MGMT 304 Exam 1

Performing similar activities better than rivals perform them

Operational Effectiveness

Examples of operational effectiveness:

• eliminating inefficiencies

• Improving customer satisfaction

• achieving best practices

• various management tools and techniques

• reducing waste

Operational effectiveness is any practice that allows a company to better utilize its ______

inputs

Constant improvement in operational efficiency is necessary to achieve _____ ______, but (usually) not sufficient to stay ahead of competition

superior profitability

Operational effectiveness practices are important sources of differences in profitability as they directyly affect:

• relative cost positions

• levels of differentiation

Performing different activities from rivals’ or performing similar activities in different ways

Strategic positioning

Without achieving ______ _______, strategy does not exist

operation effectiveness

Why is operational effectiveness insufficient?

• rapid diffusion of best practices

• competitive convergence

Leads to absolute improvement in OE for everyone, no relative improvement for anyone; major productivity gains captured

Rapid diffusion

The more benchmarking companies do, the more they will look alike → competition will gravitate towards price → mutually destructive; zero-sum competition

Competitive convergence

Strategy is the creation of a ______ and ______ position, involving a different set of activities

unique and valuable

Strategy rests in _____ activities

unique

strategy is about making _______ in competing. The essence of strategy is choosing what NOT to do

tradeoffs

Attributes of a successful strategy:

• Unique value proposition

• Distinctive value chain

• Trade-offs

• Fit (harder to imitate interlocked activities; difficult to untangle)

• Continuity

Strategy is creating ___ among a company’s activities

fit

What is the goal to get out of strategy?

• Superior performance

• Gaining and sustaining competitive advantage

___ drives both competitive advantage and sustainability

Fit

What are the 3 types of fit?

• First-order fit

• Second-order fit

• Third-order fit

simple consistency between each activity → competitive advantage cumulate and do not erode or cancel themselves out

First-order fit

activities are reinforcing

Second-order fit

goes beyond activity reinforcement to optimization of efforts (e.g., eliminate redundancy, minimize wasted effort by coordination and information exchange)

Third-order fit

Strategy is a set of goal-directed actions a firm takes to ____ and _______ competitive advantage

gain and sustain

any group or individual who can affect or is affected by the achievement of the organization’s objectives

stakeholders

Examples of external stakeholders:

• customers

• suppliers

• alliance partners

• creditors

• unions

• communities

• governments

• media

Examples of internal stakeholders

• employees

• stockholders

• board members

Without whose continuing participation, the corporation cannot survive as a going concern (e.g., shareholders/investors; employees; customers; suppliers; public stakeholder group (the government and communities)); high level of interdependence between the corporation and stakeholder

Primary Stakeholder

Those who influence or affect, or are influenced or affected by, the corporation, but they are not directly engaged in transactions with the corporation and are not essential for its survival (media, special intrest groups, trade unions, communities, etc.); Although the corporation is not dependent on them for survival, these stakeholders can cause significant damage with its capacity to mobilize public opinion

Secondary Stakeholders

Stakeholder’s salience to the firm

• Legitimacy

• Power

• Urgency

A stakeholder has _____ over a company if it can get the company to do something that it would not otherwise do

Power

A stakeholder has a ________ claim when it is perceived to be legally valid or otherwise appropriate

legitimate

A stakeholder has an _______ claim when it requires a company’s immediate attention and response

urgent

Ed Freeman’s stakeholder theory is not about

NOT about prioritizing stakeholder demands to managerial perception and organizational resources

Ed Freeman’s stakeholder theory is actually about

A means to identify shared values & build workplaces around these values

What is Ed Freeman’s idea of value creation

• Stakeholder interests are tied together (not in conflict, i.e. not a zero-sum game)

• A view that sees stakeholders’ interests as being interconnected and interdependent

Freeman wants to focus on joint value creation instead of…

tradeoffs

What is one way to measure firm-stakeholder relationships/enagement?

ESG data

Examples of environmental factors

• Natural resource use

• Carbon emissions

• Energy efficiency

• Pollution waste

• Sustainability initiatives

Examples of social factors

• Workforce health & safety

• Diversity/opportunity policies

• Employee training

• Human rights

• Privacy/Data security

• Community programs

Examples of governance factors

• Board independence

• Board diversity

• Shareholder rights

• Management compensation policy

• Business ethics

Sustainable investing incorporates analysis of _____ and ________ associated with ESG issues that may be overlooked in traditional investment process

risk and opportunities

Key challenges of measuring ESG

disclosure & data

What drives the divergence of ESG ratings?

Scope divergence, measurement divergence, and weight divergence

Ratings are based on different sets of attributes

Scope divergence

Measures same attributes but using different indicators

Measurement divergence

Rating agencies have different views on the relative importance of the attributes

Weight divergence

Investors need to undertake ___ ______ to really understand the method underlying a given ESG rating

due diligence

What can researchers do to undertake due diligence to understand an ESG rating?

• Avoid relying on one rater; include several ratings in analyses

• Pay attention to the validity of the data

• Invest in developing their metrics

What can companies do to undertake due diligence to understand an ESG rating?

Work with rating agencies to establish appropriate metrics in lines with their purposes & disclose the information

What can investors do to undertake due diligence to understand an ESG rating?

• Investors can disentangle the sources of divergence => can reduce discrepancy (e.g., impose own scope and weight)

• Utilize rating whose scope, measurement, and weight aligns with objective

Refers to the mechanisms that ensure that entities pursue strategic goals successfully and legally. Checks & balances and asking the questions at the right time

Corporate Governance

Attempts ot address the principal-agent problem

Corporate governance

Directed at the ubiquitous agency relationship, in which one party (the principal) delegates work to another (the agent), who performs that work

Principal-agent problem

Examples of principal-agent problems in the workplace

• Insider trading

• Excessive CEO compensation

When the goals of the principal vs. agents conflict & when it is difficult/expansive to verify what the agent is actually doing

Agency problem

______ theory is about resolving 2 problems (agency problem and problem of risk sharing) in the agency relationship

Agency

the principal and agent may prefer different actions because of the different risk preferences

the problem of risk sharing

Who are the principals in the principal-agent problem

principal = shareholder/represented by the board of directors

Who are the agents in the principal-agent problem

agents = professional managers (led by CEO)