Chapter one

1, Overview of Strategic Management

Introduction

Strategic Management is a set of managerial decisions and actions

that determine the long-term performance of an organization. The
decisions and action includes environmental analysis, strategy
formulation and implementation, evaluation, and control. The
practice of SM ensures continuous assessment of internal and
external changes and adjustment of competitive approach on the
basis of the assessment.

1.1 Definitions

 Strategic management is a process by which top

management determines the long-term direction and
performance of the organization by ensuring that careful
formulation, effective implementation and continued
evaluation of strategy takes place.

 Strategic Management is a set of decisions and action

resulting in the formulation and implementation of strategies
designed to achieve the objective of an organization.

 Strategic Management is an art and science of formulating

and evaluating cross functional decisions that enables an
organization to achieve its objectives.

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 According to Pearce II and Robinson, Strategic Management involves
attention to the following critical areas:

 Determination of the company’s mission

The mission of the business organization is the fundamental unique

purpose that sets it apart from other firms of its type and identifies the
scope of its operation in product or market terms.

 Developing a company Profile

A firm’s internal analysis determines its performance capabilities based

on existing or accessible resource. From this analysis a company profile
is generated. The profile depicts the quantity and quality of
financial ,human and physical resources available to the firm and also
assess the inherent strengths and weaknesses of the firms management
and organizational structure.

 Assessment of the company’s external environment

A firm’s external environment consists of all the conditions and forces

that affect its strategic option but are beyond the firms control. The
external environment consists of two interactive and interrelated
segments; the operating and the remote environments .

The operating environment consists of all the forces and conditions

within a specific industry and specific competitive operating situation
external to the firm . unlike changes in the remote environment,

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changes in the operating environment often result from strategic actions
taken by the firm or its competitors, consumers, users, suppliers
and/or creditors.

The remote environment refers to forces and condition that originate

beyond and usually irrespective of any single firm’s immediate operating
environment and provide the general economic, political ,social and
technological framework within which competing organization operate.

 Strategic analysis and Choice

Simultaneous assessment of the external environment and company

profile enable a firm to identify a range of possible attractive interactive
opportunities. These opportunities are possible avenues for investment.
However, the full list must be screened through the criterion of company
mission before a set of possible and desired opportunities is generated.
The process results in the selection of a strategic choice. It is meant
to provide the combination of long-term objective and grand strategy
that will optimally position the firm in the external environment to
achieve the company mission.

Long term objectives are the results an organization seeks over a multi
year period.

Grand strategy is the comprehensive general plan of major action

through which a firm intends to achieve its long term objectives in a
dynamic environment.

Consider the case when strategic managers feel that a firm is overly
dependent on a single customer group ( young customer). The firm’s

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interactive opportunities might include expanding the product line,
heavily emphasizing related products, accepting the status quo or
selling out profitably to a competitor. While each of this option might be
possible, a firm with a mission that stressed commitment to continued
existence as a growth oriented organization might find that only the first
two opportunities are desirable.

 Development of annual objective and short term

strategies

The result an organization seeks to achieve within a one year period are
annual objective. Annual objective involve areas similar to those
entailed in long term objectives .The difference between them stem
from the greatest specificity possible and necessary in short term
objectives.

 Implementation and evaluation of the Strategic Choice

decision

1.2 Major Components of a Strategic plan

1.2.1 Vision
Definitions
 Vision is a goal oriented mental construct that guides
people’s behavior, it is the picture for which people are
willing to work. It is a dream of desired future.
 Vision is what the firm or a person would ultimately like
to become. It is a theme which gives a focused view of a
company. It is a unifying statement and a vital challenge
to all units of an organization that may be busy pursuing

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 their independent objectives. It consists of a sense of
achievable ideas and is a foundation of inspiration for
performing the daily activities. Many firms do not have a
clear vision statement. An indirect method of knowing
whether the firm has reached the stages of corporate
strategic management is emergence of a vision
statement. Vision of a firm can not be high jacked from
a company, however, a firm may definitely get inspired
by the vision statement of another firm. It has to be
evolved after a lot of deliberations, brain storming, and
thinking.
In defining a vision the management must pose a question of
“What business are we in?”. In this respect the firm’s size,
scope, the product/service it provides & the market it serves
should be considered.
In sum, a vision describes a aspiration for the future without
specifying the means necessary to achieve those desired ends.

Example
 Addis Ababa University aspires to be a pre –eminent
African research University dedicated to excellence in
teaching, critical inquiry, creativity and public action in
an academic community that cultivate and celebrates
diversity.
 We want to be the most success full airline in Africa
Characteristics of Vision
 It deals with the future.
 It is ambitious .
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  It is expressed in simple terms –understandable at all levels of the
company.
 It does not deal with details ,but is concrete.
 It does not deal with solutions.
 It opens space for creative forward thinking, based on an
emotionally appealing “picture” .
 It is not a secret plan but an open declaration.
 It helps to mobilize people.
 It creates a momentum and initiative ;” am I doing enough to
increase the fit of my business with the corporate vision?”

Benefits of Having a Vision

Parikh and Neubaver ( 1993) point out the several benefits
accruing to an organization having a vision. Here is what they
say :
 Good vision are inspiring & exhilarating
 Good visions help in the creation of a common identity and a
shared sense of purpose
 Good visions are competitive, original and unique. They make
sense in the market place as they are practical
 Good vision foster risk taking and long term thinking
 Vision represent in discontinuity, a step function and a jump a
head so that the company knows what it is to be.

1.2.2 End Results

Organizations are deliberate and purposive creation, they

have some objectives, the end results for which they strive.
These end results are referred to as 'mission', purpose',’
objective', 'goal' etc. Many times these terms are used
interchangeable as all these denote end results. However

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 there are differences in the context in which these terms are
used. The end results are arranged in hierarchy. On the one
extreme there may be enduring reasons why an organization
exists, on the other extreme end; there may be specific
results that an individual in the organization achieves in a
specific period.

1.2.1.1 Mission and Purpose

Mission and purpose are often used interchangeably,

though at theoretical level, there is difference between the
two. Mission has external orientation and relates the
organization to society in which it operates. A mission
statement helps the organization to link its activities to the
needs of the society and legitimize its existence. Purpose is
also externally focused but it related to that segment of the
society to which it serves; it defines the business which the
company will undertake.

Thus mission of the company says what it can do for the country
(society in general) while purpose suggests how this contribution can be
made. However in general practice mission and purpose are either used
interchangeably or jointly.

The need for an explicit mission

Defining a company mission is time consuming, tedious, and not

required by any external body. Characteristically, it is a statement of
attitude, outlook, and orientation rather than details and measurable
targets. What then a company mission is designed to accomplish?

King and Cleland provide six good answers;

1. To ensure unanimity of purpose within the organization.

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 2. To provide a basis for motivating the use of organization’s
resources.
3. To develop a basis ,or standard for allocating organizational
resources.
4. To establish a general tone or organizational climate.
5. To serve as a focal point for those who can identify with the
organization’s purpose and direction ,and to deter those who
cannot from participating further in the organizations activities.
6. To facilitate the translation of objectives and goals in to a work
structure involving the assignment of task to responsible elements
within the organization.

FORMULATING A MISSION

The process of defining the mission of a specific business can perhaps

be best understood by thinking about a firm at its inception .The mission
is usually based on the following fundamental elements;

1. Belief that the product or service can provide benefits at least

equal to its price.
2. Belief that the product or services can satisfy a customer need
currently not met adequately for specific market segments.
3. Belief that with hard work and the support of others the business
can do better than just survive, it can grow and be profitable.
4. Belief that the technology to be used in production will provide a
product or service that is cost and quality competitive.
5. Belief that the mgt philosophy of the business will result a
favorable public image and financial and psychological rewards.

As the business grows or is forced by competitive pressure to alter its

product/market/technology redefining the company mission may be
necessary .If so, the revised mission statement will reflect the same set
of elements as the original. It will state the basic type of product or
services to be offered; the primary market or customer group to be
served; the technology to be used in production or delivery; the
fundamental concern for survival through growth and profitability ;the
managerial philosophy of the firm; the public image sought ;and the
self- concept those affiliated with it should have of the firm.
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Characteristics of a mission statement

Organizations legitimize themselves by performing some functions

that is valued by the society. A mission statement defines the
basic reason for the existence of that organization.

In order to be effective a mission statement should possess the

following characteristics;

1. It should be feasible

A mission should always aim high but it should not be an

impossible statement. It is should be realistic, achievable and
credible. But feasibility depends on the resources available to wok
towards a mission. In the sixties the US National Aeronautics and
Space Administration (NASA) had a mission to land on the moon.
It was a feasible mission that was ultimately realized.

2. It should be precise

A mission statement should not be so narrow as to restrict the

organizations activities nor should it be too broad to make itself
meaningless.

3. It should be clear
A mission should be clear enough to lead to action. It should not
be a high sounding set of platitudes meant for publicity purposes.
4. It should be motivating

A mission statement should be motivating for members of the

organization and of society and they should feel if worth while
working for such an organization or being its customers.

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 5. It should be distinctive

A mission statement which is indiscriminate is likely to have little

impact.

Examples of Mission Statements

 The mission of the AAU is to transmit, develop,

disseminate and preserve knowledge relevant to the
solution of the basic problem of development of the
country through student centered quality teaching,
research ,scholarship, creative application of existing
knowledge and provision of service to the community.

 The mission of Ford Motor company is to improve

continually our products and services to meet customers
need........

1.2.2.2. Goals

Goals are general ends towards which an organization directs its

efforts. Goals are the derivatives of the vision and must be selected
on the basis of the defined mission.

Strategic Goal Setting involves;

 Translating the mission in to concert terms

 Establishing the statement of desired outcome

 Define the benefits to be gained.

Example of goals

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 Marketing _ increase sales level

Production _ cut production costs

Human Resource _ cut absenteeism

Contrast to an objective we consider a goal as an open- ended

statement of what one wants to accomplish with no quantification of
what is to be achieved and no time criteria for completion. For
example a simple statement of increase profitability is thus a goal,
not an objective, because it does not state how much profit the firm
wants to make in the next year.

1.2.2.3 Objectives

Objectives are end results of planned activity. They state what is to

be accomplished by when and should be quantified, if possible. It
focuses on measurable performance.

Objectives can be classified as either short range or long range.

While many managers use only short- range and long range
objectives, some also utilize intermediate objectives. Objectives can
also be classified according to their breadth of influence in the
organization. For example objectives that apply to the entire
organization are called corporate objectives, objective that apply to a
certain division within an organization are referred to as divisional
objectives; those that apply to a certain function or department are
referred to as functional or departmental objectives

Characteristic of effective objectives

The following characteristics pertain to organizational objectives.

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  Specific and measurable: the objectives should be expressed
in qualitative terms, if possible. Not all objectives can be
expressed in name cal be expressed in numerical terms but
rages objectives have little motivating power for employees

 Challenging but realistic – objective should be challenging

but not unreasonably difficult

 Cover keep result areas- objectives can not be let for every
aspect of employee behavior or organizational performance
instead managers should identify a few key result areas
perhaps up to four or five for any organizational department or
job. Key result areas those activities that contributed are most
to company performance

 Defined time period

Key result areas

Objectives should be expressed as clearly as possible and in

quantity terms when ever possible. Most organizations establish
objectives in the following key areas

1. Customers service – expressed in terms of delivery times or

customers complaints.

Eg. To reduce the number of customer complaints by 25%

over the next two years

2. Financial resources – expressed in terms of the capital

structure, new issues of common stock and dividend
payments

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 Eg. To reduce long terms debt to br. 300,000 within two
years

3. Human resources – expressed in terms of rate of absenteeism,

turnover ,number of grievances ,numbers of people to be
trained or number of training programs .

Eg. To conduct a 16 hours management development program

for 6 supervisors in the next 2 years

4. Markets – expressed in terms of market share or volume of

sales

Eg. To increase the sales volume of product A by 20,000 units

within the coming two years

5. Organizational structure – expressed in terms of changes to be

made or projects to be undertaken.

Eg. To established a decentralized organizational structure with

3 years

6. Product – expressed in terms of sales and profitability by

product or product line or target dates for new product
development

Eg. To phase out the product with the lowest profit margin
within two years

7. Profitability – expressed in terms of profit, return on

investment, EPS or profit to sales ratio

Eg.To increase profit after tax by 15% over the next three the
years

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 8. Social responsibility- expressed in terms of types of activities,
number of days of service or financial contributions.

Eg. To increase the number – of days of community service by

5 day over the next two years

1.2.3 Organizations strategy

The world strategy has entered the field of management more

recently. At first the word was used in terms of military science to mean
what a manager does to offset actual or potential actions of
competitors. Originally the word strategy has been derived from the
Greek “strategio” which means general ship. The word strategy
therefore means the art of being a general. It refers to an important
plan to deploy the available resources in a manner to defeat the enemy.

Strategy has been defined briefly as follows;

- a strategy as a means to achieve end

- a strategy is the result of analyzing the strength and weakness of

the organization, determining opportunities and threats and come
up with appropriate course of action .

- a strategy reflects a company’s awareness of how to compete,

against whom, when, where, and for what.

- a strategy is an organizations planned response to its environment

overtime

Why have strategies

 Organizational strategies involve the entire organization .

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  organizational strategy is likely to concern it self with the survival
of the business as a minimum objective and creation of value
added as a maximum objective

 Organizational strategy directs the changing and evolving

relationship of the organization with its environment

 Organization strategy is central to the development of sustainable

competitive advantage.

1.3. Levels of strategy

Three levels of strategy can be identified

1. Corporate level strategy:-

It describes a company’s overall direction in terms of its general
attitude toward growth and the management of its various
businesses and product lines.

It is also called portfolio level strategy and primarily concerned

with top management, chief executives, or board of directors
decision for acquisitions, mergers and major expansion that add
or reduce product lines. It identifies the businesses that the
organization is taking and should take, and attempts to determine
the roles each business activity is playing and should play in the
organization. Attitudes at the corporate level reflect the concerns
of stockholders and society at large.

The corporate level officers are responsible for the financial

performance of the corporation as a whole and for achieving non-
financial goals of the firm. (eg. corporate image).

2. Business level strategy

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 It is found in the middle of the decision making hierarchy and
composed mainly of business and corporate managers. It is
concerned with a single strategic business unit (SBU) and how
each business attempts to achieve its mission within its chosen
area of activity.

Managers at this level translate the statements of direction and

intent generated at the corporate level in to concrete objectives
and strategies for individual SBU. The business level strategic
managers must determine the basis on which a company can
compete in the selected product- market areas. Here the mangers
strive to identify and secure the most profitable and promising
market segment.

3. Functional level strategy

It is found at the bottom of the decision making hierarchy
composed of mainly of mangers of product, geographic and
functional area.

The mangers responsibility is to develop annual objectives and

short term strategies in the major functional areas of the
organization. However, their greatest responsibilities are in the
implementation and execution of a company’s strategic plans. The
mangers at the functional level must stress “doing things right.”

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Importance of strategic management

- Greenly stated that strategic management offers the following

benefits;

1. It allows for identification, prioritization and exploitation of

opportunities

2. It provides an objective view of management problems

3. It represents a framework for improved coordination and

control of activities

4. It minimizes the effects of adverse conditions and changes

5. It allows major decisions to better support established

objectives

6. It allows more effective allocation of time and resources to

identified opportunities

7. It allows fewer resources and less time to be devoted to

correcting erroneous or ad hoc decisions

8. It creates a frame work for internal communication among

personnel

9. It helps integrate the behavior of individuals into a total effort

10. It provides a basis for clarifying individual responsibilities

11. It encourages forward thinking

12. It provides a cooperative, integrated, and enthusiastic

approach to tacking problems and opportunities

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 13. It encourages a favorable attitude toward change

14 .It gives a degree of discipline and formality to the

management of a business.

1.4. Strategic Decision making

Any organization’s strategy requires strategic decision. Strategic issues

have six identifiable dimensions:

1. Strategic issues require top level mgt decisions

Top level management involvement in strategic decision making is a

must because the decisions overarch several areas of a firm’s operation

2. Strategic issues involve the allocation of large amounts of

company resources.

Strategic decision commits a firm to a stream of actions over an

extended period of time involving substantial resource deployment. The
people, physical asset or money needed must be either redirected from
internal sources or secured from outside the firm.

3. Strategic issues are likely to have a significant impact on the

long term prosperity of the firm

The strategic decision usually cover a period of five years but its impact
is often much longer. Once a firm has committed itself to a particular
strategic option in a major way its competitive image and advantage are
usually tied to that strategy. Firms become known in certain markets,
for certain products, with certain characteristics. To shift from these
markets, products, or technology by adopting a radically different
strategy would jeopardize previous progress.

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4. Strategic issues are future oriented

Strategic decisionare based on what manager anticipate forces as rather

than what they know.

5. Strategic issues usually have a multi functional multi business

consequences

A strategic decision is coordinative. The firms SBUs, functions, divisions

etc will be affected by the allocation and reallocation of responsibility
and resources related to the decision.

6. Strategic issues necessitate considering factors in the firm’s

external environment.

All business firms exist in an open system they impact and are
impacted by external conditions largely beyond their control. To position
the firm in the future competitive situation the mangers must look
beyond the limits of the firms own operation.

Characteristics of strategic decisions in the three levels

1. Corporate level strategic decision

The decisions tend to be more value oriented conceptual, less

concrete than the decisions at business & functional levels. The
decision are characterized by grater risk, costs, profit potential, need
of flexibility and long time horizons. The decision includes the choice
of business, dividend policies, sources of long term financing, and
priorities of growth.

2. Business level Strategic decisions

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This helps to bridge the decisions at corporate and functional level. The
decisions are costly and risky. The most common decisions included
plant location, market segmentation, geographic coverage, and
distribution channels

3. Functional level strategic decision

These decisions are required to implement the overall strategy

formulated at the corporate and business levels. It involves action
oriented operational issues relatively short range and low risk. Incurs
modes cost because it depends on available resources.

1.5. Stakeholders and corporate mission

A stakeholder is any group or individual who can affect, is affected by

the achievement of the company purpose.

In defining or redefining the company mission, strategic managers must

recognize and acknowledge the legitimate claims of the stakeholders of
the firm. These include investors and employees as well as outsiders
affected by the company action. Each of the interest group has
justifiable reason to expect and often to demand the company to act in
a responsible manner in satisfying their claims.

Generalizing, stockholders claims appropriate return on their investment

;employees seek broadly defined job satisfaction ;customers want what
they pay for; suppliers seek dependable buyers; government want
adherence to legislation :unions seek benefits for members in proportion
to contributions to company success :competitors want fair competition;
and the general public seeks some improvement in the quality of life
resulting from the firm's existence.

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Four steps need to be taken to incorporate the interest of stakeholders
in the company mission;

1. Identification of claimants

In defining a mission, strategic mangers must identify all claimant

groups and weight their relative ability to affect the firms success.

2. Understanding of specific claims vis-a -vis the company.

Strategic managers should understand the specific demands of each

group then they will be better able to both appreciate these concerns
and initiate clearly defined actions.

3. Reconciliation of claims and assigning them priorities.

Unfortunately, the concerns of various claimants often conflict. For

example, the claims of governments and the general public tend to limit
profitability, which is the central concern of most creditors and
stockholders. Thus, claims must be reconciled. To achieve a unified
approach managers must define a mission that resolves the competing,
conflicting, and contradictory claims. Moreover claims must be assigned
priorities that reflect the relative attention the firm will give to each.

4. Coordination with other elements

Demands of claimant group for responsible action by a company

constitute only one set of inputs to the mission. Managerial operating
philosophies and determination of the product market offering are the
other principal components considered. The latter factors essentially
pose a reality test the accepted claims must pass. The key question is:
How can the company satisfy claimants and simultaneously optimize its
success in the market place?

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 1.6. Social Responsibility

The various claimants on a company can be divided in to two categories

as insiders and outsiders. Insiders are individuals and groups who are
stockholders or are employed by the firm. Outsiders are all other
individuals or groups affected by the action of the firm. This extremely
large and often amorphous set of outsiders makes the general claim
that the company be socially responsible.

Questions of social responsibility are perhaps the thorniest of all issues

faced in defining the company mission. Broadly stated, outsiders often
demand that the claims of the insiders be subordinated to the great
good of the society, that is, to the greater good of the outsiders. They
believe such issues as elimination of solid and liquid wastes, pollution
and conservation of natural resources should be principal considerations
in strategic decision making. Insiders also tend to believe that the
competing claims of the outsiders should be balance against each other
in a way that protects the company mission. For example, the
consumers need for product must be balanced against the water
pollution resulting from production, if the company can not totally afford
to eliminate the pollution and remain profitable.

Additionally, some insiders argue that the claims of society as activated

by government regulation provide tax money that is more than
sufficient to eliminate unwanted business byproducts such as water
pollution, if this is truly the wish of the general public.

The issues are numerous & complex and the problems are contingent on
the situation thus, rigid rules of conduct are not possible each business
must decide on its approach in trying to meet its perceived social
responsibility.
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Claims of Insiders
Claims of outsiders
 Executive Officers
 Customers
 Board of directors Company
 Suppliers
 Stockholders mission  Creditors
 Employees
 Government
Mission  Unions
 Competitors
 General physics
Figure, Inputs to the development of the company mission

Thus, the stakeholders management process may involve a series of

trade off that is dependent on the extent to which the firm is dependent
on the support of each effected stakeholders and the firm satisfy to earn
above average returns.

1.7 .Corporate Governance

Corporate governance is the relationship among stakeholders that is

used to determine and control the direction and performance of
organizations.

It is concerned with how shareholders (owners) can ensure that

managers develop & implement strategic decisions that are in the best
interests of the shareholder and not primarily self serving. In the
absence of effective internal governance mechanism, the market for
corporate control- and external governance mechanism- often may be
activated.

The four internal governance mechanisms are

1. Ownership concentration :

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 This represents the relative amount of stock owned by a individual
shareholders and institutional investors

2. The Board of directors

These are individual responsible for representing the firm’s owners
by monitoring the strategic decisions of top level managers

3. Executive Compensation
This is the use of salary bonuses and long term incentives to align
the interests of mangers with those of shareholders (owners)

4. The multi divisional (M-form) structure describes the creation

of individual business divisions to closely monitor the strategic
decision of top level managers.
The market for corporate control is an external governance
mechanism which involves the purchases of a firm that is under
performing relative to its industry rivals in order to improve its
strategic competitiveness.

The primary purpose of governance mechanisms is to prevent sever

problems that may occur because of the separation of ownership and
control in a large firms by positively influencing managerial behavior.

The efficient separation of ownership and control enables

specialization by owners & managers but it results in some potential
costs (risks) for owners by creating an agency relationship. An
agency relations exists) when one or more persons hires another
person or persons as a decision making specialists to perform a
service.

The potential for conflicts of interest between owners and managers

is created by the delegation of the responsibilities of decision making
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 and managing by owners to managers. Managers may take actions
that are not in the best interest of owners by selecting strategic
alternatives that serves managerial interests rather than owner’s
interests. As a result, principals establish governance and control
mechanism. (product diversification is a good example of agency
problem).

Role of Board of Directors

The board of directors is a group of elected individuals whose

primary responsibility is to act in the owner’s interest by formally
monitoring and controlling the corporation's top level executives.

Legally, the board of directors has broad power, which include

 Directing the affairs of the organization

 Punishing ( disciplining) and rewarding (Compensating
mangers)
 Protecting the rights and interests of shareholders (owners)
The board exercise authority according to the memorandum of
association and articles of association of that company. In practice
however, there is wide difference between the roles played by the
boards in various types of organization.

By definition, the board is only required to direct. But many operational

matters of vital significance like technology collaboration new product
development, senior management appointment so on may also be
referred to the board. The directing function of the board has certain
formed and informal components.

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In SM the role of the board is to guide the senior management is setting
and accomplishing objectives, reviewing and evaluating organizational
performance and appointing senior executives. The function of the board
is usually seen in terms of setting the strategic direction, which involves
establishing objectives and strategy & subsequently monitoring and
reviewing achievement.

1.8. The Role of Ethics in SM

Laws, of course do not stop all unethical behavior one response by

many organizations to the question of ethics has been to develop a code
of ethics and communicate it to all employees. A code of ethics is a
written document that outlines the principles of conduct to be used in
making organizational decisions. The guiding philosophy of the
organization forms the basis for developing a code of ethics.

Obviously guiding philosophies and code of ethics do not end unethical

behavior but they are a positive step in addressing the problem. It is
important to note that having a written guiding philosophy and code of
ethics probably does more harm than good if management does not put
it to practice what is written, “Actions speak lauder than words” is an
old statement that is especially true.

Following Carroll’s work, if business people do not act ethically,

government will be forced to pass laws regulating their actions and
usually increasing their costs. For self interest is for no other reason
manager should be more ethical in their decision making. One way to do
that is by encouraging code of ethics and another is by providing
guidelines for ethical behavior.

Code of Ethics

Yoseph Y. AAU, School of commerce 2018/19

Codes of ethics specify how an organization expects its employee to
behave while on the job. Developing codes of ethics can be useful way
to promote ethical behavior.

The importance of code of ethics is that it (1) clarifies company

expectations of employees conduct in various situations and (2) makes
clear that the company expects its people to recognize the ethical
dimensions in decisions and actions.

Various studies do indicate that an increasing number of companies are

developing codes of ethics and those manufacturing firms often include
the following element.

1. Conduct business in compliances with all laws

2. Comply with antitrust & trade regulation
3. Provide products and services of the highest quality
4. perform assigned duties to the best of your ability
5. comply with safety health and security regulation.

This same study found that the codes of ethics of service

organizations more often include the following elements.
1. Avoid outside activities for personal benefits
2. Do not use company’s property for personal benefit
3. illegal drugs and alcohol at works is prohibited
4. manage personal finance well
5. make decision without regard for personal gain
6. dress in business attire
Guideline for Ethical Behavior

Ethics is defined as the consensually accepted standards of behavior for

an occupation, trade or profession. Morality, in contrast is the percepts
Yoseph Y. AAU, School of commerce 2018/19
of personal behavior based on religion or philosophical grounds. Law
refers to formal codes that permit or forbid certain behaviors and may
or may not enforce.

Three Basic approaches to ethical Behavior

1. Utilitarian Approach
This approach proposes that actions and plans should be judged by their
consequences. People should therefore behave in such away that will
produce the greatest benefit to society with the least harm or the lowest
cost. A problem with this approach is the difficultly in recognizing all
the benefits and the cost of any particular decision. Research reveals
that only the stakeholders having the most power (ability to affect the
company) legitimacy (legal or moral claim on company resource) and
urgency (demand for immediate attention) are given priority by CEOs.

2. Individual right approach

This approach proposes that human beings have certain fundamental
right that should be respected in all decisions. A particular decision or
behavior should be avoided if interferes with the right. This approach
can encourage selfish behavior when a person defines a personal need
or want as a “right”.

3. Justice Approach
This approach proposes that decision makers be equitable, fair and
impartial in the distribution of cost and benefits to individuals and
groups

Yoseph Y. AAU, School of commerce 2018/19

Yoseph Y. AAU, School of commerce 2018/19