufficient to support the mission? How is the leadership for command and cooperation? Are the communication measures appropriate? The second stage is to formulate a strategic plan based on the evaluation in the previous stage: either expansion or contraction of the mission. The estimate of organizational capability is based on experiences, visionary reasoning, and will-to-do of the leader-ship. The essential part of strategic planning is to set goals and missions. The more accurate the plan is, the more efficient the organization is. The often revisions of the strategic plan require the corresponding cost for structural adjustment followed by layoff and budget cut. The third phase is the implementation of the strategic plan. If the mission is expanded, the company operates with more workers and funds by the enlarged structure; while if the mission is reduced, the opposite is real. Strategic Management is an unceasing process: the new beginning is a starting point for the leadership to observe the performance or efficiency of the new system for new strategies.

Figure 1. The Three Phases of Strategic Management

Goals and Values

Vision toward

New Missions

Where you are

Where You Are Now

Where You Want to Be

Strategy Evaluation Strategic Management Strategy Implementation

How to Get There

Strategy Formulation

Source: Modified by Hugo W. Kim from John M. Bryson, Strategic Planning for Public and Nonprofit Organizations, 3rd ed., San Francisco, CA: Jowwey-Bass, 2004, 7.

Until early 1980s, the United States applied strategic planning for military forces for each time span like every four years, which plan was extended to public and not-for-profit organizations. In South Korea, for example, a series of five-year economic development plans was launched by the President Park since 1961, which plans continued until President Chun’s term. Private organizations apply strategic management for their benefits whenever the leadership intends. When is the starting point for a company to launch the strategic planning? If the change of environment requires a certain degree of adjustment for the system, strategic planning is not avoidable, though the degree of changes is not easy to quantify. For example, the end of Iraq war requires the restructure of U.S. forces in the near future based on a strategic plan, but the military situations in Iraq and Afghanistan would be dynamic so that the plan must be flexible. Many organizations, therefore, rely on intuition and vision rather than formal processes of planning. Once a strategic plan is formulated, policies are provided for adjustment to the new mission with relevant programs and following actions.

Table 1. The Three Phases of Strategic Management

Basic Elements

Subordinate Elements

Phase 1

Environmental Scanning:

Gathering Information

1. External: Opportunities and Threats

* Social Environment: General forces

* Task Environment: Industry analysis

2. Internal: Strengths and Weakness

*Structure: Chain of command

*Culture: Beliefs, expectations, values

3. Resources

*Assets, skills, competencies, knowledge

Phase 2

Strategy Formulation:

Developing Long-range Plans

1. Mission: Reason for existence

2. Objectives: What results to accomplish by when

3. Strategies: Pan to achieve the mission and objectives

4. Policies: Broad guidelines for decision making

Phase 3

Strategy Implementation:

Putting Strategy into Action

1. Programs: Activities needed to accomplish a plan

2. Budgets: Cost of the programs

3. Procedures: Sequence of steps needed to do the job

Evaluation and Control:

Monitoring Performance

1. Evaluate the Performance: Based on actual results, management may need to make adjustments in its strategy formulation or in implementation

2. Feedback/Learning Process: In each process as well as after the evaluation of final results.

II. Initiation of Strategy: Triggering Events

A triggering event is something that acts as a stimulus for a change in strategy.

(a) New CEO: By asking a series of embarrassing questions, a new CEO cuts through the veil of complacency and forces people to question the very reason for the corporation's existence.

(b) External intervention: A firm's bank suddenly refuses to approve a new loan or suddenly demands payment in full on an old one. A customer complains about a serious product defect.

(c) Threat of a change in ownership: Another firm may initiate a takeover by buying a company's common stock.

(d) Performance gap: A performance gap exists when performance does not meet expectations. Sales and profits either no longer increasing or may even be falling.

(e) Strategic inflection point: When a major change takes place due to the introduction of new technologies, a different regulatory environment, a change in customers' values or tastes.

III. Strategic Decision-Making

(a) Modes of Strategic Decision Making:

1. Entrepreneurial Mode: Strategy is made by one powerful individual. The focus is on opportunities. Strategy is guided by the founder's own vision of direction and is exemplified by large, bold decision. The dominant goal is growth of the corporation.

2. Adaptive Mode: Sometimes referred to as "muddling through," this decision-making mode is characterized by reactive solutions to existing problems rather than a proactive search for new opportunities. Much bargaining goes on concerning priorities of objectives.

3. Planning Mode: This decision-making mode involves the systematic gathering of appropriate information for situation analysis, the generation of feasible alternative strategies, and the rational selection of the most appropriate strategy. It includes both the proactive search for new opportunities and the reactive solution of existing problems.

4. Logical incrementalism: It is a synthesis of the planning, adaptive, and to a lesser degree entrepreneurial modes. Top management has a reasonably clear idea of the corporation's mission and objectives, but, it its development of strategies, it chooses to sue "an interactive process in which the organization probes the future, experiments and learns from a series of partial commitments rather than through global formulations of total strategies.

(b) Strategic Decision-Making Process:

1. Evaluate current performance result in terms of (a) return on investment - revenue and profit, (b) the current mission, objectives, strategies, and policies.

2. Review corporate governance - the performance of the firm's board of directors and top management.

3. Scan and assess the external environment to determine the strategic factors that pose opportunities and threats.

4. Scan and assess the internal corporate environment to determine the strategic factors that are strengths and weaknesses.

5.Analyze strategic (SWOT) factors to (a) pinpoint problem areas, and (b) review and revise the corporate mission and objectives, as necessary.

6. Generate, evaluate, and select the best alternative strategy in light of the analysis conducted.

7. Implement selected strategies via programs, budgets, and procedures.

8. Evaluate implemented strategies via feedback systems and the control of activities to ensure their minimum deviation from plans.

Chapter 2. Corporate Governance

I. Role of the Board of Directors

(a) Responsibilities of the Board

1. Setting corporate strategy, overall direction, mission, or vision

2. Hiring and firing the CEO and top management

3. Controlling, monitoring, or supervising top management

4. Reviewing and approving the use of resources

5. Caring for shareholder interests

(b) Role of the Board in Strategic Management

1. Monitor: Ay acting through its committees, a board can keep abreast of developments inside and outside the corporation, bringing management's attention to developments.

2. Evaluate and influence: A board can examine management's proposal, decisions, and actions; agree or disagree with them; give advice and offer suggestions; and outline alternatives.

3. Initiate and determine: A board can delineate a corporation's mission and specify strategic options to its management.

(c) Members of a Board of Directors

1. Inside or management directors: officers or executives employed by the corporation

2. Outside or non-management directors

(d) Nomination and Election of Board Members

The size of a board in U.S. is determined by the corporation's charter and its bylaws, in compliance with state laws. The average large, publicly held U.S. firm has around 11 directors on its board.

II. The Role of Top Management

(a) Executive leadership and strategic vision

1. The CEO articulates a strategic vision of the corporation.

2. The CEO presents a role for others to identify with and to follow.

3. The CEO communicates high performance standards and also shows confidence in the followers' abilities to meet these standards.

(b) Managing the Strategic Planning Process

In most corporations, top management must initiate and manage the strategic planning process.

Appendix I: A System’s Approach to Strategic Management

If an organization is strategically managed by an authorized leadership, this can be called the Strategic Management. Let’s apply a method of the system’s approach to analyze strategic management based on the Figure 1. The system appears in the largest circle, which consists of six subsystems including goals and values, organizational structure, personnel, finance, marketing and technology, and control and coordination. The system interacts with the supra-system of global, regional, and local environ-ments, which are usually more powerful than the system, although the system itself can maintain a leadership in many cases. The subsystems interact with each other within the system – interactions –due to external and internal stimulation such as environmental changes or various inputs. A new input enters the system and produces an output, which reenters the system by feedback operations. This process continues until the output satisfies the goals and objectives of the system. It is essential to identify mandates and missions based on goals and values although they are modified (or adjusted) from time to time according to changes of internal capability and external environment.[footnoteRef:1] One of the most important elements in Strategic Management lies in vertical communications through the supra-system, system, and subsystems as well as horizontal communications between subsystems for timely exchanges of necessary information, because better communications minimize possible errors. [1: Hugo W. Kim, “A Korean American Heritage Foundation,” The Korea Times (One of Korean American Daily Newspapers in Washington, DC), July 21-26, 2001, a four-day series]

Figure 1. A System’s Approach to Structural Management[footnoteRef:2] [2: Hugo W. Kim, Korean Americans and Inter-Korean Relations, Washington, DC: East-West Research, Inc., 2003, 39. The figure is partially modified by the same author. It deals with a system’s approach for “Korean Americans and Integration of Community Resources” to encourage political participation of Asian and Pacific Americans. ]

Feedback Operations

Goals &

Values

Structure

Technology

Marketing

Management

Subsystem

Finance

/Funding

Personnel

/Manning

OUTUT

INPUT

Interactions

Interactions

Environment (Global, Regional, and Local)

Goals &

Values

Structure

Technology

Marketing

Management

Subsystem

Finance

/Funding

Personnel

/Manning

OUTUT

INPUT

Interactions

Interactions

Environment (Global, Regional, and Local)

Note: (a) The system is an organization which is the largest circle. (b) The subsystems include six smaller circles within the largest circle: goals and values, structure, personnel, finance, marketing, and control and coordination. (c) The supra-system is global, national, regional, and local environments, which interact with the system. (d) The output is judged by the goals and values: if output differs from the goals, which difference enters the system as a new input. The feedback process continues until the output is consistent with the goals through adjustment of either goals or output.

For example, let’s assume that two hypothetical corporations - the Virginia Food, Inc. as a profit-making business and the KA College, Inc. as a not-for-profit organization - operate business in Virginia State; that the United States is under war against terrorism around the world particularly in the Middle East, but the U.S. majority voters are favorable to end this war; and that U.S. economy is threatened by both budget and trade deficits, inflation by high oil prices, and credit crunch from numerous defaults of home loans. The supra-system of political and economic environments affects the system: the rise of food prices (both wholesale and retail), and the fall of consumption because of expected reduced income. The subsystems accordingly respond as follows.

Table 2. Interactions between Supra-System and Subsystems

Subsystems

Virginia Food, Inc. (Retail)

KA College, Inc. (Education)

Goals and Values

Reduced revenue and profit margin

No change

Organizational Structure

A certain percent of downsizing

No change

Personnel

A certain percent of Layoff

No change

Finance

Reduced budget / contraction policy

No change

Marketing & Tech.

The change of sales strategy

More aggressive strategy

Command & Cooperation

Speedy response and cooperation

Speedy response and cooperation

Table 2 explains that the Virginia Food, Inc. (a grocery retail business) responds more sensitively than the KA College, Inc. (high education). The grocery business is very sensitive to high inflation as well as recession, but the college education in the Korean American community largely depends on the rise or the fall of the number of new immigrants and students coming from Korea.

The feedback operations are an important process for proper and timely adjustment, either by the change of goals or by the change of output. Let’s assume that the Virginia Food, Inc. set the revenue to one hundred million dollars per year, which is an average achieved in the past decade. If the revenue declines by thirty percent in this recession, the feedback operations may be in two ways: either to reduce the goal to seventy million or to raise sales by reducing prices or by other promotions; or the third way by taking a middle way – reduced goal with increased sales. On the other hand, let’s assume that the KA College sets the goal at 100 admissions and 100 MBA graduates. If admissions remain unchanged but MBA graduates declined by thirty percent, the feedback operations include two ways: first, the fall of Korean American income made students more difficult to get jobs than before, so that they could not provide tuitions and fees to continue their studies; second, the quality of teachings could not attract students in classes, so that some students transferred their studies to other institutions. The tuition matter is not simple, but the school can more actively provide scholarship funds and student loan programs. The quality of teaching is the real matter of high education, which is related to compensation: that is a complicated issue for the newly established institutions such as in the Korean American communities. Above is an overview of part of Strategic Management, which will be further discussed in the following two sections.

Appendix II: Application of Strategic Planning for Personal Development

Hoping to be happy in life, man continues his efforts to pursue the happiness until he dies. Then, what is the happiness and how can we obtain this? Am I now happy and what is the index or equation of my happiness? Suppose that God gave us one hundred twenty years of life; and that since most human beings cannot follow God’s perfection, and a good man can live only ninety years of life; with which he spends thirty years for preparation: six years of baby period, sixteen years of education, three years of military service, and five years of miscellaneous matters such as extended studies, job training, marriage, and wandering. The next thirty years are in active career in a lifetime job or jobs: he is the bread winner of his family for survival with food, housing, clothing, transportation and communications, health care, insurances, and many others; he has to raise children and to educate them almost twenty years; and he has to save money for rainy days as well as for his retirement. Then, man has his last thirty years of remaining life, which would be really enjoyable if he maintains his health with appropriate pension and additional other sources of income. Therefore, an individual person really needs a strategic plan for his happiness in life.[footnoteRef:3] [3: Wheegook Kim, Towards the Land of Hope: South Korea Viewed from Washington, Seoul, S. Korea: Oreum Publishing House, 1998, 129-30, Korean version.]

Happiness lies in contentment, which is a degree of satisfaction in his life. We are happy if we satisfy ourselves in daily life, but we are unhappy when we are not satisfied. What does make us satisfied? Is it wealth with luxurious houses, appliances, cars, jewels, travels by private jets, or some other materials? Is it the success of career management with rapid promotion and wonderful positions backed by political and economic powers? Is it the academic achievement by developing new theories in research, providing useful policies for governments and businesses, teaching wise students who make a great success, or publishing valuable books? Is it the promotion of social justice with law enforcement as a lawyer, policeman, investigator, reporter, or editorial or opinion writer? Is it the pursuing of love by helping the needed by spiritually as well as materially? Is it the pursuing of beauty from painting, sculpture, music, or literature? Since that utility is in satisfaction, the equation of happiness is to maximize the objective function subject to constraints like limited resources. Then, what is the objective function? According to Maslow’s Hierarchy of Needs, human being has five steps of needs: physiological needs, safety needs, social needs, esteem needs, self-actualization which is the highest. [footnoteRef:4] In general, self-actualization is the highest motivation of human behavior, so that satisfaction is based on the degree of self-actualization, that depends on individual setting of goals and values for his life. Someone may pursue truth by building up the virtue of wisdom through years of academic studies, pursuing social justice by enforcing law and order, pursuing the virtue of love by mercy and self-sacrifice, or pursuing beauty through by arts or music activities. There are many other values for a man to pursue for his self-actualization. The four categories of values are recognized: truth, justice, love, and beauty; but most individuals holds mixed values by different degrees.[footnoteRef:5] [4: Abraham Maslow published A Theory of Human Motivation in 1943, which contents are posted at http://www.emotionalliteracyeducation.com/abraham-maslow-theory-human-motivation.shtml. ] [5: For example, the mixture could be 50% of truth, 30% of justice, 10% of love, and 10% of beauty.]

Hugo’s Triangle Theory in Four Dimensions: Figure 2 shows four dimensions: a triangle on the horizontal with the time dimension at the vertical axis. In general, individual capacity consists of three elements: wisdom from knowledge, justice and moderation from tamed mind, and courage and energy from healthy body; which give a virtuous life to individual.[footnoteRef:6] It is essential for individual to develop himself by expanding three capabilities with balancing to make the triangle the widest since its area represents productivity in his job place. If any one of three elements is short, the triangle area would be very small so that his productivity becomes very low, so does offered payroll at the job market. Therefore, total amount of his earning in life becomes the unit wage (decided by his productivity) multiplied by thirty years of the working period. [6: Plato. The Republic. Translated by Benjamin Jowett. Norwalk, CT: The Easton Press, 1980. ]

Figure 2. Hugo’s Triangle Theory in Four Dimensions

Psychological Abilities

Moderation

Intellectual Abilities

Wisdom

Physical Abilities

Courage

Individual

Abilities

Time

The Plane of

3 Dimensions

1. Intellectual abilities (Wisdom): Number aptitude, verbal comprehension, perceptual speed, inductive reasoning, deductive reasoning, spatial visualization, and memory.

2. Psychological abilities (Moderation): attitude, emotions, justice, motivation, politeness and humbleness, a sense of shame, patience, generosity, personality and values, and self-control.

3. Physical abilities (Courage): Strength, flexibility, body coordination (balance), and stamina.

To be happy, each individual tries to maximize his objective function subject to constraints. There are two ways to make him satisfied. One is the reduction of objectives or expectations which is simple in theory but complicated in practice. Every individual has hopes, expectations, and ambitions; which are developed or achieved in civilized society owning to communications with easy and better transportation; but the reduction of self-actualization goal is a matter of one’s pride. The other is the increase in individual capacity or productivity in order to release constraints by better education with more experiences in job training; which require time and money with patience. “No pain, No gain” is fit to this enhancement. My triangle theory is based on the second part: expand your capacity and productivity to produce more happiness in the future. The reduction of objectives is easier in practice but the increase in one’s capacity and productivity is more difficult than any other things. The choice is personal, but one cannot say which way is better for the happiness of each person. But in society wide, expansion is better and more beneficial than contraction or shrinking for the development of civilization as well as the upgrade of individual quality of life. The size of the triangle area should be sufficient for extended happiness for another thirty years of retirement.

Individual Values and Choice of Jobs: Some parents want their children to enter law or medical schools in high education and training. However, this is not a good advice if each individual is not fit to jobs. One may not like law enforcement activities, while the other hates even to visit the doctor’s office. If this is the case, the forced choice may result in failure of children’s life. In developing one’s strategic plan, parents, teachers, or advisors should guide him to choose education based on individual’s favorite values and his capability. @ If one mostly likes truth, let him be a researcher, policy provider, or professor in a favorite field. @ If one mostly likes justice, let him be a defense lawyer, prosecutor, judge, investigator, policeman, reporter, writer, law-enforcement worker, or soldiers. @ If one mostly likes to love people, let him be a social worker, priest or minister, medical doctor, or one who helps difficult persons. @ If one mostly likes to pursue beauty, let him be a painter, sculptor, composer, singer, music player, or play-writer, film-maker, or other fields. The choice of specialization is closely connected to that of jobs and vice versa. However, the values of individual preference are so complicated and cross-related that education itself cannot perfectly match the designated jobs in many cases. The personal system of a man considers three major subsystems including enhancement of capability, suitable career development, and sustainable finance; those which should be wisely managed by strategically provided plans in his life.

The Preparation State (until age 30): the balanced education is essential to build up wisdom from knowledge, and justice and moderation from emotional control of mind, and courage and energy from physical training. They create the capability of each individual, which makes productivity and decides the level of income in the job market. Most importantly, basic education should be balanced particularly in the high school, which is the basis of specialized education and training beginning from the college education. It is important for a student to choose his specialization based on his most favorable values with his mental and physical capabilities, since the choice is linked to his job.

The Active Career Stage (from age 30 to 60): each individual develops his specialization through education, experiences, and extended training. As the new position requires more capabilities, it is wise for a man to make a strategic plan at least every five or ten years by setting new goals for continuous education, financial plan, and career development for self-actualization. If he expects a certain status of life, he has to evaluate his current status to find out strengths and weaknesses; to formulate his strategic plan by establishing strategies from new goals and values; and to implement the strategies and policies by adjustment of all subsystems according to designated missions.

In the retirement stage (from age 60 until his death): strategic plan is most important because this is the final stage in his life. Therefore, he can provide moderate programs to finalize his life fruitfully by maintaining health, reading or writing books, and traveling around the world where he wants to see with his spouse and friends within his budget limit. It could not be ambitious but could be a matured, moderate, and optimistic plan, to be adjusted to the change of his conditions. Someone may object the idea of strategic planning in retirement, but it is a short sighted mind for his remaining life. If there is no adjustment by new strategic plans, he might regret something at the end of his life. Active challenge toward one’s happiness is a good weapon to make one’s life vivid and energetic.

(End of Lecture 011)