CHAPTER ONE

INTRODUCTION
1.1 Definition of strategic management

The term strategy is derived from a Greek word “Strategos” which means
generalship.

Strategy is a plan or course of action or a set of decision rules making a

pattern or creating a common thread (line).

Strategy is a plan of action that prescribes resource allocation and other

activities for dealing with environment, achieving a competitive advantage,
which help the organization to attain its goals. Strategies are actions that
determine whether an organization survives, prospers, or dies.

Some other meanings of strategy are:

 Strategy is the pattern of activities followed by an organization in pursuit

of its long-term purposes.
 Strategy is a course of action that helps to achieve organizational goals.
 Strategy is about winning.
 Strategy is about charting an unknown future.
 It is also about how decisions are taken to determine the long run goals
and objectives of an enterprise.

Strategic management can be defined as the art and science of formulating,

implementing, and evaluating cross-functional decisions that enable an
organization to achieve its objectives.

As this definition implies, strategic management focuses on integrating

management, marketing, finance/accounting, production/operations, research
and development, and information systems to achieve organizational success.

The purpose of strategic management is to exploit and create new and different
opportunities for tomorrow; long-range planning, in contrast, tries to optimize
for tomorrow the trends of today.

1.2 Stages of Strategic Management

The strategic-management process consists of three stages: strategy

formulation, strategy implementation, and strategy evaluation.

A. Strategy formulation includes developing a vision and mission,

identifying an organization’s external opportunities and threats,
determining internal strengths and weaknesses, establishing long-term
objectives, generating alternative strategies, and choosing particular
strategies to pursue. Strategy-formulation issues include deciding what
new businesses to enter, what businesses to abandon, how to allocate
resources, whether to expand operations or diversify, whether to enter

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 international markets, whether to merge or form a joint venture, and how
to avoid a hostile takeover.
Because no organization has unlimited resources, strategists must
decide which alternative strategies will benefit the firm most. Strategy-
formulation decisions commit an organization to specific products,
markets, resources, and technologies over an extended period of time.
Strategies determine long-term competitive advantages. For better or
worse, strategic decisions have major multifunctional consequences and
enduring effects on an organization. Top managers have the best
perspective to understand fully the ramifications of strategy-formulation
decisions; they have the authority to commit the resources necessary for
implementation.
B. Strategy implementation requires a firm to establish annual objectives,
devise policies, motivate employees, and allocate resources so that
formulated strategies can be executed.
Strategy implementation includes developing a strategy-supportive
culture, creating an effective organizational structure, redirecting
marketing efforts, preparing budgets, developing and utilizing
information systems, and linking employee compensation to
organizational performance.
Strategy implementation often is called the “action stage” of strategic
management. Implementing strategy means mobilizing employees and
managers to put formulated strategies into action. Often considered to be
the most difficult stage in strategic management, strategy
implementation requires personal discipline, commitment, and sacrifice.
Successful strategy implementation hinges upon managers’ ability to
motivate employees, which is more an art than a science. Strategies
formulated but not implemented serve no useful purpose.
Interpersonal skills are especially critical for successful strategy
implementation.
Strategy-implementation activities affect all employees and managers in
an organization.
Every division and department must decide on answers to questions,
such as
 “What must we do to implement our part of the organization’s strategy?”
and “How best can we get the job done?”

The challenge of implementation is to stimulate managers and

employees throughout an organization to work with pride and
enthusiasm toward achieving stated objectives.

C. Strategy evaluation is the final stage in strategic management.

Managers desperately need to know when particular strategies are not
working well; strategy evaluation is the primary means for obtaining this
information. All strategies are subject to future modification because

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 external and internal factors are constantly changing. Three fundamental
strategy-evaluation activities are
a. Reviewing external and internal factors that are the bases for
current strategies.
b. measuring performance, and
c. Taking corrective actions.

Strategy evaluation is needed because success today is no guarantee of success

tomorrow! Success always creates new and different problems; complacent
organizations experience demise.

Peter Drucker says the prime task of strategic management is thinking through
the overall mission of a business. That is, of asking the question, “What is our
business?” This leads to the setting of objectives, the development of strategies,
and the making of today’s decisions for tomorrow’s results. This clearly must
be done by a part of the organization that can see the entire business; that can
balance objectives and the needs of today against the needs of tomorrow; and
that can allocate resources of men and money to key results.

1.3 Key terms in strategic management

The key terms in strategic management are: competitive advantage, strategists,

vision and mission statements, external opportunities and threats, internal
strengths and weaknesses, long-term objectives, strategies, annual objectives,
and policies.

 Competitive Advantage

Strategic management is all about gaining and maintaining competitive

advantage. This term can be defined as “anything that a firm does especially
well compared to rival firms.”

When a firm can do something that rival firms cannot do, or owns something
that rival firm’s desire, that can represent a competitive advantage.

 For example, in a global economic recession, simply having ample cash

on the firm’s balance sheet can provide a major competitive advantage.
Some cash-rich firms are buying distressed rivals.

Having less fixed assets than rival firms also can provide major competitive
advantages in a global recession.

 For example, Apple has no manufacturing facilities of its own, and rival
Sony has 57 electronics factories. Apple relies exclusively on contract
manufacturers for production of all of its products, whereas Sony owns
its own plants. Less fixed assets has enabled Apple to remain financially
lean with virtually no long-term debt. Sony, in contrast, has built up
massive debt on its balance sheet.

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Getting and keeping competitive advantage is essential for long-term success in
an organization. The Industrial/Organizational (I/O) and the Resource-Based
View (RBV) theories of organization present different perspectives on how best
to capture and keep competitive advantage—that is, how best to manage
strategically. Pursuit of competitive advantage leads to organizational success
or failure. Strategic management researchers and practitioners alike desire to
better understand the nature and role of competitive advantage in various
industries.

Normally, a firm can sustain a competitive advantage for only a certain period
due to rival firms imitating and undermining that advantage. Thus it is not
adequate to simply obtain competitive advantage. A firm must strive to achieve
sustained competitive advantage by

1) Continually adapting to changes in external trends and events and

internal capabilities, competencies, and resources; and
2) Effectively formulating, implementing, and evaluating strategies that
capitalize upon those factors.

Internet as a tool for obtaining competitive advantage

 E-commerce: allows firms to sell products, advertise, purchase supplies,

bypass intermediaries, track inventory, eliminate paperwork, and share
information. Minimizes the expense of time, distance, and space in doing
business, thus yielding better customer service, greater efficiency,
improved products, and higher profitability.
 Digital communication: Consumers today are flocking to blogs, short-
post forums, video sites, and social networking sites instead of
television/radio, newspapers, and magazines. Users can log on to many
business shopping sites with their IDs from their social site.
 Strategists
Strategists are the individuals who are most responsible for the success or
failure of an organization. Strategists have various job titles, such as chief
executive officer, president, and owner, chair of the board, executive director,
chancellor, dean, or entrepreneur.

Jay Conger, professor of organizational behavior at the London Business

School and author of Building Leaders, says, “All strategists have to be chief
learning officers. We are in an extended period of change. If our leaders
aren’t highly adaptive and great models during this period, then our
companies won’t adapt either, because ultimately leadership is about being a
role model.

Strategists help an organization gather, analyze, and organize information.

They track industry and competitive trends, develop forecasting models and
scenario analyses, evaluate Corporate and divisional performance, spot

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 emerging market opportunities, identify business threats, and develop
creative action plans. Strategic planners usually serve in a support or staff
role. Usually found in higher levels of management, they typically have
considerable authority for decision making in the firm. The CEO is the most
visible and critical strategic manager. Any manager who has responsibility
for a unit or division, responsibility for profit and loss outcomes, or direct
authority over a major piece of the business is a strategic manager
(strategist).

Strategists differ as much as organizations themselves, and these differences

must be considered in the formulation, implementation, and evaluation of
strategies. Some strategists will not consider some types of strategies
because of their personal philosophies.

Strategists differ in their attitudes, values, ethics, willingness to take risks,

concern for social responsibility, concern for profitability, concern for short-
run versus long-run aims, and management style.

 Vision and Mission Statements

Many organizations today develop a vision statement that answers the

question “What do we want to become?” Developing a vision statement is
often considered the first step in strategic planning, preceding even
development of a mission statement. Many vision statements are a single
sentence.

For example, the vision of the Injibara University is `to become one of
the best university in Ethiopia and renowned university in Africa in
2030 GC (2022 E.C)`

Mission statements are “enduring statements of purpose that distinguish one

business from other similar firms. A mission statement identifies the scope of a
firm’s operations in product and market terms.” It addresses the basic question
that faces all strategists:

“What is our business?” A clear mission statement describes the values and
priorities of an organization. Developing a mission statement compels
strategists to think about the nature and scope of present operations and to
assess the potential attractiveness of future markets and activities. A mission
statement broadly charts the future direction of an organization.

A mission statement is a constant reminder to its employees of why the

organization exists and what the founders envisioned when they put their fame
and fortune at risk to breathe life into their dreams.

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Example The mission of Injibara University is `producing competent graduates
with skill, attitude, and discipline; delivering community service; conducting need
based and demand driven research`.

 External Opportunities and Threats

External opportunities and external threats refer to economic, social,
cultural, demographic, environmental, political, legal, governmental,
technological, and competitive trends and events that could significantly
benefit or harm an organization in the future.

Opportunities and threats are largely beyond the control of a single

organization—thus the word external.

In a global economic recession, a few opportunities and threats that face many
firms are listed here:

 Availability of capital can no longer be taken for granted.

 Consumers expect green operations and products.
 Marketing has moving rapidly to the Internet.
 Consumers must see value in all that they consume.
 Global markets offer the highest growth in revenues.
 As the price of oil has collapsed, oil rich countries are focused on supporting
their own economies, rather than seeking out investments in other
countries.
 Too much debt can crush even the best firms.
 Layoffs are rampant among many firms as revenues and profits fall and
credit sources dry up.
 The housing market is depressed.
 Demand for health services does not change much in a recession.
 Dramatic slowdowns in consumer spending are apparent in virtually all
sectors, except some discount retailers and restaurants.
 Borrowers are faced with much bigger collateral requirements than in years
past.
 Equity lines of credit often now are not being extended.
 Firms that have cash or access to credit have a competitive advantage over
debt-laden firms.
 Discretionary spending has fallen dramatically; consumers buy only
essential items; this has crippled many luxury and recreational businesses
such as boating and cycling.

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 The double whammy of falling demand and intense price competition is
plaguing most firms, especially those with high fixed costs.
 The business world has moved from a credit-based economy to a cash-
based economy.
 There is reduced capital spending in response to reduced consumer
spending.

The types of changes mentioned above are creating a different type of consumer
and consequently a need for different types of products, services, and
strategies.

Many companies in many industries face the severe external threat of online
sales capturing increasing market share in their industry.

Other opportunities and threats may include the passage of a law, the
introduction of a new product by a competitor, a national catastrophe, or the
declining value of the dollar.

A competitor’s strength could be a threat. Unrest in the Middle East, rising

energy costs, or the war against terrorism could represent an opportunity or a
threat.

A basic tenet of strategic management is that firms need to formulate strategies

to take advantage of external opportunities and to avoid or reduce the impact
of external threats. For this reason, identifying, monitoring, and evaluating
external opportunities and threats are essential for success. This process of
conducting research and gathering and assimilating external information is
sometimes called environmental scanning or industry analysis. Lobbying is one
activity that some organizations utilize to influence external opportunities and
threats.

 Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization’s controllable
activities that are performed especially well or poorly.

They arise in the management, marketing, finance/accounting,

production/operations, research and development, and management
information systems activities of a business.

Identifying and evaluating organizational strengths and weaknesses in the

functional areas of a business is an essential strategic management activity.

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Organizations strive to pursue strategies that capitalize on internal strengths
and eliminate internal weaknesses. Strengths and weaknesses are determined
relative to competitors. Relative deficiency or superiority is important
information. Also, strengths and weaknesses can be determined by elements of
being rather than performance.

For example, a strength may involve ownership of natural resources or a

historic reputation for quality. Strengths and weaknesses may be
determined relative to a firm’s own objectives.

For example, high levels of inventory turnover may not be a strength to a

firm that seeks never to stock-out.

Internal factors can be determined in a number of ways, including computing

ratios, measuring performance, and comparing to past periods and industry
averages. Various types of surveys also can be developed and administered to
examine internal factors such as employee morale, production efficiency,
advertising effectiveness, and customer loyalty.

 Long-Term Objectives

Objectives can be defined as specific results that an organization seeks to

achieve in pursuing its basic mission. Long-term means more than one year.
Objectives are essential for organizational success because they state direction;
aid in evaluation; create synergy; reveal priorities; focus coordination; and
provide a basis for effective planning, organizing, motivating, and controlling
activities. Objectives should be challenging, measurable, consistent,
reasonable, and clear. In a multidimensional firm, objectives should be
established for the overall company and for each division.

 Strategies

Strategies are the means by which long-term objectives will be achieved.

Business strategies may include geographic expansion, diversification,
acquisition, product development, market penetration, retrenchment,
divestiture, liquidation, and joint ventures.

Strategies are potential actions that require top management decisions and
large amounts of the firm’s resources. In addition, strategies affect an
organization’s long-term prosperity, typically for at least five years, and thus
are future-oriented. Strategies have multifunctional or multidivisional
consequences and require consideration of both the external and internal
factors facing the firm.

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  Annual Objectives

Annual objectives are short-term milestones that organizations must achieve to

reach long-term objectives. Like long-term objectives, annual objectives should
be measurable, quantitative, challenging, realistic, consistent, and prioritized.
They should be established at the corporate, divisional, and functional levels in
a large organization. Annual objectives should be stated in terms of
management, marketing, finance/accounting, production/operations, research
and development, and management information systems (MIS)
accomplishments. A set of annual objectives is needed for each long-term
objective. Annual objectives are especially important in strategy
implementation, whereas long-term objectives are particularly important in
strategy formulation. Annual objectives represent the basis for allocating
resources.

 Policies

Policies are the means by which annual objectives will be achieved. Policies
include guidelines, rules, and procedures established to support efforts to
achieve stated objectives.

Policies are guides to decision making and address repetitive or recurring

situations.

Policies are most often stated in terms of management, marketing,

finance/accounting, production/operations, research and development, and
computer information systems activities. Policies can be established at the
corporate level and apply to an entire organization at the divisional level and
apply to a single division, or at the functional level and apply to particular
operational activities or departments. Policies, like annual objectives, are
especially important in strategy implementation because they outline an
organization’s expectations of its employees and managers. Policies allow
consistency and coordination within and between organizational departments.

1.4 Over view of types of strategy ( we will discuss it briefly in chapter Five)
Alternative strategies that an enterprise could pursue can be categorized
into 3 parts.
 Corporate Level Strategy: - Corporate strategy refers to the overarching
strategy of the diversified firm. Such a corporate strategy answers the
questions of: Which businesses should we be in? And how does being in
these businesses create synergy and/or add to the competitive advantage
of the corporation as a whole?

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 Corporate-level strategy is concerned with the overall scope of an
organization and how value will be added to the different parts (business
units) of the organization.
 Business Level Strategy: - Business strategy refers to the aggregated
strategies of single business firm or a strategic business unit (SBU) in a
diversified firm.
Business-level strategy is about how the various businesses included in
the corporate strategy should compete in their particular markets (for
this reason, business-level strategy is sometimes called ‘competitive
strategy’).
 Functional Strategy: - Functional strategies are concerned with how the
component parts of an organization deliver effectively the corporate- and
business level strategies in terms of resources, processes and people.
At the functional area level, the principal focus of strategy is on the
maximization of resource productivity
Functional area strategy is to be constrained by business strategy and is,
in turn, to be constrained by corporate strategy.
1.5. The strategic management approach
 In general terms, there are two main approaches, which are opposite
but complement each other in some ways, to strategic management:
those are Resource based and Industrial organization Based
approaches.
1.5.1 The resource-based view (RBV)/Approach

It is a model that sees resources as key to superior firm performance. If a

resource exhibits VRIO attributes, the resource enables the firm to gain and
sustain competitive advantage.

V-Is resource or capacity Valuable?

R- Is resource or capacity Rare?
I- Is resource or capacity costly to Imitate?
O- Is the organization Well-Organized to Capture Value?
Question of Value. Resources are valuable if they help organizations to increase
the value offered to the customers. This is done by increasing differentiation
or/and decreasing the costs of the production. The resources that cannot meet
this condition, lead to competitive disadvantage.

Question of Rarity. Resources that can only be acquired by one or few

companies are considered rare. When more than few companies have the same
resource or capability, it results in competitive parity.
Question of Imitability. A company that has valuable and rare resource can
achieve at least temporary competitive advantage. However, the resource must

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also be costly to imitate or to substitute for a rival, if a company wants to
achieve sustained competitive advantage.
Question of Organization. The resources itself do not confer any advantage for
a company if it’s not organized to capture the value from them. Only the firm
that is capable to exploit the valuable, rare and imitable resources can achieve
sustained competitive advantage.

According to RBV proponents, it is much more feasible to exploit external

opportunities using existing resources in a new way rather than trying to
acquire new skills for each different opportunity. In RBV model, resources are
given the major role in helping companies to achieve higher organizational
performance. There are two types of resources: tangible and intangible.

Source:-

 Rothaermel, F. T. (2012). Strat.Mgmt.: Concepts and Cases. McGraw-Hill/Irwin, p. 5

 Barney, J. B. (1991). Firm Resources and Sustained Competitive Advantage. Journal of
Management, Vol. 17, pp.99–120.
1.2 The I/O (Industrial Organization) Model
 It is based on economic theory — deals with issues like competitive
rivalry, resource allocation, economies of scale.
 It adopts an external perspective to explain that forces outside of the
organization represent the dominate influences on a firm's strategic
actions and is based on the following four assumptions:

a. The external Environment The general, industry, and competitive

environments impose pressures and constraints on firms and
determines strategies that will result in superior returns. (External
Environment à Organization).
b. Most firms competing in an industry or an industry segment control
similar sets of strategically-relevant resources and thus pursue
similar strategies.
c. Resources used to implement strategies are highly mobile across
firms.
d. Organizational decision-makers are assumed to be rational and
committed to acting only in the best interests of the firm.

Note:- Study the external environment; locate an industry with high potential
for above average returns; identify the strategy appropriate for the industry
which brings the returns sought; develop or quire assets and skills needed to
implement the strategy; use the firm's developed strengths to implement the
strategy.

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1.6 Benefits of Strategic management

Strategic management allows an organization to be more proactive than

reactive in shaping its own future; it allows an organization to initiate and
influence (rather than just respond to) activities—and thus to exert control over
its own destiny. Small business owners, chief executive officers, presidents,
and managers of many for-profit and nonprofit organizations have recognized
and realized the benefits of strategic management.

Historically, the principal benefit of strategic management has been to help

organizations formulate better strategies through the use of a more systematic,
logical, and rational approach to strategic choice. This certainly continues to be
a major benefit of strategic management, but research studies now indicate
that the process, rather than the decision or document, is the more important
contribution of strategic management. Communication is a key to successful
strategic management. Through involvement in the process, in other words,
through dialogue and participation, managers and employees become
committed to supporting the organization.

The above figure illustrates this intrinsic benefit of a firm engaging in strategic
planning. Note that all firms need all employees on a mission to help the firm
succeed.

The manner in which strategic management is carried out is thus exceptionally

important. A major aim of the process is to achieve the understanding of and
commitment from all managers and employees. Understanding may be the
most important benefit of strategic management, followed by commitment.
When managers and employees understand what the organization is doing and
why, they often feel they are a part of the firm and become committed to
assisting it. This is especially true when employees also understand linkages
between their own compensation and organizational performance. Managers
and employees become surprisingly creative and innovative when they

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understand and support the firm’s mission, objectives, and strategies. A great
benefit of strategic management, then, is the opportunity that the process
provides to empower individuals. Empowerment is the act of strengthening
employees’ sense of effectiveness by encouraging them to participate in
decision making and to exercise initiative and imagination, and rewarding
them for doing so.

Greenly stated that strategic management offers the following benefits:

o It allows for identification, prioritization, and exploitation of opportunities.

o It provides an objective view of management problems.
o It represents a framework for improved coordination and control of
activities.
o It minimizes the effects of adverse conditions and changes.
o It allows major decisions to better support established objectives.
o It allows more effective allocation of time and resources to identified
opportunities.
o It allows fewer resources and less time to be devoted to correcting erroneous
or ad hoc decisions.
o It creates a framework for internal communication among personnel.
o It helps integrate the behavior of individuals into a total effort.
o It provides a basis for clarifying individual responsibilities.
o It encourages forward thinking.
o It provides a cooperative, integrated, and enthusiastic approach to tackling
problems and opportunities.
o It encourages a favorable attitude toward change.
o It gives a degree of discipline and formality to the management of a
business.

Why Some Firms Do No Strategic Planning

Some firms do not engage in strategic planning, and some firms do strategic
planning but receive no support from managers and employees. Some reasons
for poor or no strategic planning are as follows:

 Lack of knowledge or experience in strategic planning—No training in

strategic planning.
 Poor reward structures—when an organization assumes success, it
often fails to reward success. When failure occurs, then the firm may
punish.

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 Firefighting—an organization can be so deeply embroiled in resolving
crises and firefighting that it reserves no time for planning.
 Waste of time—some firms see planning as a waste of time because no
marketable product is produced. Time spent on planning is an
investment.
 Too expensive—some organizations see planning as too expensive in
time and money.
 Laziness—People may not want to put forth the effort needed to
formulate a plan.
 Content with success—particularly if a firm is successful, individuals
may feel there is no need to plan because things are fine as they stand.
But success today does not guarantee success tomorrow.
 Fear of failure—By not taking action, there is little risk of failure unless
a problem is urgent and pressing. Whenever something worthwhile is
attempted, there is some risk of failure.
 Overconfidence—as managers amass experience, they may rely less on
formalized planning. Rarely, however, is this appropriate. Being
overconfident or overestimating experience can bring demise.
Forethought is rarely wasted and is often the mark of professionalism.
 Prior bad experience—People may have had a previous bad experience
with planning, that is, cases in which plans have been long,
cumbersome, impractical, or inflexible. Planning, like anything else, can
be done badly.
 Self-interest—when someone has achieved status, privilege, or self-
esteem through effectively using an old system, he or she often sees a
new plan as a threat.
 Fear of the unknown—People may be uncertain of their abilities to learn
new skills, of their aptitude with new systems, or of their ability to take
on new roles.
 Honest difference of opinion—People may sincerely believe the plan is
wrong. They may view the situation from a different viewpoint, or they
may have aspirations for themselves or the organization that are different
from the plan. Different people in different jobs have different perceptions
of a situation.
 Suspicion—Employees may not trust management.

Solutions

1. It should be a people process more than a paper process.

2. It should be a learning process for all managers and employees.

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 3. It should be words supported by numbers rather than numbers
supported by words.

4. It should be simple and non-routine.

5. It should vary assignments, team memberships, meeting formats, and

even the planning calendar.

6. It should challenge the assumptions underlying the current corporate

strategy.

7. It should welcome bad news.

8. It should welcome open-mindedness and a spirit of inquiry and learning.

9. It should not be a bureaucratic mechanism.

10. It should not become ritualistic, stilted, or orchestrated.

11. It should not be too formal, predictable, or rigid.

12. It should not contain jargon or arcane planning language.

13. It should not be a formal system for control.

14. It should not disregard qualitative information.

15. It should not be controlled by “technicians.”

16. Do not pursue too many strategies at once.

17. Continually strengthen the “good ethics is good business” policy.

Business ethics and corporate social Responsibility.

Business ethics can be defined as principles of conduct within organizations

that guide decision making and behavior. Good business ethics is a
prerequisite for good strategic management; good ethics is just good business!.

Multiple, high-profile accounting scandals and the global financial crisis have
placed business ethics center stage in the public eye. Business ethics is an
agreed-upon code of conduct in business, based on societal norms. It lay the
foundation and provide training for “behavior that is consistent with the
principles, norms, and standards of business practice that have been agreed
upon by society.” These principles, norms, and standards of business practice
differ to some degree in different cultures around the globe.

But a large number of research studies have found that some notions—such as
fairness, honesty, and reciprocity—are universal norms. As such, many of
these values have been codified into law.

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Law and ethics, however, are not synonymous. This distinction is important.
Staying within the law is a minimum acceptable standard. A note of caution is
therefore in order, though: A manager’s actions can be completely legal, but
ethically questionable.

To go beyond the minimum acceptable standard codified in law, many

organizations have explicit codes of conduct. These codes go above and beyond
the law in detailing how the organization expects an employee to behave and to
represent the company in business dealings. Codes of conduct allow an
organization to overcome moral hazards and adverse selections as they attempt
to resonate with employees’ deeper values of justice, fairness, honesty,
integrity, and reciprocity. Since business decisions are not made in a vacuum
but are embedded within a societal context that expects ethical behavior,
managers can improve their decision making by also considering:

 When facing an ethical dilemma, a manager can ask whether the

intended course of action falls within the acceptable norms of
professional behavior as outlined in the organization’s code of conduct
and defined by the profession at large.
 The manager should imagine whether he or she would feel comfortable
explaining and defending the decision in public. How would the media
report the business decision if it were to become public? How would the
company’s stakeholders feel about it?

Business actions considered to be unethical include misleading advertising

or labeling, causing environmental harm, poor product or service safety,
padding expense accounts, insider trading, dumping banned or flawed
products in foreign markets, not providing equal opportunities for women
and minorities, overpricing, moving jobs overseas, and sexual harassment.

Seven Principles of Admirable Business Ethics

 Be trustworthy, because no individual or business wants to do

business with an entity they do not trust.
 Be open-minded, continually asking for “ethics-related feedback” from
all internal and external stakeholders.
 Honor all commitments and obligations.
 Do not misrepresent, exaggerate, or mislead with any print materials.
 Be visibly a responsible community citizen.
 Utilize your accounting practices to identify and eliminate
questionable activities.
 Follow the motto: Do unto others as you would have them do unto
you.

Corporate Social Responsibility

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It proposes that a private corporation has responsibilities to society that extend
beyond making a profit. It refers to actions an organization takes beyond what
is legally required to protect or enhance the well-being of living things.

“What economic, legal, ethical, and philanthropic responsibilities do we have to

our stakeholders?” To identify these responsibilities more effectively, scholars
have advanced the notion of corporate social responsibility (CSR). This
framework helps firms recognize and address the economic, legal, ethical, and
philanthropic expectations that society has of the business enterprise at a
given point in time. According to the CSR perspective, managers need to realize
that society grants shareholders the right and privilege to create a publicly
traded stock company. Therefore, the firm owes something to society.

Moreover, CSR provides managers with a conceptual model that more

completely describes a society’s expectations and can guide strategic decision
making more effectively.

Social responsibility is also an intangible asset, although some consider it both

intangible and tangible. Social responsibility is the expectation that the public
perceives that a firm will make decisions that are in the best interest of the
public as a whole. Social responsibility can include a broad range of topics
from environmental protection to consumer safeguards to consumer honesty
and employing the disadvantaged. An image of social responsibility can convert
a potential disaster into an advantage. In particular, CSR has four
components: economic, legal, ethical, and philanthropic responsibilities.

Economic Responsibilities. The business enterprise is first and foremost an

economic institution. Investors expect an adequate return for their risk capital.

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Creditors expect the firm to repay its debts. Consumers expect safe products
and services at appropriate prices and quality. Suppliers expect to be paid in
full and on time. Governments expect the firm to pay taxes and to manage
natural resources such as air and water under a decent stewardship. To
accomplish all this, firms must obey the law and act ethically in their quest to
gain and sustain competitive advantage.

Note:- Economic responsibilities of the business organizations management

are to produce goods and services of value to society, so that the firm may
repay its creditors and shareholders.

Legal Responsibilities. Laws and regulations are a society’s codified ethics,

embodying notions of right and wrong. They also establish the rules of the
game. For example, business as an institution can function because property
rights exist and contracts can be enforced in courts of law. Managers must
ensure that their firms obey all the laws and regulations, including but not
limited to labor, consumer, and environmental laws.

Note:- focused on governments in laws that management is expected to obey.

Ethical Responsibilities. Legal responsibilities, however, often define only the

minimum acceptable standards of firm behavior. Frequently, managers are
called upon to go beyond what is required by law. The letter of the law cannot
address or anticipate all possible business situations and newly emerging
concerns like Internet privacy or advances in genetic engineering and stem-cell
research. A firm’s ethical responsibilities, therefore, go beyond its legal
responsibilities. They embody the full scope of expectations, norms, and values
of its stakeholders. Managers are called upon to do what society deems just
and fair. Starbucks, for example, developed an ethical sourcing policy to help
source coffee of the highest quality, while adhering to fair trade and responsible
growing practices.

Note:- ethical responsibilities of an organization management are to follow the

generally held beliefs about behavior in a society.

Discretionary responsibilities:- are the purely voluntary obligations a

corporation assumes. Example

 Philanthropic responsibilities are often subsumed under the idea of

corporate citizenship, reflecting the notion of voluntarily giving back to
society.
 Training the hard-core unemployed.
 Providing day care center.

The difference between ethical and discretionary responsibilities is that few

people expect an organization to fulfill discretionary responsibilities the reverse
is true ethical responsibilities.

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THE END

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