Steve carlesi cause of death

Strategic Management Model

Gathering Information

Societal Environment: General forces

Natural Environment: Resources and

climate

Task Environment:

Industry analysis

Internal: Strengths and Weaknesses

Structure: Chain of command

Culture: Beliefs, expectations,

values

Resources: Assets, skills, competencies,

knowledge

External: Opportunities

and Threats

Developing Long-range Plans

Mission

Reason for existence Objectives

What results to accomplish by when

Strategies

Plan to achieve the mission & objectives

Policies

Broad guidelines for decision making

Environmental Scanning:

Strategy Formulation:

Feedback/Learning: Make corrections as needed

Putting Strategy into Action

Monitoring Performance

Programs

Activities needed to accomplish a plan

Budgets

Cost of the programs Procedures

Sequence of steps needed to do the job

Performance

Actual results

Strategy Implementation:

Evaluation and Control:

THIRTEENTH EDITION

Strategic Management

and Business Policy

TOWARD GLOBAL SUSTAINABILITY

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THIRTEENTH EDITION

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

J. David Hunger Iowa State University St. John’s University

Strategic Management

and Business Policy

TOWARD GLOBAL SUSTAINABILITY

with major contributions by

Kathryn E. Wheelen

Alan N. Hoffman Bentley University

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Library of Congress Cataloging-in-Publication Data Wheelen, Thomas L.

Strategic management and business policy : toward global sustainability / Thomas L. Wheelen, J. David Hunger. — 13th ed.

p. cm. Includes bibliographical references and index. ISBN-13: 978-0-13-215322-5 ISBN-10: 0-13-215322-X

1. Strategic planning. 2. Strategic planning—Case studies. 3. Sustainability. I. Hunger, J. David, II. Title.

HD30.28.W43 2012 658.4'012—dc22

2011013549

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Dedicated to

KATHY, RICHARD, AND TOM BETTY, KARI AND JEFF, MADDIE AND MEGAN, SUZI AND NICK, SUMMER AND KACEY, LORI, MERRY AND DYLAN, AND WOOFIE (ARF!).

SPECIAL DEDICATION TO KATHRYN WHEELEN:

Kathryn has worked on every phase of the case section of this book. Until this edition, she also managed the construction of the Case Instructor’s Manual. She has done every job with a high level of dedication

and concern for both the case authors and the readers of this book.

NOLA AKALA

DAVID ALEVY

TARA ALGEO

DAVID ARMSTRONG

MIKE ASKEW

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NICK BAKER

ALICIA BARNES

ASHLEY BARNES

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KENDRA BASSI

JAY BECKENSTEIN

JOSH BECKENSTEIN

NICOLE BELL

CATHY BENNETT

KATIE BOLLIN

SCOTT BORDEN

JENNIFER BOYLE

AUNDREA BRIDGES

SUZANNE BROWN

ALEXANDRA BUEHLER

KYLE BURDETTE

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AMY CAREY

MEGAN CARRICO

MARTI CARTER

ANDREA CATULLO-LINN

MEREDITH CHANDLER

LUKE CLAEYS

KAYLEE CLAYMORE

BRIAN COBB

JENNIFER COLE

TARYLL CONNOLLY

THAYNE CONRAD

DONNA CONROY

CAITLIN COUTHEN

MEGAN JOY COWART

CYNDI CRIMMINS

KASEY CROCKETT

DAN CURRIER

KELLY DAN

MICHLENE DAOUD HEALY

STACY DAVIS

FRANK DEL CASTILLO

MEREDITH DELA ROSA

CHRIS DELANEY

GEORGE DEVENNEY

DANA DODGE (Frick)

KATE DOLDER

BARBARA DONLON

HEIDI DRESSLER

TRACY DYBALSKI

BRIAN DYK

KIM ECK

TRISH EICHHOLD

KRISTIN ELBER

KELSEY ELLIOTT

KATIE EYNON

GENEVA FARROW

MARIA FELIBERTY

MIKE FINER

MICHELLE FINNERTY

CANDAS FLETCHER

ROBERT FLORY

MARCIA FLYNN

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MARGARET FRENCH

STEPHANIE FRITSON

MARK GAFFNEY

MICHELLE GARCIA-JUCHTER

SYBIL GERAUD

AMBER GOECKE

CAROLYN GOGOLIN

ADAM GOLDSTEIN

BETH GRUNFELD

MICAELA HAIDLE

GREG HAITH

DEMETRIUS HALL

BRIDGET HANNENBERG

BRYAN HARRELL

TARA HARTLEY

KENNY HARVEY

ALISON HASKINS

CAROL HAWKS

JENNIFER HEILBRUNN

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JULIE HILDEBRAND

DAUNNE HINGLE

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GENE HUMENIUK

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SUSAN JACKSON

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ANJALI JUSTUS

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LAURA KAPPES

GIA KAUL

JULIE KESTENBAUM

KARTAPURKH KHALSA

KIM KIEHLER

AMANDA KILLEEN

WALT KIRBY

MARY-JO KOVACH

ROBYN KOVAR

GREG KRAMP

DANIEL KRAUSS

MICHAEL KRISANDA

GINA LaMANTIA

CHAFIKA LANDERS

DOROTHY LANDRY

DUSTIN LANGE

ALIX LaSCOLA

JOE LEE

APRIL LEMONS

KIMBERLY LENAGHAN

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vi

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PATRICIA MARTINEZ

CHRISTINA MASTROGIOVANNI

SONNY MATHARU

TONY MATHIAS

BROOK MATTHEWS

GEORGIA MAY

ALICIA MCAULIFFE

MASON McCARTNEY

KAREN McFADYEN

BRIAN McGARRY

MICHELLE McGOVERN

IRENE McGUINNESS

RYAN McHENRY

CRISTIN McMICHAEL

KEVIN MEASELLE

RAY MEDINA

KELLY MEIERHOFER

MOLLY MEINERS

MATT MESAROS

SHALON MILLER

JAMI MINARD

WILLIAM MINERICH

EMILY MITCHELL

JILINE MIX

JULIE MOREL

RAFAEL MORENO

TRACY MORSE

OLIVIA MOUG

DOLLY MUNIZ

TRICIA MURPHY

LAUREN MURROW

AMBER MYLLION (Parks)

LINDA NELSON

LYNNE NICLAIR

BOB NISBET

BETSY NIXON

TOM NIXON

LAURA NOAH

COLLEEN O’DELL

DEBBIE OGILIVE

SARI ORLANSKY

DAVE OSTROW

DARCEY PALMER

KRISTINA PARKER

TONI PAYNE

JULIANNE PETERSON

MELISSA PFISTNER

CANDACE PINATARO

BELEN POLTORAK

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MEGAN PRENDERGAST

NICOLE PRICE

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LENNY ANN RAPER

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AMANDA RAY

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MARY RHODES

BRAD RITTER

DAN ROBERTSON

MATT ROBINSON

JENNIFER ROSEN

DOROTHY ROSENE

KELLEEN ROWE

RICH ROWE

PEYTON ROYTEK

SENG SAECHAO

STEVE SARTORI

LYNDA SAX

BOB SCANLON

MARCUS SCHERER

KIMBERLY SCHEYVING

HEIDI SCHICK (Miller)

BRAD SCHICK

CHRIS SCHMIDT

DEBORAH SCHMIDT

MOLLY SCHMIDT

CORRINA SCHULTZ

WHITNEY SEAGO

CHRISTIANA SERLE

MARTHA SERNAS

MARY SHAPIRO

BARBARA SHERRY

KEN SHIPBAUGH

DAVE SHULER

JESSICA SIEMINSKI

LEA SILVERMAN

AUTUMN SLAUGHTER

KRISTA SLAVICEK

SCOTT SMITH

ADRIENNE SNOW

LEE SOLOMONIDES

BEN STEPHEN

DAN SULLIVAN

JOHN SULLIVAN

LORI SULLIVAN

STEPHANIE SURFUS

AMANDA SVEC

CHRISTINA TATE

SARAH THOMAS

ABBY THORNBLADH

KATY TOWNLEY

ELIZABETH TREPKOWSKI

TARA TRIPP

CAROLYN TWIST

JOE VIRZI

AMANDA VOLZ

BRITNEY WALKER

MADELEINE WATSON

BEN WEBER

DANIEL WELLS

MARK WHEELER

LIZ WILDES

MICHELLE WILES

BRIAN WILLIAMS

ERIN WILLIAMS

CINDY WILLIAMSON

RACHEL WILLIS

SIMON WONG

KIMBERLY WOODS

JACKIE WRIGHT

HEATHER WRUBLESKY

GEORGE YOUNG

MARY ZIMMERMANN

KACIE ZIN

DEDICATION vii

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Brief Contents

PART ONE Introduction to Strategic Management and Business Policy 1

C H A P T E R 1 Basic Concepts of Strategic Management 2 C H A P T E R 2 Corporate Governance 42 C H A P T E R 3 Social Responsibility and Ethics in Strategic Management 70

PART TWO Scanning the Environment 93

C H A P T E R 4 Environmental Scanning and Industry Analysis 94 C H A P T E R 5 Internal Scanning: Organizational Analysis 136

PART THREE Strategy Formulation 173

C H A P T E R 6 Strategy Formulation: Situation Analysis and Business Strategy 174 C H A P T E R 7 Strategy Formulation: Corporate Strategy 204 C H A P T E R 8 Strategy Formulation: Functional Strategy and Strategic Choice 236

PART FOUR Strategy Implementation and Control 269

C H A P T E R 9 Strategy Implementation: Organizing for Action 270 C H A P T E R 1 0 Strategy Implementation: Staffing and Directing 300 C H A P T E R 1 1 Evaluation and Control 328

PART FIVE Introduction to Case Analysis 363

C H A P T E R 1 2 Suggestions for Case Analysis 364

PART SIX WEB CHAPTERS Other Strategic Issues

W E B C H A P T E R A Strategic Issues in Managing Technology & Innovation W E B C H A P T E R B Strategic Issues in Entrepreneurial Ventures & Small Businesses W E B C H A P T E R C Strategic Issues in Not-For-Profit Organizations

PART SEVEN Cases in Strategic Management 1-1

GLOSSARY G-1

NAME INDEX I-1

SUBJECT INDEX I-7

ix

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Contents

Preface xxix

PART ONE Introduction to Strategic Management and Business Policy 1

C H A P T E R 1 Basic Concepts of Strategic Management 2 1.1 The Study of Strategic Management 5

Phases of Strategic Management 5

Benefits of Strategic Management 6

1.2 Globalization and Environmental Sustainability: Challenges to Strategic Management 7

Impact of Globalization 8

Impact of Environmental Sustainability 8

Global Issue: REGIONAL TRADE ASSOCIATIONS REPLACE NATIONAL TRADE BARRIERS 9

Environmental Sustainability Issue: PROJECTED EFFECTS OF CLIMATE CHANGE 12

1.3 Theories of Organizational Adaptation 12

1.4 Creating a Learning Organization 13

1.5 Basic Model of Strategic Management 14

Environmental Scanning 16

Strategy Formulation 17

Strategy Highlight 1.1: DO YOU HAVE A GOOD MISSION STATEMENT? 18

Strategy Implementation 21

Evaluation and Control 22

Feedback/Learning Process 23

1.6 Initiation of Strategy: Triggering Events 23

Strategy Highlight 1.2: TRIGGERING EVENT AT UNILEVER 24

1.7 Strategic Decision Making 25

What Makes a Decision Strategic 25

Mintzberg’s Modes of Strategic Decision Making 25

Strategic Decision-Making Process: Aid to Better Decisions 27

1.8 The Strategic Audit: Aid to Strategic Decision-Making 28

1.9 End of Chapter Summary 29

APPENDIX 1.A Strategic Audit of a Corporation 34

xi

C H A P T E R 2 Corporate Governance 42 2.1 Role of the Board of Directors 45

Responsibilities of the Board 45

Members of a Board of Directors 48

Strategy Highlight 2.1: AGENCY THEORY VERSUS STEWARDSHIP THEORY IN CORPORATE GOVERNANCE 50

Nomination and Election of Board Members 53

Organization of the Board 54

Impact of the Sarbanes-Oxley Act on U.S. Corporate Governance 55

Global Issue: CORPORATE GOVERNANCE IMPROVEMENTS THROUGHOUT THE WORLD 56

Trends in Corporate Governance 57

2.2 The Role of Top Management 58

Responsibilities of Top Management 58

Environmental Sustainability Issue: CONFLICT AT THE BODY SHOP 59

2.3 End of Chapter Summary 62

C H A P T E R 3 Social Responsibility and Ethics in Strategic Management 70 3.1 Social Responsibilities of Strategic Decision Makers 72

Responsibilities of a Business Firm 72

Sustainability: More than Environmental? 75

Corporate Stakeholders 75

Environmental Sustainability Issue: THE DOW JONES SUSTAINABILITY INDEX 76

Strategy Highlight 3.1: JOHNSON & JOHNSON CREDO 78

3.2 Ethical Decision Making 79

Some Reasons for Unethical Behavior 79

Strategy Highlight 3.2: UNETHICAL PRACTICES AT ENRON AND WORLDCOM EXPOSED BY “WHISTLE-BLOWERS” 80

Global Issue: HOW RULE-BASED AND RELATIONSHIP-BASED GOVERNANCE SYSTEMS AFFECT ETHICAL BEHAVIOR 81

Encouraging Ethical Behavior 83

3.3 End of Chapter Summary 86

Ending Case for Part One: BLOOD BANANAS 90

PART TWO Scanning the Environment 93

C H A P T E R 4 Environmental Scanning and Industry Analysis 94 4.1 Environmental Scanning 98

Identifying External Environmental Variables 98

Environmental Sustainability Issue: MEASURING AND SHRINKING YOUR PERSONAL CARBON FOOTPRINT 100

xii CONTENTS

Global Issue: IDENTIFYING POTENTIAL MARKETS IN DEVELOPING NATIONS 107

Identifying External Strategic Factors 108

4.2 Industry Analysis: Analyzing the Task Environment 109

Porter’s Approach to Industry Analysis 110

Industry Evolution 114

Categorizing International Industries 114

International Risk Assessment 115

Strategic Groups 115

Strategic Types 117

Hypercompetition 117

Using Key Success Factors to Create an Industry Matrix 118

Strategy Highlight 4.1: MICROSOFT IN A HYPERCOMPETITIVE INDUSTRY 118

4.3 Competitive Intelligence 120

Sources of Competitive Intelligence 121

Strategy Highlight 4.2: EVALUATING COMPETITIVE INTELLIGENCE 122

Monitoring Competitors for Strategic Planning 122

4.4 Forecasting 123

Danger of Assumptions 123

Useful Forecasting Techniques 124

4.5 The Strategic Audit: A Checklist for Environmental Scanning 125

4.6 Synthesis of External Factors—EFAS 126

4.7 End of Chapter Summary 127

APPENDIX 4.A Competitive Analysis Techniques 133

C H A P T E R 5 Internal Scanning: Organizational Analysis 136 5.1 A Resource-Based Approach to Organizational Analysis 138

Core and Distinctive Competencies 138

Using Resources to Gain Competitive Advantage 139

Determining the Sustainability of an Advantage 140

5.2 Business Models 142

5.3 Value-Chain Analysis 143

Strategy Highlight 5.1: A NEW BUSINESS MODEL AT SMARTYPIG 144

Industry Value-Chain Analysis 145

Corporate Value-Chain Analysis 146

5.4 Scanning Functional Resources and Capabilities 147

Basic Organizational Structures 147

Corporate Culture: The Company Way 149

CONTENTS xiii

Global Issue: MANAGING CORPORATE CULTURE FOR GLOBAL COMPETITIVE ADVANTAGE: ABB VERSUS MATSUSHITA 150

Strategic Marketing Issues 151

Strategic Financial Issues 153

Strategic Research and Development (R&D) Issues 154

Strategic Operations Issues 156

Strategic Human Resource (HRM) Issues 158

Environmental Sustainability Issue: USING ENERGY EFFICIENCY FOR COMPETITIVE ADVANTAGE AND QUALITY OF WORK LIFE 161

Strategic Information Systems/Technology Issues 162

5.5 The Strategic Audit: A Checklist for Organizational Analysis 163

5.6 Synthesis of Internal Factors 164

5.7 End of Chapter Summary 165

Ending Case for Part Two: BOEING BETS THE COMPANY 170

PART THREE Strategy Formulation 173

C H A P T E R 6 Strategy Formulation: Situation Analysis and Business Strategy 174 6.1 Situation Analysis: SWOT Analysis 176

Generating a Strategic Factors Analysis Summary (SFAS) Matrix 176

Finding a Propitious Niche 177

Global Issue: SAB DEFENDS ITS PROPITIOUS NICHE 181

6.2 Review of Mission and Objectives 181

6.3 Generating Alternative Strategies by Using a TOWS Matrix 182

6.4 Business Strategies 183

Porter’s Competitive Strategies 183

Environmental Sustainability Issue: PATAGONIA USES SUSTAINABILITY AS DIFFERENTIATION COMPETITIVE STRATEGY 187

Cooperative Strategies 195

6.5 End of Chapter Summary 199

C H A P T E R 7 Strategy Formulation: Corporate Strategy 204 7.1 Corporate Strategy 206

7.2 Directional Strategy 206

Growth Strategies 207

Strategy Highlight 7.1: TRANSACTION COST ECONOMICS ANALYZES VERTICAL GROWTH STRATEGY 210

xiv CONTENTS

Global Issue: COMPANIES LOOK TO INTERNATIONAL MARKETS FOR HORIZONTAL GROWTH 212

Strategy Highlight 7.2: SCREENING CRITERIA FOR CONCENTRIC DIVERSIFICATION 215

Controversies in Directional Growth Strategies 216

Stability Strategies 217

Retrenchment Strategies 218

7.3 Portfolio Analysis 220

BCG Growth-Share Matrix 221

Environmental Sustainability Issue: GENERAL MOTORS AND THE ELECTRIC CAR 222

GE Business Screen 223

Advantages and Limitations of Portfolio Analysis 225

Managing a Strategic Alliance Portfolio 225

7.4 Corporate Parenting 226

Developing a Corporate Parenting Strategy 227

Horizontal Strategy and Multipoint Competition 228

7.5 End of Chapter Summary 229

C H A P T E R 8 Strategy Formulation: Functional Strategy and Strategic Choice 236 8.1 Functional Strategy 238

Marketing Strategy 238

Financial Strategy 239

Research and Development (R&D) Strategy 241

Operations Strategy 242

Global Issue: INTERNATIONAL DIFFERENCES ALTER WHIRLPOOL’S OPERATIONS STRATEGY 243

Purchasing Strategy 244

Environmental Sustainability Issue: OPERATIONS NEED FRESH WATER AND LOTS OF IT! 245

Logistics Strategy 246

Human Resource Management (HRM) Strategy 246

Information Technology Strategy 247

8.2 The Sourcing Decision: Location of Functions 247

8.3 Strategies to Avoid 250

8.4 Strategic Choice: Selecting the Best Strategy 251

Constructing Corporate Scenarios 251

Process of Strategic Choice 257

CONTENTS xv

8.5 Developing Policies 258

8.6 End of Chapter Summary 259

Ending Case for Part Three: KMART AND SEARS: STILL STUCK IN THE MIDDLE? 266

PART FOUR Strategy Implementation and Control 269

C H A P T E R 9 Strategy Implementation: Organizing for Action 270 9.1 Strategy Implementation 272

9.2 Who Implements Strategy? 273

9.3 What Must Be Done? 273

Developing Programs, Budgets, and Procedures 274

Environmental Sustainability Issue: FORD’S SOYBEAN SEAT FOAM PROGRAM 274

Strategy Highlight 9.1: THE TOP TEN EXCUSES FOR BAD SERVICE 277

Achieving Synergy 278

9.4 How Is Strategy to Be Implemented? Organizing for Action 278

Structure Follows Strategy 279

Stages of Corporate Development 280

Organizational Life Cycle 283

Advanced Types of Organizational Structures 285

Reengineering and Strategy Implementation 288

Six Sigma 289

Designing Jobs to Implement Strategy 290

Strategy Highlight 9.2: DESIGNING JOBS WITH THE JOB CHARACTERISTICS MODEL 291

9.5 International Issues in Strategy Implementation 291

International Strategic Alliances 292

Stages of International Development 293

Global Issue: MULTIPLE HEADQUARTERS: A SIXTH STAGE OF INTERNATIONAL DEVELOPMENT? 294

Centralization Versus Decentralization 294

9.6 End of Chapter Summary 296

C H A P T E R 1 0 Strategy Implementation: Staffing and Directing 300 10.1 Staffing 302

Staffing Follows Strategy 303

Selection and Management Development 305

Strategy Highlight 10.1: HOW HEWLETT-PACKARD IDENTIFIES POTENTIAL EXECUTIVES 306

Problems in Retrenchment 308

International Issues in Staffing 309

xvi CONTENTS

10.2 Leading 311

Managing Corporate Culture 311

Environmental Sustainability Issue: ABBOTT LABORATORIES’ NEW PROCEDURES FOR GREENER COMPANY CARS 312

Action Planning 316

Management by Objectives 318

Total Quality Management 318

International Considerations in Leading 319

Global Issue: CULTURAL DIFFERENCES CREATE IMPLEMENTATION PROBLEMS IN MERGER 321

10.3 End of Chapter Summary 322

C H A P T E R 1 1 Evaluation and Control 328 11.1 Evaluation and Control in Strategic Management 330

11.2 Measuring Performance 332

Appropriate Measures 332

Types of Controls 332

Activity-Based Costing 334

Enterprise Risk Management 335

Primary Measures of Corporate Performance 335

Environmental Sustainability Issue: HOW GLOBAL WARMING COULD AFFECT CORPORATE VALUATION 340

Primary Measures of Divisional and Functional Performance 342

International Measurement Issues 344

Global Issue: COUNTERFEIT GOODS AND PIRATED SOFTWARE: A GLOBAL PROBLEM 346

11.3 Strategic Information Systems 347

Enterprise Resource Planning (ERP) 347

Radio Frequency Identification (RFID) 348

Divisional and Functional IS Support 348

11.4 Problems in Measuring Performance 348

Short-Term Orientation 349

Goal Displacement 350

11.5 Guidelines for Proper Control 351

Strategy Highlight 11.1: SOME RULES OF THUMB IN STRATEGY 351

11.6 Strategic Incentive Management 352

11.7 End of Chapter Summary 354

Ending Case for Part Four: HEWLETT-PACKARD BUYS EDS 360

CONTENTS xvii

PART FIVE Introduction to Case Analysis 363

C H A P T E R 1 2 Suggestions for Case Analysis 364 12.1 The Case Method 365

12.2 Researching the Case Situation 366

12.3 Financial Analysis: A Place to Begin 366

Analyzing Financial Statements 369

Environmental Sustainability Issue: IMPACT OF CARBON TRADING 370

Global Issue: FINANCIAL STATEMENTS OF MULTINATIONAL CORPORATIONS: NOT ALWAYS WHAT THEY SEEM 371

Common-Size Statements 371

Z-value and Index of Sustainable Growth 371

Useful Economic Measures 372

12.4 Format for Case Analysis: The Strategic Audit 373

12.5 End of Chapter Summary 375

APPENDIX 12.A Resources for Case Research 377

APPENDIX 12.B Suggested Case Analysis Methodology Using the Strategic Audit 380

APPENDIX 12.C Example of a Student-Written Strategic Audit 383

Ending Case for Part Five: IN THE GARDEN 391

GLOSSARY G-1

NAME INDEX I-1

SUBJECT INDEX I-1

PART SIX WEB CHAPTERS Other Strategic Issues

W E B C H A P T E R A Strategic Issues in Managing Technology and Innovation 1 The Role of Management

Strategy Highlight 1: EXAMPLES OF INNOVATION EMPHASIS IN MISSION STATEMENTS

2 Environmental Scanning

External Scanning

Internal Scanning

3 Strategy Formulation

Product vs. Process R&D

Technology Sourcing

Global Issue: USE OF INTELLECTUAL PROPERTY AT HUAWEI TECHNOLOGIES

Importance of Technological Competence

Categories of Innovation

Product Portfolio

xviii CONTENTS

4 Strategy Implementation

Developing an Innovative Entrepreneurial Culture

Organizing for Innovation: Corporate Entrepreneurship

Strategy Highlight 2: HOW NOT TO DEVELOP AN INNOVATIVE ORGANIZATION

5 Evaluation and Control

Evaluation and Control Techniques

Evaluation and Control Measures

6 End of Chapter Summary

W E B C H A P T E R B Strategic Issues in Entrepreneurial Ventures and Small Businesses 1 Importance of Small Business and Entrepreneurial Ventures

Global Issue: ENTREPRENEURSHIP: SOME COUNTRIES ARE MORE SUPPORTIVE THAN OTHERS

Definition of Small-Business Firms and Entrepreneurial Ventures

The Entrepreneur as Strategist

2 Use of Strategic Planning and Strategic Management

Degree of Formality

Usefulness of the Strategic Management Model

Usefulness of the Strategic Decision-Making Process

3 Issues in Corporate Governance

Boards of Directors and Advisory Boards

Impact of the Sarbanes-Oxley Act

4 Issues in Environmental Scanning and Strategy Formulation

Sources of Innovation

Factors Affecting a New Venture’s Success

Strategy Highlight 1: SUGGESTIONS FOR LOCATING AN OPPORTUNITY AND FORMULATING A BUSINESS STRATEGY

5 Issues in Strategy Implementation

Substages of Small Business Development

Transfer of Power and Wealth in Family Businesses

6 Issues in Evaluation and Control

7 End of Chapter Summary

W E B C H A P T E R C Strategic Issues in Not-for-Profit Organizations 1 Why Not-for-Profit?

Global Issue: WHICH IS BEST FOR SOCIETY: BUSINESS OR NOT-FOR-PROFIT?

CONTENTS xix

2 Importance of Revenue Source

Sources of Not-for-Profit Revenue

Patterns of Influence on Strategic Decision Making

Usefulness of Strategic Management Concepts and Techniques

3 Impact of Constraints on Strategic Management

Impact on Strategy Formulation

Impact on Strategy Implementation

Impact on Evaluation and Control

4 Not-for-Profit Strategies

Strategic Piggybacking

Strategy Highlight 1: RESOURCES NEEDED FOR SUCCESSFUL STRATEGIC PIGGYBACKING

Mergers

Strategic Alliances

5 End of Chapter Summary

PART SEVEN Cases in Strategic Management 1-1

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

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.

xx CONTENTS

CASE 4 The Audit 4-1 (Contributors: John A. Kilpatrick, Gamewell D. Gantt, and George A. Johnson) 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 International Issues in Strategic Management

CASE 5 Starbucks’ Coffee Company: The Indian Dilemma 5-1 (Contributors: Ruchi Mankad and Joel Sarosh Thadamalla) Starbucks is the world’s largest coffee retailer with over 11,000 stores in 36 countries and over 10,000 employees. The case focuses on India as a potential market for the coffee retailer, presenting information on India’s societal environment and beverage industry. Profiles are provided for various existing coffee shop chains in India. The key issue in the case revolves around the question: Are circumstances right for Starbucks to enter India?

CASE 6 Guajilote Cooperativo Forestal: Honduras 6-1 (Contributors: Nathan Nebbe and J. David Hunger) This forestry cooperative has the right to harvest, transport, and sell fallen mahogany trees in La Muralla National Park of Honduras. Although the cooperative has been successful thus far, it is facing some serious issues: low prices for its product, illegal logging, deforestation by poor farmers, and possible world trade restrictions on the sale of mahogany.

S E C T I O N D General Issues in Strategic Management

I N D U S T RY O N E : Information Technology CASE 7 Apple Inc.: Performance in a Zero-Sum World Economy 7-1

(Contributors: Kathryn E. Wheelen, Thomas L. Wheelen II, Richard D. Wheelen, Moustafa H. Abdelsamad, Bernard A. Morin, Lawrence C. Pettit, David B. Croll, and Thomas L. Wheelen) Apple, the first company to mass-market a personal computer, had become a minor player in an industry dominated by Microsoft. After being expelled from the company in 1985, founder Steve Jobs returned as CEO in 1997 to reenergize the firm. The introduction of the iPod in 2001, followed by the iPad, catapulted Apple back into the spotlight. However, in 2011 Jobs was forced to take his third medical leave, leading to questions regarding his ability to lead Apple. How can Apple continue its success? How dependent is the company on Steve Jobs?

CASE 8 iRobot: Finding the Right Market Mix? 8-1 (Contributor: Alan N. Hoffman) Founded in 1990, iRobot was among the first companies to introduce robotic technology into the consumer market. Employing over 500 robotic professionals, the firm planned to lead the robotics industry. Unfortunately, its largest revenue source, home care robots, are a luxury good and vulnerable to recessions. Many of iRobot’s patents are due to expire by 2019. The firm is highly dependent upon suppliers to make its consumer products and the U.S. government for military sales. What is the best strategy for its future success?

CASE 9 Dell Inc.: Changing the Business Model (Mini Case) 9-1 (Contributor: J. David Hunger) Dell, once the largest PC vendor in the world, is now battling with Acer for second place in the global PC market. Its chief advantages—direct marketing and power over suppliers—no longer provided a competitive advantage. The industry’s focus has shifted from desktop PCs to mobile computing, software, and technology services, areas of relative weakness for Dell. Is it time for Dell to change its strategy?

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CASE 10 Rosetta Stone Inc.: Changing the Way People Learn Languages 10-1 (Contributors: Christine B. Buenafe and Joyce P. Vincelette) Rosetta Stone’s mission was to change the way people learn languages. The company blended language learning with technology at a time when globalization connected more and more individuals and institutions to each other. How should the company move forward? Would it be appropriate for Rosetta Stone to offer products like audio books or services in order to increase market share? Which international markets could provide the company with a successful future?

CASE 11 Logitech (Mini Case) 11-1 (Contributor: Alan N. Hoffman) Logitech, the world’s leading provider of computer peripherals, was on the forefront of mouse, keyboard, and video conferencing technology. By 2010, however, Logitech’s products were threatened by new technologies, such as touch pads, that could replace both the mouse and keyboard. As the peripherals market begins to disintegrate, Logitech is considering a change in strategy.

I N D U S T RY T W O : INTERNET COMPANIES

CASE 12 Google Inc. (2010): The Future of the Internet Search Engine 12-1 (Contributor: Patricia A. Ryan) Google, an online company that provides a reliable Internet search engine, was founded in 1998 and soon replaced Yahoo as the market leader in Internet search engines. By 2010, Google was one of the strongest brands in the world. Nevertheless, its growth by acquisition strategy was showing signs of weakness. Its 2006 acquisition of YouTube had thus far not generated significant revenue growth. Groupon, a shopping Web site, rebuffed Google’s acquisition attempt in 2010. Is it time for a strategic change?

CASE 13 Reorganizing Yahoo! 13-1 (Contributors: P. Indu and Vivek Gupta) Yahoo! created the first successful Internet search engine, but by 2004 it was losing its identity. Was it a search engine, a portal, or a media company? On December 5, 2006, Yahoo’s CEO announced a reorganization of the company into three groups. It was hoped that a new mission statement and a new structure would make Yahoo leaner and more responsive to customers. Would this be enough to turn around the company?

I N D U S T RY T H R E E : ENTERTAINMENT AND LEISURE

CASE 14 TiVo Inc.: TiVo vs. Cable and Satellite DVR: Can TiVo survive? 14-1 (Contributors: Alan N. Hoffman, Randy Halim, Rangki Son, and Suzanne Wong) TiVo was founded to create a device capable of recording digitized video on a computer hard drive for television viewing. Even though revenues had jumped from $96 million in 2003 to $259 million in 2007, the company had never earned a profit. Despite many alliances, TiVo faced increasing competition from generic DVRs offered by satellite and cable companies. How long can the company continue to sell TiVo DVRs when the competition sells generic DVRs at a lower price or gives them away for free?

CASE 15 Marvel Entertainment Inc. 15-1 (Contributors: Ellie A. Fogarty and Joyce P. Vincelette) Marvel Entertainment was known for its comic book characters Captain America, Spider Man, the Fantastic Four, the Incredible Hulk, the Avengers, and the X-Men. With its 2008 self-produced films, Iron Man and The Incredible Hulk, Marvel had expanded out of comic books to become a leader in the entertainment industry. The company was no longer competing against other comic book publishers like DC Comics, but was now competing against entertainment giants like Walt Disney and NBC Universal. What should Marvel’s management do to ensure the company’s future success?

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CASE 16 Carnival Corporation and plc (2010) 16-1 (Contributors: Michael J. Keeffe, John K. Ross III, Sherry K. Ross, Bill J. Middlebrook, and Thomas L. Wheelen) With its “fun ship,” Carnival Cruises changed the way people think of ocean cruises. The cruise became more important than the destination. Through acquisition, Carnival expanded its product line to encompass an entire range of industry offerings. How can Carnival continue to grow in the industry it now dominates?

I N D U S T RY F O U R : TRANSPORTATION

CASE 17 Chrysler in Trouble 17-1 (Contributors: Barnali Chakraborty and Vivek Gupta) On April 30, 2009, Chrysler Motors, the third-largest auto manufacturer in the United States, filed for bankruptcy protection along with its 24 wholly owned U.S. subsidiaries. As a condition of the U.S. federal government’s loan of more than $8 billion, Fiat was given 20% of the new Chrysler Corporation with the option of increasing its stake to 51% by 2016 after the new company had repaid the federal government’s loan. What does Chrysler need to do to ensure the success of its partnership with Fiat?

CASE 18 Tesla Motors Inc. (Mini Case) 18-1 (Contributor: J. David Hunger) Tesla Motors was founded in 2004 to produce electric automobiles. Its first car, the Tesla Roadster, sold for $101,000. It could accelerate from zero to 60 mph in 3.9 seconds and cruise for 236 miles on a single charge. In contrast to existing automakers, Tesla sold and serviced its cars through the Internet and its own Tesla stores. With the goal of building a full line of electric vehicles, Tesla Motors faced increasing competition from established automakers. How could Tesla Motors succeed in an industry dominated by giant global competitors?

CASE 19 Harley-Davidson Inc. 2008: Thriving through a Recession 19-1 (Contributors: Patricia A. Ryan and Thomas Wheelen) Harley-Davidson 2008: Thriving Through Recession is a modern success story of a motorcycle company that turned itself around by emphasizing quality manufacturing and image marketing. After consistently growing through the 1990s, sales were showing signs of slowing as the baby boomers continued to age. Safety was also becoming an issue. For the first time in recent history, sales and profits declined in 2007 from 2006. Analysts wondered how the company would be affected in a recession. How does Harley-Davidson continue to grow at its past rate?

CASE 20 JetBlue Airways: Growing Pains? 20-1 (Contributors: Shirisha Regani and S. S. George) JetBlue Airways had been founded as a “value player” in the niche between full service airlines and low-cost carriers. Competition had recently intensified and several airlines were taking advantage of bankruptcy protection to recapture market share through price cuts. JetBlue’s operating costs were rising as a result of increasing fuel costs, aircraft maintenance expenses, and service costs. Has JetBlue been growing too fast and was growth no longer sustainable?

CASE 21 TomTom: New Competition Everywhere! 21-1 (Contributor: Alan N. Hoffman) TomTom, an Amsterdam-based company that provided navigation services and devices, led the navigation systems market in Europe and was second in popularity in the United States. However, the company was facing increasing competition from other platforms using GPS technology like cell phones and Smartphones with a built-in navigation function. As its primary markets in the United States and Europe mature, how can the company ensure its future growth and success?

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I N D U S T RY F I V E : CLOTHING

CASE 22 Volcom Inc.: Riding the Wave 22-1 (Contributors: Christine B. Buenafe and Joyce P. Vincelette) Volcom was formed south of Los Angeles in 1991 as a clothing company rooted in the action sports of skateboarding, surfing, and snowboarding. By 2008, Volcom-branded products were sold throughout the United States and in over 40 countries. It did not own any manufacturing facilities, but instead worked with foreign contract manufacturers. As a primary competitor in the boardsports community, Volcom was committed to maintaining its brand, position, and lifestyle and needed to reassess its strategy.

CASE 23 TOMS Shoes (Mini Case) 23-1 (Contributor: J. David Hunger) Founded in 2006 by Blake Mycoskie, TOMS Shoes is an American footwear company based in Santa Monica, California. Although TOMS Shoes is a for-profit business, its mission is more like that of a not-for-profit organization. The firm’s reason for existence is to donate to children in need one new pair of shoes for every pair of shoes sold. By 2010, the company had sold over one million pairs of shoes. How should the company plan its future growth?

I N D U S T RY S I X : SPECIALTY RETAILING

CASE 24 Best Buy Co. Inc.: Sustainable Customer Centricity Model? 24-1 (Contributor: Alan N. Hoffman) Best Buy, the largest consumer electronics retailer in the United States, operates 4,000 stores in North America, China, and Turkey. Best Buy distinguishes itself from competitors by deploying a differentiation strategy based on superior service rather than low price. The recent recession has stressed its finances and the quality of its customer service. How can Best Buy continue to have innovative products, top-notch employees, and superior customer service while facing increased competition, operational costs, and financial stress?

CASE 25 The Future of Gap Inc. 25-1 (Contributor: Mridu Verma) Gap Inc. offered clothing, accessories, and personal care products under the Gap, Banana Republic, and Old Navy brands. After a new CEO introduced a turnaround strategy, sales increased briefly, then fell. Tired of declining sales, the board of directors hired Goldman Sachs to explore strategies to improve, ranging from the sale of its stores to spinning off a single division.

CASE 26 Rocky Mountain Chocolate Factory Inc. (2008) 26-1 (Contributors: Annie Phan and Joyce P. Vincelette) Rocky Mountain Chocolate Factory had five company-owned and 329 franchised stores in 38 states, Canada, and the United Arab Emirates. Even though revenues and net income had increased from 2005 through 2008, they had been increasing at a decreasing rate. Candy purchased from the factory by the stores had actually dropped 9% in 2008 from 2007. Was the bloom off the rose at Rocky Mountain Chocolate?

CASE 27 Dollar General Corporation (Mini Case) 27-1 (Contributor: Kathryn E. Wheelen) With annual revenues of $12.7 billion and 9,200 stores in 35 states, Dollar General is the largest of the discount “dollar stores” in the United States. Although far smaller than its “big brothers” Wal-Mart and Target, Dollar General has done very well during the recent economic recession. In 2011, it plans to open 625 new stores in three new states. Given that the company has substantial long-term debt, is this the right time to expand the company’s operations?

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I N D U S T RY S E V E N : MANUFACTURING

CASE 28 Inner-City Paint Corporation (Revised) 28-1 (Contributors: Donald F. Kuratko and Norman J. Gierlasinski) Inner-City Paint makes paint for sale to contractors in the Chicago area. However, the founder’s lack of management knowledge is creating difficulties for the firm, and the company is in financial difficulty. Unless something is done soon, it may go out of business.

CASE 29 The Carey Plant 29-1 (Contributors: Thomas L. Wheelen and J. David Hunger) The Carey Plant was a profitable manufacturer of quality machine parts until it was acquired by the Gardner Company. Since its acquisition, the plant has been plagued by labor problems, increasing costs, leveling sales, and decreasing profits. Gardner Company’s top management is attempting to improve the plant’s performance and better integrate its activities with those of the corporation by selecting a new person to manage the plant.

I N D U S T RY E I G H T: FOOD AND BEVERAGE

CASE 30 The Boston Beer Company: Brewers of Samuel Adams Boston Lager (Mini Case) 30-1 (Contributor: Alan N. Hoffman) The Boston Beer Company was founded in 1984 by Jim Koch, viewed as the pioneer of the American craft beer revolution. Brewing over 1 million barrels of 25 different styles of beer, Boston Beer is the sixth-largest brewer in the United States. Even though overall domestic beer sales declined 1.2% in 2010, sales of craft beer have increased 20% since 2002, with Boston Beer’s increasing 22% from 2007 to 2009. How can the company continue its rapid growth in a mature industry?

CASE 31 Wal-Mart and Vlasic Pickles 31-1 (Contributor: Karen A. Berger) A manager of Vlasic Foods International closed a deal with Wal-Mart that resulted in selling more pickles than Vlasic had ever sold to any one account. The expected profit of one to two cents per jar was not sustainable, however, due to unplanned expenses. Vlasic’s net income plummeted and the company faced bankruptcy. Given that Wal-Mart was Vlasic’s largest customer, what action should management take?

CASE 32 Panera Bread Company (2010): Still Rising Fortunes? 32-1 (Contributors: Joyce Vincelette and Ellie A. Fogarty) Panera Bread is a successful bakery-café known for its quality soups and sandwiches. Even though Panera’s revenues and net earnings have been rising rapidly, new unit expansion throughout North America has fueled this growth. Will revenue growth stop once expansion slows? The retirement of CEO Ronald Shaich, the master baker who created the “starter” for the company’s phenomenal growth, is an opportunity to rethink Panera’s growth strategy.

CASE 33 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market? (Mini Case) 33-1 (Contributors: Patricia Harasta and Alan N. Hoffman) Whole Foods Market is the world’s leading retailer of natural and organic foods. The company differentiates itself from competitors by focusing on innovation, quality, and service excellence, allowing it to charge premium prices. Although the company dominates the natural/organic foods category in North America, it is facing increasing competition from larger food retailers, such as Wal- Mart, who are adding natural/organic foods to their offerings.

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CASE 34 Burger King (Mini Case) 34-1 (Contributor: J. David Hunger) Founded in Florida in 1953, Burger King has always trailed behind McDonald’s as the second-largest fast-food hamburger chain in the world. Although its total revenues dropped only slightly from 2009, its 2010 profits dropped significantly, due to high expenses. Burger King’s purchase by an investment group in 2010 was an opportunity to rethink the firm’s strategy.

CASE 35 Church & Dwight: Time to Rethink the Portfolio? 35-1 (Contributor: Roy A. Cook) Church & Dwight, the maker of ARM & HAMMER Baking Soda, has used brand extension to successfully market multiple consumer products based on sodium bicarbonate. Searching for a new growth strategy, the firm turned to acquisitions. Can management successfully achieve a balancing act based on finding growth through expanded uses of sodium bicarbonate while assimilating a divergent group of consumer products into an expanding international footprint?

S E C T I O N E Web Mini Cases Additional Mini Cases Available on the Companion Web Site at www.pearsonhighered.com/wheelen.

W E B C A S E 1 Eli Lily & Company (Contributor: Maryanne M. Rouse) A leading pharmaceutical company, Eli Lilly produces a wide variety of ethical drugs and animal health products. Despite an array of new products, the company’s profits declined after the firm lost patent protection for Prozac. In addition, the FDA found quality problems at several of the company’s manufacturing sites, resulting in a delay of new product approvals. How should Lily position itself in a very complex industry?

W E B C A S E 2 Tech Data Corporation (Contributor: Maryanne M. Rouse) Tech Data, a distributor of information technology and logistics management, has rapidly grown through acquisition to become the second-largest global IT distributor. Sales and profits have been declining, however, since 2001. As computers become more like a commodity, the increasing emphasis on direct distribution by manufacturers threaten wholesale distributors like Tech Data.

W E B C A S E 3 Stryker Corporation (Contributor: Maryanne M. Rouse) Stryker is a leading maker of specialty medical and surgical products, a market expected to show strong sales growth. Stryker markets its products directly to hospitals and physicians in the United States and 100 other countries. Given the decline in the number of hospitals due to consolidation and cost containment efforts by government programs and health care insurers, the industry expects continued downward pressure on prices. How can Stryker effectively deal with these developments?

W E B C A S E 4 Sykes Enterprises (Contributor: Maryanne M. Rouse) Sykes provides outsourced customer relationship management services worldwide in a highly competitive, fragmented industry. Like its customers, Sykes has recently been closing its call centers in America and moving to Asia in order to reduce costs. Small towns felt betrayed by the firm’s decision to leave—especially after providing financial incentives to attract the firm. Nevertheless, declining revenue and net income has caused the company’s stock to drop to an all-time low.

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W E B C A S E 5 Pfizer Inc. (Contributor: Maryanne M. Rouse) With its acquisition in 2000 of rival pharmaceutical firm Warner-Lambert for its Lipitor prescription drug, Pfizer has become the world’s largest ethical pharmaceutical company in terms of sales. Already the leading company in the United States, Pfizer’s purchase of Pharmacia in 2002 moved Pfizer from fourth to first place in Europe. Will large size hurt or help the company’s future growth and profitability in an industry facing increasing scrutiny?

W E B C A S E 6 Williams-Sonoma (Contributor: Maryanne M. Rouse) Williams-Sonoma is a specialty retailer of home products. Following a related diversification growth strategy, the company operates 415 Williams-Sonoma, Pottery Barn, and Hold Everything retail stores throughout North America. Its direct sales segment includes six retail catalogues and three e-commerce sites. The company must deal with increasing competition in this fragmented industry characterized by low entry barriers.

W E B C A S E 7 Tyson Foods Inc. (Contributor: Maryanne M. Rouse) Tyson produces and distributes beef, chicken, and pork products in the United States. It acquired IBP, a major competitor, but has been the subject of lawsuits by its employees and the EPA. How should management deal with its poor public relations and position the company to gain and sustain competitive advantage in an industry characterized by increasing consolidation and intense competition?

W E B C A S E 8 Southwest Airlines Company (Contributor: Maryanne M. Rouse) The fourth-largest U.S. airline in terms of passengers carried and second-largest in scheduled domestic departures, Southwest was the only domestic airline to remain profitable in 2001. Emphasizing high- frequency, short-haul, point-to-point, and low-fare service, the airline has the lowest cost per available seat mile flown of any U.S. major passenger carrier. Can Southwest continue to be successful as competitors increasingly imitate its competitive strategy?

W E B C A S E 9 Outback Steakhouse Inc. (Contributor: Maryanne M. Rouse) With 1,185 restaurants in 50 states and 21 foreign countries, Outback (OSI) is one of the largest casual dining restaurant companies in the world. In addition to Outback Steakhouse, the company is composed of Carrabba’s Italian Grill, Fleming’s Prime Steakhouse & Wine Bar, Bonefish Grill, Roy’s, Lee Roy Selmon’s, Cheeseburger in Paradise, and Paul Lee’s Kitchen. Analysts wonder how long OSI can continue to grow by adding new types of restaurants to its portfolio.

W E B C A S E 10 Intel Corporation (Contributor: J. David Hunger) Although more than 80% of the world’s personal computers and servers use its microprocessors, Intel is facing strong competition from AMD in a maturing market. Sales growth is slowing. Profits are expected to rise only 5% in 2006 compared to 40% annual growth previously. The new CEO decides to reinvent Intel to avoid a fate of eventual decline.

W E B C A S E 11 AirTran Holdings Inc. (Contributor: Maryanne M. Rouse) AirTran (known as ValuJet before a disastrous crash in the Everglades) is the second-largest low- fare scheduled airline (after Southwest) in the United States in terms of departures and, along with Southwest, the only U.S. airline to post a profit in 2004. The company’s labor costs as a percentage of sales are the lowest in the industry. Will AirTran continue to be successful in this highly competitive industry?

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W E B C A S E 12 Boise Cascade/Office Max (Contributor: Maryanne M. Rouse) Boise Cascade, an integrated manufacturer and distributor of paper, packaging, and wood products, purchased OfficeMax, the third-largest office supplies catalogue retailer (after Staples and Office Depot), in 2003. Soon thereafter, Boise announced that it was selling its land, plants, headquarters location, and even its name to an equity investment firm. Upon completion of the sale in 2004, the company assumed the name of OfficeMax. Can this manufacturer become a successful retailer?

W E B C A S E 13 H. J. Heinz Company (Contributor: Maryanne M. Rouse) Heinz, a manufacturer and marketer of processed food products, pursued global growth via market penetration and acquisitions. Unfortunately, its modest sales growth was primarily from its acquisitions. Now that the firm has divested a number of lines of businesses and brands to Del Monte Foods, analysts wonder how a 20% smaller Heinz will grow its sales and profits in this very competitive industry.

W E B C A S E 14 Nike Inc. (Contributor: Maryanne M. Rouse) Nike is the largest maker of athletic footwear and apparel in the world with a U.S. market share exceeding 40%. Since almost all its products are manufactured by 700 independent contractors (99% of which are in Southeast Asia), Nike is a target of activists opposing manufacturing practices in developing nations. Although industry sales growth in athletic footwear is slowing, Nike refused to change its product mix in 2002 to suit Foot Locker, the dominant global footwear retailer. Is it time for Nike to change its strategy and practices?

W E B C A S E 15 Six Flags Inc.: The 2006 Business Turnaround (Contributor: Patricia A. Ryan) Known for its fast roller coasters and adventure rides, Six Flags has successfully built a group of regional theme and water parks in the United States. Nevertheless, the company has not turned a profit since 1998. Long-term debt had increased to 61% of total assets by 2005. New management is implementing a retrenchment strategy, but industry analysts are unsure if this will be enough to save the company.

W E B C A S E 16 Lowe’s Companies Inc. (Contributor: Maryanne M. Rouse) As the second-largest U.S. “big box” home improvement retailer (behind Home Depot), Lowe’s competes in a highly fragmented industry. The company has grown with the increase in home ownership and has no plans to expand internationally. With more than 1,000 stores in 2004, Lowe’s intended to increase its U.S. presence with 150 store openings per year in 2005 and 2006. Are there limits to Lowe’s current growth strategy?

W E B C A S E 17 Movie Gallery Inc. (Contributor: J. David Hunger) Movie Gallery is the second-largest North American video retail rental company, specializing in the rental and sale of movies and video games through its Movie Gallery and Hollywood Entertainment stores. Growing through acquisitions, the company is heavily in debt. The recent rise of online video rental services, such as Netflix, is cutting into retail store revenues and reducing the company’s cash flow. With just $135 million in cash at the end of 2005, Movie Gallery’s management finds itself facing possible bankruptcy.

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Preface

Welcome to the 13th edition of Strategic Management and Business Policy! Although the chapters are the same as those in the 12th edition, many of the cases are new and different. We completely revised seven of your favorite cases (Apple, Dell, Google, Carnival, Panera Bread, Whole Foods, and Church & Dwight) and added 12 brand-new ones (iRobot, Rosetta Stone, Logitech, Chrysler, Tesla Motors, TomTom, Volcom, TOMS Shoes, Best Buy, Dollar General, Boston Beer, and Burger King) for a total of 19 new cases! More than half of the cases in this book are new to this edition! Although we still make a distinction between full-length and mini cases, we have interwoven them throughout the book to better identify them with their industries.

This edition continues the theme that runs throughout all 12 chapters: global environmental sustainability. This strategic issue will become even more important in the years ahead, as all of us struggle to deal with the consequences of climate change, global warming, and energy availability. We continue to be the most comprehensive strategy book on the market, with chapters ranging from corporate governance and social responsibility to competitive strategy, functional strategy, and strategic alliances. To keep the size of the book manageable, we offer special issue chapters dealing with technology, entrepreneurship, and not-for-profit organiza- tions on the Web site (www.pearsonhighered.com/wheelen).

FEATURES NEW TO THIS 13th EDITION Nineteen New Cases: Both Full Length and Mini Length Eleven full-length new or updated comprehensive cases and eight mini-length cases have been added to support the 16 popular full-length cases carried forward from past editions. Twelve of the cases are brand new. Seven are updated favorites from past editions. Of the 35 cases appearing in this book, 22 are exclusive and do not appear in other books.

� Five of the new cases deal with technology issues (Apple, iRobot, Dell, Rosetta Stone, and Logitech).

� One of the new cases deals with the Internet (Google). � One new case involves entertainment (Carnival). � Three new cases are of old and new transportation firms (Chrysler, TomTom, and Tesla

Motors). � Two new cases are of entrepreneurial clothing companies (Volcom and TOMS Shoes). � Two new specialty retailing cases spotlight electronics (Best Buy) and variety (Dollar

General). � Five new cases come from the food, beverage, and restaurant industries (Boston Beer,

Panera Bread, Whole Foods Market, Burger King, and Church & Dwight).

HOW THIS BOOK IS DIFFERENT FROM OTHER STRATEGY TEXTBOOKS This book contains a Strategic Management Model that runs through the first 11 chapters and is made operational through the Strategic Audit, a complete case analysis methodology. The Strategic Audit provides a professional framework for case analysis in terms of external

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and internal factors and takes the student through the generation of strategic alternatives and implementation programs.

To help the student synthesize the many factors in a complex strategy case, we developed three useful techniques:

� External Factor Analysis (EFAS) Table in Chapter 4 This reduces the external Opportunities and Threats to the 8 to 10 most important exter- nal factors facing management.

� Internal Factor Analysis (IFAS) Table in Chapter 5 This reduces the internal Strengths and Weaknesses to the 8 to 10 most important internal factors facing management.

� Strategic Factor Analysis Summary (SFAS) Matrix in Chapter 6 This condenses the 16 to 20 factors generated in the EFAS and IFAS Tables into the 8 to 10 most important (strategic) factors facing the company. These strategic factors become the basis for generating alternatives and a recommendation for the company’s future direction.

Suggestions for Case Analysis are provided in Appendix 12.B (end of Chapter 12) and contain step-by-step procedures for how to use the Strategic Audit in analyzing a case. This appendix includes an example of a student-written Strategic Audit. Thousands of students around the world have applied this methodology to case analysis with great success. The Case Instructor’s Manual contains examples of student-written Strategic Audits for each of the full-length comprehensive strategy cases.

FEATURES FOCUSED ON ENVIRONMENTAL SUSTAINABILITY � Each chapter contains a boxed insert dealing with an issue in environmental sustainability.

� Each chapter ends with Eco Bits, interesting tidbits of ecological information, such as the number of plastic bags added to landfills each year.

� Special sections on sustainability are found in Chapters 1 and 3.

� A section on the natural environment is included in the societal and task environments in Chapter 4.

TIME-TESTED FEATURES This edition contains many of the same features and content that helped make previous editions success- ful. Some of the features are the following:

xxx PREFACE

� A Strategic Management Model runs through- out the first 11 chapters as a unifying concept. (Explained in Chapter 1)

� The Strategic Audit, a way to operationalize the strategic decision- making process, serves as a checklist in case analysis. (Chapter 1)

� Corporate governance is examined in terms of the roles, re- sponsibilities, and interactions of top management and the board of directors and includes the impact of the Sarbanes-Oxley Act. (Chapter 2)

� Social responsibility and managerial ethics are examined in detail in terms of how they affect strategic decision making. They include the process of stakeholder analysis and the concept of social capital. (Chapter 3)

� Equal emphasis is placed on environmental scan- ning of the societal environment as well as on the task environment. Topics include forecasting and Miles and Snow’s typology in addition to compet- itive intelligence techniques and Porter’s industry analysis. (Chapter 4)

Discretionary

Ethical

LegalEconomic

Social Responsibilities

FIGURE 3–1 Responsibilities

of Business

SOURCE: Based on A. B. Carroll, “A Three Dimensional Conceptual Model of Corporate Performance,” Academy of Management Review (October 1979), pp. 497–505; A. B. Carroll, “Managing Ethically with Global Stakeholders: A Present and Future Challenge,” Academy of Management Executive (May 2004), pp. 114–120; and A. B. Carroll, “The Pyramid of Corporate Social Responsibility: Toward the Moral Management of Organizational Stakeholders,” Business Horizons (July–August 1991), pp. 39–48.

� Core and distinctive competencies are examined within the framework of the resource- based view of the firm. (Chapter 5)

� Organizational analysis includes material on business models, supply chain management, and corporate reputation. (Chapter 5)

� Internal and external strategic factors are emphasized through the use of specially designed EFAS, IFAS, and SFAS tables. (Chapters 4, 5, and 6)

� Functional strategies are examined in light of outsourcing. (Chapter 8)

PREFACE xxxi

� Two chapters deal with issues in strategy implementation, such as organizational and job design plus strategy-manager fit, action planning, corporate culture, and international strate- gic alliances. (Chapters 9 and 10)

� A separate chapter on evaluation and control explains the importance of measurement and incentives to organizational performance. (Chapter 11)

� Suggestions for in-depth case analysis pro- vide a complete listing of financial ratios, rec- ommendations for oral and written analysis, and ideas for further research. (Chapter 12)

xxxii PREFACE

� The Strategic Audit Worksheet is based on the time-tested Strategic Audit and is designed to help students organize and structure daily case preparation in a brief period of time. The worksheet works exceedingly well for checking the level of daily student case preparation—especially for open class dis- cussions of cases. (Chapter 12)

� Special chapters deal with strategic issues in managing technology and innovation, entrepreneurial ventures and small businesses, and not-for-profit organizations. (Web Chapters A, B, and C, respectively) These issues are often ignored by other strategy textbooks, but are available on this book’s Web site at www.pearsonhighered.com/wheelen.

� An experiential exercise focusing on the material covered in each chapter helps the reader to apply strategic concepts to an actual situation.

� A list of key terms and the pages in which they are discussed enable the reader to keep track of important concepts as they are introduced in each chapter.

� Learning objectives begin each chapter. � Each Part ends with a short case that acts to integrate the material discussed within

the previous chapters. � Timely, well-researched, and class-tested cases deal with interesting companies and

industries. Many of the cases are about well-known, publicly held corporations—ideal subjects for further research by students wishing to “update” the cases.

Both the text and the cases have been class-tested in strategy courses and revised based on feedback from students and instructors. The first 11 chapters are organized around a Strategic Management Model that begins each chapter and provides a structure for both content and case analysis. We emphasize those concepts that have proven to be most useful in under- standing strategic decision making and in conducting case analysis. Our goal was to make the text as comprehensive as possible without getting bogged down in any one area. Endnote references are provided for those who wish to learn more about any particular topic. All cases are about actual organizations. The firms range in size from large, established multinationals to small, entrepreneurial ventures, and cover a broad variety of issues. As an aid to case analysis, we propose the Strategic Audit as an analytical technique.

PREFACE xxxiii

www.pearsonhighered.com/wheelen
SUPPLEMENTS Instructor Resource Center At www.pearsonhighered.com/irc, instructors can access teaching resources available with this text in downloadable, digital format. Registration is simple and gives you immediate ac- cess to new titles and new editions. As a registered faculty member, you can download re- source files and receive immediate access and instructions for installing course management content on your campus server. In case you ever need assistance, our dedicated technical sup- port team is ready to assist instructors with questions about the media supplements that ac- company this text. Visit http://247.pearsoned.com/ for answers to frequently asked questions and toll-free user support phone numbers. The Instructor Resource Center provides the fol- lowing electronic resources.

Instructor’s Manuals Two comprehensive Instructor’s Manuals have been carefully constructed to accompany this book. The first one accompanies the concepts chapters; the second one accompanies the cases.

Concepts Instructor’s Manual To aid in discussing the 12 strategy chapters as well as the three web special issue chapters, the Concepts Instructor’s Manual includes:

� Suggestions for Teaching Strategic Management: These include various teaching methods and suggested course syllabi.

� Chapter Notes: These include summaries of each chapter, suggested answers to discus- sion questions, and suggestions for using end-of-chapter cases/exercises and part-ending cases, plus additional discussion questions (with answers) and lecture modules.

Case Instructor’s Manual To aid in case method teaching, the Case Instructor’s Manual includes detailed suggestions for use, teaching objectives, and examples of student analyses for each of the full-length com- prehensive cases. This is the most comprehensive Instructor’s Manual available in strategic management. A standardized format is provided for each case:

1. Case Abstract

2. Case Issues and Subjects

3. Steps Covered in the Strategic Decision-Making Process

4. Case Objectives

5. Suggested Classroom Approaches

6. Discussion Questions

7. Case Author’s Teaching Note

8. Student-Written Strategic Audit, if appropriate

9. EFAS, IFAS, and SFAS Exhibits

10. Financial Analysis—ratios and common-size income statements, if appropriate

PowerPoint Slides PowerPoint slides, provided in a comprehensive package of text outlines and figures corre- sponding to the text, are designed to aid the educator and supplement in-class lectures.

xxxiv PREFACE

www.pearsonhighered.com/irc
http://247.pearsoned.com/
Test Item File This Test Item File contains over 1,200 questions, including multiple-choice, true/false, and essay questions. Each question is followed by the correct answer, page reference, AACSB category, and difficulty rating.

TestGen TestGen software is preloaded with all of the Test Item File questions. It allows instructors to manually or randomly view test questions, and to add, delete, or modify test-bank questions as needed to create multiple tests.

Videos on DVD Exciting and high-quality video clips help deliver engaging topics to the classroom to help students better understand the concepts explained in the textbook. Please contact your local representative to receive a copy of the DVD.

CourseSmart CourseSmart eTextbooks were developed for students looking to save on required or recom- mended textbooks. Students simply select their eText by title or author and purchase immedi- ate access to the content for the duration of the course using any major credit card. With a CourseSmart eText, students can search for specific keywords or page numbers, take notes online, print out reading assignments that incorporate lecture notes, and bookmark important passages for later review. For more information or to purchase a CourseSmart eTextbook, visit www.coursesmart.com.

Acknowledgments We thank the many people at Prentice Hall/Pearson who helped to make this edition possi- ble. We thank our editor, Kim Norbuta. We are especially grateful to Kim’s project manager, Claudia Fernandes, who managed to keep everything on an even keel. We also thank Becca Groves and Emily Bush, who took the book through the production process.

We are very thankful to Jeanne McNett, Assumption College; Bob McNeal, Alabama State University; Don Wicker, Brazosport College; Dan Kipley, Azusa Pacific University; Roxanna Wright, Plymouth State University; Kristl Davison, University of Mississippi; Francis Fabian, University of Memphis; Susan Fox-Wolfgramm, Hawaii Pacific University; Conrad Francis, Nova Southeastern University; and Gene Simko, Monmouth University for their constructive criticism of the 12th edition cases. They helped us to decide which of our favorite cases to keep and which to delete or update.

We are very grateful to Kathy Wheelen for her first-rate administrative support of the cases and to Alan N. Hoffman for helping us with the Case Instructor’s Manual. We are especially thankful to the many students who tried out the cases we chose to include in this book. Their comments helped us find any flaws in the cases before the book went to the printer.

In addition, we express our appreciation to Wendy Klepetar, Management Department Chair of Saint John’s University and the College of Saint Benedict, for her support and provision of the resources so helpful to revise a textbook. Both of us acknowledge our debt to

PREFACE xxxv

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Dr. William Shenkir and Dr. Frank S. Kaulback, former Deans of the McIntire School of Commerce of the University of Virginia, for the provision of a work climate most supportive to the original development of this book.

We offer a special thanks to the hundreds of case authors who have provided us with excellent cases for the 13 editions of this book. We consider many of these case authors to be our friends. A special thanks to you!! The adage is true: The path to greatness is through others.

Lastly, to the many strategy instructors and students who have moaned to us about their problems with the strategy course: We have tried to respond to your problems and concerns as best we could by providing a comprehensive yet usable text coupled with recent and complex cases. To you, the people who work hard in the strategy trenches, we acknowledge our debt. This book is yours.

T. L. W. Saint Petersburg, Florida

J. D. H. St. Joseph, Minnesota

xxxvi PREFACE

About the Contributors

MOUSTAFA H. ABDELSAMAD, DBA (George Washington University), is Dean of the College of Business at Texas A&M University–Corpus Christi. He previously served as Dean of the College of Business and Industry at University of Massachusetts–Dartmouth and as Professor of Finance and Associate Dean of Graduate Studies in Business at Virginia Commonwealth University. He is Editor–in-Chief of SAM Advanced Management Journal and International President of the Society of Advancement of Management. He is author of A Guide to Capital Expenditure Analysis and two chapters in the Dow Jones–Irwin Capital Budgeting Handbook. He is the author and coauthor of numerous articles in various publications.

Hitesh (John) P. Adhia, CPA, MS and BA (University of South Florida), is the President and Chief Investment Officer of Adhia Investment Advisors, Inc. (the “Firm”). Mr. Adhia is a CPA and has been in the finace industry since 1982. Mr Adhia is the founder and Investment Man- ager for the Adhia Twenty Fund, and the Adhia Health Care Fund, the Adhia Short Term Ad- vantage Fund, the Adhia Arbitrage Fund, and the Adhia Derivative Fund. Prior to forming Adhia Investment Advisors, Mr. Adhia owned a Tampa-based public accounting practice and also served as Acting CFO and Independent Advisor to the Well Care Group of Companies. Mr. Adhia has over twenty years experience in managing fixed income strategies.

KAREN A. BERGER, PhD (M. Phil and New York University), MBA (University of Connecticut), MA (Columbia University), and BA (S.U.N.Y. at Buffalo), is Chairperson of the Marketing Department and Associate Professor of Marketing at Pace University. She previously held aca- demic positions with New York University, Stern School of Business, and Mercy College. Berger has published literature in the field of Marketing and has won several teaching awards.

CHRISTINE B. BUENAFE, student of The College of New Jersey, co-author with Joyce Vincelette of the Rosetta Stone and Volcom cases in this edition.

BARNALI CHAKRABORTY, is a faculty member at the ICFAI Center for Management Research (ICMR).

RICHARD A. COISER, PhD (University of Iowa), is Dean and Leeds Professor of Management at Purdue University. He formerly was Dean and Fred B. Brown Chair at the University of Oklahoma and was Associate Dean for Academics and Professor of Business Administration at Indiana University. He served as Chairperson of the Department of Management at Indiana University. For seven years prior to assuming his current position, he was a Planning Engineer with Western Electric Company and Instructor of Management and Quantitative Methods at the University of Notre Dame. Dr. Coiser is interested in researching the managerial decision- making process, organization responses to external forces, and participative management. He has published in Behavior Science, Academy of Management Journal, Academy of Manage- ment Review, Organizational Behavior and Human Performance, Management Science, Strategic Management Journal, Business Horizons, Decision Sciences, Personnel Psychology, Journal of Creative Behavior, International Journal of Management, The Business Quarterly, Public Administration Quarterly, Human Relations, and other journals. In addition, Dr. Coiser has presented numerous papers at professional meetings and has coauthored a management

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text. He has been active in many executive development programs and has acted as management- education consultant for several organizations. Dr. Coiser is the recipient of Teaching Excellence Awards in the MBA Program at Indiana and a Richard D. Irwin Fellowship. He be- longs to the Institute of Management, Sigma Iota Epsilon, and the Decision Sciences Institute.

ROY A. COOK, DBA (Mississippi State University), is past Associate Dean of the School of Business Administration and previously a Professor at Fort Lewis College, Durango, Col- orado. He has written a best-selling textbook, Tourism: The Business of Travel, now in its 2nd edition, and has two forthcoming textbooks: Cases and Experiential Exercises in Hu- man Resource Management and Guide to Business Etiquette. He has authored numerous ar- ticles, cases, and papers based on his extensive experience in the hospitality industry and research interests in the areas of strategy, small business management, human resource man- agement, and communication. Dr. Cook has served as the Director of Colorado’s Center for Tourism Research® and Editor of The Annual Advances in Business Cases, and also on the editorial boards of the Business Case Journal, the Journal of Business Strategies, and the Journal of Teaching and Tourism. He is a member of the Academy of Management, Society for Case Research (past President), and the International Society of Travel and Tourism Ed- ucators. Dr. Cook teaches courses in Strategic Management, Small Business Management, Tourism and Resort Management, and Human Resource Management.

STEVEN M. COX, PhD (University of Nebraska), is an Associate Professor of Marketing, McColl School of Business, Queens University of Charlotte. He has a 25-year career in execu- tive level marketing and sales positions with AT&T, GE, and several satellite imaging compa- nies. He owns and manages LSI, a geographic information system company. He currently serves as a case reviewer for the Business Case Journal and the Southeast Case Research Journal.

DAVID B. CROLL, PhD (Pennsylvania State University), is Professor Emeritus of Accounting at the McIntire School of Commerce, the University of Virginia. He was Visiting Associate Pro- fessor at the Graduate Business School, the University of Michigan. He is on the editorial board of SAM Advanced Management Journal. He has published in the Accounting Review and the Case Research Journal. His cases appear in 12 accounting and management textbooks.

DAN R. DALTON, PhD (University of California, Irvine), is the Dean of the Graduate School of Business, Indiana University, and Harold A. Polipl Chair of Strategic Management. He was for- merly with General Telephone & Electronics for 13 years. Widely published in business and psychology periodicals, his articles have appeared in the Academy of Management Journal, Journal of Applied Psychology, Personnel Psychology, Academy of Management Review, and Strategic Management Journal.

CATHY A. ENZ, PhD (Ohio State University), is the Lewis G. Schaeneman Jr. Professor of Innovation and Dynamic Management at Cornell University’s School of Hotel Administra- tion. She is also the Executive Director of the Center for Hospitality Research at that insti- tution. Her doctoral degree is in Organization Theory and Behavior. Professor Enz has written numerous articles, cases, and books on corporate culture, value sharing, change management, and strategic human resource management effects on performance. Professor Enz consults extensively in the service sector and serves on the Board of Directors for two hospitality-related organizations.

ELLIE A. FOGARTY, EdD (University of Pennsylvania), MBA (Temple University), MLS (University of Pittsburgh), and BA (Immaculata University), is the Director of Compliance and Ethics at The College of New Jersey (TCNJ). Previously, she served as the Associate Provost for Planning and Resource Allocation, Executive Assistant to the Provost, and Business and

xxxviii ABOUT THE CONTRIBUTORS

Economics Librarian, all at TCNJ. She has written five cases used in earlier editions of Strategic Management and Business Policy. She has taught management courses at both TCNJ and Rutgers University.

GAMEWELL D. GANTT, JD, CPA, is Professor of Accounting and Management in the College of Business at Idaho State University in Pocatello. Idaho, where he teaches a variety of legal studies courses. He is past President of the Rocky Mountain Academy of Legal Studies in Busi- ness and a past Chair of the Idaho Endowment Investment Fund Board. His published articles and papers have appeared in journals including Midwest Law Review, Business Law Review, Copyright World, and Intellectual Property World. His published cases have appeared in sev- eral textbooks and in Annual Advances in Business Cases.

S. S. GEORGE is a faculty associate at the ICFAI Center for Management Research (ICMR).

NORMAN J. GIERLASINSKI, DBA, CPA, CFE, CIA, is Professor of Accounting at Central Washington University. He served as Chairman of the Small Business Division of the Midwest Business Administration Association. He has authored or coauthored cases for professional associations and the Harvard Case Study Series. He has authored various articles in profes- sional journals as well as serving as a contributing author for textbooks and as a consultant to many organizations. He also served as a reviewer for various publications.

VIVEK GUPTA is a faculty member at the ICFAI Center for Management Research (ICMR).

RENDY HALIN, MBA and BS (Bentley University), is currently focusing on equity and com- modity trading, as well as venturing on a new startup company. Actively involved in his church ministry, he is also contributing his time and thought on how to properly manage the church’s management and financial report effectively.

PATRICIA HARASTA, MBA (Bentley McCallum Graduate School of Business), is Director of Quality Assurance at CA (formerly Computer Associates). She manages a distributed team responsible for new development and maintenance QA activities for products that provide management of applications such as SAP, Microsoft Exchange, Lotus Domino, WebSphere, WebLogic, MQ, and Web Servers.

ALAN N. HOFFMAN, MBA, DBA (Indiana University), is Professor of Strategic Management and Director of the MBA program at the McCallum Graduate School, Bentley University. His major areas of interest include strategic management, global competition, investment strategy, and technology. Professor Hoffman is coauthor of The Strategic Management Casebook and Skill Builder textbook. His recent publications have appeared in the Academy of Management Journal, Human Relations, the Journal of Business Ethics, the Journal of Business Research, and Business Horizons. He has authored more than 20 strategic management cases including The Boston YWCA, Ryka Inc., Liz Claiborne, Ben & Jerry’s, Cisco Systems, Sun Microsys- tems, Palm Inc., Handspring, Ebay, AOL/Time Warner, McAfee, Apple Computer, Tivo Inc., and Wynn Resorts. He is the recipient of the 2004 Bentley University Teaching Innovation Award for his course: “The Organizational Life Cycle—The Boston Beer Company Brewers of Samuel Adams Lager Beer.”

J. DAVID HUNGER, PhD (Ohio State University), is currently Strategic Management Scholar in Residence at Saint John’s University in Minnesota. He is also Professor Emeritus at Iowa State University where he taught for 23 years. He previously taught at George Mason University, the University of Virginia, and Baldwin-Wallace College. He worked in brand management at Proc- ter & Gamble Company, worked as a selling supervisor at Lazarus Department Store, and

ABOUT THE CONTRIBUTORS xxxix

served as a Captain in U.S. Army Military Intelligence. He has been active as a consultant and trainer to business corporations, as well as to state and federal government agencies. He has written numerous articles and cases that have appeared in the Academy of Management Jour- nal, International Journal of Management, Human Resource Management, Journal of Business Strategies, Case Research Journal, Business Case Journal, Handbook of Business Strategy, Journal of Management Case Studies, Annual Advances in Business Cases, Journal of Retail Banking, SAM Advanced Management Journal, and Journal of Management, among others. Dr. Hunger is a member of the Academy of Management, North American Case Research Association, Society for Case Research, North American Management Society, Textbook and Academic Authors Association, and the Strategic Management Society. He is past President of the North American Case Research Association, the Society for Case Research, and the Iowa State University Press Board of Directors. He also served as a Vice President of the U.S. Asso- ciation for Small Business and Entrepreneurship. He was Academic Director of the Pappajohn Center for Entrepreneurship at Iowa State University. He has served on the editorial review boards of SAM Advanced Management Journal, Journal of Business Strategies, and Journal of Business Research. He has served on the Board of Directors of the North American Case Research Association, the Society for Case Research, the Iowa State University Press, and the North American Management Society. He is coauthor with Thomas L. Wheelen of Strategic Management and Business Policy and Essentials of Strategic Management plus Concepts in Strategic Management and Business Policy and Cases in Strategic Management and Business Policy, as well as Strategic Management Cases (PIC: Preferred Individualized Cases), and a monograph assessing undergraduate business education in the United States. The 8th edition of Strategic Management and Business Policy received the McGuffey Award for Excellence and Longevity in 1999 from the Text and Academic Authors Association. Dr. Hunger received the Best Case Award given by the McGraw-Hill Publishing Company and the Society for Case Research in 1991 for outstanding case development. He is listed in various versions of Who’s Who, including Who’s Who in the United States and Who’s Who in the World. He was also recognized in 1999 by the Iowa State University College of Business with its Innovation in Teaching Award and was elected a Fellow of the Teaching and Academic Authors Association and of the North American Case Research Association.

P. INDU is a student of Vivek Gupta at the ICFAI Center of Management Research (ICMR).

GEORGE A. JOHNSON, PhD, is Professor of Management and Director of the Idaho State University MBA program. He has published in the fields of Management Education, Ethics, Project Management, and Simulation. He is also active in developing and publishing case material for educational purposes. His industry experience includes several years as a Pro- ject Manager in the development and procurement of aircraft systems.

SHAWANA P. JOHNSON, PhD (Case Western Reserve University), is president of Global Mar- keting Insights, Inc. She has 27 years of management and marketing experience in the Hi-Tech Information and Geospatial Technology Industry with companies such as Lockheed Martin and General Electric Aerospace.

MICHAEL KEEFFE, PhD (University of Arkansas), is Associate Professor of Management and Chair of Undergraduate Assurance of Learning in the McCoy College of Business Administra- tion, Texas State University. He was the developer and draft writer of the College of Business policy and procedure system, co-director of initial AACSB-International accreditation efforts, sponsor of the Alpha Chi University Honor Society for over a decade, and developed and im- plemented the Assurance of Learning system for the McCoy College. Additionally, he has been Chair or Acting Chair of three departments in the college. With over a dozen journal articles and

xl ABOUT THE CONTRIBUTORS

numerous refereed proceedings, Dr. Keeffe is an avid case writer with over 21 cases appearing in 32 textbooks over the last 20 years.

JOHN A. KILPATRICK, PhD (University of Iowa), is Professor of Management and Interna- tional Business, Idaho State University. He has taught in the areas of business and business ethics for over 25 years. He served as Co-Chair of the management track of the Institute for Behavioral and Applied Management from its inception and continues as a board member for that organization. He is author of The Labor Content of American Foreign Trade, and is coauthor of Issues in International Business. His cases have appeared in a number of orga- nizational behavior and strategy texts and casebooks, and in Annual Advances in Business Cases.

DONALD F. KURATKO is the Jack M. Gill Chair of Entrepreneurship, Professor of Entrepreneur- ship, and Executive Director of the Johnson Center for Entrepreneurship & Innovation at The Kelley School of Business, Indiana University–Bloomington. He has published over 150 ar- ticles on aspects of entrepreneurship, new venture development, and corporate entrepreneurship. His work has been published in journals such as Strategic Management Journal, Academy of Management Executive, Journal of Business Venturing, Entrepreneurship Theory & Practice, Journal of Small Business Management, Journal of Small Business Strategy, Family Business Re- view, and Advanced Management Journal. Dr. Kuratko has authored 20 books, Entrepreneurship: Theory, Process, Practice, 7th edition (South-Western/Thomson Publishers, 2007), as well as Strategic Entrepreneurial Growth, 2nd edition (South-Western/Thomson Pub- lishers, 2004), Corporate Entrepreneurship (South-Western/Thomson Publishers, 2007), and Effective Small Business Management, 7th edition (Wiley & Sons Publishers, 2001). In addition, Dr. Kuratko has been consultant on Corporate Entrepreneurship and Entrepreneurial Strategies to a number of major corporations such as Anthem Blue Cross/Blue Shield, AT&T, United Tech- nologies, Ameritech, The Associated Group (Acordia), Union Carbide Corporation, Service- Master, and TruServ. Before coming to Indiana University, he was the Stoops Distinguished Professor of Entrepreneurship and Founding Director of the Entrepreneurship Program at Ball State University. In addition, he was the Executive Director of The Midwest Entrepreneurial Ed- ucation Center.

Dr. Kuratko’s honors include earning the Ball State University College of Business Teach- ing Award 15 consecutive years as well as being the only professor in the history of Ball State University to achieve all four of the university’s major lifetime awards: Outstanding Young Faculty (1987); Outstanding Teaching Award (1990); Outstanding Faculty Award (1996); and Outstanding Researcher Award (1999). He was also honored as the Entrepreneur of the Year for the state of Indiana and was inducted into the Institute of American Entrepreneurs Hall of Fame (1990). He has been honored with The George Washington Medal of Honor; the Leavey Foundation Award for Excellence in Private Enterprise; the NFIB Entrepreneurship Excel- lence Award; and the National Model Innovative Pedagogy Award for Entrepreneurship. In addition, Dr. Kuratko was named the National Outstanding Entrepreneurship Educator (by the U.S. Association for Small Business and Entrepreneurship) and selected as one of the Top 3 Entrepreneurship Professors in the United States by the Kauffman Foundation, Ernst & Young, Inc. magazine, and Merrill Lynch. He received the Thomas W. Binford Memorial Award for Outstanding Contribution to Entrepreneurial Development from the Indiana Health Industry Forum. Dr. Kuratko has been named a 21st Century Entrepreneurship Research Fellow by the National Consortium of Entrepreneurship Centers as well as the U.S. Association for Small Business & Entrepreneurship Scholar for Corporate Entrepreneurship in 2003. Finally, he has been honored by his peers in Entrepreneur magazine as one of the Top 2 Entrepreneurship

ABOUT THE CONTRIBUTORS xli

Program Directors in the nation for three consecutive years including the #1 Entrepreneurship Program Director in 2003.

RUCHI MANKAD is a former faculty member at the ICFAI Center for Management Research (ICMR).

BILL J. MIDDLEBROOK, PhD (University of North Texas), is Professor of Management at Southwest Texas State University. He served as Acting Chair of the Department of Man- agement and Marketing, published in numerous journals, served as a consultant in industry, and is currently teaching and researching in the fields of Strategic Management and Human Resources.

BERNARD A. MORIN, B.S., M.B.A., Ph.D., Professor Emeritus of Commerce at the University of Virginia.

NATHAN NEBBE, MBA and MA (Iowa State University), has significant interests in the in- digenous peoples of the Americas. With an undergraduate degree in Animal Ecology, he served as a Peace Corps Volunteer in Honduras, where he worked at the Honduran national forestry school ESNAACIFORE (Escuela National de Ciencias Forestales). After some time in the Peace Corps, Nathan worked for a year on a recycling project for the Town of Ignacio and the Southern Ute Indian Tribe in southwestern Colorado. Following his expe- rience in Colorado, Nathan returned to Iowa State University where he obtained his MBA, followed by an MA in Anthropology. He is currently studying how globalization of the Chilian forestry industry is affecting the culture of the indigenous Mapuche people of south central Chile.

LAWRENCE C. PETTIT, Jr., B.S., M.S., D.B.A., Professor Emeritus of Commerce at the McIntire School of Commerce University of Virginia.

ANNIE PHAN, BS (The College of New Jersey), is currently an associate at Goldman Sachs Asset Management, and is an MBA candidate at New York University Leonard N. Stern School of Business. In addition, she has assisted with research for The Global Corporate Brand Book.

SHIRISHA REGANI is a faculty associate at the ICFAI Center for Management Research (ICMR).

JOHN K. ROSS III, PhD (University of North Texas), is Associate Professor of Management at Southwest Texas State University. He has served as SBI Director, Associate Dean, Chair of the Department of Management and Marketing, published in numerous journals, and is currently teaching and researching in the fields of Strategic Management and Human Resource.

SHERRY K. ROSS, CPA (Texas), MBA (Southwest Texas State University), is a Senior Lecturer at Texas State University–San Marcos, Texas. She is the core course coordinator for financial accounting and teaches introductory financial accounting courses. Her recent work experience is Executive Director of a not-for-profit corporation.

MARYANNE M. ROUSE, CPA, MBA (University of South Florida) was a faculty member, As- sistant Dean, and Director of Management Education and Development at the College of Business Administration of the University of South Florida until her retirement.

PATRICIA A. RYAN, PhD (University of South Florida), is an Associate Professor of Finance, Colorado State University. She currently serves on the Board of Directors of the Midwest Finance Association and was the Associate Editor of the Business Case Journal. Her research

xlii ABOUT THE CONTRIBUTORS

interests lie in corporate finance, specifically initial public offerings, capital budgeting, and case writing. She has published in the Journal of Business and Management, the Business Case Journal, Educational and Psychological Measurement, the Journal of Research in Finance, the Journal of Financial and Strategic Decisions, and the Journal of Accounting and Finance Research. Her research has been cited in the Wall Street Journal, CFO Magazine, and Investment Dealers Digest.

RANGKI SON, MBA, earned his degree in Finance at the McCallum Graduate School of Busi- ness, Bentley University, in May 2007. He is currently working for KPMG Korea as a Business Performance Service Consultant.

LAURENCE J. STYBEL, EdD (Harvard University), is cofounder of Stybel Peabody Lincolnshire, a Boston-based management consulting firm devoted to enhancing career effectiveness of executives who report to boards of directors. Its services include search, outplacement, outplacement avoidance, and valued executive career consulting. Stybel Peabody Lincolnshire was voted “Best Outplacement Firm” by the readers of Massachusetts Lawyers Weekly. Its programs are the only ones officially endorsed by the Massachusetts Hospital Association and the Financial Executives Institute. He serves on the Board of Directors of the New England Chap- ter of the National Association of Corporate Directors and the Boston Human Resources Asso- ciation. His home page can be found at www.stybelpeabody.com. The “Your Career” department of the home page contains downloadable back issues of his monthly Boston Business Journal column, “Your Career.”

JOEL SAROSH THADAMALLA is a faculty member at the ICFAI center for Management Research (ICMR).

MRIDU VERMA serves as a Consulting Editor at ICFAI Business School (ICMR).

JOYCE P. VINCELETTE, DBA (Indiana University), is a Professor of Management and the Coordinator of Management and Interdisciplinary Business Programs at The College of New Jersey. She was previously a faculty member at the University of South Florida. She has au- thored and coauthored various articles, chapters, and cases that have appeared in management journals and strategic management texts and casebooks. She is also active as a consultant and trainer for a number of local and national business organizations as well as for a variety of not- for-profit and government agencies. She currently teaches and conducts research in the fields of Strategic Management and Leadership.

KATHRYN E. WHEELEN, MEd (Nova Southern University), BA, LMT, (University of Tampa), has worked as an Administrative Assistant for case and textbook development with the Thomas L. Wheelen Company (circa 1879). She works as a Special Education Teacher in the Hillsborough County School District at Citrus Park Elementary School, Tampa, Florida.

RICHARD D. WHEELEN, BS (University of South Florida), has worked as a case research assistant. He is currently practicing in the field of Health Care. He currently lives in Everett, Washington.

THOMAS L. WHEELEN, DBA (George Washington University), MBA (Babson College) and BS cum laude (Boston College), has taught as Visiting Professor at Trinity College of the University of Dublin, University of South Florida as Professor of Strategic Management, the McIntire School of Commerce of the University of Virginia as the Ralph A. Beeton Professor of Free Enterprise, and Visiting Professor at both the University of Arizona and Northeastern

ABOUT THE CONTRIBUTORS xliii

www.stybelpeabody.com
University. He was also affiliated with the University of Virginia College of Continuing Education, where he served in the following capacities: (1) Coordinator for Business Educa- tion (1978–1983, 1971–1976)—approve all undergraduate courses offered at seven regional centers and approved faculty; (2) Liaison Faculty and Consultant to the National Academy of the FBI Academy (1972–1983) and; (3) developed, sold, and conducted over 200 seminars for local, state, and national governments, and companies for McIntire School of Commerce and Continuing Education. He worked at General Electric Company, holding various management positions (1961–1965); U.S. Navy Supply Corps (SC)–Lt. (SC) USNR–Assistant Supply Officer aboard nuclear support tender (1957–1960). He has been published in the monograph, An Assessment of Undergraduate Business Education in the United States (with J. D. Hunger), 1980. He’s also authored 60 published books, with 14 books translated into eight languages (Arabic, Bahasa, Indonesia, Chinese, Chinese Simplified, Greek, Italian, Japanese, Portuguese and Thai); he is coauthor with J. D. Hunger of four active books: Strategic Management and Business Policy, 13th edition (2012); Concepts in Strategic Management and Business Policy, 13th edition (2012); Strategic Management and Business Policy, 13th edition International edition (2012); and Essentials of Strategic Management, 5th edition (2011). He is co-editor of Developments in Information Systems (1974) and Collective Bargaining in the Public Sector (1977), and co-developer of the software program STrategic Financial ANalyzer (ST. FAN) (1989, 1990, 1993—different versions). He has authored over 40 articles that have appeared in such journals as the Journal of Management, Business Quarterly, Personnel Journal, SAM Advanced Management Journal, Journal of Retailing, International Journal of Management, and the Handbook of Business Strategy. He has created roughly 280 cases appearing in over 83 text and case books, as well as the Business Case Journal, Journal of Management Case Studies, International Journal of Case Studies, and Research and Case Research Journal. He has won numerous awards, including the following: (1) Fellow elected by the Society for Ad- vancement of Management in 2002; (2) Fellow elected by the North American Case Research Association in 2000; (3) Fellow elected by the Text and Academic Authors Association in 2000; (4) 1999 Phil Carroll Advancement of Management Award in Strategic Management from the Society for Advancement of Management; (5) 1999 McGuffey Award for Excellence and Longevity for Strategic Management and Business Policy, 6th edition from the Text and Academic Authors Association; (6) 1996/97 Teaching Incentive Program Award for teaching undergraduate strategic management; (7) Fulbright, 1996–1997, to Ireland, which he had to decline; (8) Endowed Chair, Ralph A. Beeton Professor, at University of Virginia (1981–1985); (9) Sesquicentennial Associateship research grant from the Center for Advanced Studies at the University of Virginia, 1979–1980; (10) Small Business Administration (Small Business Institute) supervised undergraduate team that won District, Regional III, and Honor- able Mention Awards; and (11) awards for two articles. Dr. Wheelen currently serves on the Board of Directors of Adhia Mutual Fund, Society for Advancement of Management, and on the Editorial Board and is the Associate Editor of SAM Advanced Management Journal. He served on the Board of Directors of Lazer Surgical Software Inc, and Southern Management Association and on the Editorial Boards of the Journal of Management and Journal of Management Case Studies, Journal of Retail Banking, Case Research Journal, and Business Case Journal. He was Vice President of Strategic Management for the Society for the Advancement of Management, and President of the North American Case Research Associa- tion. Dr. Wheelen is a member of the Academy of Management, Beta Gamma Sigma, Southern Management Association, North American Case Research Association, Society for Advance- ment of Management, Society for Case Research, Strategic Management Association, and World Association for Case Method Research and Application. He has been listed in Who’s Who in Finance and Industry, Who’s Who in the South and Southwest, and Who’s Who in American Education.

xliv ABOUT THE CONTRIBUTORS

THOMAS L. WHEELEN II, BA (Boston College), has worked as a Case Research Assistant.

SUZANNE WONG was born and raised in Jakarta, Indonesia. She graduated with a dual BSBA degree in Finance and Marketing from Northeastern University in 2004, followed by an MBA in Finance from Bentley University in 2006. Upon graduation, Suzanne joined Fidelity Investments’ parent company FMRCo in Boston as an Analyst in Technol- ogy Risk Management–Information Security. She plans to continue the future operational success of her parents’ pharmaceutical company in Indonesia.

ABOUT THE CONTRIBUTORS xlv

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THIRTEENTH EDITION

Strategic Management

and Business Policy

TOWARD GLOBAL SUSTAINABILITY

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PA R T1 Introduction to

Strategic Management and Business

Policy

How does a company become successful and stay successful? Certainly not

by playing it safe and following the traditional ways of doing business! Taking a

strategic risk is what General Electric (GE) did when it launched its Ecomagination

strategic initiative in 2005. According to Jeffrey Immelt, Chairman and CEO:

Ecomagination is GE’s commitment to address challenges, such as the need for cleaner,

more efficient sources of energy, reduced emissions, and abundant sources of clean water.

And we plan to make money doing it. Increasingly for business, “green” is green.1

Immelt announced in a May 9, 2005, conference call that the company planned to more

than double its spending on research and development from $700 million in 2004 to $1.5 bil-

lion by 2010 for cleaner products ranging from power generation to locomotives to water pro-

cessing. The company intended to introduce 30 to 40 new products, including more efficient

lighting and appliances, over the next two years. It also expected to double revenues from busi-

nesses that made wind turbines, treat water, and reduce greenhouse-emitting gases to at least

$20 billion by 2010. In addition to working with customers to develop more efficient power gen-

erators, the company planned to reduce its own emission of greenhouse gases by 1% by 2012

and reduce the intensity of those gases 30% by 2008.2 In 2006, GE’s top management informed

the many managers of its global business units that in the future they would be judged not only

by the usual measures, such as return on capital, but that they would also be accountable for

achieving corporate environmental objectives.

Ecomagination was a strategic change for GE, a company that had previously been con-

demned by environmentalists for its emphasis on coal and nuclear power and for polluting the

Hudson and Housatonic rivers with polychlorinated biphenyls (PCBs) in the 1980s. Over the

years, GE had been criticized for its lack of social responsibility and for its emphasis on prof-

itability and financial performance over social and environmental objectives. What caused GE’s

management to make this strategic change?

In the 18 months before launching its new environmental strategy, GE invited managers

from companies in various industries to participate in two-day “dreaming sessions” during

which they were asked to imagine life in 2015—and the products they, as customers, would

need from GE. The consensus was a future of rising fuel costs, restrictive environmental regula-

tions, and growing consumer expectations for cleaner technologies, especially in the energy in-

dustry. Based on this conclusion, GE’s management made the strategic decision to move in a new

basic concepts of Strategic Management

C H A P T E R 1

3

� Understand the benefits of strategic management

� Explain how globalization and environmental sustainability influence strategic management

� Understand the basic model of strategic management and its components

� Identify some common triggering events that act as stimuli for strategic change

� Understand strategic decision-making modes

� Use the strategic audit as a method of analyzing corporate functions and activities

Learning Objectives

Gathering Information

Putting Strategy into Action

Monitoring Performance

Societal Environment: General forces

Natural Environment: Resources and

climate

Task Environment:

Industry analysis

Internal: Strengths and Weaknesses

Structure: Chain of command

Culture: Beliefs, expectations,

values

Resources: Assets, skills, competencies,

knowledge

Programs

Activities needed to accomplish a plan

Budgets

Cost of the programs Procedures

Sequence of steps needed to do the job

Performance

Actual results

External: Opportunities

and Threats

Developing Long-range Plans

Mission

Reason for existence Objectives

What results to accomplish by when

Strategies

Plan to achieve the mission & objectives

Policies

Broad guidelines for decision making

Environmental Scanning:

Strategy Formulation:

Strategy Implementation:

Evaluation and Control:

Feedback/Learning: Make corrections as needed

After reading this chapter, you should be able to:

direction. According to Vice Chairman David Calhoun, “We decided that if this is what our

customers want, let’s stop putting our heads in the sand, dodging environmental inter-

ests, and go from defense to offense.”3

Following GE’s announcement of its new strategic initiative, analysts raised questions

regarding the company’s ability to make Ecomagination successful. They not only ques-

tioned CEO Immelt’s claim that green could be profitable as well as socially responsible,

but they also wondered if Immelt could transform GE’s incremental approach to innova-

tion to one of pursuing riskier technologies, such as fuel cells, solar energy, hydrogen stor-

age, and nanotechnology.4 Other companies had made announcements of green

initiatives, only to leave them withering on the vine when they interfered with profits. For

example, FedEx had announced in 2003 that it would soon be deploying clean-burning hy-

brid trucks at a rate of 3,000 per year, eventually cutting emissions by 250,000 tons of

greenhouse gases. Four years later, FedEx had purchased fewer than 100 hybrid vehicles,

less than 1% of its fleet! With hybrid trucks costing 75% more than conventional trucks,

it would take 10 years for the fuel savings to pay for the costly vehicles. FedEx manage-

ment concluded that breaking even over a 10-year period was not the best use of com-

pany capital. As a result of this and other experiences, skeptics felt that most large

companies were only indulging in greenwash when they talked loudly about their sus-

tainability efforts, but followed through with very little actual results.5

CEO Immelt had put his reputation at risk by personally leading GE’s Ecomagination

initiative. Skeptics wondered if the environmental markets would materialize and if they

would be as profitable as demanded by GE’s shareholders. Would a corporate culture

known for its pursuit of the Six Sigma statistics-based approach to quality control be able

to create technological breakthroughs and new green businesses? If Immelt was correct,

not only would GE benefit, but other companies would soon follow GE’s lead. If, however,

he was wrong, Immelt would have led his company down a dead end where it would be

difficult to recover from the damage to its reputation and financial standing. According to

a 25-year veteran of GE, “Jeff is asking us to take a really big swing . . . . This is hard for us.”6

4 PART 1 Introduction to Strategic Management and Business Policy

CHAPTER 1 Basic Concepts of Strategic Management 5

1.1 The Study of Strategic Management Strategic management is a set of managerial decisions and actions that determines the long- run performance of a corporation. It includes environmental scanning (both external and in- ternal), strategy formulation (strategic or long-range planning), strategy implementation, and evaluation and control. The study of strategic management, therefore, emphasizes the moni- toring and evaluating of external opportunities and threats in light of a corporation’s strengths and weaknesses. Originally called business policy, strategic management incorporates such topics as strategic planning, environmental scanning, and industry analysis.

PHASES OF STRATEGIC MANAGEMENT Many of the concepts and techniques that deal with strategic management have been developed and used successfully by business corporations such as General Electric and the Boston Con- sulting Group. Over time, business practitioners and academic researchers have expanded and refined these concepts. Initially, strategic management was of most use to large corporations op- erating in multiple industries. Increasing risks of error, costly mistakes, and even economic ruin are causing today’s professional managers in all organizations to take strategic management se- riously in order to keep their companies competitive in an increasingly volatile environment.

As managers attempt to better deal with their changing world, a firm generally evolves through the following four phases of strategic management:7

Phase 1—Basic financial planning: Managers initiate serious planning when they are re- quested to propose the following year’s budget. Projects are proposed on the basis of very little analysis, with most information coming from within the firm. The sales force usu- ally provides the small amount of environmental information. Such simplistic operational planning only pretends to be strategic management, yet it is quite time consuming. Nor- mal company activities are often suspended for weeks while managers try to cram ideas into the proposed budget. The time horizon is usually one year.

Phase 2—Forecast-based planning: As annual budgets become less useful at stimulating long- term planning, managers attempt to propose five-year plans. At this point they consider proj- ects that may take more than one year. In addition to internal information, managers gather any available environmental data—usually on an ad hoc basis—and extrapolate current trends five years into the future. This phase is also time consuming, often involving a full month of managerial activity to make sure all the proposed budgets fit together. The process gets very political as managers compete for larger shares of funds. Endless meetings take place to eval- uate proposals and justify assumptions. The time horizon is usually three to five years.

Phase 3—Externally oriented (strategic) planning: Frustrated with highly political yet inef- fectual five-year plans, top management takes control of the planning process by initiating strategic planning. The company seeks to increase its responsiveness to changing markets and competition by thinking strategically. Planning is taken out of the hands of lower-level managers and concentrated in a planning staff whose task is to develop strategic plans for the corporation. Consultants often provide the sophisticated and innovative techniques that the planning staff uses to gather information and forecast future trends. Ex-military experts develop competitive intelligence units. Upper-level managers meet once a year at a resort “retreat” led by key members of the planning staff to evaluate and update the current strate- gic plan. Such top-down planning emphasizes formal strategy formulation and leaves the implementation issues to lower management levels. Top management typically develops five-year plans with help from consultants but minimal input from lower levels.

6 PART 1 Introduction to Strategic Management and Business Policy

Phase 4—Strategic management: Realizing that even the best strategic plans are worthless without the input and commitment of lower-level managers, top management forms plan- ning groups of managers and key employees at many levels, from various departments and workgroups. They develop and integrate a series of strategic plans aimed at achiev- ing the company’s primary objectives. Strategic plans at this point detail the implementa- tion, evaluation, and control issues. Rather than attempting to perfectly forecast the future, the plans emphasize probable scenarios and contingency strategies. The sophisticated an- nual five-year strategic plan is replaced with strategic thinking at all levels of the organi- zation throughout the year. Strategic information, previously available only centrally to top management, is available via local area networks and intranets to people throughout the organization. Instead of a large centralized planning staff, internal and external plan- ning consultants are available to help guide group strategy discussions. Although top man- agement may still initiate the strategic planning process, the resulting strategies may come from anywhere in the organization. Planning is typically interactive across levels and is no longer top down. People at all levels are now involved.

General Electric, one of the pioneers of strategic planning, led the transition from strategic planning to strategic management during the 1980s.8 By the 1990s, most other corporations around the world had also begun the conversion to strategic management.

BENEFITS OF STRATEGIC MANAGEMENT Strategic management emphasizes long-term performance. Many companies can manage short-term bursts of high performance, but only a few can sustain it over a longer period of time. For example, of the original Forbes 100 companies listed in 1917, only 13 have survived to the present day. To be successful in the long-run, companies must not only be able to execute current activities to satisfy an existing market, but they must also adapt those activities to sat- isfy new and changing markets.9

Research reveals that organizations that engage in strategic management generally out- perform those that do not.10 The attainment of an appropriate match, or “fit,” between an or- ganization’s environment and its strategy, structure, and processes has positive effects on the organization’s performance.11 Strategic planning becomes increasingly important as the envi- ronment becomes more unstable.12 For example, studies of the impact of deregulation on the U.S. railroad and trucking industries found that companies that changed their strategies and structures as their environment changed outperformed companies that did not change.13

A survey of nearly 50 corporations in a variety of countries and industries found the three most highly rated benefits of strategic management to be:

� Clearer sense of strategic vision for the firm.

� Sharper focus on what is strategically important.

� Improved understanding of a rapidly changing environment.14

A recent survey by McKinsey & Company of 800 executives found that formal strategic planning processes improve overall satisfaction with strategy development.15 To be effective, however, strategic management need not always be a formal process. It can begin with a few simple questions:

1. Where is the organization now? (Not where do we hope it is!)

2. If no changes are made, where will the organization be in one year? two years? five years? 10 years? Are the answers acceptable?

3. If the answers are not acceptable, what specific actions should management undertake? What are the risks and payoffs involved?

CHAPTER 1 Basic Concepts of Strategic Management 7

Bain & Company’s 2007 Management Tools and Trends survey of 1,221 global executives revealed strategic planning to be the most used management tool—used by 88% of respon- dents. Strategic planning is particularly effective at identifying new opportunities for growth and in ensuring that all managers have the same goals.16 Other highly-ranked strategic man- agement tools were mission and vision statements (used by 79% of respondents), core compe- tencies (79%), scenario and contingency planning (69%), knowledge management (69%), strategic alliances (68%), and growth strategy tools (65%).17 A study by Joyce, Nohria, and Roberson of 200 firms in 50 subindustries found that devising and maintaining an engaged, fo- cused strategy was the first of four essential management practices that best differentiated be- tween successful and unsuccessful companies.18 Based on these and other studies, it can be concluded that strategic management is crucial for long-term organizational success.

Research into the planning practices of companies in the oil industry concludes that the real value of modern strategic planning is more in the strategic thinking and organizational learning that is part of a future-oriented planning process than in any resulting written strate- gic plan.19 Small companies, in particular, may plan informally and irregularly. Nevertheless, studies of small- and medium-sized businesses reveal that the greater the level of planning in- tensity, as measured by the presence of a formal strategic plan, the greater the level of finan- cial performance, especially when measured in terms of sales increases.20

Planning the strategy of large, multidivisional corporations can be complex and time con- suming. It often takes slightly more than a year for a large company to move from situation as- sessment to a final decision agreement. For example, strategic plans in the global oil industry tend to cover four to five years. The planning horizon for oil exploration is even longer—up to 15 years.21 Because of the relatively large number of people affected by a strategic decision in a large firm, a formalized, more sophisticated system is needed to ensure that strategic planning leads to successful performance. Otherwise, top management becomes isolated from developments in the business units, and lower-level managers lose sight of the corporate mission and objectives.

1.2 Globalization and Environmental Sustainability: Challenges to Strategic Management

Not too long ago, a business corporation could be successful by focusing only on making and selling goods and services within its national boundaries. International considerations were min- imal. Profits earned from exporting products to foreign lands were considered frosting on the cake, but not really essential to corporate success. During the 1960s, for example, most U.S. com- panies organized themselves around a number of product divisions that made and sold goods only in the United States. All manufacturing and sales outside the United States were typically managed through one international division. An international assignment was usually considered a message that the person was no longer promotable and should be looking for another job.

Similarly, until the later part of the 20th century, a business firm could be very successful without being environmentally sensitive. Companies dumped their waste products in nearby streams or lakes and freely polluted the air with smoke containing noxious gases. Responding to complaints, governments eventually passed laws restricting the freedom to pollute the en- vironment. Lawsuits forced companies to stop old practices. Nevertheless, until the dawn of the 21st century, most executives considered pollution abatement measures to be a cost of busi- ness that should be either minimized or avoided. Rather than clean up a polluting manufac- turing site, they often closed the plant and moved manufacturing offshore to a developing nation with fewer environmental restrictions. Sustainability, as a term, was used to describe competitive advantage, not the environment.

8 PART 1 Introduction to Strategic Management and Business Policy

IMPACT OF GLOBALIZATION Today, everything has changed. Globalization, the integrated internationalization of markets and corporations, has changed the way modern corporations do business. As Thomas Fried- man points out in The World Is Flat, jobs, knowledge, and capital are now able to move across borders with far greater speed and far less friction than was possible only a few years ago.22

For example, the inter-connected nature of the global financial community meant that the mortgage lending problems of U.S. banks led to a global financial crisis in 2008. The world- wide availability of the Internet and supply-chain logistical improvements, such as con- tainerized shipping, mean that companies can now locate anywhere and work with multiple partners to serve any market. To reach the economies of scale necessary to achieve the low costs, and thus the low prices, needed to be competitive, companies are now thinking of a global market instead of national markets. Nike and Reebok, for example, manufacture their athletic shoes in various countries throughout Asia for sale on every continent. Many other companies in North America and Western Europe are outsourcing their manufacturing, soft- ware development, or customer service to companies in China, Eastern Europe, or India. Large pools of talented software programmers, English language proficiency, and lower wages in India enables IBM to employ 75,000 people in its global delivery centers in Banga- lore, Delhi, or Kolkata to serve the needs of clients in Atlanta, Munich, or Melbourne.23 In- stead of using one international division to manage everything outside the home country, large corporations are now using matrix structures in which product units are interwoven with country or regional units. International assignments are now considered key for anyone in- terested in reaching top management.

As more industries become global, strategic management is becoming an increasingly im- portant way to keep track of international developments and position a company for long-term competitive advantage. For example, General Electric moved a major research and develop- ment lab for its medical systems division from Japan to China in order to learn more about de- veloping new products for developing economies. Microsoft’s largest research center outside Redmond, Washington, is in Beijing. According to Wilbur Chung, a Wharton professor, “Whatever China develops is rolled out to the rest of the world. China may have a lower GDP per-capita than developed countries, but the Chinese have a strong sense of how products should be designed for their market.”24

The formation of regional trade associations and agreements, such as the European Union, NAFTA, Mercosur, Andean Community, CAFTA, and ASEAN, is changing how international business is being conducted. See the Global Issue feature to learn how regional trade associ- ations are forcing corporations to establish a manufacturing presence wherever they wish to market goods or else face significant tariffs. These associations have led to the increasing har- monization of standards so that products can more easily be sold and moved across national boundaries. International considerations have led to the strategic alliance between British Air- ways and American Airlines and to the acquisition of the Miller Brewing Company by South African Breweries (SAB), among others.

IMPACT OF ENVIRONMENTAL SUSTAINABILITY Environmental sustainability refers to the use of business practices to reduce a company’s im- pact upon the natural, physical environment. Climate change is playing a growing role in busi- ness decisions. More than half of the global executives surveyed by McKinsey & Company in 2007 selected “environmental issues, including climate change,” as the most important issue fac- ing them over the next five years.25 A 2005 survey of 27 large, publicly-held, multinational cor- porations based in North America revealed that 90% believed that government regulation was

CHAPTER 1 Basic Concepts of Strategic Management 9

imminent and 67% believed that such regulation would come between 2010 and 2015.26 Ac- cording to Eileen Claussen, President of the Pew Center on Global Climate Change:

There is a growing consensus among corporate leaders that taking action on climate change is a responsible business decision. From market shifts to regulatory constraints, climate change poses real risks and opportunities that companies must begin planning for today, or risk losing ground

Formed as the European Eco- nomic Community in 1957,

the European Union (EU) is the most significant trade association in

the world. The goal of the EU is the com- plete economic integration of its 27 member countries so that goods made in one part of Europe can move freely without ever stopping for a customs inspection. The EU in- cludes Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hun- gary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slove- nia, Spain, Sweden, and the United Kingdom. Others, in- cluding Croatia, Macedonia, and Turkey, have either recently applied or are in the process of applying. The EU is less than half the size of the United States of America, but has 50% more population. One currency, the euro, is be- ing used throughout the region as members integrate their monetary systems. The steady elimination of barriers to free trade is providing the impetus for a series of mergers, acquisitions, and joint ventures among business corpora- tions. The requirement of at least 60% local content to avoid tariffs has forced many U.S. and Asian companies to abandon exporting in favor of having a strong local pres- ence in Europe.

Canada, the United States, and Mexico are affiliated eco- nomically under the North American Free Trade Agree- ment (NAFTA). The goal of NAFTA is improved trade among the three member countries rather than complete economic integration. Launched in 1994, the agreement re- quired all three members to remove all tariffs among them- selves over 15 years, but they were allowed to have their own tariff arrangements with nonmember countries. Cars and trucks must have 62.5% North American content to qualify for duty-free status. Transportation restrictions and other regulations have been being significantly reduced. A number of Asian and European corporations, such as Swe- den’s Electrolux, have built manufacturing facilities in Mex- ico to take advantage of the country’s lower wages and easy access to the entire North American region.

GLOBAL issue REGIONAL TRADE ASSOCIATIONS REPLACE NATIONAL TRADE BARRIERS

South American countries are also working to harmonize their trading relationships with each other and to form trade associations. The establishment of the Mercosur (Mercosul in Portuguese) free-trade area among Argentina, Brazil, Uruguay, and Paraguay means that a manufacturing pres- ence within these countries is becoming essential to avoid tariffs for nonmember countries. Venezuela has applied for admission to Mercosur. The Andean Community (Comu- nidad Andina de Naciones) is a free-trade alliance composed of Columbia, Ecuador, Peru, Bolivia, and Chile. On May 23, 2008, the Union of South American Nations was formed to unite the two existing free-trade areas with a secretariat in Ecuador and a parliament in Bolivia.

In 2004, the five Central American countries of El Sal- vador, Guatemala, Honduras, Nicaragua, and Costa Rica plus the United States signed the Central American Free Trade Agreement (CAFTA). The Dominican Republic joined soon thereafter. Previously, Central American textile manufacturers had to pay import duties of 18%–28% to sell their clothes in the United States unless they bought their raw material from U.S. companies. Under CAFTA, members can buy raw material from anywhere and their exports are duty free. In addition, CAFTA eliminated import duties on 80% of U.S. goods exported to the region, with the remaining tariffs being phased out over 10 years.

The Association of Southeast Asian Nations (ASEAN)—composed of Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singa- pore, Thailand, and Vietnam—is in the process of linking its members into a borderless economic zone by 2020. Tar- iffs had been significantly reduced among member coun- tries by 2008. Increasingly referred to as ASEAN+3, ASEAN now includes China, Japan, and South Korea in its annual summit meetings. The ASEAN nations negotiated linkage of the ASEAN Free Trade Area (AFTA) with the existing free- trade area of Australia and New Zealand. With the EU ex- tending eastward and NAFTA extending southward to someday connect with CAFTA and the Union of South American Nations, pressure is building on the independent Asian nations to join ASEAN.

10 PART 1 Introduction to Strategic Management and Business Policy

to their more forward-thinking competitors. Prudent steps taken now to address climate change can improve a company’s competitive position relative to its peers and earn it a seat at the table to influence climate policy. With more and more action at the state level and increasing scientific clarity, it is time for businesses to craft corporate strategies that address climate change.27

Porter and Reinhardt warn that “in addition to understanding its emissions costs, every firm needs to evaluate its vulnerability to climate-related effects such as regional shifts in the availability of energy and water, the reliability of infrastructures and supply chains, and the prevalence of infectious diseases.”28 Swiss Re, the world’s second-largest reinsurer, estimated that the overall economic costs of climate catastrophes related to climate change threatens to double to $150 billion per year by 2014. The insurance industry’s share of this loss would be $30–$40 billion annually.29

The effects of climate change on industries and companies throughout the world can be grouped into six categories of risks: regulatory, supply chain, product and technology, litiga- tion, reputational, and physical.30

1. Regulatory Risk: Companies in much of the world are already subject to the Kyoto Pro- tocol, which requires the developed countries (and thus the companies operating within them) to reduce carbon dioxide and other greenhouse gases by an average of 6% from 1990 levels by 2012. The European Union has an emissions trading program that allows companies that emit greenhouse gases beyond a certain point to buy additional allowances from other companies whose emissions are lower than that allowed. Companies can also earn credits toward their emissions by investing in emissions abatement projects outside their own firms. Although the United States withdrew from the Kyoto Protocol, various regional, state, and local government policies affect company activities in the U.S. For ex- ample, seven Northeastern states, six Western states, and four Canadian provinces have adopted proposals to cap carbon emissions and establish carbon-trading programs.

2. Supply Chain Risk: Suppliers will be increasingly vulnerable to government regulations— leading to higher component and energy costs as they pass along increasing carbon-related costs to their customers. Global supply chains will be at risk from an increasing intensity of major storms and flooding. Higher sea levels resulting from the melting of polar ice will create problems for seaports. China, where much of the world’s manufacturing is cur- rently being outsourced, is becoming concerned with environmental degradation. In 2006, 12 Chinese ministries produced a report on global warming foreseeing a 5%–10% reduc- tion in agricultural output by 2030; more droughts, floods, typhoons, and sandstorms; and a 40% increase in population threatened by plague.31

The increasing scarcity of fossil-based fuel is already boosting transportation costs sig- nificantly. For example, Tesla Motors, the maker of an electric-powered sports car, trans- ferred assembly of battery packs from Thailand to California because Thailand’s low wages were more than offset by the costs of shipping thousand-pound battery packs across the Pa- cific Ocean.32 Although the world production of oil had leveled off at 85 million barrels a day by 2008, the International Energy Agency predicted global demand to increase to 116 million barrels by 2030. Given that output from existing fields was falling 8% annu- ally, oil companies must develop up to seven million barrels a day in additional capacity to meet projected demand. Nevertheless, James Mulva, CEO of ConocoPhilips, estimated in late 2007 that the output of oil will realistically stall at around 100 million barrels a day.33

3. Product and Technology Risk: Environmental sustainability can be a prerequisite to prof- itable growth. For example, worldwide investments in sustainable energy (including wind, solar, and water power) more than doubled to $70.9 billion from 2004 to 2006.34 Sixty per- cent of U.S. respondents to an Environics study stated that knowing a company is mindful of its impact on the environment and society makes them more likely to buy their products

CHAPTER 1 Basic Concepts of Strategic Management 11

and services.35 Carbon-friendly products using new technologies are becoming increas- ingly popular with consumers. Those automobile companies, for example, that were quick to introduce hybrid or alternative energy cars gained a competitive advantage.

4. Litigation Risk: Companies that generate significant carbon emissions face the threat of lawsuits similar to those in the tobacco, pharmaceutical, and building supplies (e.g., as- bestos) industries. For example, oil and gas companies were sued for greenhouse gas emissions in the federal district court of Mississippi, based on the assertion that these companies contributed to the severity of Hurricane Katrina. As of October 2006, at least 16 cases were pending in federal or state courts in the U.S. “This boomlet in global warm- ing litigation represents frustration with the White House’s and Congress’ failure to come to grips with the issue,” explained John Echeverria, executive director of Georgetown University’s Environmental Law & Policy Institute.36

5. Reputational Risk: A company’s impact on the environment can heavily affect its over- all reputation. The Carbon Trust, a consulting group, found that in some sectors the value of a company’s brand could be at risk because of negative perceptions related to climate change. In contrast, a company with a good record of environmental sustainability may create a competitive advantage in terms of attracting and keeping loyal consumers, em- ployees, and investors. For example, Wal-Mart’s pursuit of environmental sustainability as a core business strategy has helped soften its negative reputation as a low-wage, low- benefit employer. By setting objectives for its retail stores of reducing greenhouse gases by 20%, reducing solid waste by 25%, increasing truck fleet efficiency by 25%, and us- ing 100% renewable energy, it is also forcing its suppliers to become more environmen- tally sustainable.37 Tools have recently been developed to measure sustainability on a variety of factors. For example, the SAM (Sustainable Asset Management) Group of Zurich, Switzerland, has been assessing and documenting the sustainability performance of over 1,000 corporations annually since 1999. SAM lists the top 15% of firms in its Sus- tainability Yearbook and classifies them into gold, silver, and bronze categories.38

Business Week published its first list of the world’s 100 most sustainable corporations Jan- uary 29, 2007. The Dow Jones Sustainability Indexes and the KLD Broad Market Social Index, which evaluate companies on a range of environmental, social, and governance cri- teria are used for investment decisions.39 Financial services firms, such as Goldman Sachs, Bank of America, JPMorgan Chase, and Citigroup have adopted guidelines for lending and asset management aimed at promoting clean-energy alternatives.40

6. Physical Risk: The direct risk posed by climate change includes the physical effects of droughts, floods, storms, and rising sea levels. Average Arctic temperatures have risen four to five degrees Fahrenheit (two to three degrees Celsius) in the past 50 years, leading to melting glaciers and sea levels rising one inch per decade.41 Industries most likely to be af- fected are insurance, agriculture, fishing, forestry, real estate, and tourism. Physical risk can also affect other industries, such as oil and gas, through higher insurance premiums paid on facilities in vulnerable areas. Coca-Cola, for example, studies the linkages between climate change and water availability in terms of how this will affect the location of its new bottling plants. The warming of the Tibetan plateau has led to a thawing of the per- mafrost—thereby threatening the newly-completed railway line between China and Ti- bet.42 (See the Environmental Sustainability Issue feature for a more complete list of projected effects of climate change.)

Although global warming remains a controversial topic, the best argument in favor of working toward environmental sustainability is a variation of Pascal’s Wager on the existence of God:

The same goes for global warming. If you accept it as reality, adapting your strategy and prac- tices, your plants will use less energy and emit fewer effluents. Your packaging will be more

12 PART 1 Introduction to Strategic Management and Business Policy

SOURCE: F. G. Sussman and J. R. Freed, “Adapting to Climate Change: A Business Approach,” Paper prepared for the Pew Cen- ter on Global Climate Change (April 2008), pp. 5–6.

� Annual precipitation increases in most of northern Eu- rope, Canada, northeastern U.S., and the Arctic.

� Winter precipitation increases in northern Asia and the Tibetan Plateau.

� Dry spells increase in length and frequency in the Mediter- ranean, Australia, and New Zealand; seasonal droughts increase in many mid-latitude continent interiors.

EXTREME WEATHER-RELATED EVENTS

� Increasing intense tropical cyclone activity. � Increasing frequency of flash floods and large-area

floods in many regions. � Increasing risk of drought in Australia, eastern New

Zealand, and the Mediterranean, with seasonal droughts in central Europe and Central America.

� Increasing wildfires in arid and semi-arid areas such as Australia and the western U.S.

OTHER RELATED EFFECTS

� Decreasing snow season length and depth in Europe and North America.

� Fewer cold days and nights leading to decreasing frosts. � Accelerated glacier loss. � Reduction in and warming of permafrost.

According to the Intergov- ernmental Panel on Climate

Change (IPCC), the global cli- mate system is projected to in-

clude a number of changes during the 21st century:

TEMPERATURE INCREASE

� Global average warming of approximately 0.2 degrees Celsius each decade.

� Long-term warming associated with doubled carbon dioxide concentrations in the range of 2 to 4.5 degrees Celsius.

� Fewer cold days and nights; warmer and more frequent hot days and nights.

� Increased frequency, intensity, and duration of heat waves in central Europe, western U.S., East Asia, and Korea.

SEA LEVEL RISE

� Sea level will continue to rise due to thermal expansion of seawater and loss of land ice at greater rates.

� Sea level rise of 18 to 59 centimeters by the end of the 21st century.

� Warming will continue contributing to sea level rise for many centuries even if greenhouse gas concentrations are stabilized.

PRECIPITATION AND HUMIDITY

� Increasing numbers of wet days in high latitudes; in- creasing numbers of dry spells in subtropical areas.

PROJECTED EFFECTS OF CLIMATE CHANGE

ENVIRONMENTAL sustainability issue

biodegradable, and your new products will be able to capture any markets created by severe weather effects. Yes, global warming might not be as damaging as some predict, and you might have invested more than you needed, but it’s just as Pascal said: Given all the possible outcomes, the upside of being ready and prepared for a “fearsome event” surely beats the alternative.43

1.3 Theories of Organizational Adaptation Globalization and environmental sustainability present real challenges to the strategic manage- ment of business corporations. How can any one company keep track of all the changing tech- nological, economic, political–legal, and sociocultural trends around the world and make the necessary adjustments? This is not an easy task. Various theories have been proposed to account for how organizations obtain fit with their environment. The theory of population ecology, for

CHAPTER 1 Basic Concepts of Strategic Management 13

1.4 Creating a Learning Organization Strategic management has now evolved to the point that its primary value is in helping an or- ganization operate successfully in a dynamic, complex environment. To be competitive in dy- namic environments, corporations are becoming less bureaucratic and more flexible. In stable environments such as those that existed in years past, a competitive strategy simply involved defining a competitive position and then defending it. As it takes less and less time for one product or technology to replace another, companies are finding that there is no such thing as a permanent competitive advantage. Many agree with Richard D’Aveni, who says in his book Hypercompetition that any sustainable competitive advantage lies not in doggedly following a centrally managed five-year plan but in stringing together a series of strategic short-term thrusts (as Intel does by cutting into the sales of its own offerings with periodic introductions of new products).48 This means that corporations must develop strategic flexibility—the abil- ity to shift from one dominant strategy to another.49

Strategic flexibility demands a long-term commitment to the development and nurturing of critical resources. It also demands that the company become a learning organization—an organization skilled at creating, acquiring, and transferring knowledge and at modifying its be- havior to reflect new knowledge and insights. Organizational learning is a critical component of competitiveness in a dynamic environment. It is particularly important to innovation and new product development.50 For example, both Hewlett-Packard and British Petroleum (BP) use an extensive network of informal committees to transfer knowledge among their cross-functional teams and to help spread new sources of knowledge quickly.51 Siemens, a major electronics company, created a global knowledge-sharing network, called ShareNet, in order to quickly spread information technology throughout the firm. Based on its experience with ShareNet, Siemens established PeopleShareNet, a system that serves as a virtual expert marketplace for

example, proposes that once an organization is successfully established in a particular envi- ronmental niche, it is unable to adapt to changing conditions. Inertia prevents the organization from changing. The company is thus replaced (is bought out or goes bankrupt) by other organizations more suited to the new environment. Although it is a popular theory in sociol- ogy, research fails to support the arguments of population ecology.44 Institution theory, in contrast, proposes that organizations can and do adapt to changing conditions by imitating other successful organizations. To its credit, many examples can be found of companies that have adapted to changing circumstances by imitating an admired firm’s strategies and man- agement techniques.45 The theory does not, however, explain how or by whom successful new strategies are developed in the first place. The strategic choice perspective goes one step further by proposing that not only do organizations adapt to a changing environment, but they also have the opportunity and power to reshape their environment. This perspective is supported by research indicating that the decisions of a firm’s management have at least as great an impact on firm performance as overall industry factors.46 Because of its emphasis on managers making rational strategic decisions, the strategic choice perspective is the dominant one taken in strategic management. Its argument that adaptation is a dynamic process fits with the view of organizational learning theory, which says that an organization adjusts defen- sively to a changing environment and uses knowledge offensively to improve the fit between itself and its environment. This perspective expands the strategic choice perspective to include people at all levels becoming involved in providing input into strategic decisions.47

In agreement with the concepts of organizational learning theory, an increasing number of companies are realizing that they must shift from a vertically organized, top-down type of organization to a more horizontally managed, interactive organization. They are attempting to adapt more quickly to changing conditions by becoming “learning organizations.”

14 PART 1 Introduction to Strategic Management and Business Policy

facilitating the creation of cross-cultural teams composed of members with specific knowledge and competencies.52

Learning organizations are skilled at four main activities:

� Solving problems systematically

� Experimenting with new approaches

� Learning from their own experiences and past history as well as from the experiences of others

� Transferring knowledge quickly and efficiently throughout the organization53

Business historian Alfred Chandler proposes that high-technology industries are defined by “paths of learning” in which organizational strengths derive from learned capabilities.54 Ac- cording to Chandler, companies spring from an individual entrepreneur’s knowledge, which then evolves into organizational knowledge. This organizational knowledge is composed of three basic strengths: technical skills, mainly in research; functional knowledge, such as pro- duction and marketing; and managerial expertise. This knowledge leads to new businesses where the company can succeed and creates an entry barrier to new competitors. Chandler points out that once a corporation has built its learning base to the point where it has become a core company in its industry, entrepreneurial startups are rarely able to successfully enter. Thus, organizational knowledge becomes a competitive advantage.

Strategic management is essential for learning organizations to avoid stagnation through con- tinuous self-examination and experimentation. People at all levels, not just top management, par- ticipate in strategic management—helping to scan the environment for critical information, suggesting changes to strategies and programs to take advantage of environmental shifts, and working with others to continuously improve work methods, procedures, and evaluation tech- niques. For example, Motorola developed an action learning format in which people from mar- keting, product development, and manufacturing meet to argue and reach agreement about the needs of the market, the best new product, and the schedules of each group producing it. This ac- tion learning approach overcame the problems that arose previously when the three departments met and formally agreed on plans but continued with their work as if nothing had happened.55 Re- search indicates that involving more people in the strategy process results in people not only view- ing the process more positively, but also acting in ways that make the process more effective.56

Organizations that are willing to experiment and are able to learn from their experiences are more successful than those that are not.57 For example, in a study of U.S. manufacturers of diagnostic imaging equipment, the most successful firms were those that improved prod- ucts sold in the United States by incorporating some of what they had learned from their man- ufacturing and sales experiences in other nations. The less successful firms used the foreign operations primarily as sales outlets, not as important sources of technical knowledge.58 Re- search also reveals that multidivisional corporations that establish ways to transfer knowledge across divisions are more innovative than other diversified corporations that do not.59

1.5 Basic Model of Strategic Management Strategic management consists of four basic elements:

� Environmental scanning � Strategy formulation � Strategy implementation � Evaluation and control

CHAPTER 1 Basic Concepts of Strategic Management 15

Environmental Scanning

Strategy Formulation

Strategy Implementation

Evaluation and

Control

FIGURE 1–1 Basic Elements of

the Strategic Management

Process

Figure 1–1 illustrates how these four elements interact; Figure 1–2 expands each of these elements and serves as the model for this book. This model is both rational and prescriptive. It is a planning model that presents what a corporation should do in terms of the strategic man- agement process, not what any particular firm may actually do. The rational planning model predicts that as environmental uncertainty increases, corporations that work more diligently to analyze and predict more accurately the changing situation in which they operate will outper- form those that do not. Empirical research studies support this model.60 The te