The Internal Environment

Including Social Responsibility & Business Ethics

Corporate Governance

Defined as the relationship that exists among the board of directors, top management, and shareholders (institutional investors and blockholders) in determining the direction of the organization

Boards of Directors & Corporate Governance

Board ofDirectors

Setting corp strategy, overall direction, mission and vision of firm

Hiring & firing of the CEO

Controlling, monitoring, or supervising Sr Mgmt

Reviewing and approving the use of resources

Caring for the shareholder interests

Boards of Directors & Corporate Governance

Monitor developments inside & outside the firm

Review proposals, advise, offer suggestions, ad alternatives

Delineate the corporation’s mission and specify strategic alternatives

Boards of Directors & Corporate Governance

Board MembersInside Directors

- “Management Directors- Officers or Executives employed by the firm

Outside Directors- “Non-Management Directors”- May be executives of other firms, but not

employed by the board’s corporation

Boards of Directors & Corporate Governance

OutsideBoard Members

“Outsider” is an over simplistic term - some outsiders are not truly objective and could be considered “insiders.”

Affiliated directors Retired directors Family directors

Route to a Sustained Competitive Advantage

HumanResources

OrganizationalResources

PhysicalResources

Sustained Competitive Advantage

Human Resources

Boards of Directors1. Strong board members bring

experience and network contacts2. Is board comprised of internal

or external directors?3. Do board members own

significant shares of company stock?4. Is board membership stable?

Human Resources

Top Management1. Should assume role of selfless

stewards of stakeholder goals2. Job experience, job tenure, and

industry experience3. Top management turnover4. What are top mgmt’s strengths &

weaknesses

Human Resources

Middle Management, Supervisors & Employees

1. Comprehensive HR planning program

2. Training & development programs3. Emphasis on performance

appraisal4. Diversity

Organizational Resources

Are strategies consistent w/org’n mission and goals?

Are corporate, business unit and functional strategies intertwined & consistent?

Is the org’s formal structure appropriate for implementing its strategy?

Are the decision making processes effective for implementing the strategies?

Organizational Resources

Is the organization’s culture or climate consistent with its strategy?

How effective are the org’s strategic control processes?

Physical Resources

Does the org’n possess up-to-date technology?

Does the org’n possess adequate capacity?

Is the org’s distribution network efficient in reaching customers?

Are sources of supply reliable and cost effective?

Is firm in optimum geographic location?

Resource Based Approach

Internal Strategic Factors:

Critical strengths & weaknesses that are likely to determine if the firm will be able to take advantage of opportunities will avoiding threats.

Resource Based Approach

Resource is defined as an asset, competency, process, skill or knowledge that is controlled by the organization.

Evaluating Key Resources

VIRO FrameworkValue - does it provide a comp

advantage?Rareness - do other competitors have it?Imitability - Is it costly for others to

imitate?Organization - is the firm organized to

exploit the resource?

Resource Based Approach

5-step approach to internal analysis and strategy development:

1. Identify & classify a firm’s resources2. Combine & classify strengths into capabilities

3. Appraise the profit potential of resources4. Select a strategy that best exploits a firm’s

resources relative to external opportunities5. Identify resource gaps

Sustainability of an Advantage

Durability:

Rate at which a firm’s underlying resources and capabilities (core competencies) depreciate or become obsolete.

Sustainability of an Advantage

Imitability:

Rate at which a firm’s underlying resources and capabilities (core competencies) can be duplicated by others

Core Competencies

Transparent

Transferable

Replicable

Core Competencies

Explicit Knowledge: knowledge that can be easily articulated and communicated

Tacit Knowledge: knowledge that is not easily communicated b/c it is deeply rooted in employee experience or in a corporation’s culture

What Do These People Have in Common - Which Name Doesn’t

Belong Here?

Kenneth Lay

Bernie Ebbers

Sam Waksal

Dennis Kozlowski

John Rigas

John Walker Lindh

Don Cardy

David Glenn

The Agency Problem

A situation in which a corporation’s top managers who serve as agents for the firm’s owners . . . fail to act in the best interests of the owners, but instead pursue their own self interests.

Managerial Ethics

Refers to the standards of conduct and moral judgement - that is, whether managers’ decisions and behaviors are right or wrong or . . .

(Wright, 1998)The rules and principles that define right

and wrong decisions and behavior(Coulter, 2002)

Managerial Ethics

Go to “the grey zone” located on page 147 and let’s discuss.

Countering the Effects of Unethical Behavior & Agency Problems

Ethical Codes of ConductBeing consistent in policies & actionsRewarding ethical conductTreating employees fairlyExercising executive leadership in

setting a good exampleMcClenahen (1999)

Countering the Effects of Unethical Behavior & Agency Problems

Aligning the interest of both top management and boards of directors with the interests of the individual shareholder by requiring significant stock ownership.

Social Responsibility

Refers to the expectation that organization’s should act in the public interest

preserve the environmentbe truthful to customerstreat employees equitablytrain the hard-core unemployedcontribute to education & the artsrevitalize distressed areas

Social Responsibility

Firms have economic or must do responsibilities

They also have have to do obligationsThirdly, they are expected to perform

ethical or should do tasksLastly, are positioned to perform

volitional, discretionary or might do activities

Carroll (1979)

Social Responsibility

When firm’s don’t operate in a socially responsible manner . . . what happens?