Strategic management – the integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage

Competitive advantage – a firm that formulates and implements a strategy that leads to superior performance relative to other competitors in the same industry or the industry average

Sustainable competitive advantage – a firm that is able to outperform its competitors or the industry average over a prolonged period of time

Competitive disadvantage – a firm underperforms its rivals or the industry average

Competitive parity – two or more firms perform at the same level

Strategy – describes the goal directed actions a firm intends to take in its quest to gain and sustain competitive advantage

Co-opetition – when competitors cooperate with one another to achieve strategic objectives

Firm effects – the results of managers actions to influence firm performance (have more impact than industry effects)

Industry effects – the results attributed to the choice of industry in which to compete

Strategic business units – the standalone divisions of a larger conglomerate, each which its own profit-and-loss responsibility

Business model – details the firm’s competitive tactics and initiatives

Externalities – represents the side-effects of production and consumption that are not reflected in the price of the product

Crowdsourcing – a process in which a group of people voluntarily perform tasks that were traditionally being completed by a firm’s employees

Stakeholders – individuals or groups who can affect or are affected by the actions of a firm

AFI strategy framework – Analyze, Formulate, Implement

Strategic management process – describes the methods by which managers conceive of and implement a strategy that can lead to a sustainable competitive advantage

Strategic intent - the staking out of a desired leadership position in the long term that far exceeds a company’s current resources and capabilities

Vision – a statement about what the organization ultimately wants to accomplish; it captures the company’s aspiration

Mission – describes what an organization actually does – what its business is – and why it does it; can be customer-oriented or product-oriented

Strategic commitments – actions that are costly, long –term oriented, and difficult to reverse

Organizational values – ethical standards and norms that govern the behavior of individuals within a firm or organization (and within society)

Strategic (long-range) planning – a rational, top-down process through which management can program future success; typically concentrates strategic intelligence and decision-making responsibilities in the office of the CEO

Scenario-planning – strategy-planning activity in which managers envision different what-if scenarios to anticipate plausible futures

Dominant strategic plan – the strategic option that managers think most closely matches reality at a given point in time

Strategic initiative – any activity a firm pursues to explore and develop new products and processes, new markets, or new ventures

Emergent strategy – any unplanned strategic initiative undertaken by mid-level employees of their own volition

Intended strategy – the outcome of a rational and structured, top-down strategic plan

Unrealized strategy – part or all of a firm’s strategic plan that falls by the wayside due to unexpected events

Realized strategy – combination of intended or emergent strategy

PESTEL – A framework that categorizes and analyzes an important set of external factors (political, economic, sociocultural, technological, ecological, and legal) that might impinge upon a firm. These forces are embedded in the global environment and can creates both opportunities and threats for the firm.Political factors – describes the processes and actions of government bodies that can influence the decisions and behaviors of firms

Economic factors – largely macroeconomic, affecting economy-wide-phenomena i.e. growth rates, interest rates, employment levels, price stability, currency exchange ratesSociocultural factors – society’s cultures, norms, valuesTechnological factors – the application of knowledge to create new processes and productsEcological factors – broad environmental issues such as the natural environment, global warming, and sustainable economic growthLegal factors – official outcomes of the political processes as manifested in laws, mandates, regulations, and court decisions

Industry – a group of companies offering similar products or services; it makes the supply side of the market, while customers make up the demand side

Structure-conduct-performance model – a framework that explains differences in industry performance; it identifies four different industry types: perfect competition, monopolistic competition, oligopoly, and monopoly; fragmented industries tend to be less profitable than consolidated ones

Porter’s Five Forces – identifies five forces that determine the profit potential of an industry and shape a firm’s competitive strategy

1) threat of entry2) power of suppliers3) power of buyers4) threat of substitutes5) rivalry among existing competitors

Entry barriers – obstacles that determine how easily a firm can enter an industry; entry barriers are often one of the most significant predictors of industry profitability

Complement – a product, service, or competency that adds value to the original product offering when the two are used in tandem

Complementor – a company that provides a good or service that leads customers to value your firm’s offering more when the two are combined

Industry attractiveness, in terms of profit potential is determined by three distinct pairs of two forces:

1) Supplier and buyer power2) Entry and exit barriers3) Available complements and threat of substitutes

Industry Convergence – a process whereby formerly unrelated industries begin to satisfy the same customer need

Strategic Group – the set of companies that pursue a similar strategy within a specific industry in their quest for competitive advantage

Strategic Group Model – clusters different firms into groups based on a few key strategic dimensions

Competitive rivalry is strongest between firms that are within the same strategic group

Strategic groups are affected differently by the external environment Strategic groups are affected differently by the competitive forces Some strategic groups are more profitable than others

Mobility Barriers – industry-specific factors that separate one strategic group from another

Core Competencies – unique strengths embedded deep within a firm, that allows a firm to differentiate its products and services from those of its rivals, creating higher value for the customers or offering products and services of comparable value at lower cost

Resource-based view – a model that sees resources as key to superior performance. If a resource exhibits VRIO (valuable, rare, costly to imitate, organize to capture value of the resource) attributes, the resource enables the firm to gain and sustain a competitive advantage

Tangible resources – resources with physical attribute, which thus are visible

Intangible resource – resources that do not have physical attribute and thus are invisible

Resource heterogeneity – assumption in the resource-based view that a firm is a bundle of resources and capabilities that differ across firms

Resource immobility – assumption in the resource-based view that a firm has resources that tend to be “sticky” and that do not move easily from firm to firm

Value chain - the internal activities a firm engages in when transforming inputs into outputs; each activity adds incremental value; primary activities directly add value; support activities add value indirectly

Primary activities – firm activities that add value directly by transforming inputs into outputs as the firm moves a product or service horizontally along the internal value chain

Support activities – add value indirectly, but are necessary to sustain primary activities

Strategic activity system – conceptualization of a firm as a network of interconnected activities

Dynamic capabilities perspective – a model that emphasizes a firm’s ability to modify and leverage its resource base in a way that enables it to gain and sustain a competitive advantage in a constantly changing environment

Resource stocks – the firm’s current level of intangible resources

Resource flows – the firm’s level of investments to maintain or build a resource

Path dependence – describes a process in which options one faces in a current situation are limited by decisions made in the past

Causal ambiguity – describes a situation in which cause and effect of a phenomenon are not readily apparent

Social complexity – describes situations in which different social and business systems interact with one another

SWOT analysis – a framework that allows managers to synthesize insights obtained from an internal analysis of the company’s strengths and weaknesses with those from an analysis of external opportunities and threats

Value – the dollar amount a consumer would attach to a good or service; the consumer’s maximum willingness to pay; also called reservation price

Economic Value Created – difference between value and cost; also called economic contribution (V-C)

Profit (producer surplus) – difference between price charged and the cost to produce (P-C)

Consumer surplus – difference between the value a consumer attaches to a good or service and what he or she paid for it (V-P)

Opportunity costs – the value of the best forgone alternative use of the resources employedAll accounting data tend are historical data and thus backward-lookingAccounting data does not consider off-balance sheet itemsAccounting data focus mainly on tangible assets, which are no longer the most important

Risk Capital – capital provided by shareholders in exchange for an equity share in a company; it cannot be recovered if the firm goes bankrupt; the measure of competitive advantage that matter the most to shareholders

Total return to shareholders – return on risk capital that includes stock price appreciation plus dividends received over a specific period

Stock prices can be volatile, making it difficult to assess firm performance, at least in short-term

Overall macroeconomic factors such as the unemployment rate, economic growth or contraction, and interest and exchange rates all have a direct bearing on stock prices

Stock prices frequently reflect the psychological moods of investors, which can at times be irrational

Balanced scorecard – strategy implementation tool that harnesses multiple internal and external performance metrics in order to balance financial and strategic goals

How do customers view us? How do we create value? What core competencies do we need? How do shareholders view us? Disadvantage: does not provide much insight into how metrics that deviate

from set goals can be put back on track

Triple bottom line – combination of economic, social, and ecological concerns that can lead to a sustainable strategy

Business-level strategy – the actions managers take in their quest for competitive advantage when competing in a single product market

Strategic position – a firm’s strategic profile based on value creation and cost; the goal is to create as large a gap as possible between the value the firm’s product or service creates and the cost required to produce it (V-C)

Strategic trade-offs – situations that require choosing between a cost of value position, necessary because higher value tends to require higher cost

Differentiation strategy – seeks to create higher value for customers than the value that competitors create, by delivering products or services with unique features while keeping the firm’s cost structure at the same or similar levels

Cost-leadership strategy – seeks to create the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the firm to offer lower prices to its customers

Scope of competition – the size – narrow or broad – of the market in which a firm chooses to compete

Focused cost-leadership strategy – same as the cost-leadership strategy except with a narrow focus on a niche market

Focused differentiation strategy – same as the differentiation strategy except with a narrow focus on a niche market

Value drivers Product features Customer service Customization Complements

Mass customization – the manufacture of a large variety of customized products or services at relatively low unit cost

Cost drivers Cost of input factors Economies of scale Learning-curve effects – learning by doing can drive down cost Experience-curve effects – captures both economies of scale & learning effects

Economies of scale – decrease in cost per unit as output increases; allows firms to: Spread their fixed costs over a larger output Employ specialized systems and equipment Take advantage of certain physical properties

Minimum efficient scale – output range needed to bring down the cost per unit as much as possible, allowing a firm to stake out the lowest-cost position that is achievable through economies of scale

Diseconomies of scale – increases in cost per unit when output increases

Integration strategy – requires trade-offs between differentiation and low costs

Economies of scope – savings that come from producing two or more outputs at less cost than producing each output individually, despite using the same resources and technology

Ambidextrous organization – enables managers to balance and harness different activities in trade-off situations

Conglomerate – an organization that combines two or more business units, often active in different industries, under one overarching corporation

Productivity frontier – relationship that captures the result of performing best practices at any given time; the function is convex (bowed outward) to capture the trade-off between value creation and production cost

Innovation – the commercialization of any new product, process, or idea, or the modification and recombination of existing ones; to drive growth, innovation also needs to be useful and successfully implemented

Industry life cycle – the four different stages - introduction, growth, maturity, and decline – that occur in the evolution of an industry over time

Network effects – the positive effect (externality) that one user of a product or service has on the value of that product for other users

Standard – an agreed upon solution about a common set of engineering features and design choices; also known as dominant design

Product innovations – new products, such as jet airplane, electric vehicle, MP3 player, and netbook

Process innovations – new ways to produce existing products or deliver existing services

Entrepreneurship – the process by which people undertake economic risk to innovate – to create new products, processes, and sometimes new organizations

Strategic entrepreneurship – the pursuit of innovation using tools and concepts available in strategic management

Incremental innovation – an innovation that squarely builds on the firm’s established knowledge base, steadily improves the product or service it offers, and targets existing markets by using existing technology

Radical innovation – an innovation that draws on novel methods or materials, is derived from either an entirely different knowledge base or from the recombination of the firm’s existing knowledge base with a new stream of knowledge, or targets new markets by using new technologies

Architectural innovation – a new product in which known components, based on existing technologies, are reconfigured in a novel way to attack new markets

Disruptive innovation – an innovation that leverages new technologies to attack existing markets from the bottom upLong tail – business model in which companies can obtain a large part of their revenues by selling a small number of units from among almost unlimited choices

Thin markets – a situation in which transactions are likely not to take place because there are only a few buyers and sellers, who have difficulty finding each other

Discontinuities – periods of time in which the underlying technological standard changes

Paradigm shift – a situation in which a new technology revolutionizes an existing industry and eventually establishes itself as the new standard

Absorptive capacity – a firm’s ability to understand, evaluate, and integrate external technology developments

Hypercompetition – a situation in which competitive intensity has increased and periods of competitive advantage have shortened, especially in newer, technology-based industries, making any competitive advantage a string of short-lived advantages

Corporate-level strategy –the decisions that senior management makes and the actions it takes in the quest for competitive advantage in several industries and markets simultaneously; addresses where to compete

Scope of the firm – the boundaries if the firm along three dimensions: industry value chain, products and services, and geography (regional, national, or global markets)

Transaction cost economies – explains and predicts the scope of the firm, which is central to formulating a corporate-level strategy that is more likely to lead to a competitive advantage; insights gained from transaction cost economics help managers decide what activities to do in-house versus what products and services to obtain from the external market

Transaction costs – all costs associated with an economic exchange, whether within a firm or in markets

Administrative costs – all costs pertaining to organizing an economic exchange within a hierarchy, including recruiting and retaining employees, paying salaries and benefits, and setting up a business

Principal-agent problem – situation in which an agents performing activities on behalf of a principal pursues his or her own interests

Information Asymmetries – situations in which one party is more informed than another, mostly due to the possession of private information

Licensing – a form of long-term contracting in the manufacturing sector that enables firms to commercialize intellectual property

Franchising – a long-term contract in which a franchisor grants a franchisee the right to use the franchisor’s trademark and business processes to offer goods and services that carry the franchisor’s brand name; the franchisee in turn pays an up-front buy-in lump sum and a percentage of revenues

Credible commitment – a long-term strategic decision that is both difficult and costly to reverse

Joint venture – organizational form in which two or more partners create and jointly own a new organization

Vertical integration – the firm’s ownership of its production of needed inputs or of the channels by which it distributes outputs

Industry value chain – depiction of the transformation of raw materials into finished goods and services along distinct vertical stages, each of which typically represents a distinct industry in which a number of different firms are competing

Backward vertical integration – changes in an industry value chain that involve moving ownership of activities upstream to the originating (inputs) point of the value chain

Forward vertical integration – changes in an industry value chain that involve moving ownership of activities closer to the end (customer) point of the value chain

Risks of vertical integration Increasing costs Reducing quality Reducing flexibility Increasing the potential for legal repercussions

Specialized assets – assets that have significantly more value in their intended use than in their next-best use (high opportunity cost); they come in three types: site specificity, physical asset specificity, and human asset specificity

Site specificity: assets are required to be collocated, such as equipment necessary for mining bauxite and aluminum smelting

Physical asset specificity: assets whose physical and engineering properties are designed to satisfy a particular customer, such as bottling machinery for Coca-Cola and PepsiCo; since the bottles have different shapes, they require unique molds

Human asset specificity: investments made in human capital to acquire unique knowledge and skills, such as mastering the routines and procedures of a specific organization, which are not transferable to a different employer

Alternatives to Vertical Integration Taper integration – a way of orchestrating value activities in which a firm is

backwardly integrated but also relies on outside market firms for some of its supplies, and/or is forwardly integrated but relies on outside-market firms for some of its distribution

Strategic outsourcing – moving one or more internal value chain activities outside the firm’s boundaries to other firms in the industry value chain

Diversification – an increase in the variety of products or markets in which to compete

Product Diversification strategy – corporate strategy in which a firm is active in several different product markets

Geographic Diversification strategy – corporate strategy in which a firm is active in several different countries

Product-Market Diversification strategy – corporate strategy in which a firm is active in several different product markets and several different countries

Related Diversification strategy – corporate strategy in which a firm derives less than 70% of its revenues from a single business activity but obtains revenues from other lines of business that are linked to the primary business activity; this is the best form of diversification in terms of performance

Entails two additional types of costsCoordination costs – function of the number, size, and types of businesses that are linked to one anotherInfluence costs – occur due to political maneuvering by managers to influence capital and resource allocation and the resulting ineffiencies stemming from suboptimal allocation of scarce resources

Unrelated Diversification strategy – corporate strategy in which a firm derives less than 70% of its revenues from a single business activity and there are few, if any, linkages among its businesses

Diversification Discount - situation in which the stock price of highly diversified firms is valued at less than the sum of their individual business units

Diversification Premium – situation in which the stock price of related-diversification firms is valued at greater than the sum of their individual business units

Executives can enhance performance using a diversification strategy by:

Restructuring – the process of reorganizing and divesting business units and activities to refocus a company in order to leverage its core competencies more fully

BCG Growth-share matrix – locates the firm’s individual SBU’s in two dimensions: relative market share (x-axis) and speed of market growth (y-axis)

Dogs – low performing businesses, with low earnings, neutral/negative cash flow; you should divest (sell) or harvest (stop investing in the business and squeeze out as much as cash flow as possible before shutting it down or selling it)

Cash-cows – high earnings and cash flow; your should hold their current position

Stars – hold a high market share with high, stable, or growing earnings; hold or invest for growth

Question marks – could turn to dog or star, low/unstable earnings but may grow, negative cash flow; increase market share or harvest/divest

Internal capital markets – source of value creation in a diversification strategy if the conglomerates headquarters does a more efficient job of allocating capital through its budgeting process than what could be achieved in capital markets

Merger – the joining of two independent companies to form a combined entity

Acquisition – the purchase or takeover of one company by another; can be friendly or unfriendly

Hostile takeover – acquisition in which the target company does not wish to be acquired

Horizontal integration – the process of acquiring and merging with competitors, leading to industry consolidation

Managerial hubris – a form of self-delusion, in which managers convince themselves of their superior skills in the face of clear evidence to the contrary

Strategic alliances – voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services to lead to competitive advantage

Relational view of competitive advantage – strategic management framework that proposed critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries

Why firms enter strategic alliances

Strengthen competitive position Enter new markets Hedge against uncertainty Access critical complementary assets Learn new capabilities

Learning races – situations in which both partners in a strategic alliance are motivated to form an alliance for learning, but the rate at which the firms learn may vary; the firm that accomplishes its goal more quickly has an incentive to exit the alliance or reduce its knowledge sharing

Non-equity alliance – partnership based on contracts between firms; the most frequent forms are supply agreements, distribution agreements, and licensing agreements

Explicit knowledge – knowledge that can be codified (information, facts, instructions, recipes); concerns knowing about a process or product

Equity alliance – partnership in which at least one participant takes partial ownership of another partner

Tacit knowledge – knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task

Corporate venture capital – equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances

Joint venture – a standalone organization created and jointly owned by two or more parent companies

Alliance management capability – a firm’s ability to effectively manage three alliance-related tasks concurrently: partner selection and alliance information, alliance design and governance, and post formation alliance management

Strategic Network – a social structure composed of multiple organizations (network nodes) and the links among the nodes (network ties)

Degree Centrality – the number of direct ties a firm has in a network, out of the possible direct ties; the more direct ties, the more centrally located the firm is

Structural holes – spaces where two organizations are connected to the same organization, but are not connected to one another; firms that bridge structural holes (brokers) gain information and control benefits over the nonconnected firms

Small world phenomenon – situations in which a network exhibits local clusters, each with high degree centrality

Globalization – process of closer integration and exchange between different countries and peoples worldwide, made possible by falling trade and investment barriers, advances in telecommunications, and reductions in transportation costs

Multinational enterprise – a company that deploys resources and capabilities in the procurement, production, and distribution of goods and services in at least two countries

Foreign direct investment – a firm’s investments in value chain activities abroad

Location economies – benefits from locating value chain activities in the world’s optimal geographies for a specific activity, whatever that may be

Liability of foreignness – additional costs of doing business in an unfamiliar cultural and economic environment, and or coordinating across geographic distances

National culture – the collective mental and emotional “programming of the mind” that differentiates human groups

Power-distance dimension – dimension of culture that focuses on how society deals with inequality among people in terms of physical and intellectual capabilities, and how those methods translate into power distributions within organizations

Individualism dimension – dimension of culture that focuses on the relationship between individuals in a society, particularly the relationship between individual and collective pursuits

Masculinity-femininity dimension – dimension of culture that focuses on the relationship between genders and its relationship to an individual’s role at work and in society

Uncertainty-avoidance dimension – dimension of culture that focuses on societal differences in tolerance toward ambiguity and uncertainty

Cultural distance – cultural disparity between an internationally expanding firm’s home country and its targeted host country

Globalization hypothesis – assumption that consumer needs and preferences throughout the world are converging and thus becoming increasingly homogenous

Local responsiveness – the need to tailor product and service offerings to fit local consumer preferences and host-country requirements; generally entails higher cost

Integration-responsiveness framework – strategy framework that juxtaposes the pressures an MNA faces for cost reductions and local responsiveness to derive four different strategies to gain and sustain competitive advantage when competing globally: international strategy, localization strategy, global-standardization strategy, and transnational strategy

International strategy – strategy that involves leveraging home-based core competencies by selling the same products or services in both domestic and foreign markets; advantageous when the MNE faces low pressures for both local responsiveness and cost reductions

Localization strategy – strategy pursued by MNEs that attempts to maximize local responsiveness, with the intent that local consumers will perceive them to be domestic companies; strategy arises out of the combination of high pressure for local responsiveness and low pressure for cost reductions; also called a multi-domestic strategy

Global-standardization strategy – strategy attempting to reap significant economies of scale and location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at the lowest cost

Transnational strategy – strategy that attempts to combine the benefits of a localization strategy (high local responsiveness) with those of a global-standardization strategy (lowest cost position attainable); sometimes called glocalization

Death of distance hypothesis - assumption that geographic location alone should not lead to firm-level competitive advantage because firms are now, more than ever, able to source inputs globally

National competitive advantage – world leadership in specific industriesPorter’s National Competitive Advantage Framework

Factor conditions – describe a country’s endowments in terms of natural, human, and other resources

Demand conditions – the specific characteristics of demand in a firm’s domestic market

Competitive intensity in a focal industry Related and supporting industries/complementors

Regional cluster – a group of interconnected companies and institutions in a specific industry, located near each other geographically and also linked by common characteristics

Knowledge spillover – a type of positive externality that is regionally constrained

Strategy implementation – the part of the strategic management process that concerns the organization, coordination, and integration of how work gets done; it is key to gaining and sustaining competitive advantage

Organizational design – the process of creating, implementing, monitoring, and modifying the structure, processes, and procedure of an organization

Organizational structure – a key building block of organizational design that determines how the work efforts of individuals and teams are orchestrated and how resources are distributed

Key Building Blocks: Specialization – an element of organizational structure that describes the

degree to which a task is divided into separate jobs (division of labor)

Formalization – an element of organizational structure that captures the extent to which employee behavior is controlled by explicit and codified rules and procedures

Centralization – an element of organization structure that refers to the degree to which decision-making is concentrated at the top of the organization

Hierarchy – an element of organizational structure that determines the formal, position-based reporting lines and thus stipulates who reports to whom

Mechanistic organization – organizational form characterized by a high degree of specialization and formalization, and a tall hierarchy that relies on centralized decision making

Simple structure – organizational structure in which the founders tend to make all the important strategic decisions as well as run the day-to-day operations

Functional structure – organizational structure that groups employees into distinct functional areas based on domain of expertise

Multidivisional structure (M-form) – organizational structure that consists of several distinct strategic business units, each with its own profit-and-loss responsibility

Matrix Structure – organizational structure that combines the functional structure with the multidivisional structure

Organizational culture – the collectively shared values and norms of an organization’s members; a key building block if organizational design

Founder imprinting – a process by which the founder defines and shapes an organization’s culture, which can persist for decades after his or her departure

Strategic control and reward systems – a key building block of organizational design; internal-governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees)

Input controls – mechanisms in a strategic control and reward system that seek to define and direct employee behavior through a set of explicit and codified rules and standard operating procedures, considered prior to the value-creating activities

Output controls – mechanisms in a strategic control and reward system that seek to guide employee behavior by defining expected results (outputs), but leave the means to those results open to individual employees, groups, or SBUs

Results-only-work-environments (ROWEs) – output controls that attempt to tap intrinsic (rather than extrinsic) employee motivation, which is driven by the employee’s interest in and the meaning of the work itself

Carrot-and-stick approach – extrinsic motivation is driven by external factors such as awards and higher compensation or punishment such as demotion and lay-off

Stakeholder strategy – an integrative approach to connect corporate governance, business ethics, and strategic leadership

Stakeholder theory – a theoretical framework concerned with how various stakeholders create and trade value; its main thesis is that effective management of the web of exchange relationships among stakeholders can help the firm achieve its goals and improve its chances of gaining and sustaining competitive advantage

Stakeholder impact analysis – a decision tool with which managers can recognize, assess, and address the needs of different stakeholders, to allow the firm to perform optimally and act as a good corporate citizen

Corporate Social Responsibility – a framework that helps firms recognize and address the economic, legal, social, and philanthropic expectations that society has of the business enterprise at a given point in time

Corporate governance - a system of mechanisms to direct and control an enterprise in order to ensure that it pursues its strategic goals successfully and legally

Agency theory – a theory that views the firm as a nexus of legal contracts

Board of directors – the centerpiece of corporate governance, composed of inside and outside directors, who are elected by the shareholders to represent their interests

Inside directors – board members who are generally part of the company’s senior management team; appointed by shareholders to provide the board with necessary information pertaining to the company’s internal workings and performance

Outside directors – board members who are not employees of the firm, but who are frequently senior executives from other firms or full-time professionals; given their independence, they are more likely to watch out for shareholder interests

Groupthink – a situation in which opinions coalesce around a leader without individuals critically challenging and evaluating that leader’s opinions and assumptions

Stock options – an incentive mechanism to align the interests of shareholders and managers, by giving the recipient the right to buy a company’s stock at a predetermined price sometime in the future

Business ethics – an agreed upon code of conduct in business, based on societal norms

Strategic leadership – the behaviors and styles of executives that influence others to achieve organizational goals

Upper-echelons theory – a conceptual framework that states that it’s the top management team that primarily determines the success or failure of an organization through the strategies they pursue

Level-5 leadership pyramid – a conceptual framework of leadership progression with five distinct, sequential levels

Level-1: highly capable individual Level-2: contributing team manager Level-3: competent manager Level-4: effective leader Level-5: executive