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THIRTEENTH EDITION

Strategic Management CONCEPTS AND CASES

Fred R. David Francis Marion University Florence, South Carolina

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Strategic Management CONCEPTS AND CASES

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Library of Congress Cataloging-in-Publication Data David, Fred R.

Strategic management: concepts and cases / Fred R. David.—13th ed. p. cm.

Includes bibliographical references and index. ISBN-13: 978-0-13-612098-8 (casebound) ISBN-10: 0-13-612098-9 (casebound) 1. Strategic planning. 2. Strategic planning—Case studies. I. Title.

HD30.28.D385 2011 658.4'012—dc22

2009052036

10 9 8 7 6 5 4 3 2

ISBN 10: 0-13-612098-9 ISBN 13: 978-0-13-612098-8

www.pearsonhighered.com
To Joy, Forest, Byron, and Meredith— my wife and children—

for their encouragement and love.

Brief Contents

Preface xvii

Acknowledgments xxiii

About the Author xxvii

Part 1 Overview of Strategic Management 2

Chapter 1 The Nature of Strategic Management 2 THE COHESION CASE: MCDONALD’S — 2009 27

Part 2 Strategy Formulation 40

Chapter 2 The Business Vision and Mission 40

Chapter 3 The External Assessment 58

Chapter 4 The Internal Assessment 90

Chapter 5 Strategies in Action 130

Chapter 6 Strategy Analysis and Choice 172

Part 3 Strategy Implementation 210

Chapter 7 Implementing Strategies: Management and Operations Issues 210

Chapter 8 Implementing Strategies: Marketing, Finance/ Accounting, R&D, and MIS Issues 250

Part 4 Strategy Evaluation 284

Chapter 9 Strategy Review, Evaluation, and Control 284

Part 5 Key Strategic-Management Topics 308

Chapter 10 Business Ethics/Social Responsibility/ Environmental Sustainability 308

Chapter 11 Global/International Issues 328

Part 6 Strategic-Management Case Analysis 346 How to Prepare and Present a Case Analysis 346

Name Index 359

Subject Index 363

vii

Contents

Preface xvii

Acknowledgments xxiii

About the Author xxvii

Part 1 Overview of Strategic Management 2

Chapter 1 The Nature of Strategic Management 2

MCDONALD’S CORPORATION: DOING GREAT IN A WEAK ECONOMY 4

What Is Strategic Management? 5 Defining Strategic Management 6 & Stages of Strategic Management 6 & Integrating Intuition and Analysis 7 & Adapting to Change 8

Key Terms in Strategic Management 9 Competitive Advantage 9 & Strategists 10 & Vision and Mission Statements 11 & External Opportunities and Threats 11& Internal Strengths and Weaknesses 12 & Long-Term Objectives 13 & Strategies 13 & Annual Objectives 13 & Policies 14

The Strategic-Management Model 14 Benefits of Strategic Management 16

Financial Benefits 17 & Nonfinancial Benefits 18

Why Some Firms Do No Strategic Planning 18 Pitfalls in Strategic Planning 19 Guidelines for Effective Strategic Management 19 Comparing Business and Military Strategy 21

THE COHESION CASE: MCDONALD’S CORPORATION—2009 27

ASSURANCE OF LEARNING EXERCISES 37 Assurance of Learning Exercise 1A: Gathering Strategy Information 37

Assurance of Learning Exercise 1B: Strategic Planning for My University 37

Assurance of Learning Exercise 1C: Strategic Planning at a Local Company 38

Assurance of Learning Exercise 1D: Getting Familiar with SMCO 38

Part 2 Strategy Formulation 40

Chapter 2 The Business Vision and Mission 40

WAL-MART: DOING GREAT IN A WEAK ECONOMY 42

What Do We Want to Become? 43

What Is Our Business? 43 Vision versus Mission 45 & The Process of Developing Vision and Mission Statements 46

Importance (Benefits) of Vision and Mission Statements 47

A Resolution of Divergent Views 48

Characteristics of a Mission Statement 49 A Declaration of Attitude 49 & A Customer Orientation 50 & Mission Statement Components 51

Writing and Evaluating Mission Statements 53

ASSURANCE OF LEARNING EXERCISES 56 Assurance of Learning Exercise 2A: Evaluating Mission Statements 56

Assurance of Learning Exercise 2B: Writing a Vision and Mission Statement for McDonald’s Corporation 56

Assurance of Learning Exercise 2C: Writing a Vision and Mission Statement for My University 57

Assurance of Learning Exercise 2D: Conducting Mission Statement Research 57

Chapter 3 The External Assessment 58

DUNKIN' BRANDS, INC.: DOING GREAT IN A WEAK ECONOMY 60

The Nature of an External Audit 61 Key External Forces 61 & The Process of Performing an External Audit 62

The Industrial Organization (I/O) View 63

Economic Forces 63

Social, Cultural, Demographic, and Natural Environment Forces 66

Political, Governmental, and Legal Forces 68

Technological Forces 69

Competitive Forces 71 Competitive Intelligence Programs 72 & Market Commonality and Resource Similarity 74

Competitive Analysis: Porter’s Five-Forces Model 74

Rivalry Among Competing Firms 75 & Potential Entry of New Competitors 76 & Potential Development of Substitute Products 77 & Bargaining Power of Suppliers 77 & Bargaining Power of Consumers 77

Sources of External Information 78

Forecasting Tools and Techniques 78 Making Assumptions 79

ix

Industry Analysis: The External Factor Evaluation (EFE) Matrix 80 The Competitive Profile Matrix (CPM) 81

ASSURANCE OF LEARNING EXERCISES 86 Assurance of Learning Exercise 3A: Developing an EFE Matrix for McDonald’s Corporation 86

Assurance of Learning Exercise 3B: The External Assessment 86

Assurance of Learning Exercise 3C: Developing an EFE Matrix for My University 87

Assurance of Learning Exercise 3D: Developing a Competitive Profile Matrix for McDonald’s Corporation 87

Assurance of Learning Exercise 3E: Developing a Competitive Profile Matrix for My University 87

Chapter 4 The Internal Assessment 90

AMAZON.COM, INC.: DOING GREAT IN A WEAK ECONOMY. HOW? 92

The Nature of an Internal Audit 93 Key Internal Forces 93 & The Process of Performing an Internal Audit 93

The Resource-Based View (RBV) 96 Integrating Strategy and Culture 97 Management 99

Planning 100 & Organizing 100 & Motivating 101 & Staffing 102 & Controlling 102 & Management Audit Checklist of Questions 103

Marketing 103 Customer Analysis 103 & Selling Products/Services 103 & Product and Service Planning 104 & Pricing 105 & Distribution 105 & Marketing Research 106 & Cost/Benefit Analysis 106 & Marketing/Audit Checklist of Questions 106

Finance/Accounting 106 Finance/Accounting Functions 107 & Basic Types of Financial Ratios 108 & Finance/Accounting Audit Checklist 113

Production/Operations 113 Production/Operations Audit Checklist 115

Research and Development 115 Internal and External R&D 116 & Research and Development Audit 117

Management Information Systems 117 Strategic-Planning Software 118 & Management Information Systems Audit 119

Value Chain Analysis (VCA) 119 Benchmarking 120

The Internal Factor Evaluation (IFE) Matrix 122

ASSURANCE OF LEARNING EXERCISES 128 Assurance of Learning Exercise 4A: Performing a Financial Ratio Analysis for McDonald’s Corporation (MCD) 128

Assurance of Learning Exercise 4B: Constructing an IFE Matrix for McDonald’s Corporation 128

Assurance of Learning Exercise 4C: Constructing an IFE Matrix for My University 128

Chapter 5 Strategies in Action 130

VOLKSWAGEN AG: DOING GREAT IN A WEAK ECONOMY. HOW? 132

Long-Term Objectives 133 The Nature of Long-Term Objectives 133 & Financial versus Strategic Objectives 134 & Not Managing by Objectives 135

The Balanced Scorecard 135 Types of Strategies 136

Levels of Strategies 138

Integration Strategies 139 Forward Integration 139 & Backward Integration 140 & Horizontal Integration 141

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

Diversification Strategies 143 Related Diversification 144 & Unrelated Diversification 144

Defensive Strategies 146 Retrenchment 146 & Divestiture 148 & Liquidation 149

Michael Porter’s Five Generic Strategies 151 Cost Leadership Strategies (Type 1 and Type 2) 152 & Differentiation Strategies (Type 3) 153 & Focus Strategies (Type 4 and Type 5) 154 & Strategies for Competing in Turbulent, High-Velocity Markets 155

Means for Achieving Strategies 155 Cooperation Among Competitors 155 & Joint Venture/ Partnering 156 & Merger/Acquisition 158 & First Mover Advantages 161 & Outsourcing 161

Strategic Management in Nonprofit and Governmental Organizations 162

Educational Institutions 162 & Medical Organizations 163 & Governmental Agencies and Departments 163

Strategic Management in Small Firms 164

ASSURANCE OF LEARNING EXERCISES 168 Assurance of Learning Exercise 5A: What Strategies Should McDonald’s Pursue in 2011–2013? 168

Assurance of Learning Exercise 5B: Examining Strategy Articles 168

Assurance of Learning Exercise 5C: Classifying Some Year 2009 Strategies 169

Assurance of Learning Exercise 5D: How Risky Are Various Alternative Strategies? 169

Assurance of Learning Exercise 5E: Developing Alternative Strategies for My University 170

Assurance of Learning Exercise 5F: Lessons in Doing Business Globally 170

Chapter 6 Strategy Analysis and Choice 172

APPLE: DOING GREAT IN A WEAK ECONOMY. HOW? 174

The Nature of Strategy Analysis and Choice 175 The Process of Generating and Selecting Strategies 175

x CONTENTS

A Comprehensive Strategy-Formulation Framework 176 The Input Stage 177 The Matching Stage 177

The Strengths-Weaknesses-Opportunities-Threats (SMOT) Matrix 178 & The Strategic Position and Action Evaluation (SPACE) Matrix 181 & The Boston Consulting Group (BCG) Matrix 185 & The Internal-External (IE) Matrix 188 & The Grand Strategy Matrix 191

The Decision Stage 192 The Quantitative Strategic Planning Matrix (QSPM) 192 & Positive Features and Limitations of the QSPM 195

Cultural Aspects of Strategy Choice 196 The Politics of Strategy Choice 196 Governance Issues 198

ASSURANCE OF LEARNING EXERCISES 205 Assurance of Learning Exercise 6A: Developing a SWOT Matrix for McDonald’s 205

Assurance of Learning Exercise 6B: Developing a SPACE Matrix for McDonald’s 205

Assurance of Learning Exercise 6C: Developing a BCG Matrix for McDonald’s 205

Assurance of Learning Exercise 6D: Developing a QSPM for McDonald’s 206

Assurance of Learning Exercise 6E: Formulating Individual Strategies 206

Assurance of Learning Exercise 6F: The Mach Test 206

Assurance of Learning Exercise 6G: Developing a BCG Matrix for My University 208

Assurance of Learning Exercise 6H: The Role of Boards of Directors 208

Assurance of Learning Exercise 6I: Locating Companies in a Grand Strategy Matrix 209

Part 3 Strategy Implementation 210

Chapter 7 Implementing Strategies: Management and Operations Issues 210

GOOGLE: DOING GREAT IN A WEAK ECONOMY. HOW? 212

The Nature of Strategy Implementation 213 Management Perspectives 214

Annual Objectives 215 Policies 217 Resource Allocation 219 Managing Conflict 220 Matching Structure with Strategy 220

The Functional Structure 222 & The Divisional Structure 222 & The Strategic Business Unit (SBU) Structure 225 & The Matrix Structure 226 & Some Do’s and Don’ts in Developing Organizational Charts 228

Restructuring, Reengineering, and E-Engineering 229 Restructuring 230 & Reengineering 231

Linking Performance and Pay to Strategies 231 Managing Resistance to Change 234 Creating a Strategy-Supportive Culture 235 Production/Operations Concerns When Implementing Strategies 236 Human Resource Concerns When Implementing Strategies 237

Employee Stock Ownership Plans (ESOPs) 239 & Balancing Work Life and Home Life 240 & Benefits of a Diverse Workforce 242 & Corporate Wellness Programs 242

ASSURANCE OF LEARNING EXERCISES 248 Assurance of Learning Exercise 7A: Revising McDonald’s Organizational Chart 248

Assurance of Learning Exercise 7B: Do Organizations Really Establish Objectives? 248

Assurance of Learning Exercise 7C: Understanding My University’s Culture 249

Chapter 8 Implementing Strategies: Marketing, Finance/Accounting, R&D, and MIS Issues 250 The Nature of Strategy Implementation 252

JOHNSON & JOHNSON (J&J): DOING GREAT IN A WEAK ECONOMY. HOW? 252

Current Marketing Issues 253 New Principles of Marketing 254 & Advertising Media 256 & Purpose-Based Marketing 257

Market Segmentation 257 Does the Internet Make Market Segmentation Easier? 259

Product Positioning 260 Finance/Accounting Issues 261 Acquiring Capital to Implement Strategies 262

New Source of Funding 266 & Projected Financial Statements 266 & Projected Financial Statement for Mattel, Inc. 268 & Financial Budgets 271 & Evaluating the Worth of a Business 273 & Deciding Whether to Go Public 275

Research and Development (R&D) Issues 275 Management Information Systems (MIS) Issues 277

ASSURANCE OF LEARNING EXERCISES 282 Assurance of Learning Exercise 8A: Developing a Product- Positioning Map for McDonald’s 282

Assurance of Learning Exercise 8B: Performing an EPS/EBIT Analysis for McDonald’s 282

Assurance of Learning Exercise 8C: Preparing Projected Financial Statements for McDonald’s 282

Assurance of Learning Exercise 8D: Determining the Cash Value of McDonald’s 283

Assurance of Learning Exercise 8E: Developing a Product- Positioning Map for My University 283

Assurance of Learning Exercise 8F: Do Banks Require Projected Financial Statements? 283

CONTENTS xi

Part 4 Strategy Evaluation 284

Chapter 9 Strategy Review, Evaluation, and Control 284

FAMILY DOLLAR STORES: DOING GREAT IN A WEAK ECONOMY. HOW? 286

The Nature of Strategy Evaluation 286 The Process of Evaluating Strategies 290

A Strategy-Evaluation Framework 290 Reviewing Bases of Strategy 290 & Measuring Organizational Performance 292 & Taking Corrective Actions 294

The Balanced Scorecard 295 Published Sources of Strategy-Evaluation Information 297 Characteristics of an Effective Evaluation System 298 Contingency Planning 299 Auditing 300 Twenty-First-Century Challenges in Strategic Management 301

The Art of Science Issue 301 & The Visible or Hidden Issue 301 & The Top-Down or Bottom-Up Approach 302

ASSURANCE OF LEARNING EXERCISES 306 Assurance of Learning Exercise 9A: Preparing a Strategy-Evaluation Report for McDonald’s Corp. 306

Assurance of Learning Exercise 9B: Evaluating My University’s Strategies 306

Part 5 Key Strategic-Management Topics 308

Chapter 10 Business Ethics/Social Responsibility/ Environmental Sustainability 308

WALT DISNEY: DOING GREAT IN A WEAK ECONOMY. HOW? 310

Business Ethics 311 Code of Business Ethics 312 & An Ethics Culture 313 & Bribes 314 & Love Affairs at Work 314

Social Responsibility 315 Social Policy 315 & Social Policies on Retirement 316

Environmental Sustainability 317 What Is a Sustainability Report? 317 & Lack of Standards Changing 318 & Obama Regulations 318 & Managing Environmental Affairs in the Firm 319 & Should Students Receive Environmental Training? 319 & Reasons Why Firms Should “Be Green” 320 & Be Proactive, Not Reactive 320 & ISO 14000/14001 Certification 320 & Electric Car Networks Are Coming 321 & The March 2009 Copenhagen Meeting 322

ASSURANCE OF LEARNING EXERCISES 326 Assurance of Learning Exercise 10A: Does McDonald’s Have a Code of Business Ethics? 326

Assurance of Learning Exercise 10B: The Ethics of Spying on Competitors 326

Assurance of Learning Exercise 10C: Who Prepares a Sustainability Report? 327

Chapter 11 Global/International Issues 328

MARRIOTT INTERNATIONAL: DOING GREAT IN A WEAK ECONOMY. HOW? 330

Multinational Organizations 331 Advantages and Disadvantages of International Operations 332 The Global Challenge 333

Globalization 334 & A Weak Economy 335

United States versus Foreign Business Cultures 335 The Mexican Culture 337 & The Japanese Culture 338 & Communication Differences Across Countries 338

Worldwide Tax Rates 339 Joint Ventures in India 339

ASSURANCE OF LEARNING EXERCISES 343 Assurance of Learning Exercise 11A: McDonald’s Wants to Enter Africa. Help Them. 343

Assurance of Learning Exercise 11B: Does My University Recruit in Foreign Countries? 343

Assurance of Learning Exercise 11C: Assessing Differences in Culture Across Countries 343

Assurance of Learning Exercise 11D: How Well Traveled Are Business Students at Your University? 344

Part 6 Strategic-Management Case Analysis 346 How to Prepare and Present a Case Analysis 346

What Is a Strategic-Management Case? 348 Guidelines for Preparing Case Analyses 348

The Need for Practicality 348 & The Need for Justification 348 & The Need for Realism 348 & The Need for Specificity 349 & The Need for Originality 349 & The Need to Contribute 349

Preparing a Case for Class Discussion 349 The Case Method versus Lecture Approach 349 & The Cross- Examination 350

Preparing a Written Case Analysis 350 The Executive Summary 350 & The Comprehensive Written Analysis 351 & Steps in Preparing a Comprehensive Written Analysis 351

Making an Oral Presentation 351 Organizing the Presentation 351 & Controlling Your Voice 352 & Managing Body Language 352 & Speaking from Notes 352 & Constructing Visual Aids 352 & Answering Questions 353 & Tips for Success in Case Analysis 353 & Content Tips 353 & Process Tips 354 & Sample Case Analysis Outline 355

xii CONTENTS

STEPS IN PRESENTING AN ORAL CASE ANALYSIS 356 Oral Presentation—Step 1: Introduction (2 minutes) 356 Oral Presentation—Step 2: Mission/Vision (4 minutes) 356 Oral Presentation—Step 3: Internal Assessment (8 minutes) 356 Oral Presentation—Step 4: External Assessment (8 minutes) 357 Oral Presentation—Step 5: Strategy Formulation (14 minutes) 357

Oral Presentation—Step 6: Strategy Implementation (8 minutes) 357 Oral Presentation—Step 7: Strategy Evaluation (2 minutes) 358 Oral Presentation—Step 8: Conclusion (4 minutes) 358

Name Index 359

Subject Index 363

CONTENTS xiii

xiv CONTENTS

Cases

HOSPITALITY/ENTERTAINMENT 1. Walt Disney Company — 2009, Mernoush Banton 1

2. Merryland Amusement Park — 2009, Gregory Stone 14

AIRLINES 3. JetBlue Airways Corporation — 2009, Mernoush Banton 26

4. AirTran Airways, Inc. — 2009, Charles M. Byles 37

RETAIL STORES 5. Family Dollar Stores, Inc. — 2009, Joseph W. Leonard 50

6. Wal-Mart Stores, Inc. — 2009, Amit J. Shah and Michael L. Monahanat 59

7. Whole Foods Market, Inc. — 2009, James L. Harbin and Patricia Humphrey 73

8. Macy’s, Inc. — 2009, Rochelle R. Brunson and Marlene M. Reed 83

INTERNET BASED 9. Yahoo! Inc. — 2009, Hamid Kazeroony 91

10. eBay Inc. — 2009, Lori Radulovich 99

FINANCIAL 11. Wells Fargo Corporation — 2009, Donald L. Crooks, Robert S. Goodman,

and John Burbridge 111

RESTAURANTS 12. Krispy Kreme Doughnuts (KKD) — 2009, John Burbridge and

Coleman Rich 120

13. Starbucks Corporation — 2009, Sharynn Tomlin 129

NONPROFIT 14. The United States Postal Service (USPS) — 2009, Fred and

Forest David 138

15. National Railroad Passenger Corporation (AMTRAK) — 2009, Kristopher J. Blanchard 150

16. Goodwill of San Francisco, San Mateo and Marin Counties — 2009, Mary E. Vradelis 158

TRANSPORTATION 17. Harley-Davidson, Inc. — 2009, Carol Pope and Joanne Mack 166

18. Ford Motor Company — 2009, Alen Badal 176

FOOD 19. Kraft Foods Inc. — 2009, Kristopher J. Blanchard 184

20. Hershey Company — 2009, Anne Walsh and Ellen Mansfield 192

PERSONAL CARE 21. Johnson & Johnson — 2009, Sharynn Tomlin, Matt Milhauser,

Bernhard Gierke, Thibault Lefebvre, and Mario Martinez 201

22. Avon Products Inc. — 2009, Rochelle R. Brunson and Marlene M. Reed 212

BEVERAGE 23. Molson Coors — 2009, Amit J. Shah 220

24. PepsiCo — 2009, John and Sherry Ross 232

CONTENTS xv

HEALTH CARE 25. Pfizer, Inc. — 2009, Vijaya Narapareddy 243

26. Merck & Company Inc. — 2010, Mernoush Banton 252

SPORTS 27. Nike, Inc. — 2010, Randy Harris 261

28. Callaway Golf Company — 2009, Amit J. Shah 272

ENERGY 29. Chevron Corporation — 2009, Linda Herkenhoff 282

Preface

Why the Need for This New Edition? The global economic recession has created a business world today that is quite different and more complex than it was just two years ago when the previous edition of this text was published. Thousands of businesses have vanished, and consumers have become extremely price sensitive and oftentimes reluctant purchasers of products and services. Very tight credit markets, high unemployment, and millions of new entrepreneurs have also changed the business landscape. Business firms that have survived the last three years of global economic turmoil are today leaner and meaner than ever before. Gaining and sustaining competitive advantage is harder than ever. Social networking and e-commerce have altered marketing to its core since the prior edition. This new edi- tion reveals how to conduct effective strategic planning in this new world order.

Since the prior edition, thousands of liquidations, bankruptcies, divestitures, merg- ers, alliances, and partnerships captured the news. Corporate scandals highlighted the need for improved business ethics and corporate disclosure of financial transactions. Downsizing, rightsizing, and reengineering contributed to a permanently altered corpo- rate landscape. Thousands of firms began doing business globally, and thousands more closed their global operations. Thousands prospered, and yet thousands failed in the last two years as the global recession spared few. Long-held competitive advantages have eroded as new ones formed. This new edition captures the complexity of this world busi- ness environment.

Both the challenges and opportunities facing organizations of all sizes today are greater than ever. There is less room than ever for error in the formulation and imple- mentation of a strategic plan. This new edition provides a systematic effective approach for developing a clear strategic plan, even in the worst of times. Changes made in this edition are aimed squarely at illustrating the effect of new business concepts and tech- niques on strategic-management theory and practice.

Due to the magnitude of recent changes affecting companies, cultures, and countries, every page of this edition has been updated. The first edition of this text was published in 1986. Since then, this textbook has grown to be one of the most widely read strategic- management books, perhaps the most widely read, in the world. This text is now published in nine languages.

What Is New in This Edition? This edition includes exciting new features, changes, and content designed to position this text as the clear leader and best choice for teaching strategic management. Here is a sum- mary of what is new in this edition:

• A new Chapter 10, “Business Ethics/Social Responsibility/Environmental Sustainability”; there is extensive new coverage of ethics and sustainability because this text emphasizes that “good ethics is good business.” Unique to strategic-management texts, the natural environment 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.

• A new Chapter 11, “Global/International Issues”; there is extensive new coverage of cultural and conceptual strategic-management differences across countries. Doing business globally has become a necessity, rather than a luxury in most industries because nearly all strategic decisions today are affected by global

issues and concerns. Every case company in this edition does business globally, providing students ample opportunity to evaluate and consider international aspects of doing business.

• A new boxed insert at the beginning of each chapter showcases a company that has done exceptionally well in the 2008–2010 global economic recession and reveals their strategy.

• Hundreds of new examples abound in every chapter. • A new cohesion case on McDonald’s Corporation (2010); this is one of the most

successful, well-known, and best managed global companies in the world; students apply strategy concepts to McDonald’s at the end of each chapter through new Assurance of Learning Exercises.

• Thirty-two new tables in the chapters to better capture key strategic-management concepts.

• A revised comprehensive strategic management model to reflect the new chapters. • Extensive new narrative on strategic management theory and concepts in every

chapter to illustrate the new business world order. • On average, 15 new review questions at the end of each chapter. • Forty-eight new Assurance of Learning Exercises at the end of chapters that apply

chapter concepts; the exercises prepare students for strategic-management case analysis.

• Twenty-four new color photographs bring the edition to life and illustrate companies/concepts.

• All new current readings at the end of each chapter; new research and theories of seminal thinkers in strategy development, such as Ansoff, Chandler, Porter, Hamel, Prahalad, Mintzberg, and Barney are provided in the chapters; practical aspects of strategic management, however, are still center stage and the trademark of this text below.

• Twenty-nine new cases—grouped by industry; great mix of profit/nonprofit, large/small, and manufacturing/service organizations; all the cases have a 2009–2010 time setting; all the cases are “comprehensive” in the sense that each focuses on multiple business functions, rather than addressing one particular busi- ness problem or issue; all the cases are undisguised and feature real organizations in real industries using real names and real places (nothing is fictitious in any case); all the cases feature an organization “undergoing strategic change,” thus offering students up-to-date issues to evaluate and consider; all the cases are written in a lively, concise writing style that captures the reader’s interest and establishes a time setting, usually in the opening paragraph; all the cases provide excellent quantitative information such as numbers, ratios, percentages, dollar val- ues, graphs, statistics, and maps so students can prepare a more specific, rational, and defensible strategic plan for the organization; all the cases provide excellent information about the industry and competitors.

This edition continues to offer many special time-tested features and content that have made this text so successful for over 20 years. Historical trademarks of this text that are strengthened in this edition are described below.

Chapters: Time-Tested Features • This text meets AACSB-International guidelines that support a practitioner orien-

tation rather than a theory/research approach. It offers a skills-oriented approach to developing a vision and mission statement; performing an external audit; con- ducting an internal assessment; and formulating, implementing, and evaluating strategies.

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

xviii PREFACE

• A simple, integrative strategic-management model appears in all chapters and on the inside front cover of the text. This model is widely used for strategic planning among consultants and companies worldwide. One reviewer said, “One thing I have admired about David’s text is that he follows the fundamental sequence of strategy formulation, implementation, and evaluation. There is a basic flow from mission/purposes to internal/external environmental scanning to strategy develop- ment, 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.”

• A Cohesion Case follows Chapter 1 and is revisited at the end of each chapter. This Cohesion Case allows students to apply strategic-management concepts and tech- niques to a real organization as chapter material is covered, which readies students for case analysis in the course.

• End-of-chapter Assurance of Learning Exercises effectively apply concepts and techniques in a challenging, meaningful, and enjoyable manner. Eighteen exercises apply text material to the Cohesion Case; 10 apply textual material to a college or university; another 10 exercises send students into the business world to explore important strategy topics. The exercises are relevant, interesting, and contemporary.

• There is excellent pedagogy in this text, including notable quotes and objectives to open each chapter, and key terms, current readings, discussion questions, and experi- ential exercises to close each chapter.

• There is excellent coverage of strategy formulation issues, such as business ethics, global versus domestic operations, vision/mission, matrix analysis, partnering, joint venturing, competitive analysis, governance, and guidelines for conducting an internal/external strategy assessment.

• There is excellent coverage of strategy implementation issues such as corporate culture, organizational structure, outsourcing, marketing concepts, financial analysis, and business ethics.

• A systematic, analytical approach is presented in Chapter 6, including matrices such as the SWOT, BCG, IE, GRAND, SPACE, and QSPM.

• The chapter material is again published in a four-color format. • A chapters-only paperback version of the text is available. • Custom-case publishing is available whereby an instructor can combine chapters

from this text with cases from a variety of sources or select any number of cases desired from the 29 cases in the full text.

• For the chapter material, the outstanding ancillary package includes a comprehensive Instructor’s Manual, computerized test bank, and PowerPoints.

*The comprehensive strategic-management model is displayed on the inside front cover of the text. At the start of each chapter, the section of the comprehensive strategy model covered in that chapter is highlighted and enlarged so students can see the focus of each chapter in the basic unifying comprehensive model. *The Case Information Matrix and Case Description Matrix provided in the preface reveal (1) topical areas emphasized in each case and (2) contact and location information for each case company. These matrices provide suggestions on how the cases deal with concepts in the 11 chapters.

Cases: Time-Tested Features • This edition contains the most current set of cases in any strategic-management

text on the market. All cases include year-end 2009 financial data and information.

• The cases focus on well-known firms in the news making strategic changes. All cases are undisguised, and most are exclusively written for this text to reflect

PREFACE xix

xx PREFACE

current strategic-management problems and practices. These are all “student- friendly” cases.

• Organized conveniently by industry (usually two competing firms per industry), the cases feature a great mix of small business, international, and not-for-profit firms.

• All cases have been class tested to ensure that they are interesting, challenging, and effective for illustrating strategic-management concepts.

• All the cases provide complete financial information about the firm, as well as an organizational chart and a vision and mission statement for the organization if those were available.

• Customized inclusion of cases to comprise a tailored text is available to meet the spe- cial needs of some professors.

• For the cases, the outstanding ancillary package includes an elaborate Case Solutions Manual and support from the www.strategyclub.com Web site.

• All of the cases are comprehensive in the sense that each provides a full description of the firm and its operations rather than focusing on one issue or problem such as a plant closing. Each case thus lends itself to students preparing a three-year strategic plan for the firm.

Special Note to Students Welcome to strategic management. This is a challenging and exciting capstone course that will allow you to function as the owner or chief executive officer of different organizations. Your major task in this course will be to make strategic decisions and to justify those deci- sions through oral and written communication. Strategic decisions determine the future direction and competitive position of an enterprise for a long time. Decisions to expand geographically or to diversify are examples of strategic decisions.

Strategic decision-making occurs in all types and sizes of organizations, from Exxon and IBM to a small hardware store or small college. Many people’s lives and jobs are affected by strategic decisions, so the stakes are very high. An organization’s very survival is often at stake. The overall importance of strategic decisions makes this course especially exciting and challenging. You will be called upon in this course to demonstrate how your strategic decisions could be successfully implemented.

In this course, you can look forward to making strategic decisions both as an individ- ual and as a member of a team. No matter how hard employees work, an organization is in real trouble if strategic decisions are not made effectively. Doing the right things (effec- tiveness) is more important than doing things right (efficiency). For example, many American newspapers are faltering as consumers increasingly switch to interactive media for news.

You will have the opportunity in this course to make actual strategic decisions, perhaps for the first time in your academic career. Do not hesitate to take a stand and defend specific strategies that you determine to be the best, based on tools and concepts in this textbook. The rationale for your strategic decisions will be more important than the actual decision, because no one knows for sure what the best strategy is for a particular organization at a given point in time. This fact accents the subjective, contingency nature of the strategic-management process.

Use the concepts and tools presented in this text, coupled with your own intuition, to recommend strategies that you can defend as being most appropriate for the organizations that you study. You will also need to integrate knowledge acquired in previous business courses. For this reason, strategic management is often called a capstone course; you may want to keep this book for your personal library.

A trademark of this text is its practitioner and applications orientation. This book pre- sents techniques and content that will enable you to actually formulate, implement, and

www.strategyclub.com
evaluate strategies in all kinds of profit and nonprofit organizations. The end-of-chapter Assurance of Learning Exercises allow you to apply what you’ve read in each chapter to the new McDonald’s Cohesion Case and to your own university.

Definitely visit the Strategic Management Club Online at www.strategyclub.com. The templates and links there will save you time in performing analyses and will make your work look professional. Work hard in this course and have fun. Good luck!

PREFACE xxi

www.strategyclub.com
Acknowledgments

Many persons have contributed time, energy, ideas, and suggestions for improving this text over 12 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 of this text are listed alphabetically in the Name Index. To all individuals involved in making this text so popular and successful, I am indebted and thankful.

Many special persons and reviewers contributed valuable material and suggestions for this edition. I would like to thank my colleagues and friends at Auburn University, Mississippi State University, East Carolina University, and Francis Marion University. I have served on the management faculty 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 15 reviewers of the prior edition whose comments shaped this thirteenth edition:

Moses Acquaah, The University of North Carolina at Greensboro

Charles M. Byles, Virginia Commonwealth University

Charles J. Capps III, Sam Houston State University

Neil Dworkin, Western Connecticut State University

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

Thomas E. Kulik, Washington University at St. Louis

Jerrold K. Leong, Oklahoma State University

Trina Lynch-Jackson, Indiana University NW, Purdue Calumet, Calumet College of St. Joseph, Indiana Wesleyan University

Raza Mir, William Paterson University

Thomas W. Sharkey, University of Toledo

Jill Lynn Vihtelic, Saint Mary’s College

Michael W. Wakefield, Colorado State University–Pueblo

Individuals who develop cases for the North American Case Research Association Meeting, the Midwest Society for Case Research Meeting, the Eastern Case Writers Association Meeting, the European Case Research Association Meeting, and Harvard Case Services are vitally important for continued progress in the field of strategic manage- ment. From a research perspective, writing strategic management cases represents a valu- able scholarly activity among faculty. Extensive research is required to structure business policy cases in a way that exposes strategic issues, decisions, and behavior. Pedagogically, strategic management cases are essential for students in learning how to apply concepts, evaluate situations, formulate a “game plan,” and resolve implementation problems. Without a continuous stream of updated business policy cases, the strategic-management course and discipline would lose much of its energy and excitement.

Professors who teach this course supplement lecture with simulations, guest speakers, experiential exercises, class projects, and/or outside readings. Case analysis, however, is typically the backbone of the learning process in most strategic-management courses across the country. Case analysis is almost always an integral part of this course.

Analyzing strategic-management 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 as strategic-management students near graduation and soon enter the working world a full time.

Students can improve their oral and written communication skills as well as their ana- lytical and interpersonal skills by proposing and defending particular courses of action for the case companies. Analyzing cases allows students to view a company, its competitors, and its industry concurrently, thus simulating the complex business world. Through case analysis, students learn how to apply concepts, evaluate situations, formulate strategies, and resolve implementation problems. Instructors typically ask students to prepare a three-year strategic plan for the firm. Analyzing a strategic-management case entails students applying concepts learned across their entire business curriculum. Students gain experience dealing with a wide range of organizational problems that impact all the business functions.

The following people wrote cases that were selected for inclusion in this thirteenth edition. These persons helped develop the most current compilation of cases ever assem- bled in a strategic-management text:

Dr. Alen Badal, The Union Institute

Dr. Mernoush Banton, Florida International University

Dr. Rochelle R. Brunson, Baylor University

Dr. John J. Burbridge, Elon University

Dr. Charles M. Byles, Virginia Commonwealth University

Dr. Donald Crooks, Wagner College

Forest R. David, MBA, Francis Marion University

Dr. James Harbin, Texas A&M University–Texarkana

Dr. Randall D. Harris, California State University–Stanislaus

Dr. Linda Herkenhoff, Saint Mary’s College

Dr. Patricia Humphrey, Texas A&M University–Texarkana

Dr. Hamid H. Kazeroony, William Penn University

Dr. Joe W. Leonard, Miami University

Dr. Joanne Mack, Alverno College

Dr. Ellen Mansfield, La Salle University

Dr. Vijaya Narapareddy, University of Denver

Dr. Carol V. Pope, Alverno College

Dr. Lori Radulovich, Baldwin-Wallace College

Dr. John Ross III, Southwest Texas State University–San Marcos

Sherry Ross, Southwest Texas State University–San Marcos

Dr. Amit J. Shah, Frostburg State University

Dr. Greg Stone, Regent University

Dr. Sharynn M. Tomlin, Angelo State University

Mary Vradelis, Consultant in Berkeley, California

Dr. Anne M. Walsh, La Salle University

Scores of Prentice Hall employees and salespersons have worked diligently behind the scenes to make this text a leader in strategic management. I appreciate the continued hard work of all those professionals, such as Sally Yagan, Kim Norbuta, Claudia Fernandes, Ann Pulido, and Ana Jankowski.

I also 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 organiza- tion with which you become associated. I hope you come to share my enthusiasm for the rich subject area of strategic management and for the systematic learning approach taken in this text.

xxiv ACKNOWLEDGMENTS

Finally, I want to welcome and invite your suggestions, ideas, thoughts, comments, and questions regarding any part of this text or the ancillary materials. Please call me at 910-612-5343, fax me at 910-579-5132, e-mail me at freddavid9@gmail.com, or write me at the School of Business, Francis Marion University, Florence, SC 29501. I 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

ACKNOWLEDGMENTS xxv

About the Author

Dr. Fred R. David is the sole author of two mainstream strategic- management textbooks: (1) Strategic Management: Concepts and Cases, and (2) Strategic-Management Concepts. These texts have been on a two-year revision cycle since 1986 when the first edition was pub- lished. They are among the best if not the best-selling strategic- management textbooks in the world and have been used at more than 500 colleges and universities, 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, and Wake Forest University.

This textbook has been translated and published in Chinese, Japanese, Farsi, Spanish, Indonesian, Indian, Thai, and Arabic and is widely used across Asia and South America. It is the best-selling strategic-management textbook in Mexico, China, Peru, Chile, Japan, and number two in the United States. Approximately 90,000 students read Dr. David’s textbook annually as well as thousands of businesspersons. The book has led the field of strategic manage- ment for more than a decade in providing an applications/practitioner approach to the discipline.

A native of Whiteville, North Carolina, Fred David received a BS degree in mathe- matics and an MBA from Wake Forest University before being employed as a bank manager with United Carolina Bank. He received a PhD in Business Administration from the University of South Carolina, where he majored in management. Currently the TranSouth Professor of Strategic Management at Francis Marion University (FMU) in Florence, South Carolina, Dr. David has also taught at Auburn University, Mississippi State University, East Carolina University, the University of South Carolina, and the University of North Carolina at Pembroke. He is the author of 152 referred publications, including 40 journal articles and 55 proceedings publications. David has articles pub- lished in such journals as Academy of Management Review, Academy of Management Executive, Journal of Applied Psychology, Long Range Planning, and Advanced Management Journal.

Dr. David received a Lifetime Honorary Professorship Award from the Universidad Ricardo Palma in Lima, Peru. He delivered the keynote speech at the twenty-first Annual Latin American Congress on Strategy hosted by the Centrum School of Business in Peru. Dr. David recently delivered an eight-hour Strategic Planning Workshop to the faculty at Pontificia Universidad Catolica Del in Lima, Peru, and an eight-hour Case Writing/ Analyzing Workshop to the faculty at Utah Valley State College in Orem, Utah. He has received numerous awards, including FMU’s Board of Trustees Research Scholar Award, the university’s Award for Excellence in Research given annually to the best faculty researcher on campus, and the Phil Carroll Advancement of Management Award, given annually by the Society for the Advancement of Management (SAM) to a management scholar for outstanding contributions in management research. He recently gave the graduation commencement speech at Troy University.

xxviii CASE COMPANY INFORMATION MATRIX

Case Information Matrix

Case Company Stock Symbol Headquarters Web Site Address #Employees

2008 Revenues in $millions

Cohesion Case

McDonald’s Corp. MCD Oak Brook, IL www.mcdonalds.com 400,000 23,522

SERVICE FIRMS

Hospitality/Entertainment

1. Walt Disney Co. DIS Burbank, CA www.disney.com 150,000 37,843

2. Merryland Amusement Park

Kansas City, MO 100 0.890

Airlines

3. JetBlue Airways JBLU Forest Hills, NY www.jetblue.com 10,047 3,388

4. AirTran Airways AAI Orlando, FL www.airtran.com 7,850 2,552

Retail Stores

5. Family Dollar Stores FDO Charlotte, NC www.familydollar.com 25,000 6,983

6. Wal-Mart Stores WMT Bentonville, AR www.walmartstores.com 2.1M 405,607

7. Whole Foods Market WFMI Austin, TX www.wholefoodsmarket.com 46,800 7,953

8. Macy’s M Cincinnati, Ohio www.macysinc.com 167,000 24,892

Internet Based

9. Yahoo YHOO Sunnyvale, CA www.yahoo.com 13,600 7,208

10. eBay Inc. EBAY San Jose, CA www.ebay.com 16,200 8,541

Financial

11. Wells Fargo WFC San Francisco, CA www.wellsfargo.com 272,800 52,389

Restaurants

12. Krispy Kreme KKD Winston-Salem, NC www.krispykreme.com 2,700 383

13. Starbucks Corporation SBUX Seattle, WA www.starbucks.com 176,000 10,383

Nonprofit 14. The United States

Postal Service - Washington, DC www.usps.com 764,000 75,000

15. Amtrak (NRPC) - Washington, DC www.amtrak.com 19,000 2,400

16. Goodwill Industries San Francisco, CA of San Francisco, San Mateo and Marin Counties

www.sfgoodwill.org/ storeLocations2.aspx

500 28.1

MANUFACTURING

Transportation

17. Harley-Davidson HOG Milwaukee, WI www.harlety-davidson.com 10,100 5,971

18. Ford Motor FORD Dearborn, MI www.ford.com 213,000 146,277

Food

19. Kraft Foods KFT Norfield, IL www.kraft.com 98,000 42,201

20. Hershey Foods HSY Hershey, PA www.hersheys.com 12,800 5,132

(continued)

www.mcdonalds.com
www.disney.com
www.jetblue.com
www.airtran.com
www.familydollar.com
www.walmartstores.com
www.wholefoodsmarket.com
www.macysinc.com
www.yahoo.com
www.ebay.com
www.wellsfargo.com
www.krispykreme.com
www.starbucks.com
www.usps.com
www.amtrak.com
www.sfgoodwill.org/storeLocations2.aspx
www.sfgoodwill.org/storeLocations2.aspx
www.harlety-davidson.com
www.ford.com
www.kraft.com
www.hersheys.com
CASE COMPANY INFORMATION MATRIX xxix

Case Information Matrix

Case Company Stock Symbol Headquarters Web Site Address #Employees

2008 Revenues in $millions

Personal Care

21. Johnson & Johnson JNJ New Brunswick, NJ

www.jnj.com 118,700 63,747

22. Avon Products AVP New York, NY www.avon.com 42,000 10,690

Beverage

23. Molson Coors TAP Denver, CO www.molsoncoors.com 14,000 4,774

Brewing

24. PepsiCo PEP Purchase, NY www.pepsico.com 198,000 43,251

Health Care

25. Pfizer PFE New York, NY www.pfizer.com 81,800 48,296

26. Merck MRK Whitehouse Station, NJ www.merck.com 55,200 23,850

Sports

27. Nike NKE Beaverton, OR www.nike.com 32,500 18,627

28. Callaway Golf ELY Carlsbad, CA www.callawaygolf.com 2,700 1,117

Energy

29. Chevron CVX San Ramon, CA www.chevron.com 67,000 273,005

(continued)

www.jnj.com
www.avon.com
www.molsoncoors.com
www.pepsico.com
www.pfizer.com
www.merck.com
www.nike.com
www.callawaygolf.com
www.chevron.com
xxx CASE COMPANY INFORMATION MATRIX

Case Description Matrix

Topical Content Areas (Y = Yes and N = No)

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

Cohesion Case – McDonald’s Corp.

Y Y Y Y Y Y Y Y Y N N Y Y N

Service Firms

Hospitality/Entertainment

1. Walt Disney Company Y Y Y Y Y Y Y Y Y N N Y Y N

2. Merryland Amusement Park Y Y Y Y Y Y Y Y Y Y Y Y Y N

Airlines

3. JetBlue Airways Y N Y Y Y Y Y Y Y Y N Y Y N

4. AirTran Airways Y Y Y Y Y Y Y Y Y Y Y Y Y N

Retail Stores

5. Family Dollar Stores Y Y Y N Y Y Y Y Y N N Y Y N

6. Wal-Mart Stores Y Y Y N Y Y Y Y Y N N Y Y N

7. Whole Foods Market Y Y Y N Y Y Y Y Y N N Y Y N

8. Macy’s Y Y Y N Y Y Y Y Y N N Y Y N

Internet Based

9. Yahoo Y Y Y N Y Y Y Y Y Y Y Y Y N

10. eBay Inc. Y Y Y Y Y Y Y Y Y N Y Y Y N

Financial

11. Wells Fargo Y Y Y Y Y Y Y Y N N Y Y Y Y

Restaurants

12. Krispy Kreme Y Y N Y Y Y Y Y Y N N Y Y N

13. Starbucks Corporation Y Y Y Y Y Y Y Y Y Y N Y Y Y

Nonprofit

14. The United States Postal Service Y Y N N Y Y Y Y Y N Y Y Y N

15. Amtrak Y N Y Y Y Y Y Y Y Y Y Y Y N

16. Goodwill Industries of San Francisco, San Mateo and Marin Counties

Y N Y Y Y Y Y Y Y Y Y Y Y N

Manufacturing Firms

Transportation

17. Harley-Davidson Y Y Y Y Y Y Y Y Y N N Y Y N

18. Ford Motor Y Y Y Y Y Y Y Y Y N Y Y Y N

Food

19. Kraft Foods Y Y Y N Y Y Y Y Y Y N Y Y N

20. Hershey Foods Y Y Y Y Y Y Y Y Y Y Y Y Y N

Personal Care

21. Johnson & Johnson Y Y Y N Y Y Y Y Y Y Y Y Y N

22. Avon Products Y Y Y N Y Y Y Y Y N N Y Y N

Beverage

23. Molson Coors Brewing Y Y Y Y Y Y Y Y Y Y Y Y Y Y

24. PepsiCo Y N Y N Y Y Y Y Y N N Y Y N

Health Care

25. Pfizer Y Y Y Y Y Y Y Y Y N N Y Y Y

26. Merck Y Y Y Y Y Y Y Y Y N Y Y Y N

(continued)

CASE COMPANY INFORMATION MATRIX xxxi

1. Year-end 2006 Financial Statements Included?

2. Is Organizational Chart Included?

3. Does Company Do Business Outside the United States?

4. Is a Vision or Mission Statement Included?

5. E-Commerce Issues Included?

6. Natural Environment Issues Included?

7. Strategy Formulation Emphasis?

8. Strategy Implementation Included?

9. By-Segment Financial Data Included?

10. Firm Has Declining Revenues?

11. Firm Has Declining Net Income?

12. Discussion of Competitors is Provided?

13. Case Appears in Text for the First Time Ever?

14. Is Firm Headquartered Outside the United States?

Case Description Matrix

Topical Content Areas (Y = Yes and N = No)

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

Sports

27. Nike Y N Y N Y Y Y Y Y N Y Y Y N

28. Callaway Golf Company Y Y Y Y Y Y Y Y Y N N Y Y N

Energy

29. Chevron Y Y Y Y Y N Y Y Y Y Y Y Y N

(continued)

Strategic Management CONCEPTS

CHAPTER 1

1. Describe the strategic-management process.

2. Explain the need for integrating analysis and intuition in strategic management.

3. Define and give examples of key terms in strategic management.

4. Discuss the nature of strategy formulation, implementation, and evaluation activities.

5. Describe the benefits of good strategic management.

6. Discuss the relevance of Sun Tzu’s The Art of War to strategic management.

7. Discuss how a firm may achieve sustained competitive advantage.

PART 1 Overview of Strategic Management

Assurance of Learning Exercise 1A Gathering Strategy Information

Assurance of Learning Exercise 1B Strategic Planning for My University

Assurance of Learning Exercise 1C Strategic Planning at a Local Company

Assurance of Learning Exercise 1D Getting Familiar with SMCO

The Nature of Strategic Management

CHAPTER OBJECTIVES

After studying this chapter, you should be able to do the following:

"If we know where we are and something about how we got there, we might see where we are trending—and if the out- comes which lie naturally in our course are unacceptable, to make timely change."

—Abraham Lincoln

"Without a strategy, an organization is like a ship without a rudder, going around in circles. It’s like a tramp; it has no place to go."

—Joel Ross and Michael Kami

"Plans are less important than planning." —Dale McConkey

"The formulation of strategy can develop competitive advantage only to the extent that the process can give meaning to workers in the trenches."

—David Hurst

“Notable Quotes” "Most of us fear change. Even when our minds say change is normal, our stomachs quiver at the prospect. But for strategists and managers today, there is no choice but to change."

—Robert Waterman Jr.

"If a man takes no thought about what is distant, he will find sorrow near at hand. He who will not worry about what is far off will soon find something worse than worry."

—Confucius

Source: Shutterstock/Photographer Jim Lopes

When CEOs from the big three American automakers, Ford, General Motors (GM), and Chrysler, showed up without a clear strategic plan to ask congressional leaders for bailout monies, they were sent home with instructions to develop a clear strategic plan for the future. Austan Goolsbee, one of President 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 is provided in each chapter to examine how some firms are doing really well competing in a global eco- nomic recession. Some firms are strategically capitalizing on the harsh business climate and prospering as their rivals weaken. These firms are showcased in this edition to reveal how those companies achieved prosperity. Each boxed insert examines the strategies of firms doing great amid the worst recession in almost 30 years, the biggest stock market decline since 1937, high unemployment, record high and then record low oil prices, low consumer confidence, low interest rates, bankruptcies, liquidations, unavailability of credit, falling consumer demand for almost everything, and intense price competition as

4 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

When most firms were struggling in 2008,McDonald’s increased its revenues from $22.7 billion in 2007 to $23.5 billion in 2008. Headquartered in Oak Brook, Illinois McDonald’s net income nearly doubled during that time from $2.4 billion to $4.3 billion—quite impressive. Fortune magazine in 2009 rated McDonald’s as their 16th “Most Admired Company in the World” in terms of their management and performance.

McDonald’s added 650 new outlets in 2009 when many restaurants struggled to keep their doors open. McDonald’s low prices and expanded menu items have attracted millions of new customers away from sit-down chains and independent eateries. Jim Skinner, CEO of McDonald’s, says, “We do so well because our strategies have been so well planned out.” McDonald’s served about 60 million customers

every day in 2009, 2 million more than in 2008. Nearly 80 percent of McDonald’s are run by franchisees (or affiliates).

MCDonald’s Corporation

Doing Great in a Weak Economy

CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT 5

consumers today purchase only what they need rather than what they want. Societies worldwide confront the most threatening economic conditions in nearly a century. The boxed insert in each chapter showcases excellent strategic management under harsh economic times.

The first company featured for excellent performance in the global recession is McDonald’s Corporation, also showcased as the Cohesion Case in this 13th edition. McDonald’s is featured as the Cohesion Case also because it is a well-known global firm undergoing strategic change and well managed. By working through McDonald’s-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.

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.

McDonald’s in 2009 spent $2.1 billion to remodel many of its 32,000 restaurants and build new ones at a more rapid pace than in recent years. This is in stark contrast to most restaurant chains that are struggling to survive, laying off employees, closing restaurants, and reducing expansion plans. McDonald's restaurants are in 120 countries. Going out to eat is one of the first activities that customers cut in tough times. A rising U.S. dollar is another external factor that hurts McDonald’s. An internal weakness of McDonald’s is that the firm now offers upscale coffee drinks like lattes and cappuccinos in over 7,000 locations just as budget- conscious consumers are cutting back on such extrava- gances. About half of McDonald’s 31,000 locations are outside the United States.

But McDonald’s top management team says every- thing the firm does is for the long term. McDonald’s for several years referred to their strategic plan as “Plan to Win.” This strategy has been to increase sales at existing locations by improving the menu, remodel- ing dining rooms, extending hours, and adding snacks. The company has avoided deep price cuts on its menu items. McDonald’s was only one of three large U.S. firms that saw its stock price rise in 2008.

The other two firms were Wal-Mart and Family Dollar Stores.

Other strategies being pursued currently by McDonald’s include replacing gasoline-powered cars with energy-efficient cars, lowering advertising rates, halting building new outlets on street corners where nearby development shows signs of weakness, boosting the firm’s coffee business, and improving the drive-through windows to increase sales and efficiency.

McDonald’s receives nearly two thirds of its rev- enues from outside the United States. The company has 14,000 U.S. outlets and 18,000 outlets outside the United States. McDonald’s feeds 58 million customers every day. The company operates Hamburger University in suburban Chicago. McDonald's reported that first quarter 2009 profits rose 4 percent and same-store sales rose 4.3 percent across the globe. Same-store sales in the second quarter of 2009 were up another 4.8 percent.

Source: Based on Janet Adamy, “McDonald’s Seeks Way to Keep Sizzling,” Wall Street Journal (March 10, 2009): A1, A11. Also, Geoff Colvin, “The World’s Most Admired Companies,” Fortune (March 16, 2009): 76–86.

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 objec- tives. As this definition implies, strategic management focuses on integrating management, marketing, finance/accounting, production/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, with 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 very 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 strategic 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.

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 have been so reduced by the global economic recession 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 subti- tle for the capstone course in business administration. This course integrates material from all business courses. The Strategic Management Club Online at www.strategyclub.com offers many benefits for business policy and strategic management students. Professor Hansen at Stetson University provides a strategic management slide show for this entire text (www.stetson.edu/~rhansen/strategy).

Stages of Strategic Management The strategic-management process consists of 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, how to allocate resources, 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 alter- native 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 ramifi- cations of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation.

Strategy implementation requires a firm to establish annual objectives, devise poli- cies, 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 utilizing information systems, and linking employee compensa- tion to organizational performance.

6 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT

www.strategyclub.com
www.stetson.edu/~rhansen/strategy
Strategy implementation often is called the “action stage” of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strate- gies 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 upon managers’ ability to motivate employees, which is more an art 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; complacent organizations experience demise.

Strategy formulation, implementation, and evaluation activities occur at three hierarchi- cal levels in a large organization: corporate, divisional or strategic business unit, and func- tional. 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: