Chapter 2

DEFINING THE COMPANY’s MISSION and social
responsibility

WHAT IS A COMPANY MISSION?

Whether a firm is developing a new business or reformulating direction for an ongoing business, it must determine the basic goals and philosophies that will shape its strategic posture. This fundamental purpose that sets a firm apart from other firms of its type and identifies the scope of its operations in product and market terms is defined as the company mission. It embodies the business philosophy of the firm’s strategic decision makers, implies the image the firm seeks to project, reflects the firm’s self-concept, and indicates the firm’s principal product or service areas and the primary customer needs the firm will attempt to satisfy. An excellent example is the company mission statement of Nicor, Inc., shown in Exhibit 2–1.

The Need for an Explicit Mission

No external body requires that the company mission be defined, and the process of defining it is time-consuming and tedious. Characteristically, it is a statement, not of measurable targets, but of attitude, outlook, and orientation. In general terms, the mission statement addresses the following questions:

·         Why is this firm in business?

·         What are our economic goals?

·         What is our operating philosophy in terms of quality, company image, and self-concept?

·         What are our core competencies and competitive advantages?

·         What customers do and can we serve?

·         How do we view our responsibilities to stockholders, employees, communities, environment, social issues, and competitors?

 

FORMULATING A MISSION

Exhibit 2-2 provides insights into how some major corporations handle the mission statement components.

Basic Product or Service; Primary Market; Principal Technology

Three indispensable components of the mission statement are specification of the basic product or service, specification of the primary market, and specification of the principal technology for production or delivery. Often the most referenced public statement of a company’s selected products and markets appears in “silver bullet” form in the mission statement. Useful Web site: www.dhc.com (Dayton.Hudson Corporation)

Company Goals: Survival, Growth, Profitability

Three economic goals guide the strategic direction of almost every business organization. Whether or not the mission statement explicitly states these goals, it reflects the firm’s intention to secure survival through growth and profitability.

·         A firm that is unable to survive will be incapable of satisfying the aims of any of its stakeholders. When this happens, the firm may focus on short-term aims at the expense of the long run. Too often, the result is near-term economic failure owing to a lack of resource synergy and sound business practice.

·         No matter how profit is measured or defined, profit over the long term is the clearest indication of a firm’s ability to satisfy the principal claims and desires of employees and stockholders.

·         A firm’s growth is inextricably tied to its survival and profitability. In this context, the meaning of growth must be broadly defined. Although the product impact market studies (PIMS) have shown that growth in market share is correlated with profitability, other important forms of growth do exist. Useful Web site: www.hp.com (Hewlett Packard)

Company Philosophy

The statement of a company’s philosophy, often called the company creed, usually accompanies or appears within the mission statement. It reflects or specifies the basic beliefs, values, aspirations, and philosophical priorities to which strategic decision makers are committed in managing the company. Fortunately, the philosophies vary little from one firm to another. Useful Web site: www.gm.com (General Motors). One such statement of company philosophy is that of Saturn as shown in Exhibit 2–3.

Despite the similarity of these statements, the intentions of the strategic managers in developing them do not warrant cynicism. Company executives attempt to provide a distinctive and accurate picture of the firm’s managerial outlook. Exhibit 2-4 describes Dayton-Hudson’s management philosophy and Exhibit 2-5 details the principles of Nissan Motor Manufacturing (UK) Limited. General Motors’ environmental principles are described in Exhibit 2-6.

Public Image

Mission statements should reflect the public’s expectations, since this makes achievement of the firm’s goals more likely. A negative public image often prompts firms to reemphasize the beneficial aspects of their mission. Firms seldom address the question of their public image in an intermittent fashion. Exhibit 2-7 presents the mission statements of six high-end shoe companies.

Company Self-Concept

A major determinant of a firm’s success is the extent to which the firm can relate functionally to its external environment. To achieve its proper place in a competitive situation, the firm must realistically evaluate its competitive strengths and weaknesses.

Both individuals and firms have a crucial need to know themselves. The ability of either to survive in a dynamic and highly competitive environment would be severely limited if they did not understand their impact on others or of others on them.

Ordinarily, descriptions of the company self-concept per se do not appear in mission statements. Yet such statements often provide strong impressions of the company self-concept.

Newest Trends in Mission Components

Three new issues have become so prominent in the strategic planning for organizations that they are increasingly becoming integral parts in the development and revisions of mission statements: sensitivity to consumer wants, concern for quality, and statements of company vision.

·         Customers. “The customer is our top priority” is a slogan that would be claimed by the majority of businesses in the U.S. and abroad. In addition many U.S. firms maintain extensive product safety programs to help assure consumer satisfaction. Some key elements of customer service-driven organizations are listed in Exhibit 2-8.

·         Quality. “Quality is job one!” is a rallying point not only for Ford Motor Corporation (www.ford.com/) but for many resurging U.S. businesses as well. Two U.S. management experts have fostered a worldwide emphasis on quality in manufacturing. W. Edwards Deming and J. M. Juran’s messages were first embraced by Japanese managers whose quality consciousness led to global dominance in several industries including automobile, TV, audio equipment, and electronic components manufacturing. Deming summarizes his approach in 14 now well-known points:

            Create constancy of purpose.

            Adopt the new philosophy.

            Cease dependence on mass inspection to achieve quality.

            End the practice of awarding business on price tag alone. Instead, minimize total cost, often accomplished by working with a single supplier.

            Improve constantly the system of production and service.

            Institute training on the job.

            Institute leadership.

            Drive out fear.

            Break down barriers between departments.

            Eliminate slogans, exhortations, and numerical targets.

            Eliminate work standards (quotas) and management by objective.

            Remove barriers that rob workers, engineers, and managers of their right to pride of workmanship.

            Institute a vigorous program of education and self-improvement.

            Put everyone in the company to work to accomplish the transformation.

Firms in the U.S. responded aggressively. Their new philosophy is that quality should be the norm. Exhibit 2-9 presents the integration of the quality initiative into the mission statements of three corporations.

·         Vision Statement. Whereas the mission statement expresses an answer to the question ‘What business are we in?” a company vision statement is sometimes developed to express the aspirations of the executive leadership.  A vision statement presents the firm’s strategic intent that focuses the energies and resources of the company on achieving a desirable future.  However, in actual practice, the mission and vision statement are frequently combined into a single statement.

 

OVERSEEING THE STRATEGY MAKERS

As you saw in Exhibit 1–5, most organizations have multiple levels of strategic decision makers; typically, the larger the firm, the more levels it will have. The strategic managers at the highest level are responsible for decisions that affect the entire firm, commit the firm and its resources for the longest periods, and declare the firm’s sense of values. The term that describes the group is board of directors. In overseeing the management of a firm, the board of directors operates as the representatives of the firm’s stockholders. Elected by the stockholders, the board has these major responsibilities:


      1.    To establish and update the company mission.

      2.    To elect the company’s top officers, the foremost of whom is the CEO.

      3.    To establish the compensation levels of the top officers, including their salaries and bonuses.

      4.    To determine the amount and timing of the dividends paid to stockholders.

      5.    To set broad company policy on such matters as labor-management relations, product or service lines of business, and employee benefit packages.

      6.    To set company objectives and to authorize managers to implement the long-term strategies that the top officers and the board have found agreeable.

      7.    To mandate company compliance with legal and ethical dictates.

In the current business environment, boards of directors are accepting the challenge of shareholders and other stakeholders to become active in establishing the strategic initiatives of the companies that they serve.

AGENCY THEORY

Whenever there is a separation of the owners (principals) and the managers (agents) of a firm, the potential exists for the wishes of the owners to be ignored. This fact, and the recognition that agents are expensive, established the basis for a set of complex but helpful ideas known as agency theory. The cost of agency problems and the cost of actions taken to minimize agency problems are called agency costs.

How Agency Problems Occur

Because owners have access to only a relatively small portion of the information that is available to executives about the performance of the firm and cannot afford to monitor every executive decision or action, executives are often free to pursue their own interests. This condition is known as the “moral hazard problem” or “shirking.”

The second major reason that agency costs are incurred is known as adverse selection. This refers to the limited ability that stockholders have to precisely determine the competencies and priorities of executives at the time that they are hired.

Problems That Can Result from Agency

From a strategic management perspective there are five different kinds of problems that can arise because of the agency relationship between corporate stockholders and their company’s executives:

      1.    Executives pursue growth in company size rather than in earnings.

      2.    Executives attempt to diversify their corporate risk.

      3.    Executives avoid risk.

      4.    Managers act to optimize their personal payoffs.

      5.    Executives act to protect their status.

Solutions to the Agency Problem

In addition to defining an agent’s responsibilities in a contract, and including elements like bonus incentives that help align executives and owners interests, principals can take several other actions to minimize agency problems. The first is for the owners to pay executives a premium for their service. This premium helps executives to see their loyalty to the stockholders as the key to achieving their personal financial targets.

A second solution to agency problems is for executives to receive a backloaded compensation. This means that executives are paid a handsome premium for superior future performance.

Finally, creating teams of executives across different units of a corporation can help to focus performance measures on organizational rather than personal goals. Through the use of executive teams, owner interests often receive the priority that they deserve.

THE STAKEHOLDER APPROACH TO COMPANY RESPONSIBILITY

In defining or redefining the company mission, strategic managers must recognize the legitimate rights of the firm’s claimants. These include not only stockholders and employees but also outsiders affected by the firm’s actions. Such outsiders commonly include customers, suppliers, governments, unions, competitors, local communities, and the general public.

When a firm attempts to incorporate the interests of these groups into its mission statement, broad generalizations are insufficient. These steps need to be taken: identification of the stakeholders, understanding the stakeholders’ specific claims vis-à-vis the firm, reconciliation of these claims and assignment of priorities to them, and coordination of the claims with other elements of the company mission.

·         Identification. In defining the company, strategic managers must identify all of the stakeholder groups and weight their relative rights and their relative ability to affect the firm’s success. Exhibit 2-10 lists the commonly encountered stakeholder groups.

·         Understanding. Strategic decision makers should understand the specific demands of each group.

·         Reconciliation and Priorities. Claims must be reconciled in a mission statement that resolves the competing, conflicting, and contradictory claims of stakeholders.

·         Coordination with Other Elements. The demands of stakeholder groups constitute only one principal set of inputs to the company mission.  The other principal sets are the managerial operating philosophy and the determinants of the product-market offering. Those determinants constitute a realty test that the accepted claims must pass. The key question is: How can the firm satisfy its claimants and at the same time optimize its economic success in the marketplace?

Social Responsibility

As indicated in Exhibit 2-11, the various stakeholders of a firm can be divided into inside stakeholders and outside stakeholders. The insiders are the individuals or groups that are stockholders or employees of the firm. The outsiders are all the other individuals or groups that the firm’s actions affect.

·         Different approaches adopted by different firms reflect differences in competitive position, industry, country, environmental and ecological pressures, and a host of other factors. Many marketers have already discovered these new marketing facts of life by adopting strategies that can be called the “4 E’s”: (1) make it easy for the consumer to be green, (2) empower consumers with solutions, (3) enlist the support of the consumer, and (4) establish credibility with all publics and help to avoid a backlash. (Useful Web site: www.exxon.com). Exhibit 2-12 describes how Occidental Petroleum faces issues of corporate social responsibility in addressing the needs of the many stakeholders involved in the firm’s oil exploration in developing countries.  Exhibit 2-13 presents British Petroleum CEO, John Browne’s view that for his global company to thrive so must the communities in which his company does business.

Corporate Social Responsibility and Profitability

The issue of corporate social responsibility (CSR)—the idea that business has a duty to serve society as well as the financial interest of stockholders—has remained a highly contentious issue. Yet, managers recognize that the extent to which they embrace CSR is an important strategic decision.

There are three principal reasons why managers should be concerned about the socially responsible behavior of their firms. First, a company’s right to exist depends on its responsiveness to the external environment. Second, federal, state and local governments threaten increased regulation if business does not evolve to meet changing social standards. Third, a responsive corporate social policy may enhance a firm’s long-term viability.

The goal of every firm is to maintain viability through long-run profitability. Until all costs and benefits are accounted for, however, profits may not be claimed. In the case of CSR, costs and benefits are both economic and social. While economic costs and benefits are easily quantifiable, social costs and benefits are not. Managers, therefore, risk subordinating social consequences to other performance results that can be more straightforwardly measured. Exhibit 2-14 presents an argument that eBay is acting unethically by allowing, and profiting from, the sale of “murderabilia” on their website.

The dynamic between CSR and success (profit) is complex. While one concept is clearly not mutually exclusive of the other, it is also clear that neither is a prerequisite of the other. Rather than view these two concepts as competing, it may better be that CSR is a component in the decision-making process of business that must determine, among other objectives, how to maximize profits. Exhibit 2-15 describes causes promoted by corporate philanthropy, while Exhibit 2-16 presents the mission statement of Johnson and Johnson.

Performance: Critics of CSR believe that companies, which behave in a socially responsible manner, and portfolios comprising these companies’ securities, should perform more poorly financially than those, which do not. The costs of CSR outweigh the benefits for individual firms, they suggest. Several research studies have attempted to determine the relationship between corporate social performance and financial performance. Taken together, these studies fail to establish the nature of the relationship between social performance and financial performance.

CSR Today: In addition to a commonsense belief that companies should be able to “do well by doing good,” at least three broad trends are driving businesses to adopt CSR frameworks: the resurgence of environmentalism, increasing buyer power, and the globalization of business.

Effect on the Mission Statement: In developing mission statements, managers must identify all stakeholder groups and weigh their relative rights and abilities to affect the firm’s success. Some companies are proactive in their approach to CSR, making it an integral part of their raison d’être; others are reactive, adopting socially responsible behavior only when they must.

Social Audit: A social audit attempts to measure a company’s actual social performance against the social objectives it has set for itself. A social audit may be conducted by the company itself. However, one conducted by an outside consultant who will impose minimal biases may prove more beneficial to the firm. Once the social audit is complete, it may be distributed internally or both internally and externally, depending on the firm’s goals and situation. Some firms include a section in their annual report devoted to social responsibility activities; others publish a separate periodic report on their social responsiveness. The social audit may be used for more than simply monitoring and evaluating firm social performance. Managers also use social audits to scan the external environment, determine firm vulnerabilities, and institutionalize CSR within the firm.