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Chapter 8: Diversification:

Strategies for Managing a Group of Businesses

Screen graphics created by: Jana F. Kuzmicki, Ph.D. Troy University


McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

When morality comes up against profit, it is seldom profit that loses.


Shirley Chisholm
Former Congresswoman

There is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say engages in free and open competition, without deception or fraud.
Milton Friedman
Nobel Prize-winning Economist

Chapter Learning Objectives


1. Understand why business conduct is judged according to the ethical standards of society at large rather than a special set of ethical standards for businesses only. 2. Understand the principal drivers of unethical strategies and business behavior. 3. Learn why unethical business conduct can be very costly for a companys shareholders. 4. Become familiar with the various approaches to managing a companys ethical conduct. 5. Gain an understanding of the concepts of corporate social responsibility, corporate citizenship, and environmental sustainability. 6. Become familiar with both the moral case and the business case for ethical business conduct and socially responsible business behavior.
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Chapter Roadmap
What Do We Mean by Business Ethics?

Where Do Ethical Standards Come From Are

They Universal or Dependent on Local Norms and Situational Circumstances?


The Three Categories of Management Morality Drivers of Unethical Strategies and Business

Behavior
Why Ethical Strategies Matter Approaches to Managing a Companys Ethical

Conduct
Social Responsibility and Corporate Citizenship

Strategies
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Linking Strategy to Ethics and Social Responsibility


Key Issues
Should there be a link between a

companys efforts to craft and execute a winning strategy and its duties to
Conduct activities in an ethical manner? Demonstrate socially responsible behavior by Being a committed corporate citizen? Attending to needs of non-owner stakeholders?

Limit its strategic initiatives to those meeting


needs of consumers without depleting resources needed by future generations
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What Is Business Ethics?


Business ethics involves applying general

ethical principles and standards to business behavior


Ethical principles in business are not

different from ethical principles in general


Business actions are judged By general ethical standards of society Not by a set of rules businesspeople apply to their own conduct
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How Do Ethical Standards Impact the Tasks of Crafting and Executing Strategy?
Two sets of questions must be considered by

senior executives when reviewing a new strategic initiative


Is what we are proposing to do fully compliant with our code of ethical conduct? Is there anything here that could be considered ethically objectionable? Is it apparent that this proposed action is in harmony with our core values? Are any conflicts or concerns evident?
The litmus test of a companys code of ethics is the extent to which it is embraced in crafting strategy and in operating the business day to day!
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Are Ethical Standards Universal or Dependent on Local Norms?


Three schools of thought regarding extent to which ethical standards can be applied . . .

Ethical Universalism

Ethical Relativism

Integrative Social Contracts Theory


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Concept of Ethical Universalism


According to the school of ethical

universalism . . .
Same standards of what is ethical and what is unethical resonate with peoples of most societies regardless of

Local traditions and Cultural norms


Thus, common ethical standards can be used to judge conduct of personnel at companies operating in a variety of

Country markets and Cultural circumstances


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Examples of Universal Ethical Principles or Norms


Honesty

Trustworthiness
Respecting rights of others Practicing the Golden Rule Treating people with dignity and respect Exercising due diligence in product safety

Acting in a manner that does not


Harm others or Pillages the environment
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What Is the Appeal of Ethical Universalism?


Draws on collective views of multiple

societies and cultures to place clear boundaries on what constitutes


Ethical business behavior and Unethical business behavior
Regardless of what country a company is operating in

Where basic moral standards do not vary

significantly according to local cultural beliefs, traditions, or religious convictions, a multinational company can
Apply a code of ethics more or less evenly across its worldwide operations
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Concept of Ethical Relativism


According to the school of ethical

relativism . . .
Different societies/cultures/countries

Put more/less emphasis on some values than


others

Have different standards of right and wrong Have different social mores
and behavioral norms

What is ethical or unethical

Must be judged in light of local


customs and social mores and

Can vary from one country to another


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Payment of Bribes and Kickbacks


A thorny ethical problem is faced

by multinational companies
Degree of cross-country variability in paying bribes as part of business transactions

Companies forbidding payment of bribes in

their codes of ethics face a formidable challenge in countries where payments are entrenched as a local custom
Foreign Corrupt Practices Act prohibits U.S.

companies from paying bribes in all countries where they do business


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Test Your Knowledge


Paying bribes and kickbacks to grease business transactions
A. violates ethical principles of right and wrong in all countries. B. is ethically acceptable according to the principle of ethical universalism. C. is acceptable to immoral managers but not to amoral managers. D. should be considered ethically appropriate by a company so long as such payments are normal and customary in the countries where such payments are made. E. may be ethically acceptable according to the principle of ethical relativism if paying bribes and kickbacks is normal and customary practice in a country.
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Ethical Relativism = Multiple Sets of Ethical Standards


Proponents of the ethical relativism school

maintain there are


Few ethical absolutes to judge a companys conduct in various countries Plenty of situations where ethical norms are contoured to fit

Local customs and traditions Local beliefs about what is fair Local standards of right and wrong Ethical problems in business cannot be fully resolved without appealing to the shared convictions of the parties in question
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Drawbacks of Ethical Relativism


The ethical relativism rule of when in Rome,

do as the Romans do presents problems When the envelope is pushed, it is


tantamount to rudderless ethical standards It is ethically dangerous for company personnel to assume that local ethical standards are an adequate guide to ethical behavior

What if local standards condone


kickbacks and bribery? What if local standards blink at environmental degradation?

From a global markets perspective, ethical relativism results in a maze of conflicting ethical standards for multinational companies wanting to address the issue of what ethical standards to enforce companywide 8-17

Concept of Integrative Social Contracts Theory


According to the integrative social

contracts theory, the ethical standards a company should try to uphold are governed by both
A limited number of universal ethical principles that are widely recognized as putting legitimate ethical boundaries on actions and behavior in all situations and The circumstances of local cultures, traditions, and shared values that further prescribe what constitutes

Ethically permissible behavior and What does not

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Appeal of Integrative Social Contracts Theory


Universal ethical principles establish moral free

space based on the collective view of multiple societies and cultures Commonly held views about morality and ethical principles combine to form a social contract with society It is appropriate for societies or companies to go beyond universal ethical principles and specify local or second-order ethical norms Where firms have developed ethical codes, the
standards they call for provide appropriate ethical guidance Social contracts theory maintains adherence to universal or first-order ethical norms should always take precedence over local or second-order norms!
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Three Categories of Management Morality

Moral manager

Managerial ethical and moral principles

Immoral manager

Amoral manager
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Characteristics of a Moral Manager


Dedicated to high standards of ethical

behavior in
Own actions

How the companys business is to be conducted


Considers it important to Be a steward of ethical behavior

Demonstrate ethical leadership


Pursues business success Within confines of both letter and spirit of laws With a habit of operating well above what laws require

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Characteristics of an Immoral Manager


Actively opposes ethical behavior in business

Willfully ignores ethical principles in making

decisions
Views legal standards as barriers to overcome

Pursues own self-interests


Is an example of self-serving greed Ignores interests of others Focuses only on bottom line

making ones numbers


Will trample on others to avoid being trampled

upon
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Characteristics of an Intentionally Amoral Manager


Believes business and ethics should not

be mixed since different rules apply to


Business activities Other realms of life

Does not factor ethical considerations into

own actions since business activity lies outside sphere of moral judgment Views ethics as inappropriate for tough, competitive business world Concept of right and wrong is lawyer-driven (what can we get by with without running afoul of the law)
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Characteristics of an Unintentionally Amoral Manager


Is blind to or casual about ethics of

decision-making and business actions


Displays lack of concern regarding

whether ethics applies to company actions


Sees self as well-intentioned

or personally ethical
Typical beliefs

Do what is necessary to comply with laws and regulations Government provides legal framework stating what society will put up withif it is not illegal, it is allowed
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Evidence of Managerial Immorality in the Global Business Community


Evidence exists a sizable majority of

managers are either


Amoral or

Immoral
Results of recent issues of the Global

Corruption Report indicate corruption is widespread across the world


Corruption extends beyond bribes and

kickbacks
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Table 9.1: Corruption Perceptions Index (CPI), Selected Countries, 2007

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What Are the Drivers of Unethical Strategies and Business Behavior?


Large numbers of immoral and amoral business people
Overzealous pursuit of personal gain, wealth, and other selfish interests Heavy pressures on company managers to meet or beat earnings targets Company cultures that place profits and good performance ahead of ethical behavior
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Overzealous Pursuit of Personal Gain, Wealth, and Selfish Interests


People obsessed with wealth accumulation,

greed, power, status, and other selfinterests often


Push ethical principles aside in their quest for self gain Exhibit few qualms in

Skirting the rules or Doing whatever is necessary


to achieve their goals

Engage in all kinds of unethical strategic maneuvers and behaviors


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Heavy Pressures on Company Managers to Meet or Beat Earnings Targets


Managers often feel enormous pressure to do

whatever it takes to deliver good financial performance Actions often taken by managers
Cut costs wherever savings show up immediately Squeeze extra sales out of early deliveries Engage in short-term maneuvers to make the numbers Stretch rules to extreme, until limits of ethical conduct are overlooked

Executives feel pressure to hit performance targets

since their compensation depends heavily on company performance Fundamental problem with a make the numbers syndrome
Company does not create additional value for customers or improve its competitiveness
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Company Cultures that Put Bottom Line Ahead of Ethical Behavior


In an ethically corrupt or amoral work

climate, people have a company-approved license to


Ignore whats right

Engage in most any behavior or employ most any strategy they think they can get away with
Pressures to conform to cultural norms

can prompt otherwise honorable people to


Make ethical mistakes Succumb to the many opportunities to engage in unethical practices
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Why Ethical Strategies Matter


An unethical strategy Is morally wrong Reflects badly on the character of company personnel An ethical strategy is Good business In the best interest of shareholders
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Characteristics of Managers Committed to Ethical Approaches to Strategy-Making


Possess strong moral and ethical

characteristics Strongly advocate a corporate code of ethics and strict ethics compliance Display genuine commitment to certain corporate values and business practices Walk the talk in
Displaying a companys stated values Living up to ethical business principles and
standards

Adopt values statements/ethics codes that truly

paint the white lines for a companys business practices Consciously opt for strategic actions passing moral scrutiny
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Figure 9.1: The Business Costs of Ethical Failures

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Test Your Knowledge


Which one of the following is false when it comes to making a case for why a companys strategy should be ethical?
A. An unethical strategy can put a companys reputation at risk and do lasting damage, especially when the misdeeds get into the public spotlight and make media headlines. B. An ethical strategy is in the best interest of shareholders. C. An unethical strategy reflects badly on the character of the company personnel involved. D. Shareholders profits are not greatly reduced by using ethical strategies. E. A strategy that is unethical in whole or in part is morally wrong.
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Approaches to Managing a Companys Ethical Conduct


Unconcerned or Nonissue Approach

Damage Control Approach

Compliance Approach

Ethical Culture Approach


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Table 9.2: Four Approaches to Managing Business Ethics

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Characteristics of Unconcerned Approach


Prevalent at companies whose executives

are immoral and unintentionally amoral Notions of right and wrong in business matters are defined by government via prevailing laws and regulations after that, anything goes If the law permits unethical behavior, why stand on ethical principles Companies are usually out to make greatest possible profit at most any cost Strategies used, while legal, may embrace elements that are ethically shady
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Characteristics of Damage Control Approach


Favored at companies whose managers are

intentionally amoral but who fear scandal May adopt a code of ethics as windowdressing Adept at using spin to explain away the use of unethical strategy elements or discount the impact of shady actions Executives look the other way when shady behavior occurs Executives may condone questionable actions that help a company reach earnings targets or bolster its market standing
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Characteristics of Compliance Approach


From light to forceful compliance is favored

at companies whose managers


Lean toward being somewhat amoral but are highly concerned about having ethically upstanding reputations or Are moral and see strong compliance methods as best way to impose and enforce high ethical standards

Ethics code violators are disciplined, sending a

clear signal that complying with ethical standards must be taken seriously Commitment to eradicate unethical behavior stems from a desire to
Avoid cost and damage associated with unethical conduct or Gain favor from stakeholders from having a highly regarded reputation for ethical behavior
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Pursuing a Compliance Approach: Typical Actions


Make code of ethics a visible and regular part of

communications with employees


Implement ethics training programs Appoint a chief ethics officer

Have ethics committees to

give guidance on ethics matters


Institute formal procedures for

investigating alleged ethics violations


Conduct ethics audits to measure and document

compliance
Install ethics hotlines to help detect and deter

violations
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Potential Weakness of Compliance Approach


Moral control resides in a companys

code of ethics and in the ethics compliance system rather than in


Strong peer pressures for ethical behavior that come from ingraining a highly ethical corporate culture and An individuals own moral responsibility for ethical behavior
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Characteristics of Ethical Culture Approach


Top executives believe high ethical principles must Be deeply ingrained in the corporate culture Function as guides for how we do things around here Company seeks to gain employee buy-in to Companys ethical standards Business principles Corporate values Ethical principles in companys code

of ethics are integral to companys


Identity and self-image Day-to-day operations
Strategy must be ethical Employees must display ethical behaviors in

executing the strategy


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For Discussion: Your Opinion


Is it unethical for a high school or college coach to accept a talent fee or similar type of payment from a maker of sports apparel or sports equipment when the coach has authority to determine which brand of apparel or equipment to use for his/her team and subsequently chooses the brand of the company making the payment? Is it unethical for the maker of the sports apparel or equipment to make such payments in expectation that the coach will reciprocate by selecting the companys brand? (Would you answer be different if everybody is doing it?)
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For Discussion: Your Opinion


Is it unethical for a credit card company to aggressively try to sign up new accounts when, after an introductory period of interestfree or low-interest charges on unpaid monthly balances, the interest rate on unpaid balances jumps to 1.5 percent or more monthly (even though such high rates of 18 percent or more annually are disclosed in fine print)?

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What Is Corporate Social Responsibility?


The notion that corporate executives should

balance interests of all stakeholders began to blossom in the 1960s


Social responsibility as it applies to

businesses concerns a companys duty to


Operate in an honorable manner Provide good working conditions for employees

Be a good steward of the environment


Actively work to better quality of life in

Local communities where it operates and Society at large


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Concepts of Social Responsibility and Corporate Citizenship


A company should strive to balance strategic

actions to benefit shareholders against the duty to be a good corporate citizen Socially responsible behaviors go beyond
Complying with legal requirements and Corporate philanthropy activities

Socially responsible behaviors also entail

actions to earn trust and respect of stakeholders for efforts to improve the well-being of
Employees Local communities Environment Customers Society
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Figure 9.2: Demonstrating a Social Conscience: The Five Components of Socially Responsible Business Behavior

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What Is a Social Responsibility Strategy?

A companys specific combination of socially beneficial and community citizenship activities it opts to support via contributions of

Time,
Money,

Other resources.
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What Is an Environmental Sustainability Strategy?


A companys concerted actions to meet current needs of all stakeholders to
Protect the environment,
Provide for the longevity of natural resources,

Maintain ecological support systems for future generations, and


Guard against ultimate endangerment of the planet.
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Characteristics of Environmental Sustainability Initiatives


Frequently focus on improving a companys

Triple-P performance
People

Planet
Profit Convey beneficial outcomes via Press releases Special sustainability reports for stakeholders
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Example: Unilevers Environmental Sustainability Strategy


Tracked 11 sustainability agricultural indicators in its processed foods business Launched various programs to improve environmental performance of suppliers Reengineered internal processes to improve overall performance on sustainability measures

Redesigned packaging for many products to conserve natural resources and reduce volume of consumer waste
Addressed societal needs of consumers in developing countries
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Table 9.3: Companies With Exceptional Commitments to Sustainability

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Crafting Social Responsibility and Sustainability Strategies


The socially responsible/sustainability

strategies a company pursues impacts its ability to achieve a competitive advantage Management should match a companys social responsibility/sustainabilty strategy to its
Core values Business mission Overall strategy

Some companies are integrating social

responsibility and/or environmentally sustainability objectives into their


Missions Performance targets Strategies
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Moral Case: Corporate Social Responsibility and Environmentally Sustainable Business Practices
Businesses should promote the betterment of

society, acting in ways to benefit all their stakeholders because


Its the right thing to do!

Based on an implied social contract, society Grants a business the right to


conduct its business affairs

Agrees not to unreasonably restrain


a firms pursuit of a fair profit

In return for a license to operate,

a business should
Act as a responsible citizen Do its fair share to promote the general welfare
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Business Case: Socially Responsible Behavior and Environmentally Sustainable Business Practices
Generates internal benefits Enhances recruitment of quality employees Increases retention of employees Improves employee productivity Lowers costs of recruitment and training Reduces risk of reputation-damaging

incidents, leading to increased buyer patronage Works in best interest of shareholders


Minimizes costly legal and regulatory actions Provides for increased investments
by socially conscious mutual funds and pension benefit managers Focusing on environment issues may enhance earnings
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Test Your Knowledge


Which one of the following is false as concerns the merits of why acting in a socially responsible manner is good business?
A. To the extent that a companys socially responsible behavior wins applause from consumers and fortifies its reputation, a company may win additional patronage. B. Acting in a socially responsible manner reduces the risk of reputation-damaging incidents. C. Acting in a socially responsible manner is in the overall best interest of shareholders. D. Acting in a socially responsible manner is unlikely to have any effect (positive or negative) on a companys profitability. E. Acting in a socially responsible manner can generate internal benefits (as concerns employee recruiting, workforce retention, training, and improved worker productivity).
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