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Chapter 7

BU481 Chapter Notes - Chapter 7: The Roots

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Karin Schnarr

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BU481 Chapter 7 – Management Preference Analysis: The Strategy-Management Week 6
Preference Linkage
Value Creation, Capture and Distribution
-In assessing the link between management preferences and strategy, we need to address on
what basis management can and should prefer a particular strategy
-The general manager’s role is to create capture, and distribute value
-Understanding the various stakeholders reveals the alignment, or lack thereof, between
strategy and stakeholder interests
-Companies that embrace stakeholders, rather than just shareholders perform better
Reconciling Stakeholder Interests
-The discussion of reconciling stakeholders interests with respect to the creation and distribution
of value centres on employees, customers, and shareholders
-Without any of these three key stakeholders, the firm will not survive
-Assuming that managers can assess the appropriate balance, the concern remains that they
may act in a self-interested fashion, essentially tipping the balance in favour of their own
-Although there should be many checks and balances in the operations of the firm, the ultimate
responsibility for the direction and performance of the organization rests with the board of
directors whose mandate is corporate governance
Corporate Governance
-Covers all the mechanisms that govern the managers’ behaviour and delineates their
discretionary latitude
-The need for such mechanisms stems from the separation of ownership of the firm by
shareholders and control of the firm by management
-Many mechanisms contribute to corporate governance, including firm-specific processes of
checks and balances, and ultimately the board of directions; external mechanisms such as
regulatory constraints; and the market itself which exerts pressures on firms to achieve their
potential – underperforming firms become takeover targets
-Although the board of directors must ensure that the strategic direction of the organization is in
the best interest of the corporation and in particular the shareholders, there have been many
criticisms about its effectiveness in achieving this mandate
-One of the primary criticisms is that the board tends to be dominated by internet management
or friends of management
-A mechanism is to manage executive compensation to better align the interests of
management with those of shareholders through stock option plans
-Boards often lack the expertise to question management, and when a director does have the
expertise, they feel like a lone wolf in questioning the direction posed by management
-Five recommendations:
-Board members must be expert
-Board meeting procedures should focus on debating new decisions, strategies, and
policies, not just on reviewing past performance
-Directors need better access to information
-Directors should be required to devote a substantial portion of their professional time to
the corporation
-Board members must have the right incentives
-Ensuring strong corporate governance is essential to restoring confidence and trust in a
capitalist system
-There is considerable pressure to expand the domain of stakeholders to include society at
Corporate Social Responsibility
-The socially responsible firm should “strive to make a profit, obey the law, be ethical and be a
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BU481 Chapter 7 – Management Preference Analysis: The Strategy-Management Week 6
Preference Linkage
good corporate citizen”
-Social welfare is maximized when firms are guided by the single objective function of wealth
-Proponents of CSR suggest that the firm serves more than its shareholders, customers, and
employees; it serves society at large
Management as a Key Stakeholder
-Two sources of conflict or inconsistency:
-Inconsistency between the proposed and preferred strategy
-Inconsistency between the preferred strategy and other realities
Inconsistency between Proposed and Preferred Strategy
-These conflicts need to be identified and corrected or the pursuit of the strategy could be
hamstrung by management indifference or outright opposition
Inconsistency Between Preferred Strategy and Other Realities
-Some managers become committed to a new strategic proposal that is otherwise inconsistent
with business conditions
-Some managers want to persevere with a strategy that is becoming obsolete in the face of
changing conditions
The Role of Management Preferences
-You and your management colleagues drive strategy
-There is no way to divorce the decision determining the most sensible economic strategy for a
company from the personal values of those who make the choice
-Management preferences clearly cut two ways:
-Preferences serve to focus and motivate the efforts of the firm
-Management preferences may lead to pressures for inappropriate ventures, potential
inflexibility, a focus on personal versus shareholder interests, and so on
The Roots of Strategic Preference
-Strategic preferences of managers have their roots in the personal attributes of managers and
in their job contexts
-Personal attributes generate tendencies towards certain types of action; the job context adds a
web of behaviour incentives and constraints
-Basic needs, beliefs, and job contexts of managers shape their strategic preferences
Basic Needs
-Refer to central aspects of a manager’s personality
-They include the need for achievement, power, security, and recognition
-Managers with a strong need for achievement will likely favour expansionary programs and
accept the risks they may imply
-A manager’s basic needs are fairly stable and enduring and support a consistent approach to
strategic decisions
-If conflict comes up between manager’s basic needs and the strategy, you may have to change
the nature of the job or change the manager on the job
-It is important to note that management preferences not only shape strategic choices, but they
also act as a filter through which management interprets the other two components of the
strategic analysis triangle: what they need to do and what they can do
-Over the years, managers build up beliefs about their own competences
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