Chapter 1 - Why Do Companies Exist?

What are the three primary strategies to achieve one or both goals?

1- Competitor dominant 2- Profit dominant 3- Customer dominant

What are 5 areas of corporate social responsibility according to the Dow Jones Sustainability Index?

1- Strategy 2- Financial 3- Customer and Product 4- Governance and Stakeholder 5- Human

Internally Motivated Strategy

1- accommodative strategy 2- proactive strategy

Customer dominant weaknesses

1- by focusing too intensively on customers, the firm may not develop products the customers need, but don't know how to vocalize they need. 2- research has shown that some firms focus so much on their major customers that they do not give enough attention to their smaller customers, which often can become more profitable for the firm in the future. By focusing on the current big accounts, the firm often loses greater long-term profits. 3- the mechanics in place to track and focus on customer needs can create excessive complexity thereby hurting efficiency and raising costs.

Competitor dominant weaknesses

1- if managers are overly concerned with the competition, they may lower their customer focus and lose touch with the market 2- a competitor dominant paradigm promotes me-too thinking and value creation through paralleling whatever the competition is doing. 3- a competitor mindset leaves the company vulnerable to innovative disruptions.

Customer dominant strengths

1- is that managers stay focused on the true source of revenues—the customer. By observing customer behavior, management can determine customer demand via their real needs. 2- This estimated demand then helps delineate what their products really are and what they do for the customer. The end result is that the firm is in the position to innovate and disrupt with products and services. 3- It is also less likely to miss important trends or allow a rival to change the competitive rules. As the old saying goes, the best defense is a good offense.

Profit dominant weaknesses

1- like the competitor logic, the profit logic can diminish the focus on customer needs. 2- because profits are reported quarterly or annually, they can lead to short-term decision making at the expense of long term success. 3- the allure of profits can sometimes produce unethical behavior as the world saw with the great Enron fraud of 2001.

Externally Motivated Strategies

1- reactive 2- responsive

What is the stakeholder's approach to CSR?

A central idea to the stakeholder view is that organizations should not simply focus on economic performance, but that organizations should also consider their social and environmental performance as well. Many CSR supporters suggest that when firms only focus on creating wealth, they may fail to address the needs of society and the environment.

Proactive strategy

Actively engage and proactively search for ways to incorporate corporate social responsibility into their everyday operations. Many of these firms look at CSR as a way to differentiate themselves from the competition and build alliances with stakeholders to further integrate corporate social responsibility into their everyday practices. They actively participate in policy making at both the local, regional, national, and international level.

What was E. Merrick Dodd's approach on the shareholders paradigm?

Challenged this assumption and stated that, in addition to shareholder interest, corporations should also consider the interest of the organization's workers, consumers, suppliers, and society as a whole in the decision-making process. He also held the belief that organizations have a responsibility to all stakeholders of an organization, not just shareholders. This perspective was also supported by a number of prominent business leaders such as Henry Ford.

Customer and Product

Does the company foster loyalty with its products by investing in customer relationship management and product and service innovation that focus on technologies and systems, which use financial, natural, and social resources in an efficient, effective, and economic manner over the long-term?

Human

Does the company manage human resources to maintain employee satisfaction through organizational learning and knowledge?

Governance and Stakeholder

Does the company set high standards of corporate governance and stakeholder engagement, including corporate code of ethics and public reporting?

Strategy

Does the organization integrate long-term economic, environmental, and social aspects into their business strategy?

Financial

Does the organization meet shareholders' demands by providing sound financial returns, long-term economic growth, open communication and transparent financial accounting?

Profit dominant

Maximizing profit differs from maximizing shareholder wealth because share prices reflect much more than just profit and are estimates of the future value of the firm in today's dollars.

Responsive strategy

May engage in some social initiatives but, for the most part, believe that these efforts are a nuisance that distract from making a profit. While these firms may accept that they have responsibility to care for the environment, their hearts are not fully invested in CSR. These firms, must be prodded or cajoled to engage in environmental and social efforts through regulatory efforts.

What was Milton Friedman's approach on the shareholders paradigm?

Organizations have the sole responsibility to provide financial gain for the organization's shareholders and suggested that, "The social responsibility of business is to increase its (the organization's) profits." The executives of an organization are the employees of the shareholders. As such, employees have the responsibility to make as much money as possible. An underlying assumption is that while businesses should maximize their profits, they must still obey the legal rules and ethical customs of society.

Reactive strategy

Suggests that an organization is involved in little or no corporate social responsibility initiatives. Typically, organizations with a this strategy have executives who believe that, unless extenuating circumstances exist, firms have no need to engage in social efforts and should only focus on making a profit.

What are socially responsible funds?

The fund manager is appealing to an investors stakeholder paradigm to achieve a shareholder objective for the mutual fund company. The investor in the socially responsible fund however, is willing to sacrifice the shareholder objective based on the stakeholder paradigm.

What is sustainability?

The quasi-official definition comes from the United Nations' Brundlant Commission: Sustainable ". . . development meets the needs of current generations without compromising the ability of future generations to meet their own needs."

Why are all three primary logics critical?

The question is actually one of priority, not a "choose-only-one" option. The bottom line: If companies meet customers' needs efficiently (customer logic), and better than the competition (competition logic) then they will make profits both now and in the future (profit logic).

Accommodative strategy

Will often engage in social initiatives, although social initiatives are not the focus of their existence. They will often support CSR initiatives while focusing on making a profit and shareholder returns.

What is the triple bottom line?

argues that every decision has environmental, social, and financial implications. Truly sustainable decisions have to improve all three bottom lines.

Stakeholders Theory

balanced approach to add the most value possible to all the stakeholders - owners, students (customers), the professor, the book publisher, the book authors, and anyone else impacted in anyway from the sale/purchase of the text

What is A.A. Berle's approach on the shareholders paradigm?

corporations should create benefits for shareholders. In other words, managers are the "guardians" or "trustees" of the shareholders. Under Berle's perspective, managers do not need to consider the interest of all stakeholders, just the shareholders.

Customer dominant

customers are the only ones who actually put money into the value chain—everyone else in the chain simply recycles it.

Competitor dominant

in order to have the strongest firm possible (defined by either the shareholder or stakeholder paradigms), firms should focus on beating their competitors at any cost.

Can the shareholders theory and the stakeholders theory be the same?

in some cases they can be the same thing - in order to maximize shareholder wealth, the smartest thing to do may be to take a stakeholder perspective

What is CSR Corporate Social Responsibility?

is defined as management's obligation to make choices and take actions that will contribute to the welfare and interests of society as well as the organization.

Shareholder Theory

maximize shareholder (or owner) wealth - firms exist and managers manage to maximize wealth of the firms owner

Stakeholder

refers to any person or institution that has interest in the well-being of an organization and is impacted by the organizations actions

Shareholder

refers to financial owners, or stockholders of an organization

Profit dominant strengths

success is easy to measure (look at the bottom line of the income statement), it can motivate management (who often have their personal bonuses tied to profit), and it provides a structure for management to set goals (maximize sales while minimizing expenses).

Competitor dominant strengths

the goal is to be the "market leader" and to make sure none of your competitors take market share from you.