Amazon case study strategic management

STRATEGIC M a n a g e m e n : ’

EDITION Concepts and Cases

PEARSON

A COM PETITIVE ADVANTAGE APPRO ACH

G LO B A L EDITION

Fred R. David Francis Marion University Florence, South Carolina

Forest R. David Strategic Planning Consultant

Boston Columbus Indianapolis New York San Francisco Upper Saddle River

Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto

Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

Brief Contents

Preface 15

Acknowledgments 25

About the Authors 27

Chapter 1 Strategic Management Essentials 37

THE COHESION CASE: ADIDAS GROUP-2013 58

Chapter 2 Outside-USA Strategic Planning 75

Chapter 3 Ethics/Social Responsibility/Sustainability 109

Chapter 4 Types of Strategies 131

Chapters Vision and Mission Analysis 169

Chapter 6 The Internal Audit 187

Chapter 7 The External Audit 225

Chapter 8 Strategy Generation and Selection 255

Chapter 9 Strategy Implementation 295

Chapter 10 Strategy Execution 331

Chapter 11 Strategy M onitoring 371

Appendix 1 Guidelines for Case Analysis 393

Glossary 662

Name Index 673

Subject Index 677

5

Contents

Preface 15

Acknowledgments 25

About the Authors 27

Chapter 1 Strategic Management Essentials 37

SINGAPORE AIRLINES: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 38

What Is Strategic Management? 39 Defining Strategic Management 39 ■ Stages of Strategic Management 39 ■ Integrating Intuition and Analysis 40 ■ Adapting to Change 41

Key Terms in Strategic Management 42 Competitive Advantage 42 ■ Strategists 43 ■ Vision and Mission Statements 44 ■ External Opportunities and Threats 44 ■ Internal Strengths and Weaknesses 44 ■ Long-Term Objectives 45 ■ Strategies 45 Annual Objectives 45 ■ Policies 46

The Strategic-Management Model 47 Benefits of Strategic Management 48

Financial Benefits 49 ■ Nonfinancial Benefits 50 Why Some Firms Do No Strategic Planning 50 Pitfalls in Strategic Planning 50 Guidelines for Effective Strategic Management 51 Comparing Business and Military Strategy 52 Special Note to Students 53

THE COHESION CASE: ADIDAS GROUP—2013 58 ASSURANCE OF LEARNING EXERCISES 69 Assurance of Learning Exercise 1 A: Assess Singapore Airline's Most Recent Quarterly Performance Data 69 Assurance of Learning Exercise 1B: Gathering Strategy Information onadidasAG 70 Assurance of Learning Exercise 1C: Getting Familiar with the Free Excel Student Template 70 Assurance of Learning Exercise 1D: Evaluating An Oral Student Presentation 71 Assurance of Learning Exercise 1E: Strategic Planning at Nestle 71 Assurance of Learning Exercise 1F: Interviewing Local Strategists 72

Chapter 2 Outside-USA Strategic Planning 75 HONDA: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 76

Multinational Organizations 79 Advantages and Disadvantages of International Operations 80 The Global Challenge 81

Globalization 82

Corporate Tax Rates Globally 82

United States versus Foreign Business Cultures 84 Communication Differences Across Countries 87 Business Culture Across Countries 87

Mexico— Business Culture 88 ■ Japan—Business Culture 89 ■ Brazil—Business Culture 90 ■ Germany— Business Culture 90 ■ Egypt—Business Culture 91 ■ China— Business Culture 92 ■ India— Business Culture 92 ■ Nigeria—Business Culture 93

Business Climate Across Countries/Continents 94 Union Membership Across Europe 94 ■ African Countries 95 ■ China 97 ■ Philippines 99 ■ Taiwan 99 ■ India 99 ■ Germany 100 ■ Mexico 101

Special Note to Students 102 ASSURANCE OF LEARNING EXERCISES 104 Assurance of Learning Exercise 2A: The adidas Group wants to enter Africa. Help them. 104 Assurance of Learning Exercise 2B: Assessing Differences in Culture Across Countries 105 Assurance of Learning Exercise 2C: Honda Motor Company wants to enter the Vietnamese market. Help them. 105 Assurance of Learning Exercise 2D: Does My University Recruit in Foreign Countries? 106

Chapter 3 Ethics/Social Responsibility/ Sustainability 109

Business Ethics 110 NESTLE: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 110 Code of Business Ethics 112 ■ An Ethics Culture 113 ■ Whistle-Blowing 113 ■ Bribes 114 ■ Workplace Romance 115

Social Responsibility 117 Social Policy 118 ■ Social Policies on Retirement 118

Environmental Sustainability 119 What Is a Sustainability Report? 120 ■ Lack of Standards Changing 120 ■ Managing Environmental Affairs in the Firm 121 ■ IS0 14000/14001 Certification 122 ■ Wildlife 122 ■ Solar Power 123

Special Note to Students 124 ASSURANCE OF LEARNING EXERCISES 126 Assurance of Learning Exercise 3A: Sustainability and Nestle 126 Assurance of Learning Exercise 3B: How Does My Municipality Compare To Others on Being Pollution-Safe? 127 Assurance of Learning Exercise 3C: Compare adidas AG versus Nike on Social Responsibility 127 Assurance of Learning Exercise 3D: How Do You Rate adidas AG's Sustainability Efforts? 127 Assurance of Learning Exercise 3E: How Do You Rate Nestles Sustainability Efforts? 127 Assurance of Learning Exercise 3F:The Ethics of Spying on Competitors 128

7

8 CONTENTS

Chapter 4 Types of Strategies 131 Long-Term Objectives 132

The Nature of Long-Term Objectives 132 PETRONAS: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 132 Financial versus Strategic Objectives 133 ■ Not Managing by Objectives 134

Types of Strategies 134 Levels of Strategies 136

Integration Strategies 137 Forward Integration 137 ■ Backward Integration 139 ■ Horizontal Integration 140

Intensive Strategies 141 Market Penetration 141 ■ Market Development 142 ■ Product Development 142

Diversification Strategies 143 Related Diversification 144 ■ Unrelated Diversification 145

Defensive Strategies 146 Retrenchment 146 ■ Divestiture 147 ■ Liquidation 148

Michael Porter's Five Generic Strategies 149 Cost Leadership Strategies (Type 1 and Type 2) 149 ■ Differentiation Strategies (Type 3) 151 ■ Focus Strategies (Type 4 and Type 5) 152 ■ Strategies for Competing in Turbulent, High-Velocity Markets 153

Means for Achieving Strategies 153 Cooperation Among Competitors 153 ■ Joint Venture and Partnering 154 ■ Merger/Acquisition 155 ■ Private-Equity Acquisitions 157 ■ First Mover Advantages 157 ■ Outsourcing and Reshoring 158

Strategic Management in Nonprofit and Governmental Organizations 159

Educational Institutions 159 ■ Medical Organizations 160 ■ Governmental Agencies and Departments 160

Strategic Management in Small Firms 161 Special Note to Students 161

ASSURANCE OF LEARNING EXERCISES 164 Assurance of Learning Exercise 4A: Market Development: Petronas 164 Assurance of Learning Exercise 4B: Alternative Strategies for Petronas 164 Assurance of Learning Exercise 4C: Private-Equity Acquisitions 164 Assurance of Learning Exercise 4D: The strategies of adidas AG: 2013-2015 165 Assurance of Learning Exercise 4E: Lessons in Doing Business Globally 165 Assurance of Learning Exercise 4F: Petronas 2013-2015 165 Assurance of Learning Exercise 4G: What Strategies Are Most Risky? 166 Assurance of Learning Exercise 4H: Exploring Bankruptcy 166 Assurance of Learning Exercise 41: Examining Strategy Articles 166 Assurance of Learning Exercise 4J: Classifying Some Strategies 166

Chapter 5 Vision and Mission Analysis 169 SAMSUNG: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 170

What Do We Want to Become? 171 What Is Our Business? 171

Vision versus Mission 173 ■ Vision Statement Analysis 173 « T h e Process of Developing Vision and Mission Statements 173

Importance (Benefits) of Vision and Mission Statements 174 A Resolution of Divergent Views 174

Characteristics of a Mission Statement 176 A Declaration of Attitude 176 ■ A Customer Orientation 177 ■ Mission Statement Components 177

Writing and Evaluating Mission Statements 179 Special Note to Students 180

ASSURANCE OF LEARNING EXERCISES 182 Assurance of Learning Exercise 5A: Examining Potential Changes Needed in a Firm's Vision/Mission 182 Assurance of Learning Exercise 5B: Studying an Alternative View of Mission Statement Content 183 Assurance of Learning Exercise 5C: Evaluating Mission Statements 183 Assurance of Learning Exercise 5D: Evaluating the Mission Statement of Under Armour—a Competitor of adidas AG 184 Assurance of Learning Exercise 5E: Selecting the Best Vision and Mission Statements in a Given Industry 184 Assurance of Learning Exercise 5F: Writing an Excellent Vision and Mission Statement for Novartis AG 185

Chapter 6 The Internal Audit 187 The Nature of an Internal Audit 188

VOLKSWAGEN: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 188 Key Internal Forces 189 ■ The Process of Performing an Internal Audit 190

The Resource-Based View 191 Integrating Strategy and Culture 192 Management 194

Planning 194 ■ Organizing 196 ■ Motivating 197 ■ Staffing 197 ■ Controlling 198 ■ Management Audit Checklist of Questions 198

Marketing 198 Customer Analysis 199 ■ Selling Products and Services 199 ■ Product and Service Planning 200 ■ Pricing 200 ■ Distribution 201 ■ Marketing Research 201 ■ CostI Benefit Analysis 202 ■ Marketing Audit Checklist of Questions 202

Finance and Accounting 202 Finance and Accounting Functions 202 ■ Basic Types of Financial Ratios 204

Breakeven Analysis 207 Finance and Accounting Audit Checklist 209

Production and Operations 209 Production and Operations Audit Checklist 211

Research and Development 211 Internal and External Research and Development 212 ■ Research and Development Audit 213

Management Information Systems 213 Management Information Systems Audit 213

Value Chain Analysis 213 Benchmarking 214

The Internal Factor Evaluation Matrix 216 Special Note to Students 218

ASSURANCE OF LEARNING EXERCISES 221 Assurance of Learning Exercise 6A: Develop a Corporate IFE Matrix for Volkswagen Group 221 Assurance of Learning Exercise 6B: Should VW Deploy More Resources or Less Outside of the USA? 222

CONTENTS 9

Assurance of Learning Exercise 6C: Apply Breakeven Analysis 222 Assurance of Learning Exercise 6D: Performing a Financial Ratio Analysis for adidas AG 222 Assurance of Learning Exercise 6E: Constructing an IFE Matrix for adidas AG 222 Assurance of Learning Exercise 6F: Analyzing Your College or University's Internal Strategic Situation 223

Chapter 7 The External Audit 225 The Nature of an External Audit 226

MICHELIN: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 226 Key External Forces 227 ■ The Process of Performing an External Audit 228

The Industrial Organization (I/O) View 229 Economic Forces 229 Social, Cultural, Demographic, and Natural Environment Forces 231 Political, Governmental, and Legal Forces 232

Labor Unions 234 Technological Forces 236 Competitive Forces 237

Competitive Intelligence Programs 238 ■ Market Commonality and Resource Similarity 239

Competitive Analysis: Porter's Five-Forces Model 239 Rivalry Among Competing Firms 240 ■ Potential Entry of New Competitors 240 ■ Potential Development of Substitute Products 241 ■ Bargaining Power of Suppliers 241 ■ Bargaining Power of Consumers 242

Sources of External Information 242 Forecasting Tools and Techniques 243

Making Assumptions 243 Industry Analysis: The External Factor Evaluation Matrix 244 The Competitive Profile Matrix 245 Special Note To Students 247

ASSURANCE OF LEARNING EXERCISES 250 Assurance of Learning Exercise 7A: Michelin and Africa: An External Assessment 250 Assurance of Learning Exercise 7B: Preparing a CPM for Michelin Based on Countries Rather than Companies 251 Assurance of Learning Exercise 7C: Develop Divisional Michelin EFE Matrices 251 Assurance of Learning Exercise 7D: Developing an EFE Matrix for adidas AG 251 Assurance of Learning Exercise 7E: The External Assessment 252 Assurance of Learning Exercise 7F: Developing a CPM for Michelin 252 Assurance of Learning Exercise 7G: Developing a CPM for adidas AG 252 Assurance of Learning Exercise 7H: Analyzing Your College or University's External Strategic Situation 253

Chapter 8 Strategy Generation and Selection 255

The Nature of Strategy Analysis and Choice 256 The Process of Generating and Selecting Strategies 256

UNILEVER: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 256

A Comprehensive Strategy-Formulation Analytical Framework 258 The Input Stage 259

The Matching Stage 259 The SWOT Matrix 259 The Strategic Position and Action Evaluation (SPACE) Matrix 262 The Boston Consulting Group (BCG) Matrix 267 The Internal-External (IE) Matrix 270 The Grand Strategy Matrix 273 The Decision Stage 275 The Quantitative Strategic Planning Matrix (QSPM) 275

Positive Features and Limitations of the QSPM 280 Cultural Aspects of Strategy Choice 280 The Politics of Strategy Choice 280 Governance Issues 281 Special Note to Students 284

ASSURANCE OF LEARNING EXERCISES 287 Assurance of Learning Exercise 8A: Should Unilever Penetrate Southeast Asia Further? 287 Assurance of Learning Exercise 8B: Perform a SWOT Analysis for Unilever's Global Operations 288 Assurance of Learning Exercise 8C: Preparing a BCG Matrix for Unilever 288 Assurance of Learning Exercise 8D: Developing a SWOT Matrix for adidas AG 288 Assurance of Learning Exercise 8E: Developing a SPACE Matrix for adidas AG 289 Assurance of Learning Exercise 8F: Developing a BCG Matrix for adidas AG 289 Assurance of Learning Exercise 8G: Developing a QSPM for adidas AG 289 Assurance of Learning Exercise 8H: Developing a SWOT Matrix for Unilever 289 Assurance of Learning Exercise 81: Developing a SPACE Matrix for Unilever 290 Assurance of Learning Exercise 8J: Developing a BCG Matrix for your College or University 290 Assurance of Learning Exercise 8K: Developing a QSPM for a Company that You Are Familiar With 290 Assurance of Learning Exercise 8L: Formulating Individual Strategies 291 Assurance of Learning Exercise 8M: The Mach Test 291

Chapter 9 Strategy Implementation 295 The Nature of Strategy Implementation 296

ROYAL DUTCH SHELL: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 296

Current Marketing Issues 297 New Principles of Marketing 298

Market Segmentation 299 Retention-Based Segmentation 300 ■ Does the Internet Make Market Segmentation Easier? 302

Product Positioning/Perceptual Mapping 302 Finance and Accounting Issues 304

Acquiring Capital to Implement Strategies 305 ■ Projected Financial Statements 310 ■ Projected Financial Statement Analysis for Whole Foods Market 312 ■ Financial Budgets 313 ■ Company Valuation 315 ■ Deciding Whether to Go Public 319 ■ Research and Development (R&D) Issues 320

Management Information Systems (MIS) Issues 322 Business Analytics 322

Special Note to Students 323 ASSURANCE OF LEARNING EXERCISES 326 Assurance of Learning Exercise 9A: Preparing an EPS/EBIT Analysis for Royal Dutch Shell pic 326

10 CONTENTS

Assurance of Learning Exercise 9B: Developing a Product-Positioning Map for adidas AG 327 Assurance of Learning Exercise 9C: Performing an EPS/EBIT Analysis for adidas AG 327 Assurance of Learning Exercise 9D: Preparing Projected Financial Statements for adidas AG 327 Assurance of Learning Exercise 9E: Determining the Cash Value of adidas AG 328 Assurance of Learning Exercise 9F: Developing a Product-Positioning Map for My College 328 Assurance of Learning Exercise 9G: Do Banks Require Projected Financial Statements? 328

Chapter 10 Strategy Execution 331 The Nature of Strategy Implementation 332

ACCENTURE: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 332 Management Perspectives 334

Annual Objectives 335 Policies 337 Resource Allocation 339 Managing Conflict 339 Matching Structure with Strategy 340

The Functional Structure 341 ■ The Divisional Structure 342 ■ The Strategic Business Unit (SBU) Structure 345 ■ The Matrix Structure 346 ■ Some Do's and Don’ts in Developing Organizational Charts 348

Restructuring 350 Restructuring 350

Linking Performance and Pay to Strategies 351 Managing Resistance to Change 353 Creating a Strategy-Supportive Culture 354 Production and Operations Concerns When Implementing Strategies 355 Human Resource Concerns When Implementing Strategies 356

Employee Stock Ownership Plans (ESOPs) 358 ■ Balancing Work Life and Home Life 359 ■ Benefits of a Diverse Workforce 361 ■ Corporate Wellness Programs 361

Special Note to Students 363 ASSURANCE OF LEARNING EXERCISES 366 Assurance of Learning Exercise 10A: Developing an Organizational Chart for Accenture pic 366 Assurance of Learning Exercise 10B: Assessing Accenture's Philanthrophy Efforts 367 Assurance of Learning Exercise 10C: Revising adidas AG's Organizational Chart 367 Assurance of Learning Exercise 10D: Exploring Objectives 367 Assurance of Learning Exercise 10E: Understanding My University's Culture 368

Chapter 11 Strategy Monitoring 371 The Nature of Strategy Evaluation 372

BHP BILLITON: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 372 The Process of Evaluating Strategies 375

A Strategy-Evaluation Framework 376 Reviewing Bases of Strategy 376 ■ Measuring Organizational Performance 378 ■ Taking Corrective Actions 379

The Balanced Scorecard 381 Published Sources of Strategy-Evaluation Information 382 Characteristics of an Effective Evaluation System 383 Contingency Planning 384 Auditing 385 21st-Century Challenges in Strategic Management 386

The Art or Science Issue 386 ■ The Visible or Hidden Issue 386 ■ The Top-Down or Bottom-Up Approach 387

Special Note to Students 387 ASSURANCE OF LEARNING EXERCISES 390 Assurance of Learning Exercise 11 A: Evaluating BHP Billiton's Strategies 390 Assurance of Learning Exercise 11B: Preparing a Strategy-Evaluation Report for adidas AG 390 Assurance of Learning Exercise 11C: Preparing a Strategy-Evaluation Report for adidas AG 390 Assurance of Learning Exercise 11D: Evaluate My University's Strategies 390

Appendix 1 Guidelines for Case Analysis 393 What Is a Strategic-Management Case? 394 Guidelines for Preparing Case Analyses 394

The Need for Practicality 394 ■ The Need for Justification 394 ■ The Need for Realism 394 ■ The Need for Specificity 394 ■ The Need for Originality 395 ■ The Need to Contribute 395

Preparing a Case for Class Discussion 395 The Case Method versus Lecture Approach 395

The Cross-Examination 396 Preparing a Written Case Analysis 396

The Executive Summary 396 ■ The Comprehensive Written Analysis 396 ■ Steps in Preparing a Comprehensive Written Analysis 397

Making an Oral Presentation 397 Organizing the Presentation 397 ■ Controlling Your Voice 398 ■ Managing Body Language 398 ■ Speaking from Notes 398 ■ Constructing Visual Aids 398 ■ Answering Questions 398

Tips for Success in Case Analysis 399 Content Tips 399 ■ Process Tips 400 ■ Sample Case Analysis Outline 400 STEPS IN PRESENTING AN ORAL CASE ANALYSIS 401 Oral Presentation— Step 1: Introduction (2 minutes) 401 Oral Presentation—Step 2: Mission and Vision (4 minutes) 401 Oral Presentation—Step 3: Internal Assessment (8 minutes) 401 Oral Presentation—Step 4: External Assessment (8 minutes) 402 Oral Presentation—Step 5: Strategy Formulation (14 minutes) 402 Oral Presentation—Step 6: Strategy Implementation (8 minutes) 402 Oral Presentation—Step 7: Strategy Evaluation (2 minutes) 403 Oral Presentation—Step 8: Conclusion (4 minutes) 403

Glossary 662

Name Index 673

Subject Index 677

Cases Service Firms

1ẻ Ryanair 406 2. The Emirates Group 418

3. UPS 427 4. Amazon 438

5ế Netflix 450

6. Gap 462 7. Walt Disney 474 8. Staples Inc. 484

9. Office Depot Inc. 496 10. Domino's Pizza Inc. 505 11 ề Royal Caribbean Cruises 515

12. Carnival Corp. 524 13. JPMorgan Chase & Co. 535

Manufacturing Firms

14. Proctor and Gamble 546

15. Avon Products Inc. 556

16. Revlon 564

17. L'Oréal 575

18. Dr Pepper Snapple Group 583

19. The Coca-Cola Company 593

20. Starbucks 602

21. Pearson PLC 610

22. BMW 619

23ế Apple 626

24. Microsoft Corp. 636

25. Lenovo 645

26. Netgear 654

11

Welcome Forest, and Thank You:

• For joining me as a coauthor on this 15th edition • For preparing the Case Instructor's Manual for this textbook and five previous editions • For publishing many strategic management papers and articles with me and other authors • For your wise strategic-management counsel over many years as this textbook has evolved • For assisting students for many years through the Strategy Club (www.strategyclub.com) that now also

offers your free Excel Student Template • For developing an outstanding Case MyLab testing feature for this edition • For preparing the Chapter Instructor's Manual for this edition

http://www.strategyclub.com
Preface

Why Adopt This Text? This textbook is trusted around the world to provide managers the latest skills and concepts needed to effectively formulate and efficiently implement a strategic plan— a game plan, if you will— that can lead to sustainable competitive advantage for any type of business. The Association to Advance Collegiate Schools of Business (AACSB) increasingly advocates a more skills-oriented. practical approach in business books, which the David text provides, rather than a theory-based approach. This textbook meets all AACSB-International guidelines for the strategic-managcment course at both the graduate and undergraduate levels, and previ­ ous editions have been used at more than 500 colleges and universities around the world. We believe you will find this edition to be the best textbook available for communicating both the excitement and value of strategic management. Concise and exceptionally well orga­ nized. this text is now published in English. Chinese. Spanish, Thai. German, Japanese, Farsi, Indonesian, Indian, and Arabic. A version in Russian is being negotiated. Not only universi­ ties, but also hundreds of companies, organizations, and governmental bodies use this text as a management guide.

In contrast to many other strategic-management textbooks, the David book provides:

1. An effective process for developing a clear strategic plan, rather than simply presenting seminal theories in strategy, and

2. An effective model or flow for actually doing strategic planning.

Eric N. Sims, a professor w'ho in 2013 adopted the David book for his classes at Sonoma State University in California, says:

“I have read many strategy books. I am going to use the David book. What I like— to steal a line from Alabama coach Nick Saban— is your book teaches ‘a process.’ I believe at the end of your book, you can actually help a company do strategic planning. In contrast, the other books teach a number of near and far concepts related to strategy.”

A recent reviewer of this textbook says:

“One thing I admire most about the David text is that it follows the fundamental sequence of strategy formulation, implementation, and evaluation. There is a basic flow from vision/ mission to internal/external environmental scanning, to strategy development, selection, implementation, and evaluation. This has been, and continues to be, a hallmark of the David text. Many other strategy texts are more disjointed in their presentation, and thus confusing to the student, especially at the undergraduate level.”

New Chapter Features 1. The fifteenth edition is 40 percent new and improved from the prior edition. 2. Chapter 2, Outside-USA Strategic Planning, is expanded 30 percent with new coverage of

cultural and conceptual strategic-management differences across countries. Doing business globally has become a necessity in most industries. Nearly all strategic decisions today are affected by global issues and concerns.

3. Chapter 3, Ethics/Social Responsibility/Sustainability, is expanded 30 percent, provid­ ing extensive new coverage of ethics, workplace romance, and sustainability. This text emphasizes that “good ethics is good business.” Unique to strategic-management texts, the sustainability discussion is strengthened in this edition to promote and encourage firms to conduct operations in an environmentally sound manner. Respect for the natural environment has become an important concern for consumers, companies, society, and AACSB-International.

15

16 PREFACE

4. An updated Cohesion Case on adidas AG is provided, adidas is one of the most suc­ cessful, well-known, and best-managed global companies in the world. Students apply strategy concepts to adidas at the end of each chapter through brand new Assurance of Learning Exercises.

5. New or improved Assurance of Learning Exercises appear at the end of all chapters to apply chapter concepts. The exercises prepare students for strategic-management case analysis.

6. A new boxed insert at the beginning of each chapter showcases a company doing strategic management exceptionally well.

7. There are all new examples in all the chapters. 8. There is new narrative on strategic-management theory and concepts in every chapter. 9. On average, 10 new review questions are provided at the end of each chapter.

10. New color photographs bring this new edition to life and illustrate “the practice of strategic management.”

11. All current readings at the end of all chapters are new, as new research and theories of sem­ inal thinkers arc included. However, practical aspects of strategic management are center stage and the trademark of this text.

12. For the first time ever, the Excel Student Template is provided free at www.strategyclub. com to all students who use this textbook. Widely used for more than a decade by both students and businesses, and improved dramatically just for this edition, the free Excel Student Template enables students to more easily apply strategic-management concepts while engaging in assurance of learning exercises or case analysis. Using the Template, students can devote more time to applying strategy concepts and less time to the mechanics of formatting strategy matrices, tables, and PowerPoints.

13. Every sentence and paragraph has been scrutinized, modified, clarified, deleted, stream­ lined, updated, and improved to enhance the content and caliber of presentation.

New Case Features 1. All 26 cases are on student-friendly, well-known companies, thus exciting and effective for

applying strategy concepts; 2. All 26 cases are undisguised, featuring real organizations in real industries using real

names (nothing is fictitious in any case); 3. All 26 cases feature an organization and industry undergoing strategic change; 4. All 26 cases provide ample, excellent quantitative information, so students can prepare a

defensible strategic plan; 5. All 26 cases are written in a lively, concise writing style that captures the reader's

interest; 6. All 26 cases are “comprehensive,” focusing on multiple business functions, rather than a

single problem or issue; 7. All 26 cases include financial statements for the firm, so students can show the impact of a

proposed strategic plan; 8. All 26 cases provide an organizational chart and a vision and mission statement—

important strategy concepts; 9. Certain cases are supported by an excellent teacher’s note, provided to professors in a new

Case Instructor's Manual; 10. All 26 cases have been class-tested to ensure that they are interesting, challenging, and

effective for illustrating strategy concepts; 11. The 26 case companies provide an excellent mix of firms performing really well and some

performing very poorly, including service-based and manufacturing-based firms, and a good mix of small cap to large cap firms.

12. All 26 case companies have excellent websites in English that provide detailed financial information, history, sustainability statements, ethics statements, and press releases, so students can easily access current information to apply strategy concepts.

http://www.strategyclub
PREFACE 17

13. Certain cases are written by the authors, to ensure maximum control and effectiveness in applying strategic-management concepts through case analysis.

14. A Case MyLab testing feature (for 12 cases) has been carefully developed and designed specifically to apply strategic-management concepts through case analysis. The Case MyLab product assures that the cases apply the concepts, simplifies grading for professors, and achieves AACSB’s key assurance of learning objectives— even in purely or partly on­ line class settings. The new Case MyLab testing feature enables professors to use the cases to monitor student learning of strategy concepts, as revealed in the Concepts by Cases Matrix given below.

Time-Tested Features 1. This text meets all AACSB-International guidelines that support a practitioner orientation

rather than a theory/research approach. This text offers a skills-oriented process for devel­ oping a vision and mission statement; performing an external audit; conducting an internal assessment; and formulating, implementing, and evaluating strategies.

2. The author’s writing style is concise, conversational, interesting, logical, lively, and supported by numerous current examples.

3. A simple, integrative strategic-management model appears in all chapters and on the inside front cover. The model is widely used by strategic planning consultants and companies worldwide.

4. An exciting, updated Cohesion Case on adidas AG follows Chapter 1 and is revisited at the end of each chapter, allowing students to apply strategic-management concepts and tech­ niques to a real company as chapter material is covered, thus preparing students for case analysis as the course evolves.

5. End-of-chapter Assurance of Learning Exercises apply chapter concepts and techniques in a challenging, meaningful, and enjoyable manner.

6. There is excellent pedagogy, including learning objectives opening each chapter and key terms, current readings, discussion questions, and assurance of learning exercises ending each chapter.

7. There is excellent coverage of strategy formulation issues, such as business ethics, global versus domestic operations, vision and mission, matrix analysis, partnering, joint ventur­ ing, competitive analysis, value chain analysis, governance, and matrices for assimilating and evaluating information.

8. There is excellent coverage of strategy implementation issues such as corporate cul­ ture, organizational structure, outsourcing, marketing concepts, financial analysis, business ethics, whistleblowing, bribery, pay and performance linkages, and workplace romance.

9. A systematic, analytical “process” is presented that includes nine matrices; 1FEM, EFEM, CPM. SWOT, BCG, IE, GRAND. SPACE, and QSPM.

10. Both the chapter material and case material is published in four colors. 11. For the chapter material, an outstanding ancillary package includes a comprehensive

Instructor’s Manual, Test Bank, TestGen, and Chapter PowerPoints.

Instructor Supplements At www.pearsonglobaleditions.com /david, instructors can access a variety of resources that accompany this new edition. Registration is easy, please contact your Pearson Sales Representative who will provide you with the access information you need.

If you ever need assistance, our dedicated technical support team is ready to help with the media supplements that accompany this text. Visit http://247.pearsoned.coni/ for answers to frequently asked questions and toll-free user support phone numbers.

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18 PREFACE

The following supplements are available to adopting instructors:

• Chapter Instructor's Manual • Case Instructor’s Manual • Chapter PowerPoints • Test Bank • TestGen

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20 PREFACE

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Medical Careers Institute/Newport News

Mercer University— Atlanta

Mercer University— Macon

Miami-Dade College— Homestead

Miami-Dade College— Kendal

Miami-Dade College— North

M i am i - Dade Col lege—Wolf son

Michigan State University

Mid-America Christian

Millersville University

Mississippi University for Women

Morgan State University

Morrison College of Reno

Mount Marty College— South Dakota

Mount Mercy University Mount Wachusett Community College Mt. Hood Community College

Ml. Vernon Nazarene MTI Western Business College

Muhlenberg College Murray State University

New England College

New Mexico State University

New York University North Carolina Wesleyan College

North Central College

North Central State College

Northwest Arkansas Community College

Northwestern College

Northwood University— Cedar Hill

Notre Dame of Maryland University

Nyack College

Oakland University

Ohio Dominican University

Oklahoma Christian University

Oklahoma State University

Olivet College Oral Roberts University

Pace University— Pleasantville

Park University

Penn State University— Abington

Penn State University— Hazleton

Pensacola State College

Philadelphia University

Point Park University Prince George's Community College

Queens College of CUNY

Richard Stockton University

Rider University

Roger Williams University

Saint Edwards University

Saint Leo University

Saint Mary’s College

Saint Mary’s College— Indiana

Saint Xavier University

San Antonio College

Santa Fe College Savannah State University

PREFACE 23

Shippcnsburg University

Siena Heights University

Southern Nazarene University

Southern New Hampshire University

Southern Oregon University

Southern University— Baton Rouge

Southern Wesleyan University

Southwest Baptist University

Southwest University

St. Bonaventure University

St. Francis University St. Louis University

St. Martins University Sterling College

Stevenson University

Slraycr University— DC Texas A&M University— Commerce Texas A&M University—Texarkana

Texas A&M— San Antonio

Texas Tech University

The College of St. Rose The Masters College

Tri-County Technical College

Trinity Christian College

Troy State University

Troy University— Dothan

Troy University— Main Campus

Troy University—Montgomery

University Alabama— Birmingham

University Maryland— College Park University of Arkansas— Fayetteville

University of Findlay University of Houston—Clearlake

University of Louisiana at Monroe

University of Maine at Augusta

University of Maine— Fort Kent

University of Maryland

University of Massachusetts— Boston Harbor University of Massachusetts— Dartmouth

University of Miami

University of Michigan— Flint

University of Minnesota— Crookston

University of Mobile

University of Montevallo

University of Nebraska— Omaha

University of Nevada Las Vegas

PREFACE

University of New Orleans

University of North Texas

University of North Texas— Dallas

University of Pikeville

University of Sioux Falls

University of South Florida

University of St. Joseph

University of Tampa

University of Texas—Pan American

University of The Incarnate Word

University of Toledo

Upper Iowa University

Valley City State University

Virginia Community College System

Virginia State University

Virginia Tech

Wagner College

Wake Forest University

Washington University

Webber International University

Webster University

West Chester University

West Liberty University

West Valley College

West Virginia Wesleyan College

Western Connecticut State University

Western Kentucky University

Western Michigan University

Western Washington University

William Jewell College

W'illiams Baptist College

Winona State University

Winston-Salem State University

WSU Vancouver

Sample of Countries Outside the USA Where This Textbook is Very Widely Used Mexico, China, Japan, Australia, Singapore, Canada. Indonesia, Pakistan, Iran. Kenya, Congo. Hong Kong, India, England, Argentina, Equador, Zambia, Guam, Italy, Cyprus, Colombia, Philippines, South Africa, Peru. Turkey, Malaysia, and Egypt

Acknowledgments

Many persons have contributed time, energy, ideas, and suggestions for improving this text over 15 editions. The strength of this text is largely attributed to the collective wisdom, work, and experiences of strategic-management professors, researchers, students, and practitioners. Names of particular individuals whose published research is referenced in this edition are listed alphabetically in the Name Index. To all individuals involved in making this text so popular and successful, we are indebted and thankful.

Many special persons and reviewers contributed valuable material and suggestions for this edition. We would like to thank our colleagues and friends at Auburn University. Mississippi State University, East Carolina University, the University of South Carolina, Campbell University, the University of North Carolina at Pembroke, and Francis Marion University. We have taught strategic management at all these universities. Scores of students and professors at these schools helped shape the development of this text. Many thanks go to the following reviewers whose comments shaped the fourteenth and fifteenth editions:

Moses Acquaah, University of North Carolina at Greensboro Gary L. Arbogast, Glenville State College

Charles M. Byles. Virginia Commonwealth University Charles J. Capps III. Sam Houston State University

Neil Dworkin, Western Connecticut State University

Jacalyn M. Florn. University of Toledo

John Frankenstein. Brooklyn College/City University of New York

Bill W. Godair, Landmark College, Community College of Vermont

Carol Jacobson, Purdue University

Susan M. Jensen, University of Nebraska at Kearney

Dmitry Khanin, California State University at Fullerton

Thomas E. Kulik, Washington University at St. Louis

Jerrold K. Leong, Oklahoma State University

Trina Lynch-Jackson, Indiana University

Elouise Mintz, Saint Louis University

Raza Mir, William Paterson University

Gerry N. Muuka, Murray State University

Braimoh Oseghale, Fairleigh Dickinson University

Lori Radulovich, Baldwin-W'allace College

Thomas W. Sharkey, University of Toledo

Frederick J. Slack, Indiana University of Pennsylvania Daniel Slater, Union University

Demetri Tsanacas, Ferrum College

Jill Lynn Vihtelic, Saint M ary’s College

Michael W. Wakefield, Colorado State University-Pueblo Don Wicker, Brazosport College

We want to thank you, the reader, for investing the time and effort to read and study this text. It will help you formulate, implement, and evaluate strategies for any organization with which you become associated. We hope you come to share our enthusiasm for the rich subject area of strategic management and for the systematic learning approach taken in this text. We want

ACKNOW LEDGM ENTS

to welcome and invite your suggestions, ideas, thoughts, comments, and questions regarding any part of this text or the ancillary materials. Please contact Dr. Fred R. David at the following e-mail freddavid9@gmail.com, or write him at the School of Business, Francis Marion University, Florence, SC 29501. We sincerely appreciate and need your input to continually improve this text in future editions. Your willingness to draw my attention to specific errors or deficiencies in coverage or exposition will especially be appreciated.

Thank you for using this text. Fred R. David and Forest R. David

Pearson would also like to thank and acknowledge Ivan Ninov, The Emirates Academy of Hospitality Management, and Aykut Arslan, Haliç Üniversitesi, for reviewing the Global Edition.

mailto:freddavid9@gmail.com
About the Authors

Fred R. and Forest R. David, a father-son team, have published more than 50 journal articles in outlets such as Academy o f Management Review, Academy o f Management Executive, Journal o f Applied Psychology, Long Range Planning, International Journal o f Management, Journal o f Business Strategy, and Advanced Management Journal. Fred and Forest’s February 2011 Business Horizons article titled “What are Business Schools Doing for Business Today?” is changing the way many business schools view their curricula.

Fred and Forest are coauthors of Strategic Management: Concepts and Cases that has been on a two-year revision cycle since 1986 when the first edi­ tion was published. This text is among the best-selling strategic-management textbooks in the world. This text has led the field of strategic management for more than two decades in providing an applications, practitioner-approach to the discipline. More than 500 colleges and universities have used this textbook Fred R. David over the years, including Harvard University, Duke University, Carnegie- Mellon University, Johns Hopkins University, the University of Maryland, University of North Carolina, University of Georgia, San Francisco State University, University of South Carolina, Wake Forest University, and count­ less universities in Japan, China, Australia, Mexico, and the Middle East. For six editions of this book. Forest has been sole author of the Case Instructor's Manual, having developed extensive teachers’ notes (solutions) for all the cases. Forest is author of the Case MyLab ancillary and the free Excel Student Template that accompany this fifteenth edition.

Fred and Forest actively assist businesses globally in doing strategic planning. They have written and published more than 100 strategic manage­ ment cases. Fred and Forest were recently keynote speakers at the Pearson International Forum in Monterrey. Mexico. With a PhD in Management from the University of South Carolina. Fred is the TranSouth Professor of Strategic Planning at Francis Marion University (FMU) in Florence, South Carolina. Forest has taught strategic-management courses at Mississippi State University, Campbell University, and FMU.

Forest R. David

27

The Case Rationale Case analysis remains the primary learning vehicle used in most strategic-management classes, for five important reasons:

1. Analyzing cases gives students the opportunity to work in teams to evaluate the internal operations and external issues facing various organizations and to craft strategies that can lead these firms to success. Working in teams gives students practical experience solving problems as part of a group. In the business world, important decisions are generally made within groups; strategic-management students learn to deal with overly aggressive group members and also timid, noncontributing group members. This experience is valuable because strategic-management students are near graduation and soon enter the working world full-time.

2. Analyzing cases enables students to improve their oral and written communication skills as well as their analytical and interpersonal skills by proposing and defending particular courses of action for the case companies.

3. Analyzing cases allows students to view a company, its competitors, and its industry con­ currently, thus simulating the complex business world. Through case analysis, students learn how to apply concepts, evaluate situations, formulate strategies, and resolve imple­ mentation problems.

4 . Analyzing cases allows students to apply concepts learned in many business courses. Students gain experience dealing with a wide range of organizational problems that impact all the business functions.

5. Analyzing cases gives students practice in applying concepts, evaluating situations, formu­ lating a “game plan,” and resolving implementation problems in a variety of business and industry settings.

Case MyLab Testing Feature New to this edition is an enhanced MyLab with some new cases that include gradeable outcomes. This feature assures that the cases are excellent for testing student learning of the key strategic-management concepts, thus serving as a great mechanism for professors to achieve AACSB's Assurance of Learning Objectives. This new testing feature simplifies grading for professors in both traditional and online class settings.

The Case MyLab testing feature includes multiple choice questions for some of the cases, comprised of Basic questions that simply test whether the student read the case before class, and Applied questions that test the student’s ability to apply various strategic-management concepts. In addition, there arc Discussion questions per case. This testing feature enables professors to determine, before class if desired, whether students 1) read the case in Basic terms, and/or 2) are able to Apply strategy concepts to resolve issues in the case. For example, the MyLab case Basic question may be: In what country is BMW headquartered? Whereas, a MyLab case Applied question may be: What are three aspects of the organizational chart given in the BMW case that violate strategic-management guidelines? The Answers to these questions can be found in the Case Instructor's Manual.

30 CONCEPTS BY CASES MATRIX

Case Information Matrix

Case Company Stock Symbol Headquarters URL

Number of Employees

Financials (US$, millions)

Case Year

Profit Revenue %

C o h e s io n C a s e adidas Group ADS Her/.ogenaurach. Germany www.adidas.com 46,300 1,599 19,558 8.2' 2013

S e rv ice F ir m s Ryanair Holdings, pic RYAAY Dublin, Ireland www.ryanair.ie 7,200 413 4,043 10.2 2011

The Emirates Group n/a Garhoud. Dubai. UAE www.theemiratesgroup.com 67,000 986 20,934 4.7" 2013

United Parcel Service, Inc. UPS Atlanta. GA. USA www.ups.com 399,000 869 12.124 7.2 2013

Amazon.com, Inc. AMZN Seattle, WA, USA ww w.amazon .com 33,700 1,152 34.204 3.3 2011

Netflix. Inc. NFLX Los Gatos, CA, USA www.netflix.com 2,500 160 2,162 7.4 2011

Gap Inc. GPS San Fransisco, CA. USA www.gapinc.com 135,000 1,102 14.197 7.7 2011

Walt Disney Company DIS Burbank, CA, USA www.disney.com 166.000 6,173 42,278 14.6 2013

Staples, Inc. SPLS Farmingham, MA. USA www.staples.com 54,100 881 25,545 3.4 2011

Office Depot Inc. ODP Boca Raton. FL, USA www.officcdepot.com 41,000 34 11.633 0.3 2011

Domino’s Pizza, Inc. DPZ Ann Arbor. MI. USA www.dominos.com 10,000 112 1,678 6.7 2013

Royal Caribbean RCL Miami, FL. USA www.royalcaribbean.com 57,000 547 6,752 8.1 2011 Cruises Ltd.

Carnival Corporation CCL Miami, FL, USA www.carnivalcorp.com 85,200 1,978 14.469 13.6 2011 & pic

J PM organ Chase & Co. JPM New York, NY, USA www.jpmorganchase.com 240.000 21,284 97,031 21.9 2013

http://www.adidas.com
http://www.ryanair.ie
http://www.theemiratesgroup.com
http://www.ups.com
http://www.netflix.com
http://www.gapinc.com
http://www.disney.com
http://www.staples.com
http://www.officcdepot.com
http://www.dominos.com
http://www.royalcaribbean.com
http://www.carnivalcorp.com
http://www.jpmorganchase.com
CONCEPTS BY CASES MATRIX 31

Case Company Stock Symbol Headquarters URL

Number of Employees

Financials (US$, millions)

Case Year

Profit Revenue %

M a n u f a c t u r in g F ir m s Proctor & Gamble Company

PC. Cincinnati. OH. USA www.pg.com 127,(XX) 12,736 78,938 16.1 2011

Avon Products, Inc. AVP New York, NY, USA www.avoncompany.coni 39,100 314 10,717 2.9 2013 Revlon. Inc. REV New York, NY, USA www.revlon.com 4,800 327 1,321 24.7 2011 L’Oreal SA LRLCF Clichy. France www.loreal.com 72,600 2.867 22,462 12.8 2013 Dr Pepper Snapple Group Inc.

DPS Plano, TX, USA www'.drpeppersnapple.com 19,000 528 5.636 9.4 2011

Coca-Cola Company KO Atlanta. GA, USA www.coca-colacompany.com 5,200 38 1.442 4.3 2011 Starbucks Corporation SBUX Seattle, WA, USA www.starbucks.com 137,000 945 10,707 8.8 2011 Pearson PLC PSORF London. UK www.pearson.com 37.000 824 8,094 10.2"* 2013 Bayerische Motoren Werke (BMW) Group

BMW Munich, Germany www.bmwgroup.com 105.000 4.226 79,386 5.3’ 2013

Apple, Inc. AAPL Cupertino, CA, USA www.apple.com 46.600 14,013 65,225 21.5 2011 Microsoft Corporation MSFT Redmond, WA, USA www'.microsoft.com 94.000 16,978 73,723 23.0 2013 Lenovo Group Limited LNVGY Beijing, China w'w'w.lenovo.com 27,000 631 33,873 1.9 2013 Netgcar. Inc. NTGR San Jose, CA, USA www.netgear.com 850 86 1,271 6.8 2013

'Originally reported in EUR - converted at rate of 1EUR = 1.35USD "Originully reported in AED - converted at rate of 1AED = 0.27USD "'Originally reported in GBP - converted at rate of 1GBP = 1.6USD

http://www.pg.com
http://www.avoncompany.coni
http://www.revlon.com
http://www.loreal.com
http://www.coca-colacompany.com
http://www.starbucks.com
http://www.pearson.com
http://www.bmwgroup.com
http://www.apple.com
http://www.netgear.com
32 CONCEPTS BY CASES MATRIX

Topical Content Areas

1 2 3 4 5 6 7 8 9 10 11 12 13 14

C o h e s io n C a s e

adidas Group Y N Y Y N Y N N Y Y N N Y Y

S e r v ic e F ir m s

Ryanair Y Y Y Y Y Y Y Y Y Y Y N Y Y

The Emirates Group Y Y Y Y N N N N Y N N N Y Y

UPS Y Y Y Y Y Y Y Y Y N Y Y N N

Amazon Y Y Y Y Y Y Y Y Y N N Y N N

Netflix Y Y Y N Y Y Y Y Y N N Y N N

Gap Y Y Y N Y Y Y Y Y N N Y N N

Walt Disney Y Y Y Y N N N Y Y N N N Y N

Staples Inc. Y Y Y Y Y Y Y Y Y N N N Y N

Office Depot Inc. Y Y Y Y Y Y Y Y Y Y Y N Y N

Domino’s Pizza Inc. Y Y Y Y Y N N N Y N N Y N N

Royal Caribbean Cruises Y Y Y Y Y Y Y Y Y N N Y N N

Carnival Corp. Y Y Y Y Y Y Y Y Y N N Y N N

JPMorgan Chase & Co. Y Y Y Y Y N Y Y Y Y N Y N N

CONCEPTS BY CASES MATRIX 33

M a n u f a c t u r in g F ir m s

Proctor and Gamble Y Y Y Y Y N Y Y Y N Y N Y N

Avon Products Inc. Y Y Y Y N Y N N Y Y Y Y N N

Revlon Y Y Y Y N N Y Y Y N N N Y N

L’Ore'al Y Y Y N N Y N N Y N N Y N Y

Dr Pepper Snapple Group Y Y Y N Y Y Y Y Y N Y N Y N

The Coca-Cola Company Y Y Y Y Y Y Y Y Y N N Y N N

Starbucks Y Y Y Y Y Y Y Y Y N N N Y N

Pearson PLC Y Y Y N N N N Y Y N Y Y N Y

BMW Y Y Y N N N N N Y N N Y N Y

Apple Y Y Y Y Y N N Y Y N N N Y N

Microsoft Corp. Y Y Y Y N N N N Y N Y Y N N

Lenovo Y Y Y N Y N Y Y Y N N Y N Y

Netgear Y Y Y N N N N N Y N Y Y N N

1. Financial Statements Provided? 2. Organizational Chart Provided? 3. Does Company Do Business Outside the United States? 4. Is a Vision or Mission Statement Provided? 5. Business Ethics Issues Included? 6. Sustainability Issues Included? 7. Strategy Formulation Emphasis? 8. Strategy Implementation Emphasis? 9. By-Segment Financial Data Included?

10. Firm Has Declining Revenues? 11. Firm Has Declining Net Income? 12. Case Company Appears in Text for First Time? 13. Case Company Appeared in Prior Edition and Updated Now? 14. Firm Headquartered Outside the United States?

STRATEGIC MANAGEMENT ’ Concepts and Cases A COM PETITIVE ADVANTAGE APPRO ACH

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MyManagementLab® Improve Your Grade! Over 10 million students improved their results using the Pearson MyLabs. Visit m ym anag em entlab .co m for simulations, tutorials, and end-of-chapter problems.

36

Strategie Management Essentials C H A P T E R O B J E C T IV E S After studying this chapter, you should be able to do the following:

1. Discuss the nature and role of a chief strategy officer (CSO). 2. Describe the strategic-management process. 3. Explain the need for integrating analysis and intuition in strategic management. 4 . Define and give examples of key terms in strategic management. 5. Discuss the nature of strategy formulation, implementation, and evaluation

activities.

6. Describe the benefits of good strategic management.

7. Discuss the relevance of Sun Tzu's The Art of War to strategic management. 8. Discuss how a firm may achieve sustained competitive advantage.

A S S U R A N C E O F L E A R N IN G EXERCISES The following exercises are found at the end of this chapter.

Assess Singapore Airline’s Most Recent Quarterly Performance Data

Gathering Strategy Information on adidas AG

Getting Familiar with the Free Excel Student Template Evaluating An Oral Student Presentation

Strategic Planning at Nestle

Interviewing Local Strategists

EX ER C ISE 1A

EX ER C ISE 1B

EX ER C ISE 1C

EX ER C ISE 1 D

EX ER C ISE 1 E

EX ER C ISE 1F

38 CHAPTER 1 • STRATEGIC M ANAGEM ENT ESSENTIALS

When CEOs from the big three U.S. automakers— Ford, General Motors (GM), and Chrysler—showed up a few years ago without a clear strategic plan to ask congressional leaders for bailout monies, they were sent home w'ith instructions to develop a clear strategic plan for the future. Austan Goolsbce, one of President Barack Obama’s

top economic advisers, said, “Asking for a bailout without a convincing business plan was crazy.” Goolsbee also said, “If the three auto CEOs need a bridge, it’s got to be a bridge to somewhere, not a bridge to nowhere.” 1 This textbook gives the instructions on how to develop a clear strategic plan—a bridge to somewhere rather than nowhere.

This chapter provides an overview of strategic management. It introduces a practical, integrative model of the strategic-management process; it defines basic activities and terms in strategic management.

This chapter also introduces the notion of boxed inserts. A boxed insert at the beginning of each chapter reveals how' some firms are doing really well competing in a growing economy. The firms showcased are utilizing excellent strategic management to prosper as their rivals weaken. Each boxed insert examines the strategics of firms doing great amid rising consumer demand and intense price competition. The first company featured for excellent performance is the 5-star airline— Singapore Airlines Limited (SIA).

adidas AG is featured as the new Cohesion Case because it is a well-known global firm undergoing strategic change and is well managed. By working through the adidas AG-related Assurance of Learning Exercises at the end of each chapter, you will be well prepared to develop an effective strategic plan for any company assigned to you this semester. The end- of-chapter exercises apply chapter tools and concepts.

EXCELLENT STRATEGIC MANAGEMENT SHOWCASED

Singapore Airlines Singapore Airlines Limited (SIA) is the 5-star airline of Singapore. Singapore Airlines operates trans-Pacific flights, including the world's longest non-stop commercial flights from Singapore to Los Angeles and Newark on the Airbus A340-500. In late 2013, the company ceased offering those two long flights although Los Angeles is still served via Tokyo-Narita. The luxury airline has a strong presence in Asia. A mem­ ber of the Star Alliance, Singapore Airlines carried around 18 million passengers in 2012, up from 16.9 million in 2011.

Singapore Airlines is very well managed strategically. The company has diversified airline-related businesses, such as aircraft handling and engineering, and owns SilkAir that manages regional flights to secondary cities with smaller capacity requirements. Singapore Airlines operates passenger sen/ices to more than 60 cities in over 30 countries around the world. Within Asia, passengers can connect to over 30 cities served by SilkAir. The company is the official sponsor of Singapore national football team and has been marketing Singapore Girl as central image to the airline's brand. Fortune in 2013 ranked Singapore Airlines as the 31st most admired company in the world outside the United States. In December 2012, Singapore Airlines sold its 49 percent stake in Virgin Atlantic for US$360 million.

In April 2012, Singapore Airlines phased out the 747 from its fleet after 40 years of service. A final round-trip commemorative flight was operated from Singapore to Hong Kong. In December 2012, Singapore Airlines began using the A380 to San Francisco via Hong Kong as a win­ ter seasonal service, but still uses a Boeing 777-300ER for the remainder

of the year. In May 2013, S i n g a p o r e Airlines made a commitment to order 30 Boeing 787-1 OX to be delivered in 2018-2019 timeframe. In September 2013, Singapore Airlines began using the Airbus A380 on selected flights to and from Shanghai, China.

Singapore Airlines' passenger carriage (measured in revenue pas­ senger kilometers) grew 8.6 percent in August 2013 year-on-year along with a 3.1 percent increase in capacity (measured in available seat kilometers). The company's passenger load factor (PLF) improved by 4.1 percentage points to 82.4 percent as the number of passengers carried in August 2013 increased by 11.7 percent to 1.7 million. Load factors improved across all regions, bolstered by strong leisure travel demand during the Lebaran/Hari Raya holidays, coupled with returning summer traffic. Traffic to West Asia and Africa also saw improvements.

SilkAir's systemwide passenger carriage in August 2013 increased 10.7 percent year-on-year along with a 13.4 percent growth in capacity. For that month, SilkAir's PLF was 1.8 percentage points lower at 71.7 percent. Singapore Airlines' cargo traffic (measured in freight- tonne-kilometres) was 5.7 percent lower in August 2013 year-on-year, while cargo capacity was reduced by 5.0 percent.

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 39

What Is Strategic Management? Once there were two company presidents who competed in the same industry. These two presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into the woods. Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled. Instantly, the first president took off his knapsack and got out a pair of jogging shoes. The second president said, “Hey. you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you!” This story captures the notion of strategic management, which is to achieve and maintain competitive advantage.

Defining Strategic Management Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. As this definition implies, strategic management focuses on integrating management, marketing, finance and accounting, production and operations, research and development, and information systems to achieve organizational success. The term strategic management in this text is used synonymously with the term strategic planning. The latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation and strategic planning referring only to strategy formulation. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today.

The term strategic planning originated in the 1950s and was popular between the mid-1960s and the mid-1970s. During these years, strategic planning was widely believed to be the answer for all problems. At the time, much of corporate America was “obsessed” with strate­ gic planning. Following that boom, however, strategic planning was cast aside during the 1980s as various planning models did not yield higher returns. The 1990s, however, brought the revival of strategic planning, and the process is widely practiced today in the business world. Many companies today have a chief strategy officer (CSO).

A strategic plan is, in essence, a company’s game plan. Just as a football team needs a good game plan to have a chance for success, a company must have a good strategic plan to compete successfully. Profit margins among firms in most industries are so slim that there is little room for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations in lieu of other, “less desirable” courses of action.

The term strategic management is used at many colleges and universities as the title for the capstone course in business administration. This course integrates material from all business courses, and, in addition, introduces new strategic management concepts and techniques being widely used by firms in strategic planning.

Stages of Strategic Management The strategic-management process consists o f three stages: strategy formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue. Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, whether to expand operations or diversify, whether to enter international markets, whether to merge or form a joint venture, and how to avoid a hostile takeover.

Because no organization has unlimited resources, strategists must decide which alternative strategies will benefit the firm most. Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period of time. Strategies determine long-term competitive advantages. For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization. Top managers have the best perspective to understand fully the ramifications of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation.

40 CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS

Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and using information systems, and linking employee compensation to organizational performance.

Strategy implementation often is called the “action stage” of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strategies into action. Often considered to be the most difficult stage in strategic management, strategy implementation requires personal discipline, commitment, and sacrifice. Successful strategy implementation hinges on managers’ ability to motivate employees, which is more an arL than a science. Strategies formulated but not implemented serve no useful purpose.

Interpersonal skills are especially critical for successful strategy implementation. Strategy-implementation activities affect all employees and managers in an organization. Every division and department must decide on answers to questions such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?” The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives.

Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well: strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because external and internal factors are constantly changing. Three fundamental strategy-evaluation activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complaccnt organizations experience demise.

Formulation, implementation, and evaluation of strategy activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functional. By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels. Nevertheless, managers and employees at these two levels should be actively involved in strategic-management activities.

Peter Drucker says the prime task of strategic management is thinking through the overall mission of a business:

that is, of asking the question, “What is our business?” This leads to the setting of objectives, the development of strategies, and the making of today’s decisions for tomorrow’s results. This clearly must be done by a part of the organization that can see the entire business; that can balance objectives and the needs of today against the needs of tomorrow; and that can allocate resources of men and money to key results.“

Integrating Intuition and Analysis Edward Deming once said, “In God we trust. All others bring data.” The strategic-management process can be described as an objective, logical, systematic approach for making major decisions in an organization. It attempts to organize qualitative and quantitative information in a way that allows effective decisions to be made under conditions of uncertainty. Yet strategic management is not a pure science that lends itself to a nice, neat, one-two-three approach.

Based on past experiences, judgment, and feelings, most people recognize that intuition is essential to making good strategic decisions. Intuition is particularly useful for making decisions in situations of great uncertainty or little precedent. It is also helpful when highly interrelated variables exist or when it is necessary to choose from several plausible alternatives. Some managers and owners of businesses profess to have extraordinary abilities for using intuition alone in devising brilliant strategies. For example. Will Durant, who organized GM. was described by Alfred Sloan as “a man who would proceed on a course of action guided solely, as far as I could tell, by some intuitive flash of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at times, he was astoundingly correct in his judgment.”3 Albert Einstein acknowledged the importance of intuition when he said, “I believe in intuition

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 41

and inspiration. At times I feel certain that I am right while not knowing the reason. Imagination is more important than knowledge, because knowledge is limited, whereas imagination embraces the entire world:'4

Although some organizations today may survive and prosper because they have intuitive geniuses managing them, most are not so fortunate. Most organizations can benefit from strategic management, which is based on integrating intuition and analysis in decision making. Choosing an intuitive or analytic approach to decision making is not an either-or proposition. Managers at all levels in an organization inject their intuition and judgment into strategic- management analyses. Analytical thinking and intuitive thinking complement each other.

Operating from the Tve-already-made-up-my-mind-don't-bother-me-with-the-facts mode is not management by intuition; it is management by ignorance.'5 Drucker says, “I believe in intuition only if you discipline it. 'Hunch’ artists, who make a diagnosis but don’t check it out with the facts, are the ones in medicine who kill people, and in management kill businesses.’’6 As Henderson notes:

The accelerating rate of change today is producing a business world in which customary managerial habits in organizations are increasingly inadequate. Experience alone was an adequate guide when changes could be made in small increments. But intuitive and experience-based management philosophies are grossly inadequate when decisions are strategic and have major, irreversible consequences.7

In a sense, the strategic-management process is an attempt to duplicate what goes on in the mind of a brilliant, intuitive person who knows the business and assimilates and integrates that knowledge using analysis to formulate effective strategies.

Adapting to Change The strategic-management process is based on the belief that organizations should continually monitor internal and external events and trends so that timely changes can be made as needed. The rate and magnitude of changes that affect organizations are increasing dramatically, as evidenced by how the global economic recession caught so many firms by surprise. Firms, like organisms, must be “adept at adapting” or they will not survive.

One company trying hard to adapt is the Washington Post Company, best known as publisher of the Washington Post newspaper that has a circulation of 525.000 in the Washington, DC area. But the newspaper industry is in decline globally, so the Washington Post Company recently diversified by acquiring Celtic Healthcare, a provider of hospice and home health care facilities in Pennsylvania and Maryland. Treating patients at home instead of paying for hospital stays is a much faster growing industry than selling newspapers. The Washington Post Company also owns Kaplan, a well-known source of test preparation materials, and six TV stations.

To survive, all organizations must astutely identify and adapt to change. The strategic- management process is aimed at allowing organizations to adapt effectively to change over the long run. As Waterman has noted:

In today’s business environment, more than in any preceding era, the only constant is change. Successful organizations effectively manage change, continuously adapting their bureaucracies, strategies, systems, products, and cultures to survive the shocks and prosper from the forces that decimate the competition.8

On a political map, the boundaries between countries may be clear, but on a competitive map showing the real flow of financial and industrial activity, the boundaries have largely disappeared. The speedy flow of information has eaten away at national boundaries so that people worldwide readily see for themselves how other people live and work. We have become a borderless world with global citizens, global competitors, global customers, global suppliers, and global distributors! U.S. firms are challenged by large rival companies in many industries. For example, Samsung recently surpassed Apple and Lenovo surpassed HP and Dell in revenues.

The need to adapt to change leads organizations to key strategic-management questions, such as “What kind of business should we become?” “Are we in the right fteld(s)?” “Should we reshape our business?” “What new competitors are entering our industry?” “What strategies

42 CHAPTER 1 • STRATEGIC M ANAGEM ENT ESSENTIALS

should we pursue?” “How are our customers changing?” “Are new technologies being developed that could put us out of business?”

The Internet promotes endless comparison shopping, which thus enables consumers worldwide to band together to demand discounts. The Internet has transferred power from businesses to individuals. Buyers used to face big obstacles when attempting to get the best price and service, such as limited time and data to compare, but now consumers can quickly scan hundreds of vendor offerings. Both the number of people shopping online and the average amount they spend is increasing dramatically. Digital communication has become the name of the game in marketing. Consumers today are flocking to blogs, sending tweets, watching and posting videos on YouTube, and spending hours on Tumbler, Facebook, Reddit, Instagram, and Linkedln instead of watching television, listening to the radio, or reading newspapers, and magazines. Facebook and Myspace recently unveiled features that further marry these social sites to the wider Internet. Users on these social sites now can log on to many business shopping sites from their social site so their friends can see what items they have purchased on various shopping sites. Both of these social sites want their members to use their identities to manage all their online identities. Most traditional retailers have learned that their online sales can boost in-store sales if they use their websites to promote in-store promotions.

Key Terms in Strategic Management Before we further discuss strategic management, we should define nine key terms: competitive advantage, strategists, vision and mission statements, external opportunities and threats, internal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.

Competitive Advantage Strategic management is all about gaining and maintaining competitive advantage. This term can be defined as “anything that a firm does especially well compared to rival firms.” When a firm can do something that rival firms cannot do or owns something that rival firms desire, that can represent a competitive advantage. For example, having ample cash on the firm’s balance sheet can provide a major competitive advantage. Some cash-rich firms are buying distressed rivals. Examples of cash- rich (cash as a percentage of total assets) companies today include Priceline.com (63%), Altera (80%), Franklin Resources (51%), Gilead Sciences (57%), and Lorillard (54%). Microsoft, Apple, and Samsung are cash rich, as is the Cohesion Case company, adidas AG.

Having less fixed assets than rival firms also can provide major competitive advantages. For example, Apple has no manufacturing facilities of its own, and rival Sony has 57 electronics factories. Apple relies exclusively on contract manufacturers for production of all of its products, whereas Sony owns its own plants. Less fixed assets has enabled Apple to remain financially lean with virtually no long-term debt. Sony, in contrast, has built up massive debt on its balance sheet.

CEO Paco Underhill of Envirosell says, “Where it used to be a polite war, it’s now a 21st-century bar fight, where everybody is competing with everyone else for the customers’ money.” Shoppers are “trading down,” so Nordstrom is taking customers from Neiman Marcus and Saks Fifth Avenue, TJ Maxx and Marshalls are taking customers from most other stores in the mall, and Family Dollar is taking revenues from Walmart.lj Getting and keeping competi­ tive advantage is essential for long-term success in an organization. In mass retailing, big-box companies such as Walmart. Best Buy, and Sears are losing competitive advantage to smaller stores, so there is a dramatic shift in mass retailing to becoming smaller. As customers shift more to online purchases, less brick and mortar is definitely better for sustaining competitive advantage in retailing. Walmart Express stores of less than 40.0(H) square feet each, rather than 185,000-square-foot Supercenters, and Office Depot’s new 5,000-square-foot stores are examples of smaller is better.

Normally, a firm can sustain a competitive advantage for only a certain period because of rival firms imitating and undermining that advantage. Thus, it is not adequate to simply obtain competitive advantage. A firm must strive to achieve sustained competitive advantage by (1) continually adapting to changes in external trends and events and internal capabilities, competencies, and resources; and by (2) effectively formulating, implementing, and evaluating strategies that capitalize on those factors.

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 43

An increasing number of companies are gaining a competitive advantage by using the Internet for direct selling and for communication with suppliers, customers, creditors, partners, shareholders, clients, and competitors who may be dispersed globally. E-commerce allows firms to sell products, advertise, purchase supplies, bypass intermediaries, track inventory, eliminate paperwork, and share information. In total, e-commerce is minimizing the expense and cumbersomeness of time, distance, and space in doing business, thus yielding better customer service, greater efficiency, improved products, and higher profitability.

Strategists Strategists are the individuals most responsible for the success or failure of an organization. Strategists have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur. Jay Conger, professor of organizational behavior at the London Business School and author of Building Leaders, says, “All strategists have to be chief learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models during this period, then our companies won't adapt either, because ultimately leadership is about being a role model.”

Strategists help an organization gather, analyze, and organize information. They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they typically have considerable authority for decision making in the firm. The CEO is the most visible and critical strategic manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist). In the last few years, the position of CSO has emerged as a new addition to the top management ranks of many organizations, including Sun Microsystems, Network Associates, Clarus, Lante, Marimba, Sapient, Commerce One, BBDO, Cadbury Schweppes, General Motors, Ellie Mae, Cendant, Charles Schwab, Tyco, Campbell Soup, Morgan Stanley, and Reed-Elsevier. This corporate officer title represents recognition of the growing importance of strategic planning in business. Franz Koch, the CSO of German sportswear company Puma AG, was recently promoted to CEO of Puma. When asked about his plans for the company, Koch said on a conference call “I plan to just focus on the long-term strategic plan.”

Strategists differ as much as organizations themselves, and these differences must be considered in the formulation, implementation, and evaluation of strategies. Some strategists will not consider some types of strategies because of their personal philosophies. Strategists differ in their attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style. The founder of Hershey Foods. Milton Hershey, built the company to manage an orphanage. From corporate profits, Hershey Foods today cares for about 900 boys and l .000 girls in its boarding school for pre-K through 12 grade.

Several CSOs who spoke at the CSO Summit in May 2013 in San Francisco were:

Roland Pan at Skype Mark Achler at Redbox

Jon Berlin at Wells Fargo

Drew Aldrich at Trans-Lux

Ann Neir at Cisco Systems Jennifer Scott at Virgin Media

Gina Copeland at Mitsubishi Electric Raj Ratnaker at Tyco Electronics

Tim Johnsone at Hopelink Nhat Ngo at Omnicell

Daniel Gastel at UBS

Clarence So at Salesforce Barry Margerum at Plantronics

44 CHAPTER 1 • STRATEGIC M ANAGEM ENT ESSENTIALS

Vision and Mission Statements Many organizations today develop a vision statement that answers the question “What do we want to become?” Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Many vision statements are a single sentence. For example, the vision statement of Stokes Eye Clinic in Florence, South Carolina, is “Our vision is to take care of your vision.”

Mission statements are “enduring statements of purpose that distinguish one business from other similar firms. A mission statement identifies the scope of a firm’s operations in product and market terms.” 10 It addresses the basic question that faces all strategists: “What is our business?” A clear mission statement describes the values and priorities of an organization. Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities. A mission statement broadly charts the future direction of an organization. A mission statement is a constant reminder to its employees of why the organization exists and what the founders envisioned when they put their fame and fortune at risk to breathe life into their dreams.

External Opportunities and Threats External opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future. Opportunities and threats are largely beyond the control of a single organization—thus the word external. A few opportunities and threats that face many firms are listed here:

• Availability of capital can no longer be taken for granted. • Consumers expect green operations and products. • Marketing is moving rapidly to the Internet. • Commodity food prices are increasing. • Political unrest in the Middle East is raising oil prices. • Computer hacker problems are increasing. • Intense price competition is plaguing most firms. • Unemployment and underemployment rates remain high globally. • Interest rates are rising. • Product life cycles are becoming shorter. • State and local governments are financially weak. • Drug cartel-related violence in Mexico. • Winters are colder and summers hotter than usual. • Home prices remain exceptionally low. • Global markets offer the highest growth in revenues.

These types of changes are creating a different type of consumer and consequently a need for different types of products, services, and strategies. Many companies in many industries face the severe external threat o f online sales capturing increasing market share in their industry.

Other opportunities and threats may include the passage of a law, the introduction of a new product by a competitor, a national catastrophe, or the declining value of the Euro. A competi­ tor’s strength could be a threat. A growing middle class in Africa, rising energy costs, or social media networking could represent an opportunity or a threat.

A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and avoid or reduce the impact of external threats. For this reason, identifying, monitoring, and evaluating external opportunities and threats are essen­ tial for success. This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis. Lobbying is one activity that some organizations use to influence external opportunities and threats.

Internal Strengths and Weaknesses Internal strengths and internal weaknesses are an organization’s controllable activi­ ties that are performed especially well or poorly. They arise in the management, mar­ keting, finance/accounting, production/operations, research and development (R&D), and

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 45

management information systems (MIS) activities of a business. Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity. Organizations strive to pursue strategies that capitalize on inter­ nal strengths and eliminate internal weaknesses.

Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information. Also, strengths and weaknesses can be determined by elements of being rather than performance. For example, a strength may involve ownership of natural resources or a historic reputation for quality. Strengths and weaknesses may be determined relative to a firm’s own objectives. For example, high levels of inventory turnover may not be a strength for a firm that seeks never to stock-out.

In performing a strategic-management case analysis, it is important to be as divisional as possible when determining and stating internal strengths and weaknesses. In other words, for a company such as Walmart saying that Sam Club’s revenues grew 11 percent in the recent quar­ ter. rather than Walmart couching all of their internal factors in terms of Walmart as a whole. This practice will enable strategies to be more effectively formulated because in strategic plan­ ning, firms must allocate resources among divisions (segments) of the firm (that is, by product, region, customer, or whatever the various units of Lhe firm are), such as Sam’s Club versus Supercenters or Mexico versus Europe at Walmart.

Both internal and external factors should be stated in specific terms to the extent possible, using numbers, percentages, dollars, and ratios, as well as comparisons over time and to rival firms. Specificity is important because strategies will be formulated and resources allocated based on this information. The more specific the underlying external and internal factors, the more effectively strategies can be formulated and resources allocated. Determining the numbers takes more time, but survival of the firm often is at stake, so identifying and estimating numbers associated with key factors is essential.

Internal factors can be determined in a number of ways, including computing ratios, measuring performance, and comparing to past periods and industry averages. Various types of surveys also can be developed and administered to examine internal factors such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.

Long-Term Objectives Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission. Long-term means more than one year. Objectives are essential for organizational success because they provide direction; aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing, motivating, and controlling activities. Objectives should be challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives should be established for the overall company and for each division.

Strategies Strategies are the means by which long-term objectives will be achieved. Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures. Strategies currently being pursued by some companies are described in Table 1-1

Strategies are potential actions that require top management decisions and large amounts of the firm’s resources. In addition, strategies affect an organization’s long-term prosperity, typically for at least five years, and thus are future-oriented. Strategies have multifunctional or multidivisional consequences and require consideration of both the external and internal factors facing the firm.

Annual Objectives Annual objectives are short-term milestones that organizations must achieve to reach long-term objectives. Like long-term objectives, annual objectives should be measurable, quantitative, chal­ lenging, realistic, consistent, and prioritized. They should be established at the corporate, divisional, and functional levels in a large organization. Annual objectives should be stated in terms of man­ agement. marketing, finance/accounting, production/operations, R&D, and MIS accomplishments.

TABLE 1-1 Sample Strategies in Action in 2013

46 CHAPTER 1 • STRATEGIC M ANAGEM ENT ESSENTIALS

Walgreen Company

Do you prefer Walgreen’s or CVS? Headquartered in Deerfield. Illinois. Walgreen’s is deepening its penetration into the southeastern portion of the USA by acquiring firms such as USA Drug, May’s Drug, Med-X. Drug Warehouse, and Super D Drug. At the same time, Walgreen’s is expanding globally through acquisition of firms such as U.K pharmacy-led health-and-beauty retailer Alliance Boots GmbH. Perhaps a reason Walgreen's is acquiring firms is that its same-store pharmacy sales have dropped 15 percent in (he last year, mainly as a result of selling more generic rather than prescription drugs, and their same-store-overall sales have dropped 10 percent, mainly because of the chain’s exit from pharmacy- benefit manager Express Scripts Holding. Of course, their major rival firm, CVS, could also be a key reason why Walgreen’s is acquiring other firms—to show net growth, despite lower organic (internal) revenue declines. Netflix Inc.

Based in Los Gatos, California, the long-time DVD-by-mail provider is struggling to survive as the firm switches from the DVD business to (a) providing Internet-delivered streaming content and (b) expanding to overseas markets. Major rivals to Netflix include News Corp.’s Hulu and Coinstar’s Redbox, who are growing rapidly, in the USA. Netflix’s overseas efforts arc not going well because that strategy requires country-by-country deals to line up video content. In a recent quarter, Netflix lost 850,000 DVD subscribers and added 530,(XK) movie and TV-show streaming customers. Netflix’s international streaming business lost about $400 million in 2012. Microsoft

Based in Redmond, Washington. Microsoft added 35 retail “pop-up stores” in late 2012 to go with its 30 existing retail stores in the United States and one store in Toronto. This forward integration strategy coincided with Microsoft introducing its first tablet computer. Surface, which unlike Apple’s iPad, runs popular Microsoft Office apps such as Word and Excel. The Surface also has an innovative keyboard cover that makes typing easier. In addition to its new retail stores, Microsoft is also selling its new Surface tablet online, but many customers want to touch and see before buying such a product online.

A set of annual objectives is needed for each long-term objective. Annual objectives are especially important in strategy implementation, whereas long-term objectives are particularly important in strategy formulation. Annual objectives represent the basis for allocating resources.

Policies Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and address repetitive or recurring situations.

Policies are most often stated in terms of management, marketing, finance/accounting, production/operations, R&D, and MIS activities. Policies can be established at the corporate level and apply to an entire organization at the divisional level and apply to a single division, or they can be established at the functional level and apply to particular operational activities or departments. Policies, like annual objectives, are especially important in strategy implementa­ tion because they outline an organization’s expectations of its employees and managers. Policies allow consistency and coordination within and between organizational departments.

Substantial research suggests that a healthier workforce can more effectively and efficiently implement strategies. Smoking has become a heavy burden for Europe’s state-run social welfare systems, with smoking-related diseases costing more than $100 billion a year. Smoking also is a huge burden on companies worldwide, so firms are continually implementing policies to curtail smoking. Starbucks in mid-2013 banned smoking within 25 feet of its 7,000 stores not located inside another retail establishment.

Hotel and motels in the United States are rapidly going “smoke-free throughout” with more than 13,000 now having this policy. The American Hotel and Lodging Association says there are 50,800 hotel/motels in the USA with 15 or more rooms. All Marriotts are now nonsmoking. Almost all (except Hertz) car rental companies are exclusively nonsmoking, including Avis, Dollar, Thrifty, and Budget. Most rental car companies charge a $250 cleaning fee if a customer

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS

smokes in iheir rental vehicle. More cigarettes are smoked in Russia per capita (2,786) than any other country in the world, but that country in 2013 instituted strict, mandatory new antismoking policies among all restaurants and bars and government facilities.” Sixty percent of men in Russia smoke. Other heavily smoking countries per capita include Japan (1,841), China (1,711), and Indonesia (1,085), compared to the USA (1,028). Excise taxes in Russia on tobacco prod­ ucts are set to rise 135 percent by 2015. About 400,000 Russians die each year as a result of smoking, costing the country 1.5 trillion rubles (S48.1 billion) annually in health-care costs.

The Strategie-Management Model The strategic-management process can best be studied and applied using a model. Every model represents some kind of process. The framework illustrated in Figure 1-1 with white shading is a widely accepted, comprehensive model of the strategic-management process.1 2 This model does not guarantee success, but it does represent a clear and practical approach for formulating, implement­ ing, and evaluating strategies. Relationships among major components of the strategic-management process are shown in the model, which appears in all subsequent chapters with appropriate areas

I_______________________________ Strategy ________________________ Formulation

FIGURE 1-1 A Comprehensive Strategie-Management Model

Strategy Implementation

Strategy ____I Evaluation I

Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.

48 CHAPTER 1 • STRATEGIC M ANAGEM ENT ESSENTIALS

shaped to show the particular focus of each chapter. These are three important questions to answer in developing a stralegic plan:

Where are we now?

Where do we want to go?

How are we going to get there?

Identifying an organization's existing vision, mission, objectives, and strategies is the logical starting point for strategic management because a firm’s present situation and condition may preclude certain strategies and may even dictate a particular course of action. Every organi­ zation has a vision, mission, objectives, and strategy, even if these elements are not consciously designed, written, or communicated. The answer to where an organization is going can be determined largely by where the organization has been!

The strategic-management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. For instance, African countries coming online could represent a major opportunity and require a change in long-term objectives and strategies; a failure to accomplish annual objectives could require a change in policy; or a major competitor's change in strategy could require a change in the firm's mission. Therefore, strategy formulation, implementation, and evaluation activities should be performed on a continual basis, not just at the end of the year or semiannually. The strategic-management process never really ends.

Note in the strategic-management model that business ethics, social responsibility, and environmental sustainability issues impact all activities in the model as discussed in Chapter 3. Also, note in the model that global and international issues also impact virtually all strategic decisions today, as described in detail in Chapter 2.

The strategic-management process is not as cleanly divided and neatly performed in practice as the strategic-management model suggests. Strategists do not go through the process in lockstep fashion. Generally, there is give-and-take among hierarchical levels of an organization. Many organizations conduct formal meetings semiannually to discuss and update the firm's vision, mission, opportunities, threats, strengths, weaknesses, strategies, objectives, policies, and performance. These meetings are commonly held off-premises and are called retreats. The rationale for periodically conducting strategic-management meetings away from the work site is to encourage more creativity and candor from participants. Good communication and feedback are needed throughout the strategic-management process.

Application of the strategic-management process is typically more formal in larger and well-established organizations. Formality refers to the extent that participants, responsibilities, authority, duties, and approach are specified. Smaller businesses tend to be less formal. Firms that compete in complex, rapidly changing environments, such as technology companies, tend to be more formal in strategic planning. Firms that have many divisions, products, markets, and technologies also tend to be more formal in applying strategic-management concepts. Greater formality in applying the strategic-management process is usually positively associated w'ith the cost, comprehensiveness, accuracy, and success of planning across all types and sizes of

13organizations.

Benefits of Strategic Management Strategic management allows an organization to be more proactive than reactive in shaping its own future; it allows an organization to initiate and influence (rather than just respond to) activities— and thus to exert control over its own destiny. Small business owners, chief executive officers, presidents, and managers of many for-profit and nonprofit organizations have recog­ nized and realized the benefits of strategic management.

Historically, the principal benefit of strategic management has been to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach to strategic choice. This certainly continues to be a major benefit of strategic management, but research studies now indicate that the process, rather than the decision or document, is the more important contribution of strategic management.14 Communication is a key to successful strategic management. Through involvement in the process, in other words, through dialogue

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 49

FIGURE 1-2 Benefits to a Firm That Does Strategic Planning

and participation, managers and employees become committed to supporting the organization. Figure 1-2 illustrates this intrinsic benefit of a firm engaging in strategic planning. Note that all firms need all employees “on a mission” to help the firm succeed. Dale McConkey said “plans are less important than planning.”

The manner in which strategic management is carried out is thus exceptionally important. A major aim of the process is to achieve understanding and commitment from all managers and employees. Understanding may be the most important benefit of strategic management, followed by commitment. When managers and employees understand what the organization is doing and why, they often feel a part of the firm and become committed to assisting it. This is especially true when employees also understand links between their own compensation and organizational performance. Managers and employees become surprisingly creative and innova­ tive when they understand and support the firm's mission, objectives, and strategies. A great benefit of strategic management, then, is the opportunity that the process provides to empower individuals. Em powerm ent is the act of strengthening employees’ sense of effectiveness by encouraging them to participate in decision making and to exercise initiative and imagination, and rewarding them for doing so. William Fulmer said “you want your people to run the busi­ ness as it if were their own.”

Strategic planning is a learning, helping, educating, and supporting process, not merely a paper-shuffling activity among top executives. Strategic-management dialogue is more impor­ tant than a nicely bound strategic-management document.1'̂ The worst thing strategists can do is develop strategic plans themselves and then present them to operating managers to execute. Through involvement in the process, line managers become “owners” of the strategy. Ownership of strategies by the people who have to execute them is a key to success!

Although making good strategic decisions is the major responsibility of an organization’s owner or chief executive officer, both managers and employees must also be involved in strategy formulation, implementation, and evaluation activities. Participation is a key to gaining commit­ ment for needed changes.

An increasing number of corporations and institutions are using strategic management to make effective decisions. But strategic management is not a guarantee for success; it can be dysfunctional if conducted haphazardly.

Financial Benefits Research indicates that organizations that use strategic-management concepts are more profitable and successful than those that do not.16 Businesses using strategic-management concepts show significant improvement in sales, profitability, and productivity compared to firms without systematic planning activities. High-performing firms tend to do systematic planning to prepare for future fluctuations in their external and internal environments. Firms with planning systems more closely resembling strategic-management theory generally exhibit superior long-term financial performance relative to their industry.

High-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences. In contrast, firms that perform poorly often engage in activities that are shortsighted and do not reflect good forecasting of future conditions. Strategists of low-performing organizations are often preoccupied with solving internal

50 CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS

problems and meeting paperwork deadlines. They typically underestimate their competitors’ strengths and overestimate their own firm’s strengths. They often attribute weak performance to uncontrollable factors such as a poor economy, technological change, or foreign competition.

More than 100,000 businesses in the USA fail annually. Business failures include bankruptcies, foreclosures, liquidations, and court-mandated receiverships. Although many factors besides a lack of effective strategic management can lead to business failure, the planning concepts and tools described in this text can yield substantial financial benefits for any organization. The business failure rate in the USA fell dramatically in 2012/2013. but rates rose significantly throughout Europe.

Nonfinancial Benefits Besides helping lirms avoid financial demise, strategic management offers other tangible benefits, such as an enhanced awareness of external threats, an improved understanding of competitors’ strategies, increased employee productivity, reduced resistance to change, and a clearer understanding of performance-reward relationships. Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels. Firms that have nurtured their managers and employees, shared organizational objectives with them, empowered them to help improve the product or service, and recognized their contributions can turn to them for help in a pinch because of this interaction.

In addition to empowering managers and employees, strategic management often brings order and discipline to an otherwise floundering firm. It can be the beginning of an efficient and effective managerial system. Strategic management may renew confidence in the current business strategy or point to the need for corrective actions. The strategic-management process provides a basis for identifying and rationalizing the need for change to all managers and employees of a firm; it helps them view change as an opportunity rather than as a threat. Some nonfinancial benefits of a firm utilizing strategic management, according to Greenley, are increased discipline, improved coordination, enhanced communication, reduced resistance to change, increased forward thinking, improved decision-making, increased synergy, and more effective allocation of time and resources.17

Why Some Firms Do No Strategic Planning Some firms do no strategic planning, and some firms do strategic planning but receive no support from managers and employees. Ten reasons (excuses) often given for poor or no strategic planning in a firm are as follows:

1. No formal training in strategic management 2. No understanding of or appreciation for the benefits of planning 3. No monetary rewards for doing planning 4. No punishment for not planning 5. Too busy “firefighting” (resolving internal crises) to plan ahead 6. To view planning as a waste of time, since no product7service is made 7. Laziness; effective planning takes time and effort; time is money 8. Content with current success; failure to realize that success today is no guarantee for

success tomorrow; even Apple Inc. is an example 9. Overconfident

10. Prior bad experience with strategic planning done sometime/somewhere

Pitfalls in Strategic Planning Strategic planning is an involved, intricate, and complex process that takes an organization into uncharted territory. It does not provide a ready-to-use prescription for success; instead, it takes the organization through a journey and offers a framework for addressing questions and solving problems. Being aware of potential pitfalls and being prepared to address them is essential to success.

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 51

Some pitfalls to watch for and avoid in strategic planning are these:

• Using strategic planning to gain control over decisions and resources • Doing strategic planning only to satisfy accreditation or regulator)' requirements • Too hastily moving from mission development to strategy formulation • Failing to communicate the plan to employees, who continue working in the dark • Top managers making many intuitive decisions that conflict with the formal plan • Top managers not actively supporting the strategic-planning process • Failing to use plans as a standard for measuring performance • Delegating planning to a “planner” rather than involving all managers • Failing to involve key employees in all phases of planning • Failing to create a collaborative climate supportive of change • Viewing planning as unnecessary or unimportant • Becoming so engrossed in current problems that insufficient or no planning is done • Being so formal in planning that flexibility and creativity are stilled18

Guidelines for Effective Strategic Management Failing to follow certain guidelines in conducting strategic management can foster criticisms of the process and create problems for the organization. Issues such as “Is strategic management in our firm a people process or a paper process?” should be addressed. Some organizations spend an inordinate amount of time developing a strategic plan, but then fail to follow through with effective implementation. Change and results in a firm come through implementation, not through formulation, although effective formulation is critically important for successful imple­ mentation. Continual evaluation of strategies is also essential because the world changes so rapidly that existing strategies can need modifying often.

Strategic management must not become a self-perpetuating bureaucratic mechanism. Rather, it must be a self-reflective learning process that familiarizes managers and employees in the organization with key strategic issues and feasible alternatives for resolving those issues. Strategic management must not become ritualistic, stilted, orchestrated, or too for­ mal, predictable, and rigid. Words supported by numbers, rather than numbers supported by words, should represent the medium for explaining strategic issues and organizational responses. A key role of strategists is to facilitate continuous organizational learning and change.

R. T. Lenz offers six guidelines for effective strategic management:

1. Keep the process simple and easily understandable. 2. Eliminate vague planning jargon. 3. Keep the process nonroutine, so vary assignments, team membership, meeting formats,

settings, and even the planning calendar. 4. Welcome bad news and encourage devil's advocate thinking. 5. Do not allow technicians to monopolize the planning process. 6. To the extent possible, involve managers from all areas of the firm.19

An important guideline for effective strategic management is open-mindedness. A will­ ingness and eagerness to consider new information, new viewpoints, new ideas, and new pos­ sibilities is essential: all organizational members must share a spirit of inquiry and learning. Strategists such as chief executive officers, presidents, owners of small businesses, and heads of government agencies must commit themselves to listen to and understand managers’ posi­ tions well enough to be able to restate those positions to the managers’ satisfaction. In addition, managers and employees throughout the firm should be able to describe the strategists’ positions to the satisfaction of the strategists. This degree of discipline will promote understanding and learning.

No organization has unlimited resources. No firm can take on an unlimited amount of debt or issue an unlimited amount of stock to raise capital. Therefore, no organization can pursue all the strategies that potentially could benefit the firm. Strategic decisions thus always have to be made to eliminate some courses of action and to allocate organizational resources among others. Most organizations can afford to pursue only a few corporate-level strategies at any given time.

52 CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS

TABLE 1-2 Seventeen Guidelines for the Strategic-Planning Process to Be Effective

1. It should he a people process more than a paper process. 2. It should be a learning process for all managers and employees. 3. It should be words supported by numbers rather than numbers supported by words. 4. It should be simple and nonroutine. 5. It should vary assignments, team memberships, meeting formats, and even the planning calendar. 6. It should challenge the assumptions underlying the current corporate strategy. 7. It should welcome bad news. 8. It should welcome open-mindness and a spirit of inquiry and learning. 9. It should not be a bureaucratic mechanism.

10. It should not become ritualistic, stilted, or orchestrated. 11. It should not be too formal, predictable, or rigid. 12. It should not contain jargon or arcane planning language. 13. It should not be a formal system for control. 14. It should not disregard qualitative information. 15. It should not be controlled by “technicians.” 16. Do not pursue too many strategies at once. 17. Continually strengthen the “good ethics is good business" policy.

It is a critical mistake for managers to pursue too many strategies at the same time, thereby spreading the firm’s resources so thin that all strategies are jeopardized.

Strategic decisions require trade-offs such as long-range versus short-range consider­ ations or maximizing profits versus increasing shareholders’ wealth. There are ethics issues too. Strategy trade-offs require subjective judgments and preferences. In many cases, a lack of objectivity in formulating strategy results in a loss of competitive posture and profitability. Most organizations today recognize that strategic-management concepts and techniques can enhance the effectiveness of decisions. Subjective factors such as attitudes toward risk, con­ cern for social responsibility, and organizational culture will always affect strategy-formula- tion decisions, but organizations need to be as objective as possible in considering qualitative factors. Table 1-2 summarizes important guidelines for the strategic-planning process to be effective.

Comparing Business and Military Strategy A strong military heritage underlies the study of strategic management. Terms such as objectives, mission, strengths, and weaknesses first were formulated to address problems on the battlefield. According to Webster’s New World Dictionary, strategy is “the science of planning and directing large-scale military operations, of maneuvering forces into the most advanta­ geous position prior to actual engagement with the enemy”20. The word strategy comes from the Greek strategos, which refers to a military general and combines stratos (the army) and ago (to lead). The history of strategic planning began in the military. A key aim of both business and military strategy is “to gain competitive advantage.” In many respects, business strategy is like military strategy, and military strategists have learned much over the centuries that can benefit business strategists today. Both business and military organizations try to use their own strengths to exploit competitors' weaknesses. If an organization’s overall strategy is wrong (ineffective), then all the efficiency in the world may not be enough to allow success. Business or military success is generally not the happy result of accidental strategies. Rather, success is the product of both continuous attention to changing external and internal conditions and the formulation and implementation of insightful adaptations to those conditions. The element of surprise provides great competitive advantages in both military and business strategy; informa­ tion systems that provide data on opponents’ or competitors’ strategies and resources are also vitally important.

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 53

Of course, a fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with an assumption of competition, whereas military strategy is based on an assumption of conflict. Nonetheless, military conflict and business competition are so similar that many strategic-management techniques apply equally to both. Business strategists have access to valuable insights that military thinkers have refined over time. Superior strategy formulation and implementation can overcome an opponent’s superiority in numbers and resources.

Born in Pella in 356 b .c .f.., Alexander the Great was king of Macedon, a state in northern ancient Greece. Tutored by Aristotle until the age of 16, Alexander had created one of the largest empires of the ancient world by the age of 30, stretching from the Ionian Sea to the Himalayas. Alexander was undefeated in battle and is considered one of history’s most success­ ful commanders. He became the measure against which military leaders even today compare themselves, and military academies throughout the world still teach his strategies and tactics. Alexander the Great once said: “Greater is an army o f sheep led by a lion, than an army o f Hons led be a sheep." This quote reveals the overwhelming importance of an excellent strategic plan for any organization to succeed. The legendary Alabama football coach Bear Bryant once said: / will defeat the opposing coach’s team with my players, but i f given a week's notice, / could defeat the opposing coach team with his players and he take my players.

Both business and military organizations must adapt to change and constantly improve to be successful. Too often, lirms do not change their strategies when their environment and competi­ tive conditions dictate the need to change. Gluck offered a classic military example of this:

When Napoleon won. it was because his opponents were committed to the strategy, tactics, and organization of earlier wars. When he lost—against Wellington, the Russians, and the Spaniards— it was because he, in turn, used tried-and-true strategies against enemies who thought afresh, who were developing the strategies not of the last war but of the next.21

Similarities can be construed from Sun Tzu’s writings to the practice of formulating and implementing strategies among businesses today. Table 1-3 provides narrative excerpts from The Art o f War. As you read through the table, consider which of the principles of war apply to business strategy as companies today compete aggressively to survive and grow.

The Art o f War has been applied to many fields well outside of the military. Much of the text is about how to fight wars without actually having to do battle: it gives tips on how to out­ smart one’s opponent so that physical battle is not necessary. As such, it has found application as a training guide for many competitive endeavors that do not involve actual combat, such as in devising courtroom trial strategy or acquiring a rival company. There are business books applying its lessons to office politics and corporate strategy. Many Japanese companies make the book required reading for their top executives. The book is a popular read among Western busi­ ness managers who have turned to it for inspiration and advice on how to succeed in competitive business situations.

The Art o f War has also been applied in the world of sports. NFL coach Bill Belichick is know'n to have read the book and used its lessons to gain insights in preparing for games. Australian cricket, as well as Brazilian association football coaches Luis Felipe Scolari and Carolos Alberto Parreira. embraced the text. Scolari made the Brazilian World Cup squad of 2002 study the ancient work during their successful campaign.

Special Note to Students In performing strategic-management case analysis, emphasize throughout your project, beginning with the first page or slide, where your firm has competitive advantages and disad­ vantages. More importantly, emphasize throughout how you recommend the firm sustain and grow its competitive advantages and how you recommend the firm overcome its competitive disadvantages. Begin paving the way early for what you ultimately recommend your firm should do over the next three years. The notion of competitive advantage should be integral to the discussion of every page or PowerPoint slide. Therefore, avoid being merely descriptive in your written or oral analysis; rather, be prescriptive, insightful, and forward-looking through­ out your project.

TA BLE 1-3 Excerpts from Sun Tzu's The A rt o f War Writings

54 CHAPTER 1 • STRATEGIC M ANAGEM ENT ESSENTIALS

• War is a matter of vital importance to the state: a matter of life or death, the road either to survival or rain. Hence, it is imperative that it be studied thoroughly.

• Warfare is based on deception. When near the enemy, make it seem that you are far away; when far away, make it seem that you are near. Hold out baits to lure the enemy. Strike the enemy when he is in disorder. Avoid the enemy when he is stronger. If your opponent is of choleric temper, try to irritate him. If he is arrogant, try to encourage his egotism. If enemy troops are well prepared after reorganization, try to wear them down. If they arc united, try to sow dissension among them. Attack the enemy where he is unprepared, and appear where you are not expected. These are the keys to victory for a strategist. It is not possible to formulate them in detail beforehand.

• A speedy victory is the main object in war. If this is long in coming, weapons are blunted and morale depressed. When the army engages in protracted campaigns, the resources of the state will fall short. Thus, while we have heard of stupid haste in war. we have not yet seen a clever operation that was prolonged.

• Generally, in war the best policy is to take a state intact; to ruin it is inferior to this. To capture the enemy’s entire army is better than to destroy it; to take intact a regiment, a company, or a squad is better than to destroy it. For to win one hundred victories in one hundred battles is not the epitome of skill. To subdue the enemy without fighting is the supreme excellence. Those skilled in war subdue the enemy’s army without battle.

• The art of using troops is this: When ten to the enemy’s one. surround him. W'hen live times his strength, attack him. If double his strength, divide him. If equally matched, you may engage him with some good plan. If weaker, be capable of withdrawing. And if in all respects unequal, be capable of eluding him.

• Know your enemy and know yourself, and in a hundred battles you will never be defeated. When you are ignorant of the enemy but know yourself, your chances of winning or losing are equal. If ignorant both of your enemy and of yourself, you are sure to be defeated in every battle.

• He who occupies the field of battle first and awaits his enemy is at ease, and he who comes later to the scene and rushes into the light is weary. And therefore, those skilled in war bring the enemy to the field of battle and are not brought there by him. Thus, when the enemy is at ease, be able to tire him; when well fed, be able to starve him; when at rest, be able to make him move.

• Analyze the enemy’s plans so that you will know his shortcomings as well as his strong points. Agitate him to ascertain the pattern of his movement. Lure him out to reveal his dispositions and to ascertain his position. Launch a probing attack to learn where his strength is abundant and where deficient. It is according to the situation that plans are laid for victory, but the multitude does not comprehend this.

• An army may be likened to water, for just as flowing water avoids the heights and hastens to the lowlands, so an army should avoid strength and strike weakness. And as water shapes its How in accordance with the ground, so an army manages its victory in accordance with the situation of the enemy. And as water has no constant form, there are in warfare no constant conditions. Thus, one able to win the victory by modifying his tactics in accordance with the enemy situation may be said to be divine.

• If you decide to go into battle, do not announce your intentions or plans. Project “business as usual." • Unskilled leaders work out their conflicts in courtrooms and battlefields. Brilliant strategists rarely

go to battle or to court; they generally achieve their objectives through tactical positioning well in advance of any confrontation.

• When you do decide to challenge another company (or army), much calculating, estimating, analyzing, and positioning bring triumph. Little computation brings defeat.

• Skillful leaders do not let a strategy inhibit creative counter-movement. Nor should commands from those at a distance interfere with spontaneous maneuvering in the immediate situation.

• When a decisive advantage is gained over a rival, skillful leaders do not press on. They hold their position and give their rivals the opportunity to surrender or merge. They do not allow their forces to be damaged by those who have nothing to lose.

• Brilliant strategists forge ahead with illusion, obscuring the area(s) of major confrontation, so that opponents divide their forces in an attempt to defend many areas. Create the appearance of confusion, fear, or vulnerability so the opponent is helplessly drawn toward this illusion of advantage.

Note: Substitute the words strategy or strategic planning for war or warfare.

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 55

Conclusion All firms have a strategy, even if it is informal, unstructured, and sporadic. All organizations are heading somewhere, but unfortunately some organizations do not know where they are going. The old saying “If you do not know where you are going, then any road will lead you there!” accents the need for organizations to use strategic-management concepts and techniques. The strategic-management process is becoming more widely used by small firms, large companies, nonprofit institutions, governmental organizations, and multinational conglomerates alike. The process of empowering managers and employees has almost limitless benefits.

Organizations should take a proactive rather than a reactive approach in their industry, and they should strive to influence, anticipate, and initiate rather than just respond to events. The strategic-management process embodies this approach to decision making. It represents a logical, systematic, and objective approach for determining an enterprise’s future direction. The stakes are generally too high for strategists to use intuition alone in choosing among alternative courses of action. Successful strategists take the time to think about their businesses, where they are with their businesses, and what they want to be as organizations— and then they implement programs and policies to get from where they are to where they want to be in a reasonable period of time.

It is a known and accepted fact that people and organizations that plan ahead are much more likely to become what they want to become than those that do not plan at all. A good strate­ gist plans and controls his or her plans, whereas a bad strategist never plans and then tries to control people! This textbook is devoted to providing you with the tools necessary to be a good strategist.

Key Terms and Concepts annual objectives (p. 45) competitive advantage (p. 42) empowerment (p. 49) environmental scanning (p. 44) external opportunities (p. 44) external threats (p. 44) internal strengths (p. 44) internal weaknesses (p. 44) intuition (p. 40) long-range planning (p. 39) long-term objectives (p. 45) mission statements (p. 44) policies (p. 46)

retreats (p. 48) strategic management (p. 39) strategic-management model (p. 48) strategic-management process (p. 39) strategic planning (p. 39) strategies (p. 45) strategists (p. 43) strategy evaluation (p. 40) strategy formulation (p. 39) strategy implementation (p. 40) sustained competitive advantage (p. 42) vision statement (p. 44)

Issues for Review and Discussion 1- 1. Singapore Airlines has done very well in 2013. Briefly

explain whether this strategy will be just as effective 1-3 . Compare and contrast the activities involved in

strategy formulation versus those involved in strategy implementation.going forward.

1-2. Does Singapore Airlines have its strategic plan posted on its website? Should the company do so? Why or why not?

56 CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS

1-4. Given the political and economic collapse of various Middle Eastern and European countries, identify a list of companies for which gaining and sustaining com­ petitive advantage has permanently changed.

1-5. There is a dramatic shift in mass retailing to become smaller. Give four reasons for this phenomenon, with corporate examples of each.

1-6. Avoid being merely descriptive in your written or oral case analysis: rather, be prescriptive, insightful, and forward-looking throughout your project. Discuss the meaning of this sentence.

1-7. Briefly explain what Dale McConkey means when he says, “plans are less important than planning.’"

1-8. In terms of developing a strategic plan, explain what Edward Deming means by “In God we trust. All others bring data.”

1-9. In an organization, at which three hierarchal levels would strategy formulation, implementation, and evaluation activities occur?

1-10. Explain Einstein’s rationale for saying “Imagination is more important than knowledge.” Would you agree with Einstein? Why?

1-11. Explain Drucker’s statement “I believe in intuition only if you discipline it.” Do you agree with it? Give reasons for your answer.

1-12. Strategic management is all about gaining and maintaining competitive advantage. Explain using examples.

1-13. Based on the definition of strategists in Chapter 1, identify the top three strategists that you have personally spoken to, and interacted with.

1-14. Would the collapse of the euro be a major threat, or opportunity, for your college or university? Why? In your opinion, what is the probability of such a collapse?

1-15. Strategic management is not a panacea for success. It can be dysfunctional if conducted haphazardly. Give five examples of potential “haphazard” aspects of the planning process.

1-16. Explain why open-mindedness is an important guideline for effective strategic management.

1-17. Explain how and why firms use social networks these days to gain a competitive advantage.

1-18. Compare and contrast vision statements with mission statements.

1-19. Identify the top 10 external factors that you feel axe affecting your university. Rank them with one being most important.

1-20. In order of importance, list six benefits of a firm engaging in strategic management.

1-21. Rank six reasons, in order of their importance, why firms don't have strategic plans.

1-22. Identify six guidelines required while conducting strategic management activities.

1-23. Discuss how relevant you think Sun Tzu’s Art o f War writings are. for firms today, in developing and carrying out a strategic plan.

1-24. Determine the ways and means that your college or university does strategic planning, and report on these efforts to your class.

1-25. Go to the Strategy club website (www.strategyclub. com) and describe the strategic planning products offered.

1-26. Compare and contrast the extent to which strategic- planning concepts are used by companies in your country with those in the United States.

1-27. Would strategy formulation or strategy implementation concepts differ more across countries? Why?

1-28. Compare strategic planning with long range planning. 1-29. Which three activities comprise strategy evaluation?

Why is strategy evaluation important, even for successful firms?

1-30. Explain how a firm can achieve sustained competitive advantage.

1-31. Identify and give an overview of three social net­ working sites that firms are using to gain competitive advantage.

1-32. List four strategists whom you know personally. Rank them on their effectiveness as a leader in their organization.

1-33. List six characteristics of objectives, using examples.

1-34. Conduct an Internet research to determine what percent­ age of your country's population smoke. What implica­ tions does this have for firms in your country?

1-35. List four financial and four nonfinancial benefits of a firm engaging in strategic planning.

1-36. Discuss the comparisons between business strategy and military strategy.

1-37. Briefly explain whether strategic planning should be more of a people-process than a paper process.

1-38. Do you agree with the fact that strategic planning should not be controlled by technicians. Briefly explain the reasons for your answer.

1-39. According to Sun Tzu, warfare is based on decep­ tion. Should strategic planning be based on deception? Explain.

1-40. Explain Sun Tzu's statement “Generally, in war the best policy is to take a state intact: to ruin it is inferior to this." Is this true in corporate strategic planning? Explain.

1-41. What is Singapore Airlines’ competitive advantage? How can this advantage be sustained?

1-42. Are there any compelling reasons why the external audit, and internal audit, should not be conducted simultaneously?

1-43. Which stage of strategic management do you feel is the most important? Give reasons for your answer.

1-44. Should strategic planning be more open or closed (i.e., hidden or transparent)? Why?

1-45. Discuss the extent to which strategic planning concepts would be applicable to individuals managing their own lives.

http://www.strategyclub
CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 57

MyManagementLab® Go to m ym anag em entlab .co m for the following Assisted-graded writing questions:

1-46 . Strengths and weaknesses should be determined relative empowerment to be successful? Which relies most on to competitors, or by elements of being, or relative to a statistics? Justify your answers, firm's own objectives. Explain. 1-48 . Mymanageinentlab Only— comprehensive writing

1-47. What are the three stages in strategic management? assignment for this chapter. Which stage is more analytical? Which relies most on

Current Readings Foote, Nathaniel. Russell Eisenstat. and Tobias Fredberg.

“The Higher-Ambition Leader." Harvard Business Review (September 2011): 94.

Frisch, Bob. “Who Really Makes the Big Decisions in Your Companv?" Harvard Business Review (December 2011): 104.

Gavetti, Giovanni. “The New Psychology of Strategic Leadership.'' Harvard Business Review (July-August 2011): 118.

Isaacson, Walter. “The Real Leadership Lessons of Steve Jobs.” Harvard Business Review (April 2012): 92.

Lafley, A. G. and Noel M. Tichy. “The Ait and Science of Finding the Right CEO." Harvard Business Review (October 2011): 66.

Leavy, Brian. “Michael Beer— Higher Ambition Leadership.” Strategy and Leadership 40, no. 4 (2012): 5-11.

Reeves, Martin and Mike Deimler. “Adaptability: The New Competitive Advantage." Harvard Business Review (July-August 2011): 134.

Reeves, Martin, Claire Love, and Philipp Tillmanns. “Your Strategy Needs a Strategy." Harvard Business Review (September 2012): 56.

Ronda-Pupo. Guillermo Armando, and Luis Angel Guerras. “Dynamics of the Evolution of the Strategy Concept 1962-2008: A Co-word Analysis.” Strategic Management Journal 33, no. 2 (February 2012): 162-188.

Stieger, Daniel, Kurt Matzler, Sayan Chatterjee, and Florian Ladstaetter-Fussenegger. “Democratizing Strategy: How Crowdsourcing Can Be Used for Strategy Dialogues.” Inside CMR 54, no. 4 (Summer 2012): 44.

Zachary, Miles A., Aaron F. McKenny, Jeremy C. Short, and David J. Ketchen. “Strategy in Motion: Using Motion Pictures to Illustrate Strategic Management Concepts.” Business Horizons 55, no. 1 (January 2012): 5-10.

Zahra, Shaker A., and Satish Nambisan. “Entrepreneurship and Strategic Thinking in Business Ecosystems.” Business Horizons 55. no. 3 (May 2012): 219-229.

Zook, Chris, and James Allen. “The Great Repeatable Business Model." Ha/yard Business Review (November 2011): 106.

58 CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS

adidas Group - 2013 Forest R. and Fred R. David Francis Marion University www.adidas-group.com

Headquartered in Herzogenaurach, Germany, adidas AG is a sports apparel and footwear manufac­ turer and parent company of the adidas Group, which includes the Reebok sportswear company, the TaylorMade-adidas Golf, and Rockport footwear, as well as many other globally-known brands. Besides sports footwear, adidas also produces accessory products such as bags, shirts, watches, eyewear, and other sports- and clothing-related goods. The company is the largest sportswear manufacturer in Europe and the second-largest sportswear manufacturer in the world, with Nike being the first.

The company sells sports shoes, apparel, and equipment, sporting its three-stripe design in 170 countries and focuses on training equipment and apparel for sports such as soccer, basketball, and track athletics, as well as lifestyle goods including SLVR and Y-3 fashion brands, adidas has three segments: Wholesale, Retail, and Other Business. The Wholesale division supplies adidas and Reebok products to retailers globally, while the company’s Retail segment operates almost 2.500 Reebok and adidas stores. The Other Business segment includes TaylorMade-adidas Golf, Rockport, Reebok-CCM Hockey, and other brands.

History At the age of 20, Adolf A d i’ Dassler was driven by a single idea when he made his first shoe. His vision was to produce the most durable and safest footwear for athletes in different sports. Dassler continued this vision until his death in 1978. His first shoe in 1920 was constructed of canvas due to few materials being available in the post-war period. By the 1930s, Dassler was making 30 different styles of shoes for I 1 different sports and employed around 100 workers. After World War II, Dassler found himself once again making shoes with limited materials and in 1947, with only 47 workers, he resurrected shoe manufacturing using canvas and rubber from American fuel tanks. His brother, Rudolf, founded rival company Puma, which is also head­ quartered in Herzogenaurach. Dassler made the first post-war sports shoes in 1949 and formally registered his company adidas. which is the first three letters of his first and last names. To this day, adidas is still referred to as the “Three Stripes Company."

Perhaps the earliest and greatest pioneer in sports marketing, Dassler garnered many famous athletes to endorse his product, including Jesse Owens. Muhammad Ali, Franz Beckenbauer. The German football team won the 1954 World Cup wearing adidas shoes with screw-in studs, spurring the company to develop and promote many new products for major sporting events.

In January 2006. adidas acquired Reebok International Ltd., furthering the adidas Group as one of the top athletic footwear, apparel, and sports hardware producers in the world. In 2008, adidas entered the English cricket market by sponsoring English batsman Kevin Pietersen. The follow­ ing year, adidas signed the English player Ian Bell and the Indian Player Ravindra Jadeja as brand spokesmen. The lines under which adidas produces and sells cricket bats currently include Incurza, Pellara. and Libro, and additionally, adidas manufactures the uniforms worn by both the England and the Australia cricket teams.

http://www.adidas-group.com
CHAPTER 1 • THE COHESION CASE 59

At the London 2012 Olympic Games, adidas outfitted all volunteers, technical staff, and officials. As the Official Partner of Team GB, adidas provided all British athletes in all Olympic sports with performance products, alongside Licensed and Event-Branded Olympic fan wear in those games.

Second Quarter (Q2) of 2013 Results

For Q2 of 2013. adidas reported growth in their Retail stores segment, but sales declined in their Wholesale and Other Businesses segments. Also for that quarter, adidas’ revenues in Western Europe decreased 11 percent compared to the prior year. The company’s sales in North America were down 2 percent, mainly due to sales declines at TaylorMade-adidas Golf. In Greater China for Q2, company sales were up 6 percent, while revenues in Other Asian Markets increased 7 percent. For Q2 of 2013, the best performing region for the company was Latin America where sales grew 21 percent.

From a brand perspective, adidas’ sales at Reebok grew 11 percent while sales from the company’s TaylorMade-adidas Golf segment declined 8 percent. The company’s Rockport sales grew 7 percent and Reebok-CCM Hockey sales increased 2 percent.

Overall, adidas’ revenues declined 4 percent to €3.383 billion in Q2 of 2013, from €3.517 billion in Q2 of 2012. The operating profit declined 2 percent to €252 million compared to €256 million in 2012. The company’s net income grew 4 percent to €172 million (2012: €165 million) and their earnings per share rose to €0.82 (2012: €0.79).

adidas Segments Wholesale In 2012. sales in the adidas W'holesale segment grew 2 percent, driven by strong growth at adidas that more than offset sales declines at Reebok. Wholesale’s gross profit grew 8 percent to €3.840 billion from €3.570 billion in 2011. Wholesale’s operating profit improved 10 percent to €2.965 billion versus €2.690 billion in the prior year. In 2012, adidas’ Wholesale segment increased in all regions except North America, where sales were down 9 percent. In 2012, adidas Sport Performance wholesale rev­ enues grew 6 percent mainly a result of double-digit sales increases in the football, running, basketball and outdoor categories. In 2012, Reebok wholesale revenues decreased 28 percent due mainly due to the discontinuation of the NFL license agreement.

Retail

In 2012, adidas’ Retail revenues increased 14 percent. The company’s Concept stores, factor)' outlets, concession, and e-commerce comers were all up versus the prior year. The adidas Retail Segmental operating profit increased 22 percent to €724 million versus €593 million in the prior year. Retail sales increased in all regions, especially in the UK, Germany and France. Sales in European Emerging Markets rose 19 percent, with Russia leading the way. Sport Performance revenues grew 11 percent in 2012, Sport Style sales rose 20 percent. Reebok sales rose 12 percent, store sales for the adidas brand rose 7 percent. At year-end 2012, the Retail segment operated 2.446 stores, up 62 stores or 3 percent versus the prior year-end level. Of the total number of stores, 1,353 were adidas and 363 were Reebok branded and there were 730 factory outlets. During 2012, adidas opened 323 new stores, 261 stores were closed and 92 stores were remodeled. In addition in 2012, adidas opened 250 new concept stores, 110 concept stores were closed, 57 concept stores were reclassified as concession comers, and one concept store was reclassified as a factory outlet. As a result, the number of concept stores increased by 82 to 1,437 with 1,171 being adidas brand and 266 Reebok. Also in 2012, sales from adidas and Reebok e-commerce platforms were up 68 percent.

60 CHAPTER 1 • STRATEGIC M ANAGEM ENT ESSENTIALS

Other Businesses

The Other Businesses revenues increased at a double-digit rate in all regions. Revenues in Western Europe were up 16 percent led by double-digit sales growth at Other Centrally Managed Brands and TaylorMade-adidas Golf. Sales at Reebok-CCM Hockey grew at a low-single-digit rate, and revenues at Rockport declined at a double-digit rate. Sales in European Emerging Markets increased 17 percent led by strong double-digit growth at Rockport. Revenues at Reebok-CCM Hockey and TaylorMade-adidas Golf were up at a high-single- and mid-single-digit rate, respec­ tively. North America revenues rose 19 percent, led by double-digit growth at TaylorMade-adidas Golf and Reebok-CCM Hockey. Revenues in Greater China were up 10 percent while sales in Other Asian Markets grew 12 percent. In Latin America, sales grew 37 percent, as a result of strong double-digit growth at TaylorMade-adidas Golf and Rockport. In 2012, TaylorMade-adidas Golf revenues grew 20 percent and Rockport revenues increased 2 percent. The company's Other Centrally Managed Brands revenues grew 61 percent.

Internal Issues Vision and Mission

The overall mission of adidas is "to be the leading and most loved sports brand in the world.”, whilst adidas’ vision for their Retail segment is "to become a top retailer by delivering healthy, sustainable growth with outstanding return on investment." TaylorMade-adidas Golf's mission is “to maintain its status as the world’s leading golf company in terms of sales and profitability.” Rockport’s mission is “to become one of the world’s leading leather footwear brands through the innovative combination of contemporary style and engineered comfort.”

Organizational Structure

Four young white male executives comprise the top management team at adidas. The individuals are listed below:

1. Herbert Hainer, CEO 2. Glenn Bennett. Director of Global Operations 3. Robin Stalker, CFO 4. Erich Stamminger, Director of Global Brands

Production

Production for almost all of adidas" footwear, apparel and hardware is outsourced to independent third-party suppliers, primarily located in Asia. The company operates ten production and assembly sites in Germany (1), Sweden ( I ), Finland (1), the USA (4) and Canada (3). In comparison, in 2012, adidas had 337 independent manufacturing partners (2011: 308). The number of suppliers increased throughout all product categories (footwear, apparel and hardware). Among these manufacturing partners, 76 percent were located in Asia, 16 percent in the Americas and 8 percent in Europe. In total. 31 percent of all adidas suppliers were located in China. In fact, 96 percent of adidas' total 2012 footwear volume for adidas, Reebok and adidas Golf was produced in Asia (2011: 97%). Vietnam housed 31 percent of adidas’ production and Indonesia had 26 percent. The volume of footwear that adidas sources from Cambodia increased strongly in 2012. Overall for that year, adidas’ footwear suppliers produced approximately 244 million pairs of shoes (2011: 245 million pairs), with the largest footwear factory producing about 10 percent of the footwear sourcing volume (2011: 9%). Rockport produced approximately 8 million pairs of footwear in 2012, a decrease of 5 percent from the prior year.

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Apparel production in Turkey increases significantly in 2012 as company sourced 84 percent of its total apparel volume from Asia (2011: 83%). Europe remained the second-largest apparel sourcing region, representing 11% of the volume (2011: 11%). The Americas accounted for 5 percent of the volume (2011: 6%). The largest apparel factory produced approximately 10percent.

R&D

R&D expenses increased 12 percent in 2012 to €128 million (2011: €115 million).

Finance

For the first half of 2013, adidas revenues increased its Retail and Other Businesses (TaylorMade- adidas golf and Rockport) but declined in Wholesale, as indicated in Exhibit 1. The company relies heavily on third-party Wholesale retail channels, including department stores, c-tailers and specialist sports retailers.. Over the past five years, adidas has evolved into a significant retailer itself, operating 2.446 stores for the adidas and Reebok brands worldwide, which comprise the company's Retail segment.

In the first half of 2013, adidas sales grew in all regions except Western Europe, as indicated in Exhibit 2. Revenues in Western Europe decreased 9 percent, as growth in France and Poland was more than offset by double-digit sales declines in the UK. Italy and Spain. In European Emerging Markets, adidas’ reported slight sales growth in all countries except Ukraine. Sales in North America grew 1 percent and in Greater China rose 6 percent on a currency-neutral basis. Revenues in Other Asian Markets grew 1 percent, with higher increases in India. South Korea and Australia. In Latin Amcrica, adidas’ sales grew 16 percent.

EXH IBIT 1 adidas Revenues by Category

First Half Year 2013

First Half Year 2012

Change y-o-y in euro terms

€ in millions € in millions in %

Wholesale 4,495 4,727 (5) Retail 1.589 1,547 3 Other Businesses 1,050 1.067 (2) Total 7,134 7,341 (3)

Source: adidas First Half Year Repori 2013.

EXH IBIT 2 adidas Sales by Region

First Half Year First Half Year Change y-o-y in 2013 2012 euro terms

€ in millions € in millions in %

Western Europe 1.907 2,098 (9) European Emerging Markets 901 917 (2) North America 1,716 1,728 0 ) Greater China 781 732 7 Other Asian Markets 1,064 1,162 (8) Latin America 765 704 9 Total 7,134 7341 (3)

Source: adidas First Half Year Report 2013.

62 CHAPTER 1 • STRATEGIC M ANAGEM ENT ESSENTIALS

In the first half of 2013, adidas' net incomc increased 6 percent to €480 million from €455 million in 2012. Net borrowings at June 30.2013 amounted to €94 million, a decrease of €223 million, or 70 percent, versus €318 million at the end of June 2012.

Sustainability

For the 13th consecutive year in 2013, adidas was included in the Dow Jones Sustainability Indexes (DJSI) and the FTSE4Good Europe Index, the Vigeo Group’s Ethibel Sustainability Index Excellence Europe as well as in the ASPI Eurozone Index. For 2012. adidas was included for the eighth con­ secutive time in “The Global 100 Most Sustainable Corporations in the World.” a list that is revealed each year at the World Economic Forum in Davos, Switzerland. The company is a constituent of the STOXX Global ESG Leaders indices.

Product Areas Football

As the world’s most popular sport, football is a key strategic focus for adidas. and the company puts research and development into technologies for boots, apparel, and footballs at a position of high priority. In late 2013, adidas launched a stream of new and innovative football products for the W'orld Cup. In 2013, adidas reported successes in football, such as brand spokesman Lionel Messi being awarded the FIFA Ballon d'Or as the best player of the year for the fourth time in a row, Chelsea FC won an all-adidas-sponsored final in the UEFA Europa League, and FC Bayern Munich was recently crowned UEFA Champions League winner. At the 2013 FIFA Confederations Cup, four out of eight teams are equipped by adidas, including the World and European Champion Spain. Asian Champion Japan. CONCACAF Champion Mexico and the 2013 Africa Cup winner Nigeria. The Japan team was also the very lirst team to qualify the 2014 FIFA World Cup in Brazil.

The company cxpects to achieve record sales of €2 billion in the football category in 2014. As the official sponsor, supplier and licensee of the 2014 FIFA World Cup, to be held in Brazil, and will again supply the official ball of the tournament as well as equipment for officials, referees, and volunteers. Additionally, having extended their partnership with the Union of European Football Associations, adidas will also supply the balls and equipment for the UEFA EURO 2016 tourna­ ment. These partnerships continue adidas’ 30-year history of sponsoring some of the world’s largest sporting events, which also includes the FIFA Confederations Cup and UEFA Champions League. Sponsorship of high-profile events such as these provide adidas with important platforms to assert and showcase their dominance in football.

In 2012 adidas sponsored Spain winning the UEFA EURO 2012 and Chelsea FC becoming the winner of the UEFA Champions League in an all-adidas final against host club FC Bayern Munich. The adizero f50 featuring miCoach has changed the way football is played and how data is analyzed. The introduction of Predator Lethal Zones marked the successful recognition of the Predator family, the most successful boot concept in football history.

Basketball

The company is expanding its market share in the North American and Chinese basketball markets and capitalizing on the growing popularity of the sport in the emerging markets by building brand equity, leveraging its status as the official NBA outfitter, and capitalizing on relationships with some of the most promising stars of the NBA. including Derrick Rose and Dwight Howard. In 2012, adidas Basketball focused on expanding the Derrick Rose signature collection and launched the 269g adizero Crazy Light 2. Also introduced were the D Rose 3.0 basketball shoe and Derrick Rose’s first signature apparel collection.

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Training

In 2012, adidas introduced several new technologies and product updates, such as the Adipure Trainer 360, a training shoe for men and women offering unrestricted foot movement using lightweight and flexible materials. In 2013, adidas Training introduced the next generation of the ClimaCool and ClimaWarm apparel technologies, featuring advanced fabrics, as well as expanding the Adipure foot­ wear range, to provide athletes with the highest functionality and comfort.

Outdoor

In 1978. climbing legend Reinhold Messner used new adidas boots to reach base camp on his way to becoming the first man to climb Mount Everest without artificial oxygen. Today, adidas offers a wide range of boots for mountaineers, climbers, and hikers, as well as technical footwear, apparel, backpacks and eyewear, sometimes in collaboration with partners such as Gore-Tex, Windstopper, Primaloft and Continental. The adidas Outdoor group has close relationships with the mountain guides from the Alpine Centre in Zermatt. Switzerland, and some of the best climbing and moun­ taineering athletes from around the world, including world-renowned climbers like Alexander and Thomas Huber, Mayan Smith-Gobat, Dean Potter and Sasha DiGiulian, a rising star in competitive climbing. Special adidas Outdoor offerings include the Terrex Fast R and the HydroterraShandal and the Terrexlcefeather Gore-Tex Pro-Shell jacket. In 2013, adidas Outdoor launched the Terrex Solo Stealth, the first adidas shoe with Stealth rubber designed for technical climbing, where perfect grip is essential.

Sport Style

Street-wear and lifestyle sports fashion now makes up more than 28 percent of adidas brand sales glob­ ally. Originals is recognized as a legitimate sports lifestyle brand offering a wide range of products aimed at the 16- to 24-year-old consumer.

Y-3

Y-3 athletic sportswear is elegant and chic. In 2013, the Y-3 portfolio was extended with stores in London, Vienna and Hong Kong and increased emphasis on the Y-3 global e-commerce website.

Porsche Design Sport

Working closely with Porsche Design Sport, adidas creates luxury sportswear that features leading- edge performance technologies. An adidas spokesperson in this category is José Mourinho who show­ cases the image of Porsche Design Sport. In 2012, the men’s collection included apparel, footwear and accessories in the categories of Driving, Golf, Gym, Running, W'ater and Snow. In 2013, adidas launched its first women’s collection and introduced it with the support of its new brand ambassador, tennis player Daniela Hantuchova. New adidas products include the Made in Germany Cleat II and Compound II as well as an exclusive offer of heli-skiing items. Porsche Design Sport is available in Porsche Design stores, adidas Concept Stores and high-end department stores.

SLVR

SLVR is a sportswear clothing product offering that combines comfort and style with advanced fabrics and techniques. In fall 2013, adidas SLVR created a global e-commerce store.

64 CHAPTER 1 • STRATEGIC M ANAGEMENT ESSENTIALS

Fitness Brand

The adidas-owned brand Reebok strives to become the leading fitness brand in the world, having helped usher in the aerobics movement years ago with groundbreaking, game-changing products and marketing. While the sporting goods industry and the world have changed considerably since then. Reebok wants lo help shift the paradigm and change the perception of fitness, evolving it from a chore to a series of activities and a lifestyle choice. Therefore, Reebok is on a mission to empower people to be “lit for life”, supporting them to achieve their full potential in a fun, collaborative and engaging way. In 2013, Reebok significantly expanded its fitness offerings and broadened its com­ munication of what the brand stands for and what it means to wear Reebok.

Studio

In 2013 adidas began its Reebok Studio offerings that include Dance, Yoga and Aerobics product concepts and programmes for women. Dance and Yoga products launched in spring 2013, while Aerobics launched in the second half of 2013. The key dance product is the Dance UR Lead - a technical dance shoe.