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Management 05-8
Lecture 1: Basic Concept of Strategic Management
(STRATEGIC MANAGEMENT & BUSINESS POLICY12TH EDITION) THOMAS L. WHEELEN J. DAVID HUNGER
Strategic Management: a set of managerial decisions and actions that determines the long-run performance of a corporation.
Includes:
• Internal and external environment scanning
• Strategy formulation
• Strategy implementation
• Evaluation and control
Phases of Strategic Management:
• Phase 1: Basic financial planning• Phase 2: Forecast-based planning• Phase 3: Externally oriented strategic planning• Phase 4: Strategic management
Benefits of Strategic Management:
• Clearer sense of strategic vision for the firm
• Sharper focus on what is strategically important
• Improved understanding of a rapidly changing environment
Additional Benefits of Strategic Management:
• Improved organizational performance• Achieves a match between the organization’s environment and its strategy, structure and
processes• Important in unstable environments• Strategic thinking• Organizational learning
Impact of Globalization:
Globalization: the integration and internationalization of markets and corporations
Impact of Environmental Sustainability:
Environmental Sustainability: the use of business practices to reduce a company’s impact on the natural, physical environment
Impact of Environmental Sustainability
Risks of Climate Change include:• Regulatory risk• Supply chain risk• Product and technology risk• Litigation risk• Reputational risk• Physical risk
Population ecology: established organizations are unable to adapt to changeInstitution theory: organizations adapt by imitating successful organizationsStrategic choice perspective: organizations adapt to change and have the ability to reshape their environmentOrganizational learning theory: organizations adapt defensively and use knowledge to improve their relationship with the environment
Strategic flexibility: the ability to shift from one dominant strategy to another and requires:
• Long-term commitment to the development and nurturing of critical resources• Learning organization
Learning organization: an organization skilled at creating, acquiring, and transferring knowledge and at modifying its behavior to reflect new knowledge and insights
Main activities of a learning organization include:• Solving problems systematically• Experimenting with new approaches• Learning from past experience, history and experiences of others• Transferring knowledge quickly and easily throughout the organization
Basic Elements of Strategic Management
1. Environmental scanning2. Strategy formulation3. Strategy implementation4. Evaluation and control
Basic Elements of Strategic Management
Environmental Scanning is the monitoring, evaluating and disseminating of information from the external and internal environments to key people within the organization
Basic Elements of Strategic Management
Strategy Formulation: the development of long-range plans for the effective management of environmental opportunities and threats in light of organizational strengths and weaknesses (SWOT)
Mission - the purpose or reason for the organization’s existence
Vision- describes what the organization would like to become
Objectives- the end results of planned activity
Strategies- form a comprehensive master plan that states how the corporation will achieve its mission and objectives
– Corporate– Business– Functional
Policies- the broad guidelines for decision making that links the formulation of a strategy with its implementation
Strategy implementation: the process by which strategies and policies are put into action through the development of:
• Programs
• Budgets
• Procedures
Evaluation and control: the process in which corporate activities and performance results are monitored so that actual performance can be compared to desired performance
Performance : the end result of organizational activities
Feedback/Learning Process : revise or correct decisions based on performance
Triggering event: something that acts as a stimulus for a change in strategy and can include:• New CEO• External intervention• Threat of change of ownership• Performance gap• Strategic inflection point
What Makes a Strategic Decision?
Strategic decision making focuses on the long-run future of the organizationCharacteristics of strategic decision making include:
• Rare• Consequential• Directive
Mintzberg’s Modes of Strategic Decision Making• Entrepreneurial• Adaptive• Planning• Logical incrementalism (Quinn)
Strategic Decision Making Process:1. Evaluate current performance results2. Review corporate governance3. Scan and assess the external environment4. Scan and assess the internal corporate environment5. Analyze strategic (SWOT) factors6. Generate, evaluate and select the best alternative strategy7. Implement selected strategies8. Evaluate implemented strategies
Strategic audit provides a checklist of questions, by area or issue, that enables a systematic analysis to be made of various corporate functions and activities
1. Why has strategic management become so important to today’s corporations?2. How does strategic management typically evolve in a corporation?3. What is a learning organization? Is this approach to strategic management better than the more
traditional top-down approach in which strategic planning is primarily done by top management?
4. Why are strategic decisions different from other kinds of decisions?5. When is the planning mode of strategic decision making superior to the entrepreneurial and
adaptive modes?
Corporation: a mechanism established to allow different parties to contribute capital, expertise and labor for their mutual benefit
Corporation is governed by the board of directors that oversees top management with the concurrence of the shareholders.
Corporate governance: the relationship among the board of directors, top management and shareholders in determining the direction and performance of the corporation
Due care : Board of directors are responsible that the corporation is not harmed by members of the board. Directors can be held liable
Responsibilities of the Board of Directors• Sets corporate strategy, overall direction, mission, or vision• Hires and fires the CEO and top management• Controls, monitors, or supervises top management• Reviews and approves the use of resources• Cares for shareholders’ interests• Assures that the corporation is managed in accordance with state laws, security regulations and
conflict of interest situationsRole of the Board in Strategic Management
• Monitor developments inside and outside the corporation• Evaluate and Influence management proposals, decisions and actions• Initiate and Determine the corporation’s mission and strategies
Members of a Board of DirectorsInside Directors are officers or executives employed by the board’s corporation
Outside Directors are executives of other firms but are not employees of the board’s corporation
Affiliated directors- not employed by the corporation, handle legal or insurance work
Retired executive directors - used to work for the corporation, partly responsible for past decisions affecting current strategy
Family directors- descendents of the founder and own significant blocks of stock
Agency theory problems arise in corporations because top management is not willing to accept responsibility for their decisions unless they own a substantial amount of stock in the corporation
Stewardship theory as the result of long tenure with the corporation, insiders (top management) tend to identify with the corporation and its success. Act in the best interest of the corporation more than self-interest
Interlocking Directorates - useful for gaining both inside information about an uncertain environment and objective expertise about potential strategies and tactics
Direct interlocking directorate - when two firms share a director or when an executive of one firm sits on the board of a second
Indirect interlocking directorate - when two corporations have directors who serve on the board of a third firm
Nomination and Election of Board Members
97% of U.S. boards use nominating committees to identify potential board members
Staggered boards - only a portion of board members stand for re-election when directors serve more than one year terms
Criteria for a good director include:– Willingness to challenge management when necessary– Special expertise that is important to the company– Available for outside meetings to advise management– Expertise on global issues– Understands the firm’s key technologies and processes– Brings external contacts that are potentially valuable to the firm– Has detailed knowledge of the firm’s industry– Has high visibility in their field– Is accomplished at representing the firm to stakeholders
Approximately 70% of the top executives of U.S. publicly held companies hold the dual designation of Chairman and CEO
Lead Director- is consulted by the Chair/CEO regarding board affairs and coordinates the annual evaluation of the CEO
• 96% of U.S. companies that combine the Chairman and CEO positions had a lead director
Impact of the Sarbanes-Oxley Act on U.S. Corporate Governance
Sarbanes Oxley Act 2002 - designed to protect shareholders from excesses and failed oversight of boards of directors
– Whistleblower procedures– Improved corporate
• Evaluating Governance– Rating agencies– S&P Corporate Governance Scoring System
• Avoiding Governance Improvements– Multiple classes of stock– Public to private ownership– Controlled companies
Trends in Corporate Governance• Boards shaping company strategy• Institutional investors active on boards• Shareholder demands that directors and top management own significant stock• More involvement of non-affiliated outside directors• Increased representation of women and minorities• Boards evaluating individual directors• Smaller boards• Splitting the Chairman and CEO positions• Shareholders may begin to nominate board members• Society expects boards to balance profitability with social needs of society
Responsibilities of Top Management
Executive leadership is the directing of activities toward the accomplishment of corporate objectives. Sets the tone for the entire corporation
Strategic vision- description of what the company is capable of becoming
Transformational Leaders provide change and movement in an organization by providing a vision for that change.
Characteristics include:• CEO articulates a strategic vision for the corporation• CEO presents a role for others to identify with and to follow• CEO communicates high performance standards and also show confidence in the followers’
abilities to meet these standards
Managing the Strategic Planning Process
Strategic planning staff- supports both top management and the business units in the strategic planning process
Major responsibilities include:• Identifying and analyzing company-wide strategic issues, and suggesting corporate strategic
alternatives to top management• Work as facilitators with business units to guide them through the strategic planning process
1. When does a corporation need a board of directors?2. Who should and should not serve on a board of directors?3. Should a CEO be allowed to serve on another company’s board of directors?4. What would be the result if the only insider on a corporation’s board were the CEO?5. Should all CEOs be transformational leaders? Would you like to work for a transformational
leader?
Responsibilities of a Business Firm
Social Responsibility: proposes that a private corporation has responsibilities to society that extend beyond making a profit
Friedman’s traditional view of a business firm:
• Argues against the concept of social responsibility
– Primary goal of business is profit maximization not spending shareholder money for the general social interest
Carroll’s four responsibilities of business: (in order of priority)
• Economic
• Legal
• Ethical
• Discretionary
Carroll’s four responsibilities of business:
Social capital refers to the goodwill of key stakeholders
and provides a company with:
• The ability to enter local and international markets• Enhanced reputation• Competitive advantage• Cost savings• The ability to charge premium prices• Improved relationships with suppliers and distributors• The ability to attract better talent• Goodwill in the eyes of public officials• Access to capital
Characteristics of Sustainability• Environmental• Economic• Social
Corporate Stakeholders• Stakeholders have an interest in the business and affect or are affected by the achievement of
the firm’s objectives
• Enterprise strategy- articulates the firm’s ethical relationship with its stakeholders
Stakeholder Analysis- the identification of corporate stakeholders in 3 steps:
1. Primary stakeholders have a direct connection with the corporation and have sufficient bargaining power to directly affect corporate activities
2. Secondary stakeholders have an indirect stake in the corporation but are also affected by corporate activities
3. Estimate the effect on each stakeholder from a particular strategic decision
Reasons for Unethical Behavior
• Unaware that behavior is questionable• Lack of standards of conduct• Different cultural norms and values• Behavior-based or relationship-based governance systems• Different values between business people and stakeholders
• Moral Relativism claims that morality is relative to some personal, social, or cultural standard and that there is not a method for deciding whether one decision is better than another
Types of Moral Relativism include:• Naïve relativism
• Role relativism
• Social group relativism
• Cultural relativism
Kohlberg’s Levels of Moral Development• Preconventional level: concern for one’s self
• Conventional level: considerations for society’s laws and norms
• Principled level: guided by an internal code
Encouraging Ethical Behavior• Code of Ethics- specifies how an organization expects its employees to behave while on the job
• Whistleblowers - employees who report illegal or unethical behavior on the part of others
Key Terms in Ethical Behavior
Ethics- the consensually accepted standards of behavior for an occupation, trade, or profession
Morality- the precepts of personal behavior based on religious or philosophical grounds
Law is the formal codes that permit or forbid certain behaviors and may or may not enforce ethics or morality
Approaches to Ethical Behavior
Utilitarian - actions are judged by consequences
Individual rights - fundamental rights should be respected
Justice - decisions must be equitable, fair and impartial in the distribution of costs and benefits to individuals or groups
Cavanagh’s questions to solve ethical problems:1. Utility- does it optimize the satisfactions of the stakeholders?
2. Rights- Does it respect the rights of the individuals involved
3. Justice- Is it consistent with the canons of justice?
Kant’s categorical imperatives:
1. Actions are ethical only if the person is willing for the same action to be taken by everyone who is in a similar situation
2. Never treat another person simply as a means but always as an end
1. What is the relationship between corporate governance and social responsibility?2. What is your opinion of GAP International’s having a code of conduct for its suppliers? What
would Milton Friedman say? Contrast his view with Archie Carroll’s view.3. Does a company have to act selflessly to be considered socially responsible? For example, when
building a new plant, a corporation voluntarily invested in additional equipment that enabled it to reduce its pollution emissionsbeyond any current laws. Knowing that it would be very expensive for its competitors to do the same, the firm lobbied the government to make pollution regulations more restrictive on the entire industry. Is this company socially responsible? Were its managers acting ethically?
4. Are the people living in a relationship-based governancesystem likely to be unethical in business dealings?
5. Given that people rarely use a company’s code of ethicsto guide their decision making, what good are the codes?
Environmental scanning- the monitoring, evaluation and dissemination of information from the external and internal environments to key people within the corporation
Identifying External Environmental Variables• Natural environment• Societal environment • Task environment
Natural environment• Physical resources• Wildlife• Climate
Societal environment - social systems that influence long-term decisions• Economic forces• Technological forces• Political-legal forces• Sociocultural forces
Task environment- groups that directly affect a corporation and are affected by the corporation• Government• Local communities• Suppliers• Competitors• Customers• Creditors• Unions• Special interest groups/trade associations
Industry analysis - an in-depth examination of key factors within a corporation’s task environment
STEEP Analysis- monitoring trends in the societal and natural environments
– Sociocultural-– Technological-– Economic-– Ecological-– Political-legal forces
Trends in Economic Forces:• Interest rates• Home sales• Oil prices• Emerging markets
• BRIC countries• Eastern Europe
Trends in Technological Forces:– Portable information devices and electronic networking– Alternative energy sources– Precision farming– Virtual personal assistants– Genetically altered organisms– Smart, mobile robots
Trends in Political-Legal Forces:– Enforcement of U.S. antitrust laws– Taxation and labor laws– Government bureaucracy– World Trade Organization
Trends in Sociocultural Forces:– Demographics– Increasing environmental awareness– Growing health consciousness– Expanding seniors market– Impact of Gen Y– Declining mass market– Changing pace and location of life– Changing household composition– Increasing diversity of workforce and markets
Identifying External Strategic Factors:
Issues priority matrix- used to identify and analyze developments in the external environment
External strategic factors- key environmental trends that are judged to have both a medium to high probability of occurrence and a medium to high probability of impact on the corporation
Industry- a group of firms that produces a similar product or service
Porter’s 5 forces:– Threat of new entrants– Rivalry among existing firms– Threat of substitute products– Bargaining power of buyers– Bargaining power of suppliers– Relative power of other stakeholders (added)
Threat of new entrants - new entrants to an industry bring new capacity, a desire to gain market share and substantial resources
Entry barrier- an obstruction that makes it difficult for a company to enter an industry• Economies of scale• Product differentiation• Capital requirements
• Switching costs• Access to distribution channels• Cost disadvantages due to size• Government policies
Rivalry Among Existing Firms- new entrants to an industry bring new capacity, a desire to gain market share and substantial resources
• Number of competitors• Rate of industry growth• Product or service characteristics• Amount of fixed costs• Capacity• Height of exit barriers• Diversity of rivals
Threat of Substitute Products or Services- products that appear different but can satisfy the same need as another product
Bargaining Power of Buyers - ability of buyers to force prices down, bargain for higher quality, play competitors against each other
• Large purchases• Backward integration• Alternative suppliers• Low cost to change suppliers• Product represents a high percentage of buyer’s cost• Buyer earns low profits• Product is unimportant to buyer
Bargaining Power of Suppliers - ability of suppliers to raise prices or reduce quality• Industry is dominated by a few companies• Unique product or service• Substitutes are not readily available• Ability to forward integrate• Unimportance of product or service to the industry
Relative Power of Other Stakeholders• Government• Local communities• Creditors• Trade associations• Special interest groups
• Unions• Shareholders• Complementors- products that work well with a firm’s product
Industry Evolution
• Fragmented industry- no firm has a large market share and each firm only serves a small piece of the total market in competition with other firms
• Consolidated industry - domination by a few large firms, each struggles to differentiate products from its competition
Categorizing International Industries• Multi-domestic Industries - specific to each country or group of countries
• Global Industries- operate worldwide with multinational companies making only small adjustments for country-specific circumstances
• Regional industries - multinational companies primarily coordinate their activities within regions
Strategic group- a set of business units or firms that pursue similar strategies with similar resources
Strategic Types• Defenders- focus on improving efficiency• Prospectors- focus on product innovation and market opportunities• Analyzers - focus on at least two different product market areas• Reactors - lack a consistent strategy-structure-culture relationship
HypercompetitionCreates a condition of disequilibrium and change
• Competitive advantage comes from:– knowledge of environment– willingness to take risks– Cannibalization of own products
Key success factors- variables that can significantly affect the overall competitive positions of companies within an industry
Industry matrix- summarizes the key success factors within a particular industry
Using Key Success Factors to Create an Industry Matrix
Competitive intelligence (business intelligence)- a formal program of gathering information on a company’s competitors
Sources of competitive intelligence:• Information brokers• Internet
• Industrial espionage• Investigatory services
Monitoring Competitors for Strategic Planning
Primary activity of competitive intelligence is to monitor competitors
Competitors organizations that offer same, similar, or substitute products or services in the business areas in which a particular company operates
• Forecasting is based on a set of assumptions
• Faulty underlying assumptions are the most frequent cause of forecasting errors
Useful forecasting techniques
• Extrapolation
• Brainstorming
• Expert opinion
• Industry Scenario
• Delphi technique
• Statistical modeling
• Prediction markets
• Cross impact analysis
1. Discuss how a development in a corporation’s natural and societal environments can affect the corporation through its task environment
2. According to Porter, what determines the level of competitive intensity in an industry?
3. According to Porter’s discussion of industry analysis, is Pepsi Cola a substitute of Coca Cola?
4. How can a decision maker identify strategic factors in acorporation’s external international environment?
5. Compare and contrast trend extrapolation with the writingof scenarios as forecasting techniques
Organizational analysis- concerned with identifying and developing an organization’s resources and competencies
Core and Distinctive Competencies
Resources- an organization’s assets
• Tangible
• Intangible
Capabilities- a corporation’s ability to exploit its resources
Competency- a cross-functional integration and coordination of capabilities
Core competency- a collection of competencies that cross divisional boundaries, is wide-spread throughout the corporation and is something the corporation does exceedingly well
Distinctive competency- core competencies that are superior to those of the competition
VRIO framework (Barney)
• Value
• Rare
• Imitability
• Organization
Using Resources to Gain Competitive Advantage
1. Identify and classify resources in terms of strengths and weaknesses
2. Combine the firm’s strengths into specific capabilities and core competencies
3. Appraise profit potential- Are there any distinctive competencies?
4. Select the strategy that best exploits the firm’s capabilities and competencies relative to external opportunities
5. Identify resource gaps and invest in upgrading weaknesses
Access to a Distinctive Competency
1. Asset endowment
2. Acquired from someone else
3. Shared with another business
4. Built and accumulated within the company
Access to a Distinctive Competency
Clusters- geographic concentrations of interconnected companies and industries
Access to:
• Employees
• Suppliers
• Information
• Complementary products
Imitability an Advantage
Durability- the rate at which a firm’s underlying resources, capabilities, or core competencies depreciate or become obsolete
Imitability- the rate at which a firm’s underlying resources, capabilities, or core competencies can be duplicated by others
Determining the Sustainability of an Advantage
Transparency- the speed at which other firms under the relationship of resources and capabilities support a successful strategy
Transferability- the ability of competitors to gather the resources and capabilities necessary to support a competitive challenge
Replicability- the ability of competitors to use duplicated resources and capabilities to imitate the other firm’s success
Explicit knowledge- knowledge that can be easily articulated and communicated
Tacit knowledge- knowledge that is not easily communicated because it is deeply rooted in employee experience or in the company’s culture
Business models- a company’s method for making money in the current business environment
Includes
• Who the company serves
• What the company provides
• How the company makes money
• How the company differentiates and sustains competitive advantage
• How the company provides its product/service
• Customer solutions model
• Profit pyramid model
• Multi-component system/installed model
• Advertising model
• Switchboard model
• Efficiency model
• Blockbuster model
• Profit multiplier model
• Entrepreneurial model
• De Facto industry standard model
Value chain- a linked set of value creating activities that begin with basic raw materials coming from suppliers, moving on to a series of value-added activities involved in producing and marking a product or service, and ending with distributors getting the final goods into the hands of the ultimate consumer
Industry Value Chain Analysis
Value chain segments include:
• Upstream
• Downstream
Center of gravity- the part of the chain that is most important to the company and the point where its core competencies lie
– Vertical integration
Corporate Value Chain Analysis
Primary activities
• Inbound logistics
• Operations
• Outbound logistics
Support activities
• Procurement
• Technology development
• Human resource management
• Firm infrastructure
Corporate Value Chain Analysis
1. Examine each product line’s value chain in terms of the various activities involved in producing the product or service
2. Examine the linkages within each product line’s value chain
3. Examine the potential synergies among the value chains of different product lines or business units
Basic Organizational Structures
• Simple
• Functional
• Divisional
• Strategic Business Units
• Conglomerate
Corporate Culture: The Company Way
Corporate culture- the collection of beliefs, expectations and values learned and shared by a corporation’s members and transmitted from one generation of employees to another.
Functions of Corporate Culture
• Conveys a sense of identity for employees
• Generates employee commitment
• Adds to the stability of the organization as a social system
• Serves as a frame of reference for employees to understand organizational activities and as a guide for behavior
Corporate Culture: The Company Way
Cultural intensity- the degree of which members of a unit accept the norms, values and other cultural content associated with the unit
Shows the depth of the culture
Cultural integration- the extent of which units throughout the organization share a common culture
Shows the breadth of the culture
Strategic Marketing Issues
Market position- Who are our customers?
Marketing Mix- the particular combination of key variables under a corporation’s control that can be used to affect demand and to gain competitive advantage
Product life cycle- product monetary sales over time from introduction through growth and maturity to decline
Brand- a name given to a company’s product which identifies that item in the mind of the consumer
Corporate brand- a type of brand in which the company’s name serves as the brand
Corporate reputation- a widely held perception of a company by the general public
• Stakeholders’ perceptions of quality
• Corporation’s prominence in the minds of stakeholders
Strategic Financial Issues
Financial leverage- ratio of total debt to total assets
• Used to describe how debt is used to increase earnings available to common shareholders
Capital budgeting- the analyzing and ranking of possible investments in fixed assets in terms of additional outlays and receipts that will result from each investment
• Hurdle point
Strategic Research and Development Issues
R & D intensity- pending no R & D as a percentage of sales revenue
Technology competence- the development and use of innovative technology
Technology transfer- the process of taking new technology from the laboratory to the marketplace
R & D Mix- the mix of:
Basic R & D- focuses on theoretical problems
Product R & D- concentrates on marketing and is concerned with product or product packaging improvements
Engineering R & D is concerned with engineering, concentrating on quality control, and the development of design specifications and improved production equipment
Strategic Research and Development Issues
Technology discontinuity- when a new technology cannot be used to enhance current technology, but substitutes for the technology to yield better performance
• Moore’s Law
Strategic Operations Issues
Intermittent Systems- item is normally processed sequentially, but the work and sequence of the process vary
Continuous systems- work is laid out in lines on which products can be continuously assembled or processed
Operating leverage- impact of a specific change in sales volume on net operation income
Experience curve- unit production costs decline by some fixed percentage each time the total accumulated volume of production units doubles
Flexible Manufacturing for Mass Customization
• Computer Assisted Design
• Computer Assisted Manufacturing
• Economies of Scale
Strategic Human Resource Issues
Teams
Autonomous (self-managed)- a group of people working together without a supervisor to plan, coordinate and evaluate their work
Cross-functional work teams- various disciplines are involved in a project from the beginning
Concurrent engineering- specialists work side-by-side and compare notes constantly to design cost-effective products with features customers want
Virtual Teams- groups of geographically or organizationally dispersed coworkers that are assembled using a combination of telecommunications and information technologies to accomplish organizational tasks- driven by 5 trends
• Flatter organizational structures
• Turbulent environments
• Increased employee autonomy
• Higher knowledge requirements
• Increased globalization
• Increased employee decision making
Quality of work life- includes improvements in:
• Introducing participative problem solving
• Restructuring work
• Introducing innovative reward systems
• Improving the work environment
Human diversity- the mix in the workplace of people from different races, cultures and backgrounds
• Provides a sustainable competitive advantage
Strategic Information Systems/Technology Issues
Information systems/technology contributions to performance:
• Automation of back office processes
• Automation of individual tasks
• Enhancement of key business functions
• Development of a competitive advantage
Current trends in Information systems/technology Internet include:
• Intranet
• Extranet
• Web 2.0
Supply chain management- networks for sourcing raw materials, manufacturing products or creating services, storing, and distributing goods, and delivering them to customers and consumers
1. What is the relevance of the resource-based view of the
firm to strategic management in a global environment?
2. How can value chain analysis help indentify a company’s
strengths and weaknesses?
3. In what ways can a corporation’s structure and culture
be internal strengths and weaknesses?
4. What are the pros and cons of management using the
experience curve to determine strategy?
5. How might a firm’s management decide whether it should
continue to invest in current known technology or
in new, but untested technology? What factors might
encourage or discourage such a shift?