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Case Study Analysis

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Strategic M anagem

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Strategic Management and Business Policy

Globalization, Innovation and Sustainability

FIFTEENTH EDITION

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

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FIFTEENTH EDITION GLOBAL EDITION

Alan N. Hoffman Bentley University

Strategic Management

and Business Policy

GLOBALIZATION, INNOVATION, AND SUSTAINABILITY

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

Charles E. Bamford University of Notre Dame

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

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Dedicated to

TOM WHEELEN AND DAVID HUNGER

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

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

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

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

Alan N. Hoffman Charles E. Bamford

SPECIAL DEDICATION TO DAVID HUNGER

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

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

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

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

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

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

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4 DEDICATED

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

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

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

We love you David/Dad/GrandDad.

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

Alan Hoffman

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

Chuck Bamford

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Brief Contents

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

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

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

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

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

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

NAME INDEx I-1

SUBJECT INDEx I-6

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Contents

Preface 21 About the Authors 29

PART ONE Introduction to Strategic Management and Business Policy 33

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

Phases of Strategic Management 37

Benefits of Strategic Management 38

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

Impact of Globalization 40

Impact of Innovation 41

Global Issue: ASEAN: REGIONAL TRADE ASSOCIATIONS 42

Impact of Sustainability 42

Theories of Organizational Adaptation 44

Creating a Learning Organization 44

Basic Model of Strategic Management 46

Environmental Scanning 46

Strategy Formulation 48

Strategy Implementation 52

Evaluation and Control 53

Feedback/Learning Process 54

Initiation of Strategy: Triggering Events 54

Strategic Decision Making 55

What Makes a Decision Strategic? 55

Mintzberg’s Modes of Strategic Decision Making 56

Strategic Decision-Making Process: Aid to Better Decisions 57

The Strategic Audit: Aid to Strategic Decision Making 58

End of Chapter Summary 59

APPENDIx 1.A Strategic Audit of a Corporation 64

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

Responsibilities of the Board 76

Board of Directors Composition 79

Innovation Issue: JCPENNEY AND INNOVATION 80

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

Nomination and Election of Board Members 85

Organization of the Board 86

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

Global Issue: GLOBAL BUSINESS BOARD ACTIVISM AT YAHOO! 88

Improving Governance 89

Evaluating Governance 89

Avoiding Governance Improvements 90

Trends in Corporate Governance 90

The Role of Top Management 91

Responsibilities of Top Management 92

Sustainability Issue: CEO PAY AND CORPORATE PERFORMANCE 92

End of Chapter Summary 95

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

Responsibilities of a Business Firm 104

Sustainability 107

Sustainability Issue: MARkS & SPENCER LEADS THE WAY 108

Corporate Stakeholders 108

Stakeholder Analysis 109

Strategy Highlight: JOHNSON & JOHNSON CREDO 111

Ethical Decision Making 111

Some Reasons for Unethical Behavior 112

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

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

Encouraging Ethical Behavior 116

Views on Ethical Behavior 117

End of Chapter Summary 119

CONTENTS 7

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PART TWO Scanning the Environment 123

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

Identifying External Environmental Variables 127

Sustainability Issue: GREEN SUPERCARS 128

Strategic Importance of the External Environment 129

Scanning the Societal Environment: Steep Analysis 129

Global Issue: SUVS POWER ON IN CHINA 137

Identifying External Strategic Factors 139

Industry Analysis: Analyzing the Task Environment 139

Porter’s Approach to Industry Analysis 140

Industry Evolution 144

Categorizing International Industries 144

Innovation Issue: TAkING STOCk OF AN OBSESSION 145

International Risk Assessment 146

Strategic Groups 146

Strategic Types 147

Hypercompetition 148

Using Key Success Factors to Create an Industry Matrix 149

Competitive Intelligence 150

Sources of Competitive Intelligence 151

Strategy Highlight EVALUATING COMPETITIVE INTELLIGENCE 152

Monitoring Competitors for Strategic Planning 153

Forecasting 154

Danger of Assumptions 154

Useful Forecasting Techniques 154

The Strategic Audit: A Checklist for Environmental Scanning 156

Synthesis of External Factors 156

End of Chapter Summary 158

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

Core and Distinctive Competencies 166

Using Resources/Capabilities to Gain Competitive Advantage 169

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Business Models 170

Value-Chain Analysis 172

Industry Value-Chain Analysis 172

Corporate Value-Chain Analysis 174

Scanning Functional Resources and Capabilities 175

Basic Organizational Structures 175

Culture 177

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

Strategic Marketing Issues 179

Innovation Issue: DOCOMO MOVES AGAINST THE GRAIN 181

Strategic Financial Issues 182

Strategic Research and Development (R&D) Issues 183

Strategic Operations Issues 185

Strategic Human Resource Management (HRM) Issues 187

Strategic Information Systems/Technology Issues 189

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

The Strategic Audit: A Checklist for Organizational Analysis 192

Synthesis of Internal Factors (IFAS) 192

End of Chapter Summary 194

PART THREE Strategy Formulation 199

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

Generating a Strategic Factors Analysis Summary (SFAS) Matrix 203

Finding Market Niches 205

Mission and Objectives 206

Business Strategies 207

Porter’s Competitive Strategies 207

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

Innovation Issue: CHEGG AND COLLEGE TExTBOOkS 212

Sustainability Issue: STRATEGIC SUSTAINABILITY—ESPN 214

Cooperative Strategies 215

Strategic Alliances 216

End of Chapter Summary 220

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

Directional Strategy 226

Growth Strategies 227

Strategy Highlight: TRANSACTION COST ECONOMICS ANALYZES VERTICAL Growth StrateGy  230

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

Controversies in Directional Growth Strategies 233

Stability Strategies 234

Retrenchment Strategies 235

Portfolio Analysis 237

BCG Growth-Share Matrix 238

Sustainability Issue: GENERAL MOTORS AND THE ELECTRIC CAR 240

Advantages and Limitations of Portfolio Analysis 241

Managing a Strategic Alliance Portfolio 241

Corporate Parenting 242

Innovation Issue: TO RED HAT OR NOT? 243

Developing a Corporate Parenting Strategy 244

Horizontal Strategy and Multipoint Competition 244

End of Chapter Summary 245

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

Marketing Strategy 252

Financial Strategy 254

Research and Development (R&D) Strategy 255

Operations Strategy 256

Global Issue: WHY IS STARBUCkS AFRAID OF ITALY? 257

Purchasing Strategy 258

Sustainability Issue: HOW HOT IS HOT? 259

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

Logistics Strategy 261

Human Resource Management (HRM) Strategy 261

Information Technology Strategy 262

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The Sourcing Decision: Location of Functions 262

Strategies To Avoid 265

Strategic Choice: Constructing Scenarios 265

Constructing Corporate Scenarios 266

The Process of Strategic Choice 271

Using Policies to Guide Strategic Choices 273

End of Chapter Summary 273

PART FOUR Strategy Implementation and Control 279

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

International Coordination 284

International Strategic Alliances 285

Stages of International Development 285

International Employment 286

Measurement of Performance 288

End of Chapter Summary 290

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

Who Implements Strategy? 297

What Must Be Done? 297

Developing Programs, Budgets, and Procedures 297

Sustainability Issue: A BETTER BOTTLE—ECOLOGIC BRANDS 298

Achieving Synergy 302

How Is Strategy To Be Implemented? Organizing for Action 303

Structure Follows Strategy 303

Stages of Corporate Development 304

Innovation Issue: THE P&G INNOVATION MACHINE STUMBLES 305

Organizational Life Cycle 309

Flexible Types of Organizational Structure 310

The Matrix Structure 310

Network Structure—The Virtual Organization 312

Global Issue: OUTSOURCING COMES FULL CIRCLE 313

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

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Reengineering and Strategy Implementation 314

Six Sigma 315

Designing Jobs to Implement Strategy 316

Centralization Versus Decentralization 317

End of Chapter Summary 318

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

Staffing Follows Strategy 327

Selection and Management Development 329

Innovation Issue: HOW TO kEEP APPLE “COOL” 329

Problems in Retrenchment 331

Leading 333

Managing Corporate Culture 333

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

Action Planning 338

Management by Objectives 340

Total Quality Management 341

Global Issue: CULTURAL DIFFERENCES CREATE IMPLEMENTATION PROBLEMS in MerGer  342

End of Chapter Summary 342

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

Appropriate Measures 350

Types of Controls 351

Innovation Issue: SOLAR POWER AND THE GRID 352

Activity-Based Costing 353

Enterprise Risk Management 354

Primary Measures of Corporate Performance 354

Sustainability Issue: THE END OF THE CASH REGISTER RECEIPT 357

Balanced Scorecard Approach: Using Key Performance Measures 358

Primary Measures of Divisional and Functional Performance 360

Responsibility Centers 360

Using Benchmarking To Evaluate Performance 362

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

Strategic Information Systems 363

Enterprise Resource Planning 364

Radio Frequency Identification and Near Field Communication 364

Divisional and Functional is Support 365

Problems in Measuring Performance 365

Short-Term Orientation 366

Goal Displacement 367

Guidelines for Proper Control 368

Aligning Incentives 369

End of Chapter Summary 371

PArt fiVe Introduction to Case Analysis 377

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

Researching the Case Situation 380

Financial Analysis: A Place to Begin 381

Analyzing Financial Statements 381

Common-Size Statements 385

Z-Value and the Index of Sustainable Growth 385

Useful Economic Measures 386

Format for Case Analysis: The Strategic Audit 386

End of Chapter Summary 389

APPendix 13.A Resources for Case Research 391

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

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

PArt six Cases in Strategic Management 1-1

s e C t i o n A Executive Leadership

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

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

S E C T I O N B Business Ethics

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

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

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

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

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

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

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

S E C T I O N D Privacy

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

S E C T I O N E International Issues in Strategic Management

CASE 9 Harley Davidson: An Overreliance on Aging Baby Boomers 9-1 (Contributors: Alan N. Hoffman and Natalia Gold) At Harley Davidson, customers not only purchased a motorcycle, they bought the “rebel” lifestyle Harley signified. This rebel image took a long time to develop and constituted a major competitive advantage for Harley. Nothing promised the same excitement as being on the open road on a Harley, its engine roaring, the wind whipping, the great open spaces of America just down the road. Harley Davidson specifically targeted a narrowly defined market of middle-aged males with disposable income. However, as US baby boomers got older, the company recognized that it had to look to new markets and demographics to expand sales.

CASE 10 Uber: Feeling the Heat from Competitors and Regulators Worldwide 10-1 (Contributors: Alan N. Hoffman and Natalia Gold) Uber, originally known as “UberCab,” was started by Travis Kalanick and Garrett Camp in San Francisco, California, in 2009. The company grew rapidly and by 2015 it was providing carpooling services in 300 major cities in 58 countries around the world. As Uber moved forward into new territories, however, it got entangled in many regulatory and legal hassles. The company had to figure out how to sustain its lead in the heavily regulated, controversial, competitive, and ever-changing taxi industry. Moreover, despite a landslide market share Uber was operating at a loss. How to lower costs and become profitable was another challenge for this young and aggressive company.

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

I N D U S T R Y O N E : INTERNET COMPANIES

CASE 11 Pandora Internet Radio (2014): Just Press Play 11-1 (Contributors: Gary Stenftennagel and Joyce Vincelette) Pandora Media was built around the idea of providing listeners with only the music that they love. To do so, Pandora fundamentally changed how people listened to music by allowing station customization and the ability to listen to music over the Internet. As technology changed, Pandora evolved from a Web site based radio provider and developed a mobile application where the company could offer its services to customers whenever and wherever they wanted to listen to music. Monetizing the mobile product proved to be difficult and Pandora had not yet attained profitability.

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CASE 1 2 Amazon.com, Inc.: Retailing Giant to High-Tech Player? 12-1 (Contributor: Alan N. Hoffman) In 2012, more than half of all Amazon sales came from computers, mobile devices including the Kindle, Kindle Fire, and Kindle Touch, and other electronics, as well as general merchandise from home and garden supplies to groceries, apparel, jewelry, health and beauty products, sports and outdoor equipment, tools, and auto and industrial supplies. Amazon was at a crossroads with regard to its push into technology versus its general merchandise. Amazon also faced other challenges, including those from state governments that wanted it to collect sales taxes so it would not adversely compete against local businesses.

CASE 1 3 Blue Nile, Inc.: “Stuck in the Middle” of the Diamond Engagement Ring Market 13-1 (Contributor: Alan N. Hoffman) Blue Nile Inc. has developed into the largest online retailer of diamond engagement rings. Unlike traditional jewelry retailers, Blue Nile operates completely store-front-free, without in-person consultation services. The business conducts all sales online or by phone, and sales include both engagement (70%) and non-engagement (30%) categories. Blue Nile’s vision is to educate its customer base so customers can make an informed, confident decision no matter what event they are celebrating. It wants to make the entire diamond-buying process easy and hassle-free.

I N D U S T R Y T W O : ENTERTAINMENT AND LEISURE

CASE 1 4 Groupon Inc.: Daily Deal or Lasting Success? 14-1 (Contributors: Nick Falcone, Eric Halbruner, Ellie A. Fogarty, and Joyce Vincelette) Groupon began as a local Chicago discount service and became a global phenomenon seemingly overnight. It was a great idea. The company was the first of its kind and changed the way consumers spend, shop, and think about discounts. But how could Groupon, based on such innovation and having experienced such exceptional growth, be in such a precarious position? A wave of competition had swelled, including the likes of technology giants and both general and niche daily deals services, all replicating Groupon’s business model. How could Groupon compete against large companies and their expansive resources?

CASE 1 5 Netflix Inc.: The 2011 Rebranding/Price Increase Debacle 15-1 (Contributor: Alan N. Hoffman) On September 18, 2011, Netflix CEO and co-founder Reed Hastings announced on the Netflix blog that the company was splitting its DVD delivery service from its online streaming service, rebranding its DVD delivery service, Qwikster, as a way to differentiate it from its online streaming service, and creating a new Web site for it. Three weeks later, in response to customer outrage and confusion, Hastings rescinded the decision to rebrand the DVD delivery service, Qwikster, and reintegrated it into Netflix. Nevertheless, only five weeks after the initial split, Netflix acknowledged that it had lost 800,000 U.S. subscribers and expected to lose many more, thanks both to the Qwikster debacle and the price hike the company had decided was necessary to cover increasing content costs.

CASE 1 6 Town Sports International Holdings, Inc.: Unsquashable 16-1 (Contributors: Sarah Stefanelli, Christina Marie Kopka, Jakub Libucha, and Joyce Vincelette) Town Sports International decided to move forward with its expansion strategy in order to become the most recognized health club network, through both designing and building clubs and through selective acquisitions within its four major markets, Boston, New York, Washington D.C., and Philadelphia. Town Sports Int’l set out to accomplish this efficiently and effectively by living by its customer-centric mission, “Improving Lives Through Exercise.”

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CASE 1 7 Zynga, Inc. (2011): Whose Turn Is It? 17-1 (Contributors: Zachary Burkhalter, Daniel Zuller, Concetta Bagnato, Joyce Vincelette, and Ellie A. Fogarty) Zynga built its company around social gaming. This new type of gaming transformed the gaming industry on multiple levels and across various platforms. Zynga originally built its games using the Facebook platform and then capitalized on the company’s unique method of social networking to capture audiences around the world. However, this strong reliance on Facebook and changes in consumer gaming practices caused some concern among outside investors as to the future of Zynga.

INDUSTRY THREE: FOOD AND BEVERAGE

CASE 1 8 The Boston Beer Company: Brewers of Samuel Adams Boston Lager (Mini Case) 18-1 (Contributor: Alan N. Hoffman) The Boston Beer Company, founded in 1984 by Jim Koch, is viewed as a pioneer in the American craft beer revolution. Brewing over one 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 1 9 Panera Bread Company (2010): Still Rising Fortunes? 19-1 (Contributors: Joyce P. 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 2 0 Whole Foods Market (2010): How to Grow in an Increasingly Competitive Market? (Mini Case) 20-1 (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 like Wal-Mart, who are adding natural/organic foods to their offerings.

CASE 2 1 Burger King (Mini Case) 21-1 (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 2 2 Sonic Restaurants: Does Its Drive-In Business Model Limit Future Growth Potential? 22-1 (Contributors: Alan N. Hoffman and Natalia Gold) Sonic is an iconic American drive-in fast-food chain with nearly thousands of franchises established across the United States by 2014. As Sonic continued to expand, it ran into various hurdles. The most daunting challenge was to enter urban environments where space was too scarce to make drive-in possible. At the same time, while the drive-in model was highly effective in the US, thanks to nostalgia, it did not have the same emotional appeal to international

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consumers. Should Sonic move away from the drive-in model and reinvent itself? If so, would it become just another fast food burger joint with a customizable menu? And how could it compete with larger players such as McDonald’s and Burger King that already had a substantial urban and international presence?

CASE 2 3 “Breaking Up is Hard to Do”: PepsiCo in 2014 23-1 (Contributor: Ram Subramanian) On April 17, 2014, Indra Nooyi, the Chief Executive Officer of the Purchase, New York-based PepsiCo, a diversified beverage and snack foods company, met with Ian Cook, the Presiding Director of the company’s Board, to discuss a response to Nelson Peltz’s (the head of Trian Fund Management, an activist fund) latest call for breaking up the company into two independent entities. Peltz had threatened to approach the company’s stockholders directly if the Board did not accede to his demands.

INDUSTRY FOUR: APPAREL

CASE 2 4 Under Armour 24-1 (Contributors: Ram Subramanian and Pradeep Gopalakrishna) Under Armour’s footwear sales declined by 4.5% during the second quarter of 2009 and showed a 16.6% decline in the first six months of 2010 compared to 2009. This was in contrast to its performance apparel, the company’s core category, which saw a 32.2% uptick over 2009. Under Armour had tremendous growth opportunities in the apparel category in China. However, CEO Kevin Plank wanted Under Armour to be a leading player in the field of athletic footwear.

CASE 2 5 TOMS Shoes (Mini Case) 25-1 (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?

CASE 2 6 J.C. Penney Company, Inc.: Surviving the Ron Johnson (CEO) Era 26-1 (Contributor: Alan N. Hoffman) Ron Johnson, the architect behind Apple’s wildly successful retail stores and 15-year Target veteran, became American department store chain J.C. Penney’s new CEO in November 2011. The owner of J.C. Penney had high hopes for Johnson, who proceeded to make drastic changes to the company including a new logo and a new spokesperson (Ellen DeGeneres). His vision included transforming 700 of the largest J.C. Penney stores into collections of some 100 branded shops with a central ”town square” gathering area for services. J.C. Penney fired Ron Johnson after just 17 months, following a disastrous decline in business directly attributable to the failure of the new business plan.

INDUSTRY FIVE: RETAILING

CASE 2 7 Best Buy Co. Inc. (2009): A Sustainable Customer-Centricity Model? 27-1 (Contributor: Alan N. Hoffman)

Best Buy, the largest consumer electronics retailer in the United States, operates 4000 stores in North America, China, and Turkey. It 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?

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CASE 2 8 Target Corp’s Tarnished Reputation: Failure in Canada and a Massive Data Breach 28-1 (Contributors: Alan N. Hoffman and Natalia Gold) Target is a US mass-market discount store catering to shoppers seeking high quality products. In a crowded market, Target was eager to grow its business outside the US and online. It expanded to Canada in 2011 by acquiring a failed retailer. A move that seemed prudent actually saddled Target with inconveniently located stores and strained its logistics infrastructure. Closing down its Canadian stores, Target focused on strengthening its online presence. But two massive data breach incidents in 2013 and 2014 affected over 100 million of its customers and weakened Target’s sales significantly. In order to keep its market share on a par with competitors such as Walmart and Amazon, Target clearly has challenges to be met.

CASE 2 9 Staples: The Fierce Battle Between Brick and Mortar vs. Online Sales 29-1 (Contributors: Alan N. Hoffman and Natalia Gold) With a focus on convenience and a wide range of product offerings, Staples was the world’s largest office supplies retailer. The office supply sector had almost no barriers to entry as capital costs were low compared to other retail industries. No licensing requirements were necessary, easing the burden on new entrants. The low level of differentiation of goods between one office supply store and the next, forced new entrants to provide either niche or specialty products to compete and often in the online realm. As the retail industry had been trending towards e-commerce, Staples’ traditional brick and mortar stores were costing it dearly. The global office supplies leader found it increasingly difficult to compete on the Internet.

INDUSTRY SIx: TRANSPORTATION

CASE 3 0 Tesla Motors, Inc.: The First U.S. Car Company IPO Since 1956 30-1 (Contributor: Alan N. Hoffman) Tesla Motors was founded in 2004 to produce electric automobiles. Its first car, the Tesla Roadster, sold for US$101,000. It could accelerate from 0 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 faces increasing competition from established automakers. How can Tesla Motors succeed in an industry dominated by giant global competitors?

CASE 3 1 TomTom: New Competition Everywhere! 31-1 (Contributor: Alan N. Hoffman) TomTom, an Amsterdam-based company that provides navigation services and devices, led the navigation systems market in Europe and is second in popularity in the United States. However, the company is facing increasing competition from other platforms using GPS technology, like cell phones and Smartphones with built-in navigation functions. As its primary markets in the United States and Europe mature, how can the company ensure its future growth and success?

INDUSTRY SEVEN: MANUFACTURING

CASE 3 2 General Electric, GE Capital, and the Financial Crisis of 2008: The Best of the Worst in the Financial Sector? 32-1 (Contributor: Alan N. Hoffman) The financial services industry was, by definition, volatile, and GE Capital was particularly hard hit by the economic recession of 2008. With the credit markets illiquid and financial markets falling, GE Capital found it was overexposed to commercial real estate and foreign residential mortgages. At this point, GE’s parent corporation stepped in, began reorganizing GE Capital, and significantly downsized the unit. GE Capital hoped to see continued sustainable earnings growth with growing margins and lower portfolio risk, and to return money to investors and resume paying dividends to its parent company.

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CASE 3 3 Snap-on Tools: A Victim of Its Own Success 33-1 (Contributor: Alan N. Hoffman) For 93 years, Snap-on Tools had firmly established itself as an innovative premium tool manufacturer serving the automotive industry. In recent years, Snap-on Tools started to expand its product lines to engineering industries including aerospace, aviation, and oil and gas. It also began to give technical education to build the skilled labor base in the US—its largest market that constituted 65% of all revenue. Snap-on feared that its overdependence on the US market could make its business and operations vulnerable to country-specific trends as well as increase the company’s exposure to local factors such as severe weather conditions, labor strikes, or changes in regulations.

GLOSSARY G-1

NAME INDEx I-1

SUBJECT INDEx I-6

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Preface

Welcome to the 15th edition of Strategic Management and Business Policy! All of the chapters have been updated and we have added one new chapter on Global Strategy. In addition, we have added 13 brand-new cases (Target, American Red Cross, Sonic Restaurants, Harley Davidson, Staples, Chipotle, Uber, Pandora Internet Radio, Snap-on Tools, Google, Pepsi, Town Sports International, and JC Penney). Many of the cases are exclusive 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.

The theme that runs throughout all 13 chapters of this edition continues our view from the 14th edition that there are three strategic issues that comprise the corner- stone all organizations must build upon to push their businesses forward. Those are globalization, innovation, and sustainability. Each chapter incorporates specific vignettes about these three themes. We strive to be the most comprehensive and prac- tical strategy book on the market, with chapters ranging from corporate governance and social responsibility to competitive strategy, functional strategy, and strategic alliances.

FEATURES NEW TO THIS 15TH EDITION This edition of the text has:

■■ A completely new Chapter (9) on Global Strategy. While we discuss globalization in every chapter of the book, including a Global Issues section in each chapter, we have called out a stand-alone chapter to address the key issues of entry, inter- national coordination, stages of international development, international employ- ment, and measurement of performance.

■■ New and updated vignettes on sustainability (which is widely defined as business sustainability), globalization (which we view as an expectation of business), and innovation (which is the single most important element in achieving competitive advantage) appear in every chapter of the text.

■■ Every example, chapter opening, and story has been updated. This includes chap- ter opening vignettes examining companies such as: Tesla, Pizza Hut, UNIQLO, Kärcher, Purbani Group, and United Airlines among many others.

■■ Resource-based analysis and more specifically the VRIO framework (Chapter 5) has been added to the toolbox of students’ understanding of core competencies and competitive advantage with a significant addition of material and a practical example.

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■■ Extensive additions have been made to the text from both strategy research and practical experience.

■■ Thirteen new comprehensive cases have been added to support the 14 popular full- length cases and 6 mini-cases carried forward from past editions. Of the 33 cases appearing in this book, 19 are exclusive and do not appear in other books.

■■ One of the new cases deals with privacy (Google and the Right to Be Forgotten). ■■ One of the new cases deals with governance (American Red Cross). ■■ One of the new cases deals with conscious capitalism (Chipotle). ■■ Two of the new cases deal with international issues (Uber, Harley Davidson). ■■ One of the new cases involves Internet companies (Pandora Internet Radio). ■■ One of the new cases deals with Sports and Leisure (Town Sports Int’l). ■■ One of the new cases deals with Apparel (J.C. Penney). ■■ Three of the new cases deal with Food and Beverages (Pepsi, Sonic Restaurants). ■■ Two of the new cases deal with Retailing (Target, Staples). ■■ One of the new cases deals with Manufacturing (Snap-on Tools).

HOW THIS BOOk IS DIFFERENT FROM OTHER STRATEGY TExTBOOkS This book contains a Strategic Management Model that runs through the first 12 chap- ters 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 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:

■■ The External Factor Analysis (EFAS) Table in Chapter 4 ■■ This reduces the external opportunities and threats to the 8 to 10 most important

external factors facing management. ■■ The 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. ■■ The 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 act as a recommendation for the company’s future direction.

Suggestions for case analysis are provided in Appendix 13.B (end of Chapter 13) and contain step-by-step procedures on how to use a 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.

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FEATURES This edition contains many of the same features and content that helped make previ- ous editions successful. Some of the features include the following:

■■ A strategic management model runs throughout the first 12 chapters as a unify- ing concept. (Explained in Chapter 1)

■■ The strategic audit, a way to opera- tionalize the strategic decision- making process, serves as a checklist in case analysis. (Chapter 1)

■■ Corporate governance is examined in terms of the roles, responsibilities, and interactions of top management and the board of directors. (Chapter 2)

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

PREFACE 23

3534

Basic Concepts of Strategic Management

C h a p t e r 1 1-5. Describe the basic model of strategic man-

agement and its components 1-6. Identify some common triggering events

that act as stimuli for strategic change 1-7. Explain strategic decision-making modes 1-8. Use the strategic audit as a method

of analyzing corporate functions and activities

1-1. Discuss the benefits of strategic management

1-2. Explain how globalization, innovation, and environmental sustainability influence strategic management

1-3. Discuss the differences between the theo- ries of organizations

1-4. Discuss the Activities where learning orga- nizations excel

Learning Objectives After reading this chapter, you should be able to:

Toyota Motors Co. In 1937, Kiichiro Toyoda founded the Toyota Motor Corporation, head-

quartered in Aichi Prefecture, Japan. The company, now headed by Akio

Toyoda, the President and Representative Director, has a capital of around

$179,399 million. Its primary business activities involve automotive manu-

facturing. As of March 2016, the company employs around 348,977 people.

Sakichi Toyoda, the founder of Toyota Industries, set certain Guiding

Principles that reflect Toyota’s organizational culture and values, and are the

basis for the corporate management philosophy. These were first revised in

1992, and again in 1997, to support its operations in a multicultural environment.

They were modified in response to the societal changes and the company’s business

structure, which support its global vision, strategies, and operations worldwide. An example of its strategy to

keep with the changing times is the Toyota Way 2001, which focuses on CSR and customer orientation, innovative

management, and the nurturing of its employees’ creativity and teamwork, mutual trust, and respect between

labor and management. At the heart of the Toyota Way are two pillars—continuous improvement and respect

for people. These are supported by five values: challenge, continuous improvement (kaizen), seeing for yourself

(genchi genbutsu), respect, and teamwork.

In 1997, Thailand, a regional hub of Toyota’s auto manufacturing industry in ASEAN, faced an economic crisis

resulting from over-investment in real estate and a liberal financing policy. Toyota Motor Thailand Co., Ltd. (TMT)

subsequently encountered huge losses. To overcome the crisis various actions were taken—the TMT first requested

and received two capital injections, totaling US$200 million, from Toyota Motor Corporation in Japan. However, since

the automotive market was down by about 75%, the TMT had to use a job-sharing approach to retain its skilled, but

redundant, workforce. Together with this measure, the company observed it’s “no lay-off” policy by sending about

200 idle associates to Japan for training, while others assisted their local dealers. To avoid further losses, TMT focused

on 100% localization of parts and took advantage of export opportunities. Undertaking new business reforms, such

as online management of vehicle supply and demand and the formation of project teams in finance and marketing,

helped boost new vehicle sales. For dealers and suppliers, TMT granted credit lines and short-term loans.

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Putting Strategy into Action

Developing Long-range Plans

Monitoring Performance

Feedback/Learning: Make corrections as needed

Gathering Information

Strategy Implementation:

Strategy Formulation:

Evaluation and Control:

Environmental Scanning:

Societal Environment: General forces

Natural Environment: Resources and

climate

Task Environment:

Industry analysis

Structure: Chain of command

Culture: Beliefs, expectations,

values

Resources: Assets, skills, competencies,

knowledge

Activities needed to accomplish a plan Cost of the

programs

Sequence of steps needed to do the job

What results to accomplish by when Plan to

achieve the mission & objectives Broad

guidelines for decision making

Mission

Internal

External

Programs and Tactics

Budgets

Procedures

Performance

Objectives

Strategies

Policies

Actual results

Reason for existence

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Introduction to Strategic

Management and Business

Policy

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46 PART 1 Introduction to Strategic Management and Business Policy

Highly involved boards tend to be very active. They take their tasks of moni- toring, evaluating and influencing, and initiating and determining very seriously; they provide advice when necessary and keep management alert. As depicted in Figure 2–1, their heavy involvement in the strategic management process places them in the active participation or even catalyst positions. Although 74% of public cor- porations have periodic board meetings devoted primarily to the review of overall company strategy, the boards may not have had much influence in generating the plan itself.11 The same global survey of directors by McKinsey & Company found that directors devote more time to strategy than any other area. Those boards reporting high influence typically shared a common plan for creating value and had healthy debate about what actions the company should take to create value. Together with top management, these high-influence boards considered global trends and future scenarios and developed plans. In contrast, those boards with low influence tended not to do any of these things.12 Nevertheless, studies indicate that boards are becom- ing increasingly active.

These and other studies suggest that most large publicly owned corporations have boards that operate at some point between nominal and active participation. As a board becomes less involved in the affairs of the corporation, it moves farther to the left on the continuum (see Figure 2–1). On the far left are passive phantom or rubber- stamp boards that typically never initiate or determine strategy unless a crisis occurs. In these situations, the CEO who also usually serves as Chairman of the Board (although we see the same situation in active boards), personally nominates all directors and works to keep board members under his or her control by giving them the “mushroom treatment”—throw manure on them and keep them in the dark!

Generally, the smaller the corporation, the less active is its board of directors in strategic management.13 In an entrepreneurial venture, for example, the privately held corporation may be 100% owned by the founders—who also manage the company. In this case, there is no need for an active board to protect the interests of the owner- manager shareholders—the interests of the owners and the managers are identical.

FIGURE 2–1 Board of Directors’ Continuum

DEGREE OF INVOLVEMENT IN STRATEGIC MANAGEMENT

Low (Passive)

Rubber StampPhantom

Never knows what to do, if anything; no degree of involvement.

Formally reviews selected issues that o�cers bring to its attention.

Involved to a limited degree in the perfor- mance or review of selected key decisions, indicators, or programs of management.

Approves, questions, and makes final de- cisions on mis- sion, strategy, policies, and objectives. Has active board committees. Performs fiscal and manage- ment audits.

Takes the leading role in establishing and modifying the mission, objectives, strategy, and policies. It has a very active strategy committee.

Permits o�cers to make all decisions. It votes as the o�cers recom- mend on action issues.

Minimal Review

Nominal Participation

Active Participation Catalyst

High (Active)

Low High

SOURCE: T. L. Wheelen and J. D. Hunger, “Board of Directors’ Continuum,” Copyright © 1994 by Wheelen and Hunger Associates. Reprinted by permission.

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CHAPTER 3 Social Responsibility and Ethics in Strategic Management 73

a business corporation need profits to survive and grow. “Maximizing profits is like maximizing food.” Thus, contends Byron, maximization of profits cannot be the primary obligation of business.2

As shown in Figure 3–1, Archie Carroll proposed that the managers of business organizations have four responsibilities: economic, legal, ethical, and discretionary.3

1. Economic responsibilities of a business organization’s management are to produce goods and services of value to society so that the firm may repay its creditors and increase the wealth of its shareholders.

2. Legal responsibilities are defined by governments in laws that management is expected to obey. For example, U.S. business firms are required to hire and promote people based on their credentials rather than to discriminate on non-job-related characteristics such as race, gender, or religion.

3. Ethical responsibilities of an organization’s management are to follow the generally held beliefs about behavior in a society. For example, society generally expects firms to work with the employees and the community in planning for layoffs, even though no law may require this. The affected people can get very upset if an organization’s management fails to act according to generally prevailing ethical values.

4. Discretionary responsibilities are the purely voluntary obligations a corpora- tion assumes. Examples are philanthropic contributions, training the hard-core unemployed, and providing day-care centers. The difference between ethical and discretionary responsibilities is that few people expect an organization to fulfill discretionary responsibilities, whereas many expect an organization to fulfill ethi- cal ones.4

Carroll lists these four responsibilities in order of priority. A business firm must first make a profit to satisfy its economic responsibilities. To continue in existence, the firm must follow the laws, thus fulfilling its legal responsibilities. There is evidence that com- panies found guilty of violating laws have lower profits and sales growth after convic- tion.5 On this point, Carroll and Friedman are in agreement. Carroll, however, goes further by arguing that business managers have responsibilities beyond economic and legal ones.

Having satisfied the two basic responsibilities, according to Carroll, a firm should look to fulfilling its social responsibilities. Social responsibility, therefore, includes both ethical and discretionary, but not economic and legal, responsibilities. A firm can fulfill its ethical responsibilities by taking actions that society tends to value but has not yet put into law. When ethical responsibilities are satisfied, a firm can focus on discretion- ary responsibilities—purely voluntary actions that society has not yet decided to expect

FIGURE 3–1 Responsibilities of

Business Discretionary

Ethical

LegalEconomic

Social Responsibilities

SOURCE: Suggested by Archie Carroll in A. B. Carroll, “A Three Dimensional Conceptual Model of Corpo- rate 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.

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280

Strategy Implementation: Global Strategy

C H A P T E R 9

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Societal Environment: General forces

Natural Environment: Resources and

climate

Task Environment:

Industry analysis

Structure: Chain of command

Culture: Beliefs, expectations,

values

Resources: Assets, skills, competencies,

knowledge

Activities needed to accomplish a plan Cost of the

programs

Sequence of steps needed to do the job

Reason for existence

What results to accomplish by when Plan to

achieve the mission & objectives Broad

guidelines for decision making

RReason ffor

Mission

NNaturall

Structure:

WhWhatt l

h PlPlan to

hi the

BroB dad id li

A tActi iivitities d d

h CCostt of tf thhe

SeqSequenuencece f

Internal

External

Programs and Tactics

Budgets

Procedures

Performance

Objectives

Strategies

Policies

Actual results

Putting Strategy into Action

Strategy Implementation:

Developing Long-range Plans

Strategy Formulation:

Monitoring Performance

Evaluation and Control:

Gathering Information

Environmental Scanning:

Feedback/Learning: Make corrections as needed

281

9-4. Explain how companies can improve their staffing efforts as they expand beyond their home country

9-5. Discuss the unique issues related to Mea- suring Organizational performance that are presented with the administration of atruly international company

9-1. Describe the means of entry by which an organization can do business in another country

9-2. Explain the elements of International Stra- tegic Alliances that lead to success

9-3. Discuss the stages of International Development

Learning Objectives After reading this chapter, you should be able to:

U.S. Immigration Policy and Founders of Entrepre- neurial Startups Few issues are as contentious around the world as is immigration and

foreign-born workers. The whole conversation gets more confused in

the United States when foreign-born students of U.S. colleges and uni-

versities start-up new companies. There are no visas specifically designed

for foreign-born students who start up their own companies. The focus

of most visa efforts revolves around the H-1B for ‘skilled’ foreign workers.

There is a lottery each year for the 65,000 slots and the additional 20,000 slots for

graduates with advanced degrees. All of these slots presume that the person receiving

the visa is an employee who works for an established U.S. company. The founder of a new firm might not be

receiving compensation early on and even if he or she is paid, they are not employees but owners.

According to the Kauffman Foundation while 13% of U.S. population is foreign-born, they make up 24%

of the tech and engineering companies formed and a whopping 44% of those formed in the Silicon Valley.

These entrepreneurs have a long visa battle ahead of them to be able to stay in the United States with their

new companies. They generally apply for a so-called ‘rock star’ visa (Justin Beiberand other artists have one).

Among the founders that failed to secure this visa and left the country was WhatsApp CEO Jan Koum, Snapdeal

founder Kunal Bahl, and Instagram’s technical lead Mike Krieger. Bahl graduated from Wharton and has now

built a business valued at over US$5 Billion with more than 4,000 employees in India.

Addressing how to operate a global company involves a number of difficult operating decisions that

includes the staffing of the company and how foreign-born workers are treated.

SOURCES: “No Country for Startup Founders,” Bloomberg BusinessWeek, February 15–21, 2016, pp. 27–28 D. Stangler& J. Wiens, “The Economic Case for Welcoming Immigrant Entrepreneurs,” EwingMarion Kauffman Foundation, September 8, 2015 (http://www.kauffman.org/what-we-do/resources/entrepreneurship-policy-digest/the-economic-case-for-welcoming -immigrant-entrepreneurs); L. Robbins, “New U.S. Rule Extends Stay for Some Foreign Graduates,” New York Times, March 9, 2016 (http://www.nytimes.com/2016/03/09/nyregion/new-us-rule-extends-stay-for-some-foreign-graduates .html?_r=0).

Pearson MyLab Management®

■■ Equal emphasis is placed on environmental scanning of the societal environment as well as on the task environment. Topics include fore- casting and Miles and Snow’s typology in addi- tion to competitive intelligence techniques and Porter’s industry analysis. (Chapter 4)

■■ Core and distinctive competencies are exam- ined within the framework of the resource- based view of the firm and utilizing the VRIO framework. (Chapter 5)

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

■■ Internal and external strategic factors are em- phasized 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)

■■ Three chapters deal with issues in strategy implementation, such as organizational and job design, as well as strategy-manager fit, action planning, and corporate culture. In addition we address Global Strategy as a unique im- plementation issue. (Chapters 9, 10 and 11)

■■ A separate chapter on evaluation and control explains the impor-

tance of measure- ment and incentives to organizational p e r f o r m a n c e . (Chapter 12)

■■ Suggestions for in-depth case analysis provide a complete listing of financial ratios, recommendations for oral and written analysis, and ideas for further research. (Chapter 13)

24 PREFACE

134 PART 2 Scanning the Environment

Pierre Beaudoin stepped down in 2015 as the company continued to spiral down-

ward. The C-Series has yet to make any real penetration in the market with orders of less

than 250 planes (and none in the past 1½ years) as of 12/31/15 compared to 3,072 orders

for Boeing’s 737 and 4,471 for Airbus’s 320. As the investment of billions in the program

was underway, the company decided to launch two new business jets further stretching

resources.

The company has invested over $5 billion in the C-Series alone and has had a net negative

cash burn for the past five years. The stock is now worth one-tenth of what it was in 2011

and the company is asking for a bailout from the Canadian government as they lay off nearly

10% of their workforce.

SOURCES: S. Deveau & F. Tomesco, “Why Bombardier Is Struggling to Build Bigger Planes,” Bloomberg Business, February 4, 2016; A. Petroff, “Bombardier cutting 7,000 jobs,” CNN Money; February 17, 2016 (money.cnn.com/2016/02/17/news/companies/bombardier-job-cuts-canada-europe/index.html); http://www.bombardier.com/en/about-us/history.html; F. Tomesco, “Quebec eyes fresh Bombardier aid absent federal investment,” The Globe and Mail, February 10, 2016, http://www.theglobeandmail.com /report-on-business/quebec-eyes-fresh-bombardier-aid-absent-federal-investment/article28701038/

A Resource-Based Approach to Organizational analysis—Vrio

Scanning and analyzing the external environment for opportunities and threats is nec- essary for the firm to be able to understand its competitive environment and its place in that environment. It is the absolute starting place for strategic analysis. However, in order for the organization to thrive, the senior leadership team must look within the corporation itself to identify internal strategic factors—critical strengths and weaknesses that are likely to determine whether a firm will be able to take advantage of opportuni- ties while avoiding threats. This internal scanning, often referred to as organizational analysis, is concerned with identifying, developing, and taking advantage of an organiza- tion’s resources and competencies.

CORE AND DISTINCTIVE COMPETENCIES Resources are an organization’s assets and are thus the basic building blocks of the organization. They include tangible assets (such as its plant, equipment, finances, and location), human assets (the number of employees, their skills, and motivation), and intangible assets (such as its technology [patents and copyrights], culture, and reputa- tion).1 Capabilities refer to a corporation’s ability to exploit its resources. They consist of business processes and routines that manage the interaction among resources to turn inputs into outputs. For example, a company’s marketing capability can be based on the interaction among its marketing specialists, distribution channels, and salespeople. A capability is functionally based and is resident in a particular function. Thus, there are marketing capabilities, manufacturing capabilities, and human resource manage- ment capabilities. When these capabilities are constantly being changed and recon- figured to make them more adaptive to an uncertain environment, they are called dynamic capabilities.2 A competency is a cross-functional integration and coordination

5-1. Apply the resource-based view of the firm and the VRIO framework to determine core and distinctive competencies

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324

Strategy Implementation: Staf�ng and Directing

C H A P T E R 11

Improve Your Grade! Over 10 million students improved their results using the Pearson MyLabs. Visit mymanagementlab.com for simulations, tutorials, and end-of-chapter problems.

Societal Environment: General forces

Natural Environment: Resources and

climate

Task Environment:

Industry analysis

Structure: Chain of command

Culture: Beliefs, expectations,

values

Resources: Assets, skills, competencies,

knowledge

Activities needed to accomplish a plan Cost of the

programs

Sequence of steps needed to do the job

Reason for existence

What results to accomplish by when Plan to

achieve the mission & objectives Broad

guidelines for decision making

RReason ffor

Mission

NNaturall

Structure:

WhWhatt l

h PlPlan to

hi the

BroB dad id li

A tActi iivitities d d

h CCostt of tf thhe

SeqSequenuencece f

Internal

External

Programs and Tactics

Budgets

Procedures

Performance

Objectives

Strategies

Policies

Actual results

Putting Strategy into Action

Strategy Implementation:

Developing Long-range Plans

Strategy Formulation:

Monitoring Performance

Evaluation and Control:

Gathering Information

Environmental Scanning:

Feedback/Learning: Make corrections as needed

Pearson MyLab Management®

325

11-3. Utilize an action planning framework to implement an organization’s MBO and TQM initiatives

11-1. Explain the link between strategy and staffing decisions

11-2. Discuss how leaders manage corporate culture

Learning Objectives After reading this chapter, you should be able to:

Workplace Discrimination and Public Image While the legal context of what constitutes workplace discrimination

is constantly evolving, public perception can impact companies in vir-

tually any industry. In 2015, the U.S. Equal Employment Opportunity

Commission (EEOC) received almost 90,000 charges of workplace dis-

crimination. These included discrimination complaints related to race,

color, sex, age, religion, pregnancy, disability, genetic information, and

national origin.

One of the more contentious issues has developed around the Affordable

Care Act (ACA), a movement nationwide to recognize same-sex marriages, and theŽLGBT

community. Companies including Wal*Mart, BNSF Railroad, Saks Fifth Avenue, SkyWest Airlines, and Pepperdine

University have cases pending against them in the federal court system. These plaintiffs argue that they are

being discriminated against because of their sex.

Wal*Mart extended spousal health coverage to same-sex marriages (where legal) in January 2014, however

those denied prior to that point have formed a class action suit against the company for discriminating based

upon the sex of the partner. As the country moved toward increasing recognition of same-sex marriage (37

states had statutes on the books before the June 2015 Supreme Court ruling that allowed same-sex couples

to marry) more and more companies decided to include same-sex married couples in their employees benefit

offerings. Today, it presents not only a business issue, but a public perception issue. Should Wal*Mart fight the

retroactive assignment of benefits or should the company settle with plaintiffs?

SOURCES: “If You Are Anti Are You Anti?” Bloomberg BusinessWeek, February 22–28, 2016, pp. 23–24; “State Same-Sex Marriage State Laws Map,” Governing, (http://www.governing.com/gov-data/same-sex-marriage-civil-unions-doma-laws-by -state.html) (Accessed 3/17/16); S. Heasley, “Workplace Disability Discrimination Claims At Record High,” Disability Scoop, February 17, 2016 (https://www.disabilityscoop.com/2016/02/17/workplace-claims-record-high/21926/).

A01_WHEE5488_15_GE_FM.indd 24 7/13/17 4:01 PM

http://www.bombardier.com/en/about-us/history.html
http://www.theglobeandmail.com//report-on-business/quebec-eyes-fresh-bombardier-aid-absent-federal-investment/article28701038
http://www.theglobeandmail.com//report-on-business/quebec-eyes-fresh-bombardier-aid-absent-federal-investment/article28701038
http://www.governing.com/gov-data/same-sex-marriage-civil-unions-doma-laws-by-state.html
http://www.governing.com/gov-data/same-sex-marriage-civil-unions-doma-laws-by-state.html
https://www.disabilityscoop.com/2016/02/17/workplace-claims-record-high/21926
■■ The strategic audit worksheet is based on the time-tested strategic audit and is designed to help students organize and structure daily case prepa- ration in a brief period of time. The worksheet works exceedingly well for checking the level of daily student case preparation—especially for open class discussions of cases. (Chapter 13)

■■ An experiential exercise focusing on the material covered in each chapter helps the reader apply strategic con- cepts to an actual situation.

■■ A list of key terms and the pages on which they are discussed let the reader keep track of important concepts as they are introduced in each chapter.

PREFACE 25

FIGURE 13–1 Strategic Audit

Worksheet Analysi s

Strategic Audit Heading (+) Factors (–) Factors Comments

I. Current Situation

A. Past Corporate Performance Indexes

B. Strategic Posture: Current Mission Current Objectives Current Strategies Current Policies

SWOT Analysis Begins:

II. Corporate Governance

A. Board of Directors

B. Top Management

III. External Environment (EFAS): Opportunities and Threats (SWOT)

A. Natural Environment

B. Societal Environment

C. Task Environment (Industry Analysis)

IV . Internal Environment (IFAS): Strengths and Weaknesses (SWOT)

A. Corporate Structure

B. Corporate Culture

C. Corporate Resources

1. Marketing

2. Finance

3. Research and Development

4. Operations and Logistics

5. Human Resources

6. Information Technology

V. Analysis of Strategic Factors (SFAS)

A. Key Internal and External Strategic Factors (SWOT)

B. Review of Mission and Objectives

SWOT Analysis Ends. Recommendation Begins:

VI. Alternatives and Recommendations

A. Strategic Alternatives—pros and cons

B. Recommended Strategy

VII. Implementation

VIII. Evaluation and Control

NOTE: See the complete Strategic Audit on pages 32–39. It lists the pages in the book that discuss each of the eight headings. SOURCE: T. L. Wheelen and J. D. Hunger, “Strategic Audit Worksheet.” Copyright © 1985, 1986, 1987, 1988, 1989, 2005, and 2009 by T. L. Wheelen. Copyright © 1989, 2005, and 2009 by Wheelen and Hunger Associ- ates. Revised 1991, 1994, and 1997. Reprinted by permission. Additional copies available for classroom use in Part D of the Case Instructor’s Manual and on the Prentice Hall Web site (www.prenhall.com/wheelen).

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162 PART 2 Scanning the Environment

MyManagementLab® Go to mymanagementlab.com to complete the problems marked with this icon .

End of Chapter SUMMARY Every day, about 17 truckloads of used diesel engines and other parts are dumped at a receiving facility at Caterpillar’s remanufacturing plant in Corinth, Mississippi. The filthy iron engines are then broken down by two workers, who manually hammer and drill for half a day until they have taken every bolt off the engine and put each component into its own bin. The engines are then cleaned and remade at half of the cost of a new engine and sold for a tidy profit. This system works at Caterpillar because, as a general rule, 70% of the cost to build something new is in the materials and 30% is in the labor. Remanufactur- ing simply starts the manufacturing process over again with materials that are essentially free and which already contain most of the energy costs needed to make them. The would- be discards become fodder for the next product, eliminating waste, and cutting costs. Caterpillar’s management was so impressed by the remanufacturing operation that they made the business a separate division in 2005. The unit earned more than US$1 billion in sales in 2005 and by 2012 employed more than 8500 workers in 16 countries.

Caterpillar’s remanufacturing unit was successful not only because of its ability to wring productivity out of materials and labor, but also because it designed its prod- ucts for reuse. Before they are built new, remanufactured products must be designed for disassembly. In order to achieve this, Caterpillar asks its designers to check a “Reman” box on Caterpillar’s product development checklist. The company also needs to know where its products are being used in order to take them back—known as the art of reverse logistics. This is achieved by Caterpillar’s excellent relationship with its dealers throughout the world, as well as through financial incentives. For example, when a customer orders a crankshaft, that customer is offered a remanu- factured one for half the cost of a new one—assuming the customer turns in the old crankshaft to Caterpillar. The products also should be built for performance with little regard for changing fashion. Because diesel engines change little from year to year, a remanufactured engine is very similar to a new engine and might perform even better.

Monitoring the external environment is only one part of environmental scanning. Strategists also need to scan a corporation’s internal environment to identify its resources, capabilities, and competencies. What are its strengths and weaknesses? At Caterpillar, management clearly noted that the environment was changing in a way to make its remanu- factured product more desirable. It took advantage of its strengths in manufacturing and distribution to offer a recycling service for its current customers and a low-cost alternative product for those who could not afford a new Caterpillar engine. It also happened to be an environmentally friendly, sustainable business model. Caterpillar’s management felt that remanufacturing thus provided them with a strategic advantage over competitors who don’t remanufacture. This is an example of a company using its capabilities in key functional areas to expand its business by moving into a new profitable position on its value chain.87

brand (p. 149) business model (p. 138) capabilities (p. 134) capital budgeting (p. 150)

competency (p. 134) conglomerate structure (p. 145) a core competency (p. 135) corporate culture (p. 145)

corporate reputation (p. 150) distinctive competencies (p. 135) divisional structure (p. 144) economies of scale (p. 154)

K E Y T E R M S

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286 PART 4 Strategy Implementation and Control

Simultaneous pressures for decentralization to be locally responsive and central- ization to be maximally efficient are causing interesting structural adjustments in most large corporations. This is what is meant by the phrase “think globally, act locally.” Companies are attempting to decentralize those operations that are culturally oriented and closest to the customers—manufacturing, marketing, and human resources. At the same time, the companies are consolidating less visible internal functions, such as research and development, finance, and information systems, where there can be significant economies of scale.

End of Chapter SUMMARY Strategy implementation is where “the rubber hits the road.” Environmental scanning and strategy formulation are crucial to strategic management but are only the beginning of the process. The failure to carry a strategic plan into the day-to-day operations of the workplace is a major reason why strategic planning often fails to achieve its objectives. It is discouraging to note that in one study nearly 70% of the strategic plans were never successfully implemented.76

For a strategy to be successfully implemented, it must be made action-oriented. This is done through a series of programs that are funded through specific budgets and con- tain new detailed procedures. This is what Sergio Marchionne did when he implemented a turnaround strategy as the new Fiat Group CEO in 2004. He attacked the lethargic, bureaucratic system by flattening Fiat’s structure and giving younger managers a larger amount of authority and responsibility. He and other managers worked to reduce the number of auto platforms from 19 to 6 by 2012. The time from the completion of the design process to new car production was cut from 26 to 18 months. By 2008, the Fiat auto unit was again profitable. Marchionne reintroduced Fiat to the U.S. market in 2012 after a 27-year absence.77 Unfortunately, Fiat struggled to gain any traction in the U.S. market. Despite a strong marketing campaign and a number of cars designed

FIGURE 10–2 Geographic Area

Structure for an MNC Board of Directors

President

Operating Companies

U.S.

Operating Companies

Europe*

Operating Companies

Latin America

Operating Companies

Africa

Operating Companies

Asia*

Product Group

B

Product Group

D

Corporate Sta�

Product Group

A

Product Group

B

Product Group

C

R&D

*NOTE: Because of space limitations, product groups for only Europe and Asia are shown here.

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CHAPTER 10 Strategy Implementation: Organizing and Structure 319

Pearson MyLab Management® Go to mymanagementlab.com to complete the problems marked with this icon .

specifically for the market, by 2016 sales had stalled at 44,000 cars a year. The company has remained strongly profitable and even acquired 100% of Chrysler in 2014.78

This chapter explains how jobs and organizational units can be designed to sup- port a change in strategy. We will continue with staffing and directing issues in strategy implementation in the next chapter.

Pearson MyLab Management® Go to mymanagementlab.com for the following assisted-graded writing questions:

10-1. How do timing tactics impact the strategy implementation efforts of a company? 10-2. What issues would you consider to be the most important for a company that is considering the use of a func-

tional structure?

budget (p. 301) cellular/modular organization

(p. 314) first mover (p. 299) geographic-area structure (p. 317) job design (p. 316) late movers (p. 299) market location tactic (p. 299)

matrix structures (p. 310) network structure (p. 312) organizational life cycle (p. 309) procedures (p. 301) product-group structure (p. 317) program (p. 298) reengineering (p. 314)

Six Sigma (p. 315) stages of corporate development

(p. 304) strategy implementation (p. 296) structure follows strategy (p. 303) synergy (p. 302) timing tactic (p. 299) virtual organization (p. 312)

K E Y T E R M S

D I S C U S S I O N Q U E S T I O N S 10-3. Staffing decisions are considered an important

component of strategic planning and the man- agement process. Why? How is strategy imple- mentation process connected to the decisions resulting from a staffing strategy?

10-4. Why is it necessary for an organization to align its managers with the corporate strategy to ensure better organizational performance?

10-5. Is downsizing a good strategy for revamping an organization’s competitiveness when it is facing major competitive threats in the market?

10-6. Can organizations be controlled by culture? Explain.

10-7. How is an international staffing strategy different from a domestic one?

S T R A T E G I C P R A C T I C E E X E R C I S E The Synergy Game Yolanda Sarason and Catherine Banbury

Setup

Put three to five chairs on either side of a room, facing each other, in the front of the class. Put a table in the middle, with a bell in the middle of the table.

Procedure

The instructor/moderator divides the class into teams of three to five people. Each team selects a name for itself. The instructor/moderator lists the team names on the board. The first two teams come to the front and sit in the chairs facing each other. The instruc- tor/moderator reads a list of products or services

M10_WHEE5488_15_GE_C10.indd 319 6/20/17 7:55 AM

A01_WHEE5488_15_GE_FM.indd 25 7/13/17 4:01 PM

http://www.prenhall.com/wheelen
■■ Learning objectives begin each chapter. ■■ Timely, well-researched, and class-tested cases deal with interesting companies

and industries. Many of the cases are about well-known, publicly held corpora- tions—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 12 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 understanding 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. Extensive 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.

SUPPLEMENTS At www.pearsonglobaleditions.com/Wheelen instructors can access teaching resources available with this text in a downloadable, digital format. Registra- tion is simple and gives you immediate access to new titles and editions. Please contact your Pearson sales representative for your access code. As a registered f aculty member, you can download resource files and receive immediate access and i nstructions for installing course management content on your campus server. In case you ever need assistance, our dedicated technical support team is ready to assist instructors with questions about the media supplements that accompany this text. Visit for answers to frequently asked questions. This title has the follow- ing electronic resources.