Graduate School of Management (GSM)

BRAC University

MGT 601 Strategic Management

Lecture 9
 Strategic Management Process
The External
Environment
Strategic inputs

Strategic Intent
Strategic Mission
The Internal
Environment

Strategy Formulation Strategy Implementation

Strategic actions

Organizational
Business-level Competitive Corporate- Corporate
Structure &
Strategy Dynamics level Strategy Governance
Controls
Acquisition &
International Cooperative Strategic Strategic
Restructuring
Strategies Strategies Leadership Entrepreneurship
Strategies
outcomes
Strategic

Strategic Competitiveness
Feed back Above Average Returns
 Lecture outline

Strategy Implementation
Corporate Governance
Formulation VS Implementation
Strategy Formulation Strategy Implementation
•Positioning forces before •Matching forces during
action the action
•Focuses on effectiveness •Focuses on efficiency
•An intellectual process •An operation process
•Intuitive & analytical •Special motivation &
skills leadership skills
•Coordination among a •Coordination among
few individual many person
 Executing the strategy
An action-oriented, make-things happen task
involving management’s ability to
– Direct organizational change
– Achieve continuous improvement in operations
and business processes
• Move toward operating excellence
-Create and nurture a strategy-supportive culture
-Consistently meet or beat performance targets
 Tougher and more time consuming than
crafting strategy
 Why executing strategy is a
demanding role…
Overcoming resistance to change
Wide array of demanding managerial activities to
be performed
Numerous ways to tackle each activity
Demands good people management skills
Requires launching and managing a variety of
initiatives simultaneously
Hard to integrate efforts of many different work
groups into a smoothly-functioning whole
 Who are strategy implementer?
Implementing and executing strategy involves a all
employees NOT management team
Just as every player of a team plays a role in winning
EVERY WEEK. It takes ALL of an organization working
cohesively for a strategy to be well-executed
Top-level managers must lead the process
and orchestrate major initiatives
But WE must rely on cooperation of
Middle and lower-level managers to see things go well in
various parts of an organization and
Employees to perform their roles competently
Why is that important?
 Who owns Microsoft?
Microsoft: Net worth equals about
$2.515 trillion [Dec. 09, 2021]
Employees: 181,000 [Jun. 30, 2021]

% of Shares Held by All Insider and 5% Owners 10%

% of Shares Held by Institutional & Mutual Fund Owners 65%

% of Float Held by Institutional & Mutual Fund Owners 72%

Number of Institutions Holding Shares 1902

 Corporate Governance
… represents the relationship among stakeholders that
is used to determine & control the strategic direction &
performance of organizations.
… is the system by which businesses are directed &
controlled.
…involves oversight in areas where owners, managers &
members of boards of directors may have conflicts of
interest.
…reflects & enforces the company’s values.
 Stakeholders and Corporate Performance
Stakeholders: Individuals/groups with an interest
/claim/or stake in company.
Internal (e.g., employees, stockholders)
External (e.g., customers, creditors,
governments).
Company must consider stakeholder claims in
developing & implementing strategy.
Stakeholders and the Enterprise
 Stockholders

Elect
Board of Directors

Hires

President
(MD/CEO)

Vice President Vice President

Vice President Vice President Vice President
Finance Information
Human Resources Manufacturing Marketing
(CFO) Resources
 Unique Role of Stockholders
Company’s legal owners & providers of risk capital, a
major source of capital to operate a business.

Maximizing long-run profitability & profit

growth is route to maximizing returns to
shareholders, as well as satisfying claims
of most other stakeholder groups.
Long-term investment?

No.
Shareholders are short-term
investors
 What is a shareholder?

• Short-term investor
• Focus on short-term
profit
• Consider companies
as a commodity
 Implications

• Principle of “Shareholder
democracy” completely
gone
• Employees pay the bill
 Agency Theory
Agency relationship: Whenever one party
delegates decision-making authority or
control over resources to another.
 Agency Relationship
Shareholders Risk Bearing Specialist
(Principals) (Principal)

Hire Managerial Decision-Making

Firm Owners Specialist
(Agent)

Managers
(Agents)
which creates
Decision
Makers
Problems of the agency relationship
Agents & principals may have
different goals.
Agents goals not in best interests of
principals.
Agents may take advantage of
information asymmetries (irregularities)
to maximize interests at expense of
principals.
Difficult for principals to measure
performance
 Corporate Governance Mechanisms
1. Internal Governance Mechanisms
i. Ownership Concentration
ii. Board of Directors
iii. Executive Compensation
2. External Governance Mechanism
i. Market for Corporate Control
Internal Governance Mechanisms
Ownership Concentration
o High relative amounts of shares owned by individual
shareholders & institutional investors.
Board of Directors
o Individuals responsible for representing the firm’s
owners by monitoring top-level managers’ strategic
decisions.
Executive Compensation
o The use of salary, bonuses & long-term incentives to
align managers ‘interests with shareholders’ interests.
Ownership Concentration
Ownership Concentration: Governance
mechanism defined by both the
number of large-block shareholders &
the total percentage of shares they
own.
Large Block Shareholders: Shareholders
owning a concentration of at least 5 percent
of a corporation’s issued shares. It is
worthwhile spending time, effort & expense
on monitoring. They may also obtain board
seats which enhances their ability to monitor
effectively.
Ownership Concentration
Institutional Owners: Financial
institutions such as stock mutual funds
& pension funds that control large-
block shareholder positions. Financial
institutions are legally forbidden from
directly holding board seats.
o Shareholders can convene to discuss
the corporation’s direction.
o If a consensus exists, shareholders can
vote as a block to elect their
candidates to the board.
The Board of Directors (BOD)
As stewards of an organization's
resources, an effective & well-
structured Board of Directors can
influence the performance of a firm
Oversee managers to ensure the
company is operated in ways to
maximize shareholder wealth.
Direct the affairs of the organization.
Punish & reward managers.
Protect shareholders’ rights &
interests.
Protect owners from managerial
opportunism.
 The Board of Directors (BOD)
Composition of Boards
Insiders: The firm’s CEO & other top-level managers
Related outsiders: Individuals not involved with the
firm’s day-to-day operations, but who have a
relationship with the firm.
Outsiders: Individuals who are independent of the
firm’s day-to-day operations & other relationships.
Key Roles of a Board of Directors

Be well informed about a company’s performance

Guide & judge CEO & other top executives
Exhibit courage to curb inappropriate or unduly risky
management actions
Certify to shareholders that CEO is doing what board
expects
Provide insight & advice to management
Intensely involved in debating pros & cons of key actions
& decisions
A Board of Directors has a very important oversight role in the
strategy-making, strategy-executing process!
Executive Compensation (EC)
 Executive Compensation (EC):
 Governance mechanism that
seeks to align the interests of
top managers & owners
through salaries, bonuses, &
long-term incentive
compensation, such as stock
awards & stock options
 Thought to be excessive & out
of line with performance
Executive Compensation (EC)
Alignment of pay & performance:
Complicated Board responsibility
The effectiveness of pay plans as
a governance mechanism is
suspect.
Incentive systems do not
guarantee that managers make
the “right” decisions, but they do
increase the likelihood that
managers will do the things for
which they are rewarded
External Governance Control Mechanisms
External Governance Control
Mechanisms: Methods that
ensure that managerial actions
lead to shareholder value
maximization & do not harm
other stakeholder groups & that
are outside the control of the
corporate governance system
 External Governance Control Mechanisms
Market for corporate control
Auditors
Banks & analysts
Regulatory bodies
Media & public activists
External mechanisms are less precise than
internal governance mechanisms
 Most experts-managers, the SEC, and
academic researchers- agree that the most
important factor in good corporate
governance is an ethical climate, which top
management sets.
 Overseeing Governance in Bangladesh
 Bangladesh Securities and Exchange Commission (SEC)
The Securities and Exchange Commission Act of 1993
Corporate Governance Code 2018
Prices Surveillance Authority of SEC
DSE & CSE Listing Rules
The Companies Act of 1994
The Capital Issues Act of 1947
The Labour Act of 2006 [amended in 2013 & 2018]
The Consumer Rights Protection Act of 2009
Bangladesh Bank Directives on CG
The Securities and Exchange Ordinance, 1969
The Securities and Exchange Rules, 1987
International Accounting Standards (IAS)
International Financial Reporting Standards (IFRS)
The Financial Reporting Act of 2015