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Strategic M anagem

ent and Business Policy G

lobalization, Innovation and Sustainability G

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Strategic Management and Business Policy

Globalization, Innovation and Sustainability

FIFTEENTH EDITION

Thomas L. Wheelen • J. David Hunger Alan N. Hoffman • Charles E. Bamford

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FIFTEENTH EDITION GLOBAL EDITION

Alan N. Hoffman Bentley University

Strategic Management

and Business Policy

GLOBALIZATION, INNOVATION, AND SUSTAINABILITY

Thomas L. Wheelen Formerly with University of Virginia, Trinity College, Dublin, Ireland

Charles E. Bamford University of Notre Dame

J. David Hunger Formerly with Iowa State University, St. John’s University

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Dedicated to

TOM WHEELEN AND DAVID HUNGER

Tom originated this book in the late 1970s and with his friend David Hunger brought the first edition to fruition in 1982. What a ride it was! We lost both of these extraordinary men in rapid succession. After battling bone cancer, Tom died in Saint Petersburg, Florida, on December 24, 2011. David died in St. Joseph, Minnesota on April 10, 2014 after fighting cancer himself. It was Tom’s idea from the very beginning to include the latest research and useful material written in

such a way that the typical student could read and understand the book without outside assistance. That has been a key reason for the success of the book through its many editions. Tom and David

worked in adjoining offices at the McIntire School of Commerce at the University of Virginia where their lifelong collaboration blossomed. Tom’s last months were spent working with the two new co-authors to map out the direction for the 14th edition and we were fortunate to work with

David through the early part of the 14th edition update until his fight against his cancer took prior- ity. We thank you both and bid you a fond farewell! This 15th edition is for you!

Alan N. Hoffman Charles E. Bamford

SPECIAL DEDICATION TO DAVID HUNGER

A special dedication in honor of David Hunger to his colleagues, friends, and students—

It is our hope and prayer that you found, and continue to find, some joy in your study of Strategic Management and Business Policy and, perhaps, experience a sense of the passion behind the subject matter presented in this textbook. It was originated by two men who were the best of

friends and colleagues, Dr. Tom Wheelen (May 30, 1935 – December 24, 2011) and our Dad, Dr. J. David Hunger (May 17, 1941 – April 10, 2014). This will be the first edition we will see without a handwritten note in the front and a dedication to us all. Dad came alive discussing strategy, case management, theory, entrepreneurship, and the daily happenings in the field of

management. Even relaxing at the end of the day, he could be found thumbing through a Business Week or journal. Colleagues always knew when he was in their presentations because he was fully

engaged, offering questions and happy to share in an animated dialogue. Students speak fondly of being in his class. His dedication to the field never ended. Even up to a month before he died

(still undergoing chemotherapy) he insisted on travelling by train from Minnesota to Chicago for a Case Research Conference to run a panel. We are so proud and thankful that Drs. Alan Hoffman and Chuck Bamford knew Tom and Dad and are carrying the torch forward. As his 4 daughters

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4 DEDICATED

and 6 grandchildren, we miss him daily. We lost him far too soon. Finally, our mom, Betty Hunger, who lived with the authorship of this textbook for three quarters of their 45 years together

and joked that it was their 5th child, wishes to express just how much she misses Dad and looks forward to seeing him again.

Betty, Kari and Jeff, Madison and Megan, Suzi and Nick, Summer and Kacey, Lori and Derek, Merry and Dylan, and Edan and Greyson.

We love you David/Dad/GrandDad.

To Will Hoffman, the greatest son in the world…. and to our saint Wendy Appel. …. and to Jodi L. Silton, thank you for your kindness and understanding.

Alan Hoffman

To Yvonne, for your support, advice, encouragement, love, and confidence. To my children Ada, Rob, and Sean and my grandchildren Silas, Isaac, and Clara.

Chuck Bamford

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Brief Contents

PART ONE Introduction to Strategic Management and Business Policy 33 C H A P T E R 1 Basic Concepts of Strategic Management 34 C H A P T E R 2 Corporate Governance 72 C H A P T E R 3 Social Responsibility and Ethics in Strategic Management 102

PART TWO Scanning the Environment 123 C H A P T E R 4 Environmental Scanning and Industry Analysis 124 C H A P T E R 5 Organizational Analysis and Competitive Advantage 164

PART THREE Strategy Formulation 199 C H A P T E R 6 Strategy Formulation: Business Strategy 200 C H A P T E R 7 Strategy Formulation: Corporate Strategy 224 C H A P T E R 8 Strategy Formulation: Functional Strategy and Strategic Choice 250

PART FOUR Strategy Implementation and Control 279 C H A P T E R 9 Strategy Implementation: Global Strategy 280 C H A P T E R 1 0 Strategy Implementation: Organizing and Structure 294 C H A P T E R 1 1 Strategy Implementation: Staffing and Directing 324 C H A P T E R 1 2 Evaluation and Control 348

PART FIVE Introduction to Case Analysis 377 C H A P T E R 1 3 Suggestions for Case Analysis 378

PART SIx Cases in Strategic Management 1-1 GLOSSARY G-1

NAME INDEx I-1

SUBJECT INDEx I-6

5

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Contents

Preface 21 About the Authors 29

PART ONE Introduction to Strategic Management and Business Policy 33

C H A P T E R 1 Basic Concepts of Strategic Management 34 The Study of Strategic Management 37

Phases of Strategic Management 37

Benefits of Strategic Management 38

Globalization, Innovation, and Sustainability: Challenges to Strategic Management 39

Impact of Globalization 40

Impact of Innovation 41

Global Issue: ASEAN: REGIONAL TRADE ASSOCIATIONS 42

Impact of Sustainability 42

Theories of Organizational Adaptation 44

Creating a Learning Organization 44

Basic Model of Strategic Management 46

Environmental Scanning 46

Strategy Formulation 48

Strategy Implementation 52

Evaluation and Control 53

Feedback/Learning Process 54

Initiation of Strategy: Triggering Events 54

Strategic Decision Making 55

What Makes a Decision Strategic? 55

Mintzberg’s Modes of Strategic Decision Making 56

Strategic Decision-Making Process: Aid to Better Decisions 57

The Strategic Audit: Aid to Strategic Decision Making 58

End of Chapter Summary 59

APPENDIx 1.A Strategic Audit of a Corporation 64

6

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C H A P T E R 2 Corporate Governance 72 Role of the Board of Directors 75

Responsibilities of the Board 76

Board of Directors Composition 79

Innovation Issue: JCPENNEY AND INNOVATION 80

Strategy Highlight: AGENCY THEORY VERSUS STEWARDSHIP THEORY IN CORPORATE GOVERNANCE 81

Nomination and Election of Board Members 85

Organization of the Board 86

Impact of Sarbanes–Oxley on U.S. Corporate Governance 87

Global Issue: GLOBAL BUSINESS BOARD ACTIVISM AT YAHOO! 88

Improving Governance 89

Evaluating Governance 89

Avoiding Governance Improvements 90

Trends in Corporate Governance 90

The Role of Top Management 91

Responsibilities of Top Management 92

Sustainability Issue: CEO PAY AND CORPORATE PERFORMANCE 92

End of Chapter Summary 95

C H A P T E R 3 Social Responsibility and Ethics in Strategic Management 102 Social Responsibilities of Strategic Decision Makers 104

Responsibilities of a Business Firm 104

Sustainability 107

Sustainability Issue: MARkS & SPENCER LEADS THE WAY 108

Corporate Stakeholders 108

Stakeholder Analysis 109

Strategy Highlight: JOHNSON & JOHNSON CREDO 111

Ethical Decision Making 111

Some Reasons for Unethical Behavior 112

Global Issue: HOW RULE-BASED AND RELATIONSHIP-BASED GOVERNANCE SYSTEMS AFFECT ETHICAL BEHAVIOR 113

Innovation Issue: TURNING A NEED INTO A BUSINESS TO SOLVE THE NEED 115

Encouraging Ethical Behavior 116

Views on Ethical Behavior 117

End of Chapter Summary 119

CONTENTS 7

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PART TWO Scanning the Environment 123

C H A P T E R 4 Environmental Scanning and Industry Analysis 124 Aspects of Environmental Scanning 126

Identifying External Environmental Variables 127

Sustainability Issue: GREEN SUPERCARS 128

Strategic Importance of the External Environment 129

Scanning the Societal Environment: Steep Analysis 129

Global Issue: SUVS POWER ON IN CHINA 137

Identifying External Strategic Factors 139

Industry Analysis: Analyzing the Task Environment 139

Porter’s Approach to Industry Analysis 140

Industry Evolution 144

Categorizing International Industries 144

Innovation Issue: TAkING STOCk OF AN OBSESSION 145

International Risk Assessment 146

Strategic Groups 146

Strategic Types 147

Hypercompetition 148

Using Key Success Factors to Create an Industry Matrix 149

Competitive Intelligence 150

Sources of Competitive Intelligence 151

Strategy Highlight EVALUATING COMPETITIVE INTELLIGENCE 152

Monitoring Competitors for Strategic Planning 153

Forecasting 154

Danger of Assumptions 154

Useful Forecasting Techniques 154

The Strategic Audit: A Checklist for Environmental Scanning 156

Synthesis of External Factors 156

End of Chapter Summary 158

C H A P T E R 5 Organizational Analysis and Competitive Advantage 164 A Resource-Based Approach to Organizational Analysis—Vrio 166

Core and Distinctive Competencies 166

Using Resources/Capabilities to Gain Competitive Advantage 169

8 CONTENTS

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Business Models 170

Value-Chain Analysis 172

Industry Value-Chain Analysis 172

Corporate Value-Chain Analysis 174

Scanning Functional Resources and Capabilities 175

Basic Organizational Structures 175

Culture 177

Global Issue: MANAGING CORPORATE CULTURE FOR GLOBAL COMPETITIVE ADVANTAGE: ABB VS. PANASONIC 179

Strategic Marketing Issues 179

Innovation Issue: DOCOMO MOVES AGAINST THE GRAIN 181

Strategic Financial Issues 182

Strategic Research and Development (R&D) Issues 183

Strategic Operations Issues 185

Strategic Human Resource Management (HRM) Issues 187

Strategic Information Systems/Technology Issues 189

Sustainability Issue: THE OLYMPIC GAMES—LONDON 2012/SOCHI 2014/RIO 2016 & TOkYO 2020 190

The Strategic Audit: A Checklist for Organizational Analysis 192

Synthesis of Internal Factors (IFAS) 192

End of Chapter Summary 194

PART THREE Strategy Formulation 199

C H A P T E R 6 Strategy Formulation: Business Strategy 200 A Framework for Examining Business Strategy 202

Generating a Strategic Factors Analysis Summary (SFAS) Matrix 203

Finding Market Niches 205

Mission and Objectives 206

Business Strategies 207

Porter’s Competitive Strategies 207

Global Issue: HAS EMIRATES REACHED THE LIMIT OF GLOBALIZATION? 209

Innovation Issue: CHEGG AND COLLEGE TExTBOOkS 212

Sustainability Issue: STRATEGIC SUSTAINABILITY—ESPN 214

Cooperative Strategies 215

Strategic Alliances 216

End of Chapter Summary 220

CONTENTS 9

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C H A P T E R 7 Strategy Formulation: Corporate Strategy 224 Corporate Strategy 226

Directional Strategy 226

Growth Strategies 227

Strategy Highlight: TRANSACTION COST ECONOMICS ANALYZES VERTICAL Growth StrateGy  230

Global Issue: GLOBAL ExPANSION IS NOT ALWAYS A PATH TO GROWTH 232

Controversies in Directional Growth Strategies 233

Stability Strategies 234

Retrenchment Strategies 235

Portfolio Analysis 237

BCG Growth-Share Matrix 238

Sustainability Issue: GENERAL MOTORS AND THE ELECTRIC CAR 240

Advantages and Limitations of Portfolio Analysis 241

Managing a Strategic Alliance Portfolio 241

Corporate Parenting 242

Innovation Issue: TO RED HAT OR NOT? 243

Developing a Corporate Parenting Strategy 244

Horizontal Strategy and Multipoint Competition 244

End of Chapter Summary 245

C H A P T E R 8 Strategy Formulation: Functional Strategy and Strategic Choice 250 Functional Strategy 252

Marketing Strategy 252

Financial Strategy 254

Research and Development (R&D) Strategy 255

Operations Strategy 256

Global Issue: WHY IS STARBUCkS AFRAID OF ITALY? 257

Purchasing Strategy 258

Sustainability Issue: HOW HOT IS HOT? 259

Innovation Issue: WHEN AN INNOVATION FAILS TO LIVE UP TO ExPECTATIONS 260

Logistics Strategy 261

Human Resource Management (HRM) Strategy 261

Information Technology Strategy 262

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The Sourcing Decision: Location of Functions 262

Strategies To Avoid 265

Strategic Choice: Constructing Scenarios 265

Constructing Corporate Scenarios 266

The Process of Strategic Choice 271

Using Policies to Guide Strategic Choices 273

End of Chapter Summary 273

PART FOUR Strategy Implementation and Control 279

C H A P T E R 9 Strategy Implementation: Global Strategy 280 International Entry 282

International Coordination 284

International Strategic Alliances 285

Stages of International Development 285

International Employment 286

Measurement of Performance 288

End of Chapter Summary 290

C H A P T E R 1 0 Strategy Implementation: Organizing and Structure 294 Strategy Implementation 296

Who Implements Strategy? 297

What Must Be Done? 297

Developing Programs, Budgets, and Procedures 297

Sustainability Issue: A BETTER BOTTLE—ECOLOGIC BRANDS 298

Achieving Synergy 302

How Is Strategy To Be Implemented? Organizing for Action 303

Structure Follows Strategy 303

Stages of Corporate Development 304

Innovation Issue: THE P&G INNOVATION MACHINE STUMBLES 305

Organizational Life Cycle 309

Flexible Types of Organizational Structure 310

The Matrix Structure 310

Network Structure—The Virtual Organization 312

Global Issue: OUTSOURCING COMES FULL CIRCLE 313

Cellular/Modular Organization: A New Type of Structure? 314

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Reengineering and Strategy Implementation 314

Six Sigma 315

Designing Jobs to Implement Strategy 316

Centralization Versus Decentralization 317

End of Chapter Summary 318

C H A P T E R 1 1 Strategy Implementation: Staffing and Directing 324 Staffing 326

Staffing Follows Strategy 327

Selection and Management Development 329

Innovation Issue: HOW TO kEEP APPLE “COOL” 329

Problems in Retrenchment 331

Leading 333

Managing Corporate Culture 333

Sustainability Issue: PANERA AND THE “PANERA CARES COMMUNITY CAFé” 334

Action Planning 338

Management by Objectives 340

Total Quality Management 341

Global Issue: CULTURAL DIFFERENCES CREATE IMPLEMENTATION PROBLEMS in MerGer  342

End of Chapter Summary 342

C H A P T E R 1 2 Evaluation and Control 348 Measuring Performance 350

Appropriate Measures 350

Types of Controls 351

Innovation Issue: SOLAR POWER AND THE GRID 352

Activity-Based Costing 353

Enterprise Risk Management 354

Primary Measures of Corporate Performance 354

Sustainability Issue: THE END OF THE CASH REGISTER RECEIPT 357

Balanced Scorecard Approach: Using Key Performance Measures 358

Primary Measures of Divisional and Functional Performance 360

Responsibility Centers 360

Using Benchmarking To Evaluate Performance 362

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Global Issue: Counterfeit Goods And PirAted softwAre: A GlobAl Problem 363

Strategic Information Systems 363

Enterprise Resource Planning 364

Radio Frequency Identification and Near Field Communication 364

Divisional and Functional is Support 365

Problems in Measuring Performance 365

Short-Term Orientation 366

Goal Displacement 367

Guidelines for Proper Control 368

Aligning Incentives 369

End of Chapter Summary 371

PArt fiVe Introduction to Case Analysis 377

C h A P t e r 1 3 Suggestions for Case Analysis 378 The Case Method 380

Researching the Case Situation 380

Financial Analysis: A Place to Begin 381

Analyzing Financial Statements 381

Common-Size Statements 385

Z-Value and the Index of Sustainable Growth 385

Useful Economic Measures 386

Format for Case Analysis: The Strategic Audit 386

End of Chapter Summary 389

APPendix 13.A Resources for Case Research 391

APPendix 13.b Suggested Case Analysis Methodology Using the Strategic Audit 393

APPendix 13.C Example of Student-Written Strategic Audit 396

PArt six Cases in Strategic Management 1-1

s e C t i o n A Executive Leadership

CAse 1 The Recalcitrant Director at Byte Products, Inc.: Corporate Legality versus Corporate Responsibility 1-7 (Contributors: Dan R. Dalton, Richard A. Cosier, and Cathy A. Enz) A plant location decision forces a confrontation between the board of directors and the CEO regarding an issue in social responsibility and ethics.

Contents 13

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CASE 2 The Wallace Group 2-1 (Contributor: Laurence J. Stybel) Managers question the company’s strategic direction and how it is being managed by its founder and CEO. Company growth has resulted not only in disorganization and confusion among employees, but in poor overall performance. How should the board deal with the company’s founder?

S E C T I O N B Business Ethics

CASE 3 Everyone Does It 3-1 (Contributors: Steven M. Cox and Shawana P. Johnson) When Jim Willis, Marketing VP, learns that the launch date for the company’s new satellite will be late by at least a year, he is told by the company’s president to continue using the earlier published date for the launch. When Jim protests that the use of an incorrect date to market contracts is unethical, he is told that spacecraft are never launched on time and that it is common industry practice to list unrealistic launch dates. If a realistic date was used, no one would contract with the company.

CASE 4 The Audit 4-1 (Contributors: Gamewell D. Gantt, George A. Johnson, and John A. Kilpatrick) A questionable accounting practice by the company being audited puts a new CPA in a difficult position. Although the practice is clearly wrong, she is being pressured by her manager to ignore it because it is common in the industry.

S E C T I O N C Corporate Governance and Social Responsibility

CASE 5 Early Warning or False Sense of Security? Concussion Risk and the Case of the Impact-Sensing Football Chinstrap 5-1 (Contributors: Clifton D. Petty, and Michael R. Shirley) In 2009, Battle Sports Science, headquartered in Omaha, Nebraska, was built with a focus on “enhancing safety for athletes.” Specifically, the company wanted to protect young athletes who might have suffered a concussion. Battle Sports Science attempted to gain market attention for its US$149.99 impact indicator (chin strap) through endorsements, and had enlisted a number of NFL players. The company hoped to sell the device to sports programs (schools) as well as to individual players.

CASE 6 The Storm of Governance Reform at the American Red Cross 6-1 (Contributors: Jill A. Brown and Anne Anderson) In early 2006, a U.S. Senate Finance Committee began investigating the American Red Cross following substantial concerns over the governance effectiveness of the organization and its Board of Governors. This investigation was prompted by concerns over Hurricane Katrina relief efforts, as well as governance concerns regarding the structure and processes of the ARC Board. Consequently, the Finance Committee appointed an Independent Governance Advisory Panel to provide recommendations regarding how to overhaul the American Red Cross Board of Governors.

CASE 7 Chipotle Mexican Grill, Inc.: Conscious Capitalism by Serving “Food With Integrity” 7-1 (Contributor: Alan N. Hoffman) People loved Chipotle Mexican Grill because of the tasty and healthy food as well as its edgy, trendy, cool brand image. Chipotle established itself as a successful company practicing “conscious capitalism” by serving “food with integrity”—its supply chain and corporate culture were closely integrated from the time that ingredients were farmed, raised, harvested, and shipped to stores to the time the final product was placed on a customer’s serving tray. By 2014, the fast

new

new

14 CONTENTS

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casual food market in the US became increasingly competitive and crowded with many new entrants. Being a public listed company, Chipotle had to meet Wall Street’s high expectations of growth and earnings. Living up to analysts’ expectations was becoming increasingly difficult for Chiptole.

S E C T I O N D Privacy

CASE 8 Google and the Right to Be Forgotten 8-1 (Contributor: Cynthia E. Clark) In 2009, Mario Costeja Gonzalez, a self-employed attorney casually “googled” himself and was startled by what came up on his computer screen. Prominently displayed in the search results was a brief legal notice that had appeared more than a decade earlier in a local newspaper, which listed property seized and being auctioned by a government agency for nonpayments of debts. Costeja immediately realized that this information could damage his reputation as an attorney