How does mcdonald's compete with their competitors

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Case 15

McDonald’s

Jamal Shamsie

Alan B. Eisner

Strategic Management:
Creating Competitive Advantages

McDonald’s
Discussion Question

What situation did Thompson inherit when he became CEO? What are the current forces in the external environment that might affect new CEO Thompson’s strategy?

What source of competitive advantage does McDonald’s have, and is that position supported by its value chain and other internal resources?

What other strategies did McDonald’s formulate to achieve a competitive advantage? What steps did Skinner take to fix the problems that McDonalds faced? What should Thompson do now to perhaps build on Skinner’s accomplishments?

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McDonald’s
Q1. Strategy Concept

Strategic management consists of the analyses, decisions, and actions an organization undertakes in order to create and sustain competitive advantages.
Q1: What situation did Thompson inherit?

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Strategy is all about the ideas, decisions, and actions that enable a firm to succeed.

McDonald’s
Q1. Strategy Concept, cont.

Key Attributes of strategic management:

Directs the organization toward overall goals and objectives
Includes multiple stakeholders in decision making
Needs to incorporate short-term and long-term perspectives
Recognizes trade-offs between efficiency (cost) and effectiveness (performance)
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McDonald’s
Q1. Strategy Concept, cont.

The primary role of the organizational leader is to articulate vision, mission and strategic objectives
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Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of “ambidextrous behavior”, where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization.

McDonald’s
Q1. Strategy Concept, cont.

Exhibit 1.6

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The primary role of the organizational leader is to articulate vision, mission and strategic objectives.

McDonald’s
Q1. Strategy Concept, cont.

Company vision
Massively inspiring
Overarching
Long-term
Driven by and evokes passion
Fundamental statement of the organization’s
Values
Aspiration
Goals
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Leaders must communicate their initial vision of the organization’s purpose: what was the original goal that evokes a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion? Is the original vision still applicable given the present circumstances?

McDonald’s
Q1. Strategy Concept, cont.

Mission statements
Purpose of the company
Scope of operations
Basis of competition and competitive advantages
More specific than vision
Focused on the means by which the firm will compete
Reflects an organization’s enduring, overarching strategic priorities and competitive positioning
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The organizational mission also needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers, 2) what customer need is the organization trying to fulfill, and 3) how does the business create and deliver value to customers and satisfy their needs. Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm’s mission can and should change when competitive conditions dramatically change or the firm is faced with new threats or opportunities.

McDonald’s
Q1. Strategy Concept, cont.

Strategic objectives
Operationalize the mission statement
Provide guidance on how the organization can fulfill or move toward the “higher goals”
Specific, measurable, appropriate, realistic
Cover a more well-defined time frame
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Anticipating that things might change, an organization’s leadership must then establish strategic objectives to operationalize the mission statement with specific yardsticks. That is, objectives help to provide guidance on how the organization can fulfill or move toward the “higher goals” in the goal hierarchy—the mission and vision.

McDonald’s
Q1. Strategy Concept, cont.

McDonald’s original vision was to provide local customers with a quality meal at a fair price through a quick and convenient service delivery.
Mission became to deliver this service consistently, providing an all-around enjoyable experience for the whole family
Cantalupo’s objective was to inspire employees and franchisees to “put the smile back into the McDonald’s experience”
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McDonald’s
Q1. Strategy Concept, cont.

External forces had begun pushing for healthier forms of food
Franchisees had inconsistency in service, décor
New menu items had to be accepted by loyal customers
Would Thompson be correct to continue with the original vision & mission?
Should he rethink strategy as a result of factors in the environment?
15-*

External forces had begun pushing for healthier forms of food. Company-owned and franchisee restaurants had inconsistency in service and décor. New menu items had to be accepted by loyal customers. Skinner appeared to have continued with the original vision & mission. Should Thompson do the same? McDonald’s provides an interesting example of a firm that did very well for decades with a clear strategy and then stumbled as it tried to reevaluate what it wanted to do. It is clear from the case that McDonald’s had been tremendously successful primarily as a fast food chain, with particular emphasis on hamburgers. Should Thompson rethink strategy as a result of factors in the environment?

McDonald’s
Q1. Strategy Concept, cont.

Strategic Management involves

Analysis
Strategic goals (vision, mission, strategic objectives)
Internal and external environment
Decisions - Formulation
What industries should we compete in?
How should we compete in those industries?
Actions - Implementation
Allocate necessary resources
Design the organization to bring intended strategies to reality
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During strategic analysis, the leader does “advance work” to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here’s where innovation is important.

McDonald’s
Q1. Strategy Concept, cont.

How can McDonald’s create a sustainable competitive advantage in the marketplace that is not only unique and valuable but also difficult for competitors to copy or substitute?
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The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute?

McDonald’s
Q1. External Environment

Q1 cont: What are the current forces in McDonald’s external environment?

External Scanning
Surveillance of a firm’s external environment:
Predict environmental changes to come

Detect changes already under way

Proactive mode

External Monitoring
Track evolution of:
Environmental trends
Sequence of events
Streams of activities
Exhibit 2.1

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Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm’s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends – what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm’s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape – what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process.

McDonald’s
Q1. External Environment, cont.

Demographic
Sociocultural
Political/Legal
Technological
Economic
Global
The general environment is composed of factors that are both hard to predict and difficult to control:

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What factors or trends might be most important to McDonald’s? To assess how the external environment might affect McDonald’s strategy, it’s necessary to take a look at the factors in the general external environment. McDonald’s must consider the political/legal, economic and global, sociocultural and demographic, and technological forces that might affect the ability of the firm to deliver its services and sustain its business. See which factors in the general environment we might pick that have a significant impact on the fast food industry.

McDonald’s
Q1. External Environment, cont.

Forces in McDonald’s General Environment:

Demographic - customers now working around the clock, expecting 24 hour access to fast food, how to please range of customers from kids to contractors?
Sociocultural - customers preferences have changed to more exotic foods, healthier food with better taste
Economic - current economic downturn means customers might be trading down to McDonald’s if they want to eat out
Global - boundaries are disappearing, travelers more open to global consistency in food offerings - Golden Arches are accepted, and expected, everywhere
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McDonald’s
Q1. External Environment, cont.

Segments of the competitive environment include:
Competitors
Customers/Buyers
Suppliers
Sometimes called the task or industry environment
Porter’s five forces model
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To answer the question about the current forces in the general and fast food industry environments that affect McDonald’s ongoing strategy, it’s necessary to assess the segments of the external competitive environment that include competitors, customers, and suppliers, substitutes and new entrants. Porter’s five forces model allows strategists to anticipate where the industry might be most vulnerable.

McDonald’s
Q1. External Environment, cont.

Based on the external environmental factor analysis, the fast food business is not an attractive industry, with many competitors trying to carve out a piece of the “profit” pie.

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Let’s apply Porter’s Five Forces of competition. Based on the external environmental industry analysis, the fast food business is not an attractive industry, with many competitors trying to carve out a piece of the “profit” pie.

McDonald’s
Q2. Internal Analysis

Value-Chain Analysis:

Sequential process of value-creating activities
The amount that buyers are willing to pay for what a firm provides them
Value is measured by total revenue
Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service
Q2 cont: How is McDonald’s strategy supported by its value chain and other internal resources?

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To answer the question of whether McDonald’s differentiation strategy is adequately supported by its value chain and other internal resources, McDonald’s must assess the relationships between the elements in its value chain. Every activity should add value.

McDonald’s
Q2. Internal Analysis, cont.

Exhibit 3.1

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Take a look at Chapter 3, Exhibit 3.1 to see the value chain activities.

McDonald’s
Q2. Internal Analysis, cont.

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Value Chain Activity - Primary: How does McDonald’s create value?
Inbound logistics Hard to assess
Operations Strived for consistency across the chain, with differing results. Refurbishing of restaurants, change in hours may help draw customers.
Outbound logistics Hard to assess
Marketing and sales Many product innovations failed, $1 menu didn’t go well with franchisees. I’m Loving It campaign was attempt to reach all customers, and has been successful.
Service Hard to assess
McDonald’s
Q2. Internal Analysis, cont.

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Value Chain Activity - Secondary: How does McDonald’s create value?
Procurement Info not available in the case
Technology development Adoption of expensive cooking processes failed to generate desired results. Premium salads take advantage of technology.
Human resource management Lower standards for hiring, less time for training led to deterioration of service
General administration Top-down decision-making, lack of involvement in changes caused franchisee complaints, especially when profits went down. Franchise training program will help.
McDonald’s
Q2. Internal Analysis, cont.

Skinner realized that basic changes in McDonalds’ value chain needed to made to get the company back on track.
Menu changes and franchisee relationships were key factors that he addressed.
His moves seem to have paid off in that McDonalds’ financial performance improved, but fundamental issues still remained - would the McCafe innovation and “healthier” menu dilute the traditional brand image and harm McDonald’s reputation?
15-*

CEO Skinner realized that basic changes in McDonalds’ value chain needed to made to get the company back on track. Menu changes and franchisee relationships were key factors that he addressed. His moves seem to have paid off in that McDonalds’ financial performance improved, but fundamental issues still remained - would the McCafe innovation and “healthier” menu dilute the traditional brand image and harm McDonald’s reputation?

McDonald’s
Q2. Internal Analysis, cont.

Resource-Based View of the Firm:

Two perspectives
The internal analysis of phenomena within a company
An external analysis of the industry and its competitive environment
Three key types of resources
Tangible resources
Intangible resources
Organizational capabilities
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To further answer the question of how to support a competitive strategy, it’s important to consider the concept of the resource-based view of the firm, and the three key types of resources: tangible resources, intangible resources, and organizational capabilities.

McDonald’s
Q2. Internal Analysis, cont.

McDonald’s has tangible & intangible internal resources:

Financial - McDonald’s appears to have managed its finances well, currently has adequate cash on hand
Physical - has significant physical assets in the restaurants
Technological - has kept up with current technology
Organizational - franchise model is a weakness unless strong quality controls are in place
Human - training of staff is critical, could be a problem
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McDonald’s profile might look like this:

McDonald’s
Q2. Internal Analysis, cont.

McDonald’s has other intangible internal resources:

Innovation - this is a current strength, but needs to be managed in the right direction - choice of innovation is key
Reputation - McDonald’s brand is its most significant strength - this should be protected at all costs
Organizational Capabilities - Thompson’s leadership, willingness to extend Cantalupo’s and Skinner’s vision of excitement to all stakeholders is key
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McDonald’s
Q2. Internal Analysis, cont.

Firm Resources and
Sustainable Competitive Advantages (VRIN)

Exhibit 3.6

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Determining whether the internal resources are valuable, rare, difficult to imitate, or difficult to substitute (VRIN) can help a firm sustain a competitive advantage. See Chapter 3, Exhibit 3.6.

McDonald’s
Q2. Internal Analysis, cont.

McDonald’s doesn’t appear to have any resources that are clearly valuable, rare, in-imitable or non-substitutable.
This indicates that McDonald’s may have a major challenge sustaining a competitive advantage, especially since any strategy it implements can be quickly imitated by competitors.
McDonald’s core capability appears to be its operations focus on the original vision and mission. This has allowed its brand reputation to remain solid over the years.
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Applying the VRIN analysis, McDonald’s doesn’t appear to have any resources that are clearly valuable, rare, in-imitable, or non-substitutable. This indicates that McDonald’s may have a major challenge sustaining a competitive advantage, especially since any strategy it implements can be quickly imitated by competitors. However, McDonald’s core capability appears to be its operations focus on the original vision and mission. This has allowed its brand reputation to remain solid over the years.

McDonald’s
Q2. Internal Analysis, cont.

Intellectual capital
Reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees
Human capital
Individual capabilities, knowledge, skills, and experience of the company’s employees and managers
McDonald’s has some valuable intangible assets to help it carry out its mission - but these need to be further developed, especially with a more franchise-based model. Thompson’s leadership is key.
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Consider the concepts of intellectual capital and human capital, both of which are intangible assets that a company such as McDonald’s needs to have in order to compete successfully. Intellectual capital is a measure of the value of a firm’s intangible assets, its reputation, employee loyalty and commitment, customer relationships, company values, brand names, and the experience and skills of employees. Human capital involves the individual capabilities, knowledge, skills, and experience of the company’s employees and managers. McDonald’s has some valuable intangible assets to help it carry out its mission - but these need to be further developed, especially now that the company has transitioned to a more franchise-based model. Thompson’s leadership is key! Given McDonald’s challenges both internally and externally, he must make some good choices about how to compete going forward.

McDonald’s
Q3. Strategic Formulation

Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed to create value.
Q3: What other strategies did McDonald’s formulate to achieve a competitive advantage?

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Corporate strategy focuses discussion on the questions of what businesses a corporation should compete in, and how the businesses should be managed so they can create “synergy” – creating value through entering new markets or developing new technologies, either through related or unrelated diversification.

McDonald’s
Q3. Corporate-Level Strategy, cont.

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Diversification initiatives must create value for stakeholders. Options include:
Mergers and acquisitions
Strategic alliances
Joint ventures
Internal development
Diversification should create synergy
Diversification is the process of firms expanding their operations by entering new businesses. In related diversification, a firm enters a different business in which it can benefit from leveraging core competencies, sharing activities, or building market power. Whatever the choice, it should create value for all stakeholders – employees, suppliers, distributors, and the organization’s owners themselves. The choice of diversification strategy should create synergy so that all parties gain something they would not have had on their own.

McDonald’s
Q3. Corporate-Level Strategy, cont.

Achieving Synergy through Diversification:
Related businesses (horizontal relationships)
Sharing tangible resources
Sharing intangible resources
Leveraging core competencies
Unrelated businesses (hierarchical relationships)
Value creation derives from corporate office
Leveraging support activities
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When achieving synergy through diversification, a firm has two choices: related diversification through horizontal relationships with related businesses, sharing tangible and intangible resources, and leveraging core competencies; and unrelated diversification though hierarchical relationships with unrelated business. In this case, value creation derives from the corporate office by leveraging support activities.

McDonald’s
Q3. Corporate-Level Strategy, cont.

McDonald’s has pursued related diversification through its relationships with franchisees.
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*

McDonald’s
Q3. International Strategy

International expansion is a viable diversification strategy, however before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country.
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International expansion is a viable diversification strategy, however before pursuing this, a firm needs to determine why an industry in a given country is more (or less) successful than the same industry in another country.

McDonald’s
Q3. International Strategy, cont.

Motivation for International Expansion:

Increase the size of potential markets
Attain economies of scale
Taking advantage of arbitrage opportunities
Extend the life cycle of a product
Optimize the physical location for every activity in its value chain
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McDonald’s
Q3. International Strategy, cont.

When choosing a country to expand into, firms must assess
The degree of consumer demand,
The degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available,
The speed with which such resources can be deployed,
The extent of political and economic risk and corruption,
The access to qualified management.
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When choosing a country to expand into, firms must assess the degree of consumer demand, the degree to which resources such as skilled labor and other supplier or supporting infrastructure are developed and available, the speed with which such resources can be deployed, the extent of political and economic risk and corruption, the access to qualified management.

McDonald’s
Q3. Strategic Implementation

What does strategy consist of:

Analysis
Strategic goals (vision, mission, strategic objectives)
Internal and external environment of the firm
Decisions - Formulation
What industries should we compete in (business-level)?
How should we compete in those industries (corporate-level & international strategies)?
Action - Implementation
Allocate necessary resources
Design the organization to bring intended strategies to reality
Q3 cont: What steps did Skinner take to fix the problems McDonald’s faced?

15-*

Remember our previous discussion…

McDonald’s
Q3. Strategic Implementation, cont.

Skinner continued the tough “up or out” grading system for franchisees that identified underperforming units
Introduced new products such as McGriddles breakfast sandwich, added healthier items
Created a new promotion, “I’m loving it”
Refurbished restaurants, making them more comfortable, providing TVs and wireless access
Allowed franchisees to experiment and make changes to fit their local community
Moved toward 24/7 all hour customer access
Innovated by incorporating McCafe concept to appeal to another type of customer
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McDonald’s
Q3. Strategic Implementation, cont.

McDonalds’s had experienced a comeback the likes of which were pretty unprecedented. The prevailing belief was that when restaurants started to slide, it really took a lot to turn them around. Would McDonald’s be the exception?
Will new CEO Thompson guide McDonald’s to be able to successfully compete against all of its rivals?
Who’s willing to bet yes??
15-*

Strategy is all about the ideas, decisions, and actions that enable a firm to succeed.

Leaders face a large number of complex challenges. Leaders must be proactive, anticipate change and continually refine changes to their strategies. This requires a certain level of “ambidextrous behavior”, where leaders are alert to opportunities beyond the confines of their own jobs, and are also cooperative and seek out opportunities to combine their efforts with others. Leaders must make strategic management both a process and a way of thinking throughout the organization.

The primary role of the organizational leader is to articulate vision, mission and strategic objectives.

Leaders must communicate their initial vision of the organization’s purpose: what was the original goal that evokes a powerful and compelling mental image of a shared future, one that would be massively inspiring, overarching, and long-term, that represented a destination that is driven by and evokes passion? Is the original vision still applicable given the present circumstances?

The organizational mission also needs to be considered: a mission encompasses both the purpose of the company as well as the basis for competition and competitive advantages. In writing a mission statement, it is important to understand the definition of the business: 1) who are its customers, 2) what customer need is the organization trying to fulfill, and 3) how does the business create and deliver value to customers and satisfy their needs. Organizations must respond to multiple constituencies if they are to survive and prosper, and the mission provides a means of communicating to diverse organizational stakeholders. Although vision statements tend to be quite enduring and seldom change, a firm’s mission can and should change when competitive conditions dramatically change or the firm is faced with new threats or opportunities.

Anticipating that things might change, an organization’s leadership must then establish strategic objectives to operationalize the mission statement with specific yardsticks. That is, objectives help to provide guidance on how the organization can fulfill or move toward the “higher goals” in the goal hierarchy—the mission and vision.

External forces had begun pushing for healthier forms of food. Company-owned and franchisee restaurants had inconsistency in service and décor. New menu items had to be accepted by loyal customers. Skinner appeared to have continued with the original vision & mission. Should Thompson do the same? McDonald’s provides an interesting example of a firm that did very well for decades with a clear strategy and then stumbled as it tried to reevaluate what it wanted to do. It is clear from the case that McDonald’s had been tremendously successful primarily as a fast food chain, with particular emphasis on hamburgers. Should Thompson rethink strategy as a result of factors in the environment?

During strategic analysis, the leader does “advance work” to anticipate unforeseen environmental developments, identify unanticipated resource constraints, assess changes in his or her preferences for how to manage. During strategy formulation, the organization addresses the issue of how to compete in a given business to attain competitive advantage. Strategies are formulated at the business, corporate, and international levels. Entrepreneurial initiatives may also play a role. In strategy implementation, depending on the type of organization structure, the leader might include key individuals in a discussion around selecting which strategies might be best to implement at which level within the organization. The leader must ensure proper strategic controls and organizational design, and establish effective means to coordinate and integrate activities within the firm as well as with suppliers, customers and possible alliance partners. Leaders should also be committed to excellence and ethical behavior while promoting learning and continuous improvement. Here’s where innovation is important.

The basic question strategic management tries to answer is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute?

Organizational leaders must become aware of factors in the overall environment that might affect their ability to create a competitive advantage. So how do managers become environmentally aware? By doing scanning, monitoring, and gathering competitive intelligence, and using these inputs to develop forecasts. This prepares the firm to do more extensive analysis of the forces in the general environment and the industry or competitive environment. Environmental scanning involves surveillance of a firm’s external environment to predict environmental changes and detect changes already under way. It is a BIG PICTURE viewpoint of the industry/competition, looking for key indicators of emerging trends – what catches your eye? Alerts the firm to critical trends before changes have developed a discernible pattern and before competitors recognize them. Environmental monitoring is a firm’s analysis of the external environment that tracks the evolution of environmental trends, sequences of events, or streams of activities. Leaders need to monitor the trends that have the potential to change the competitive landscape – what do you want to track? Firms need to CHOOSE the trends identified via the scanning activity, and regularly monitor or track these specific trends to evaluate the impact of these trends on their strategy process.