Activities for Today

1. Activities for Today • Attendance • Simulation Presentation Guidelines • Class Activities • Mini-Case: Stick to the Core or Go for More? • Good Managers Don't Make Policy Decisions (Wrapp) • The Fall and Rise of Strategic Planning (Mintzberg) • Homework • Exam 2 MQM485/Fl08/Class11

2. Stick to the Core or Go for More? 1. Briefly elaborate the key capabilities that distinguish Advaark from its rivals. 2. Should Advaark stick to its core competence (i.e., core capabilities)?

3. The Fall and Rise of Strategic Planning – Henry Mintzberg • What suggestions Mintzberg offers to enhance the effectiveness of planning?

4. The Fall and Rise of Strategic Planning – Henry Mintzberg • What suggestions Mintzberg offers, to enhance the effectiveness of planning? • Strategic Thinking versus Planning – Strategy Requires Synthesis (intuition and creativity) which cannot be formalized. • Routine World of Budgets • Non-Routine World of Strategy • Strategies are based on Assumption/Predictions of the future and hence should NOT be Articulated very Precisely. Thinking and Doing cannot be separated. • Fallacy of Prediction • Fallacy of Detachment • Fallacy of Formulation

5. Strategy means is essentially making a “Commitment” to a Objective and making/forcing managers to think and act strategically till they are achieved. • Importance of Buy-In by Others • Formal Systems Cannot Handle Creative Ideas • Deliberate Vs. Emergent Strategy • Forcing Managers to think Strategically • Planners job should be viewed as: • Somebody who Helps Managers Convert Ideas and Analyze Data; • Challenge Mental Models of Manages to bring flexibility in Thinking; and, • Serve as Catalysts to Enable Managers to Find, Codify, Communicate, and, Elaborate Strategies

6. Good Manager’s Don’t Make Policy Decisions – H. Edward Wrapp • According to Wrapp, what are the common characteristics that successful executives exhibit?

7. Good Manager’s Don’t Make Policy Decisions – H. Edward Wrapp • According to Wrapp, what are the common characteristics that successful executives exhibit? • Keeping well informed: Keep open many pipelines of information • Focusing time and energy: Concentrate on a few significant Issues • Playing the power game: Cultivate sensitivity to power structure of the company A sense of timing • Appearing imprecise: Give the organization a sense of direction with open-ended objectives Avoid policy straight jackets • Muddling with a purpose: Spot opportunities and relationships in the stream of operating problems and decisions Exploitation of change

8. Corporate Governance: Separation of Ownership and Managerial Control • Introduction • Small firms’ managers are high percentage owners, which implies less separation between ownership and management control • Usually implies family-owned businesses • This group faces 2 critical issues 1. As they grow, they may not have access to all needed skills to manage the growing firm and maximize its returns, so may need outsiders to improve management 2. May need to seek outside capital (whereby they give up some ownership control)

9. An Agency Relationship

10. Separation of Ownership and Managerial Control (Cont’d) • Agency relationships • Relationships between business owners (principals) and decision-making specialists (agents)hired to manage principals' operations and maximize returns on investment (and focus of this chapter) • Other agency relationship examples: Consultants/clients; insured/insurer; manager/employee

11. Ownership Concentration Governance Mechanisms • Large block shareholders (often institutional owners) have a strong incentive to monitor management closely • Their large stakes make it worth their while to spend time, effort and expense to monitor closely • They may also obtain Board seats which enhances their ability to monitor effectively (although financial institutions are legally forbidden from directly holding board seats)

12. Ownership Concentration Board of Directors Governance Mechanisms • Recommendations for more effective Board Governance: • Increase diversity of board members’ backgrounds • Strengthen internal management and accounting control systems • Establish formal processes for evaluation of the board’s performance

13. Ownership Concentration Board of Directors Executive Compensation Governance Mechanisms • Salary, bonuses, long term incentive compensation • Executive decisions are complex and non-routine • Many factors intervene making it difficult to establish how managerial decisions are directly responsible for outcomes

14. Ownership Concentration Board of Directors Executive Compensation Governance Mechanisms • Stock ownership (long-term incentive compensation) makes managers more susceptible to market changes which are partially beyond their control • Incentive systems do not guarantee that managers make the “right” decisions, but do increase the likelihood that managers will do the things for which they are rewarded

15. Executive Compensation • Stock options are highly popular • Repricing: strike price value of options is commonly lowered from its original position • Backdating:options grant is commonly dated earlier than actually drawn up to ensure an attractive exercise price

16. Ownership Concentration Board of Directors Executive Compensation Market for Corporate Control Governance Mechanisms • Firms face the risk of takeover when they are operated inefficiently • Many firms begin to operate more efficiently as a result of the “threat” of takeover, even though the actual incidence of hostile takeovers is relatively small • Changes in regulations have made hostile takeovers difficult • Acts as an important source of discipline over managerial incompetence and waste

17. Managerial Defense Tactics • Designed to fend off the takeover attempt • Increase the costs of making the acquisitions • Causes incumbent management to become entrenched while reducing the chances of introducing a new management team • Tactics • Golden Parachutes - Lucrative contract that is given to top executives in the event that the company is taken over by another corporation and results in job loss. The contract usually includes a large amount of severance pay, stock options, and a bonus. Golden Parachutes are usually a part of an anti-takeover strategy.

18. Managerial Defense Tactics • Staggered Board - A corporate board structure where only a portion of the board of directors is elected each year, usually to discourage takeover attempts • Green Mail - A corporate provision to combat hostile takeovers. When triggered, the poison pill allows shareholders to acquire additional shares at below market price, thereby increasing the number of shares outstanding and making the takeover prohibitively expensive • Super Majority - A supermajority or a qualified majority (e.g. 80% of the vote) is a requirement for a proposal to gain a specified level or type of support which exceeds a simple majority in order to have effect. • Lobbying - Many corporate managers turned to state legislatures to lobby for protection through antitakeover laws. According to Roe (1993: 353), "by calling for political reinforcements, managers won in state-by-state political combat what they could not win in contracts with shareholders. They won freedom, nearly complete, from takeover."