40 Contemporary Issues in Strategic Management
| 1. Learning Outcome |
| 2. Introduction |
| 3. Business Ethics |
| 4. Corporate Social Responsibility |
| 5. Corporate Governance |
| 6. Environment Sustainability |
| 7. Strategic Leadership |
| 8. Technology Proliferation |
| 9. Innovation |
| 10. Summary |
1. Learning Outcome:
After completing this module the students will be able to understand:
- Changes in the decision environment
- Contemporary issues in the area of strategic management
- Impact of those issues on strategic decisions
- Managing those issues while formulating and implementing strategies
2. Introduction:
In today’s business environment, the top down approach to management has fundamentally disappeared. Mangers face new set of problems and issues while making their decisions in the present era. Different issues like innovation, corporate governance, corporate social responsibility, sustainability etc. have emerged which has significant impact over the strategic decisions of an organization. Strategists today must understand and apply variety of strategic management approaches and concepts to maneuver organizations through real time issues. In order to take an organization through complex strategic decisions, managers need to capitalize on emerging strategic management issues. Some of these issues can be discussed as below.
For example, United Technologies has a code of business ethics comprising of full 21 pages and has appointed a vice president of business ethics also. Toyota has also framed and implemented a code of business ethics called “Toyota Code of Conduct”, (Figure-2) which suggests the ethical practices to be followed while transacting within and outside the organization. Similarly, Hewlett-Packard has also set a code of ethics called “Standards of Business Conduct” which talks about company’s core values, leader’s attributes, building trust, respect, Integrity, passion for customers, responsible corporate citizenship, and details regarding ethical compliance office (Figure-3).
4. Corporate Social Responsibility:
CSR has evolved as a way of corporate life and has become integral part of any company’s performance review. It is the obligation of business to pursue those policies, to make those decisions or to follow those lines of action which are desirable in terms of objectives and values of society. It is a concept whereby companies voluntarily integrate social and environmental concerns in their business operations. CSR is the continuing commitment by the business to behave ethically and contribute towards economic development while improving the quality of life of
workforce and their families as well as of the local community and society at large (Figure-4). The European Commission says that being socially responsible means not only fulfilling the legal expectations, but also going beyond compliance and investing more into human capital, the environment and relations with the stakeholders.
Therefore, being socially responsible has become unavoidable for the social problems in terms of potential costs and benefits to the firm and focus on social issues that could benefit the company in the future.
Many critics believe that a company should manage the bottom line, measured in financial terms only, as that is what an investor would be interested in. But, business leaders who plan on evolving long-term strategies have understood the importance of CSR. They have been quick to understand the new ethos and have identified the potential for triple bottom line benefits, namely economic bottom line, social bottom line and environmental bottom line. A number of companies have started using this method of accounting which expands the traditional reporting frameworks and takes into account the social and environmental performance in addition to financial performance.
It has become imperative to focus CSR during the process of formulating and implementing strategies. While a company frames strategies to maximize the wealth of its shareholders, it must take into account that main stakeholders of a company includes shareholders, employees, the surrounding community, vendors and customers also. It is important that every stakeholder’s interest be addressed and focused while deciding strategies. CSR in relation to production processes can also be carried out to reduce energy use, limit or alter material usage, reduce water use, save natural resources, efficiently managing emissions etc. CSR activities can be broadly divided into four categories: Community, Stakeholders, Production Processes, and Employee relations.
5. Corporate Governance:
Corporate Governance is the code of practices by which a company’s management is held accountable towards shareholders for efficient use of resource. It is a system of directing and controlling the organization. corporate governance can be defined as a process affected by a set of legislative, regulatory, legal, market mechanisms, listing standards, best practices and effort of all corporate participants including auditors and financial advisors which create a system of checks and balances with the goal of creating and enhancing enduring and sustainable value while protecting the interest of external environment.
As we know that primary objective of management of a company is to enhance its value and to maximize the wealth of its shareholders. The central purpose of corporate governance is to make managers accountable to shareholders. Without a corporate governance structure, managers would be free to make decisions that are in their own interest, but not necessarily in the interest of the company or shareholders. Corporate governance keeps managers in check by limiting their power and, often, by tying their pay to company’s performance. According to Donovan,” Corporate Governance is an internal system encompassing policies, processes and people, which serve the needs of shareholders and other stakeholders, by directing and controlling the management activities with good business savvy, objectivity, accountability and integrity”. The primary principle behind the concept of corporate governance is the agency theory. Managers work as agent of shareholders. Each and every action or activity of mangers is supposed to lead towards value creation. But sometimes there may be a conflict in interest of principle and agent i.e. shareholder and manager (Figure-6). Therefore it is better to ensure the accountability of managers through some system that try to reduce or eliminate such conflict of interest between principle and agent.
In context to strategic management, corporate governance refers to the set of internal rules and policies that determine how a company is directed. Corporate governance decides, for example, which strategic decisions can be decided by managers and which decisions must be decided by the board of directors or shareholders. Therefore corporate governance helps in shaping the strategic focus which determines the direction an organization should take to meet its goals and ensure stakeholders satisfaction. This should be based on the predictability as the evolution of strategies have to consider the dynamic nature of environment within which it has to operate and hence the challenges from environment need to be anticipated. Strategists, while deciding upon any strategy has to take care of the corporate governance as well.
The fundamental concern of the corporate governance is to ensure the conditions under which organization’s management and directors Accountability act in larger interest of the organization and shareholder in particular. It also ensures the means by which managers are held accountable towards capital providers for the use of assets. It allows more constructive and flexible response to raise the standards in running and managing a company as opposed to strict statutory requirements.Corporate governance in India is mainly based on Birla Committee’s guidelines, which have three key aspects relating to scope, importance and ambit of corporate governance. These aspects are defined as accountability, transparency and equality of treatment for all shareholders (Figure-7)
6. Environment Sustainability:
Companies around the globe are struggling with a new role, which is to meet the needs of present generations without compromising the ability of coming generations to meet their own needs. Companies are being called upon to take responsibility for the ways their operations impact the natural environment (Figure-8). They are also being asked to apply sustainability principles to the ways in which they conduct their business. Sustainability refers to an organization’s activates, typically considered voluntary, that demonstrate the inclusion of environmental concerns in the business operations and interactions with the stakeholders.
Strategies framed by companies are being evaluated in terms of environmental practices as well. People appreciate the organizations that decide and implement their strategies in a way that helps in conserving and preserving the environment. The interest of society is increasing in the companies that support preserving nature’s ecological balance and foster the clean and healthy environment. Strategically companies are demonstrating to their customers and stakeholders that their green efforts are substantive and which set them apart from their competitors. A company’s environmental performance must back up their rhetoric and be consistent with sustainability standards. The ecological challenge faci
ng all organizations requires managers to formulate strategies that preserve and conserve natural resources and control pollution. Special natural environmental issues include ozone depletion, global warming, developing biodegradable products and packages, waste management, water, air and noise pollution etc. In addition to having environmental favoring strategies, companies can have environmental representatives on their board of directors also. For example, Wall-Mart is following the strategy of monitoring not only price its vendor offers for the product but also how these products are made in terms of environmental practices (Figure-9). It has come up with a project of installing solar panels on all its stores in California and Hawaii which will be serving more than 30% of power requirement in the stores. It may go forward for adopting the same practice at national level if project is found to be successful.
Sustainability Report: Majority of the companies have now started publishing sustainability report as an annual feature. Sustainability report is a document released by the company disclosing information about its environmental and social performance. It reveals that how company’s activities are affecting natural environment. The Global Reporting Initiatives (GRI) has specified some guidelines regarding the information and contents to be provided by the companies in sustainability report. Earlier companies were used to use different terms like organic, green, safe, environment friendly etc. because there were no set of guidelines or norms and legal definitions were available. No company likes to have reputation of being polluter. Bad sustainability track reduces the market share, threaten its standing in the society and attracts scrutiny & penalty from government, environmentalists and regulators.
7. Strategic Leadership:
The effective strategic leadership is the key for successful strategic management in an organization. Strategic leadership is the ability of a manager to express strategic vision for the organization and to motivate the employees to work for fulfillment of that vision (Figure-10). Strategic leaders create organization structure, allocate resources and express the strategic vision. They make use of rewards and incentives to encourage the employees. It is the ability to anticipate, envision, maintain flexibility and to empower others to create strategic change in the organization.
Strategic productivity is the primary objective of strategic leadership. The ability to manage human capital is the most important skill of strategic leader. Probability to have competitive advantage and to earn above average profits is reduced when a strategic leader is not able to assess the changes in the environment and to respond quickly as well as appropriately. Strategic leader must know how to deal with the drivers and complex competitive situations.
The responsibility for strategic leadership generally lies with the top management. This role is mostly played by the CEO (Figure-11). It can be some time members of board of director, the divisional general manager also. Regardless of their title and organizational function, strategic leaders have substantial decision making responsibilities which cannot be further delegated. Strategic leadership is quite complex and critical form of leadership. Successful strategies cannot be formulated and implemented without having an effective strategic leader.
The productivity of the employees led by strategic leader is determined by the leadership style adopted by the leader. Most effective and commonly used style of strategic leadership is Transformational leadership. Transformational leaders motivates the followers to do more than expected, to continuously enrich their capabilities and to place the interest of organization over and above their individual interests. They keep on motivating followers to work for higher level of achievement. Such types of strategic leaders generally have high emotional intelligence, are empathetic with others and have effective interpersonal skills. Another style of Strategic leadership can be Transactional Leadership. Leaders using this style provide rewards and punishments to the followers depending upon their performance. Leaders and followers set the goals together, and employees agree to follow the direction and leadership to accomplish those goals. The leader review results and train or correct employees when team members fail to meet goals. Employees receive rewards, such as bonuses, incentives, promotion etc. when they accomplish goals.
Strategic leaders have to take undertake so many activities and actions. Some key actions taken by the strategic leaders include determining strategic direction, effectively managing the firm’s resources, sustaining an effective organizational culture, ensuring ethical practices, and establishing balanced organizational control.
8. Technology Proliferation:
Technology can be defined as a body of knowledge that a company uses during the production of products and services (Figure-12). One of the biggest challenge strategists face today is how to deal with fast changing technology. How to accept it, reject it or to integrate into business operations. Decision regarding technology has become quite imperative because accepting right technology and changing or modifying the products accordingly, will keep the business moving forward otherwise company can be out of the business. Technological changes can lead to demolition of existing business or even the entire industry. It can affect the products and services offered by a company or the way a company carries its operations. The rate of changes in the technology varies from industry to industry. For example, in case of electronic goods such rate of change can be very high and constant in comparison to furniture manufacturing. Since the technology is integrated into almost all the sub-systems of a business, therefore success or failure of strategies also depends upon the effective decisions regarding technology.
Technology proliferation affects more in case of high technology industries. High technology industries are those where scientific knowledge that company uses while producing products and services is advancing very rapidly, resulting into frequent changes in the attributes of products and services being produced (Figure-13). Smartphones, Digital Cameras, Computers and Laptops and other electronic equipments are the best example of high technology industry.
In case of high technology industries, companies often compete to develop revolutionary products and to be the first mover. Because being first mover in regard to a revolutionary product will lead to monopoly position and there are chances of earning huge profits if such revolutionary product is successful to satisfy the unmet needs of the consumer and demand is high. Moreover such first movers may be able to establish brand loyalty, which will be expensive to break for late movers. First movers may be able to ramp up the sales volume and can enjoy the large scale economies before the entry of rivals. At the same time, first mover has to bear the significant pioneering cost related to developing technology, distribution channels and educating the consumer about the nature of the product, which late entrants will not be required to spend and may be enjoying a free ride. Due to lots many uncertainties involved, first movers are prone to bear huge losses as well.
9. Innovation:
Innovation is rapidly becoming a key strategic driver for successful organizations. It gives much needed competitive edge to the companies to move ahead of their competitors. According to Schumpeter, Invention is the act of creating or developing new products or processes, whereas Innovation is the process of creating a commercial product from an invention. Thus invention brings something new into existence and innovation brings something new into use. Technical criteria can be used to determine the success of an invention whereas commercial criteria can be used to determine the success of an innovation. No company can become and remain market leader in its industry if it is not in a continuous process of developing innovative products desired by the customers (Figure-14).
Many companies are able to create ideas that lead to inventions, but commercializing those inventions through innovation has proved difficult. This difficulty can be suggested by the fact that approximately eighty percent of R&D occurs in large firms, but these large firms produce less than fifty percent of the patents. Patents are strategic assets and ability to regularly produce them can be an important source of competitive advantage, especially for the firms competing in knowledge based industries. Innovation is not a result of being genius; rather it is a collaborative process where people from different parts of the organization contribute to create and implement the new ideas. It requires the broader set of people working with different backgrounds like engineers, marketing managers, investors, finance managers and above all strategists.
Methods of Innovation: Companies can follow any of the three methods to innovate. Innovation can be done through internal activities, through strategic alliances and by acquiring other companies to gain access to their innovations and innovative capabilities. A company can use even all the methods to innovate.
9.1 Internal Innovation: In case of established organizations most of innovation comes from efforts in research and development (R&D). Research and development is the most critical factor in gaining and sustaining a competitive advantage in some knowledge based industries such as information technology, pharmaceuticals etc. Innovating through internal R&D required a lot of time and investment as performance of R&D cannot be evaluated in the short run. Firms can go for two types of internal innovations – Incremental innovations and Radical innovations.
Most of innovations in this category are the incremental innovations. It refers to building on existing knowledge base and provides small improvements in the current product lines. These are evolutionary and linear in nature. The markets for internal innovations are well defined, characteristics are clearly understood, profit margins are lower, and competition is primarily on the price. For example, adding a whitening agent to soap detergent (Figure-15), improvements in televisions over the period of time etc. These types of innovations are the outcome of induced strategic behavior. In contrast to incremental innovations, radical innovations are technological breakthroughs and create new knowledge. These are revolutionary and non-linear in nature; typically use the new technologies to serve newly created markets. It establishes new functionalities for the users and significant potential for growth in revenues and profits. Radical innovations are rare because of the difficulty and risk involved in developing them. Value of the technology and the market opportunities are highly uncertain. These types of innovations are the outcome of autonomous strategic behavior. For example, development of smartphone from the basic cell phone, or development of personal computer to present age computer.
9.2 Innovation through Strategic Alliance: Companies are increasingly depending on strategic alliances for innovating and are building networks of alliances or joint ventures that represents a form of social capital for them. This social capital in form of relationship with other entities, help them to obtain knowledge and other resources required for innovation. Some firms even allow other companies to participate in their internal new product development processes.
9.3 Innovation through Acquisitions: Firms sometimes acquire other entities to have access to their innovations and their capabilities to innovate. Another reason for going such acquisitions can be growth. Capital market values growth; and acquisitions provide a mean to rapidly extend one or more product lines and increase the firm’s revenues. But in such cases, sometimes company loses strategic control and focus instead on financial control of their original and especially of their acquired units. Therefore this method of gaining innovation is also not free from risk.
- Summary:
It is clear from the above discussion that there are different areas and issues which are critical and gaining complexity over a period of time. Companies do business in an environment where society and community is also a stakeholder, therefore firms need to manager their relationship with community and society in large. Corporations are responsible for impact of their operations on society and environment beyond the legal compliance. Each of the strategic issues discussed above is critical to the future of businesses as they present some level of risk to the present businesses, organizations or strategic systems. Managers, while deciding and implementing strategies, must consider these issues and challenges to effectively navigate the company through environment they are operating in today. By paying attention and reacting to these issues, leaders can strategically manage their organizations to compete globally and for future growth and sustainability.
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