What type of diversification strategy is amazon pursuing

Case Study: Amazon

STRATEGIC M a n a g e m e n : ’

EDITION Concepts and Cases

PEARSON

A COM PETITIVE ADVANTAGE APPRO ACH

G LO B A L EDITION

Fred R. David Francis Marion University Florence, South Carolina

Forest R. David Strategic Planning Consultant

Boston Columbus Indianapolis New York San Francisco Upper Saddle River

Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montréal Toronto

Delhi Mexico City São Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo

Brief Contents

Preface 15

Acknowledgments 25

About the Authors 27

Chapter 1 Strategic Management Essentials 37

THE COHESION CASE: ADIDAS GROUP-2013 58

Chapter 2 Outside-USA Strategic Planning 75

Chapter 3 Ethics/Social Responsibility/Sustainability 109

Chapter 4 Types of Strategies 131

Chapters Vision and Mission Analysis 169

Chapter 6 The Internal Audit 187

Chapter 7 The External Audit 225

Chapter 8 Strategy Generation and Selection 255

Chapter 9 Strategy Implementation 295

Chapter 10 Strategy Execution 331

Chapter 11 Strategy M onitoring 371

Appendix 1 Guidelines for Case Analysis 393

Glossary 662

Name Index 673

Subject Index 677

5

Contents

Preface 15

Acknowledgments 25

About the Authors 27

Chapter 1 Strategic Management Essentials 37

SINGAPORE AIRLINES: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 38

What Is Strategic Management? 39 Defining Strategic Management 39 ■ Stages of Strategic Management 39 ■ Integrating Intuition and Analysis 40 ■ Adapting to Change 41

Key Terms in Strategic Management 42 Competitive Advantage 42 ■ Strategists 43 ■ Vision and Mission Statements 44 ■ External Opportunities and Threats 44 ■ Internal Strengths and Weaknesses 44 ■ Long-Term Objectives 45 ■ Strategies 45 Annual Objectives 45 ■ Policies 46

The Strategic-Management Model 47 Benefits of Strategic Management 48

Financial Benefits 49 ■ Nonfinancial Benefits 50 Why Some Firms Do No Strategic Planning 50 Pitfalls in Strategic Planning 50 Guidelines for Effective Strategic Management 51 Comparing Business and Military Strategy 52 Special Note to Students 53

THE COHESION CASE: ADIDAS GROUP—2013 58 ASSURANCE OF LEARNING EXERCISES 69 Assurance of Learning Exercise 1 A: Assess Singapore Airline's Most Recent Quarterly Performance Data 69 Assurance of Learning Exercise 1B: Gathering Strategy Information onadidasAG 70 Assurance of Learning Exercise 1C: Getting Familiar with the Free Excel Student Template 70 Assurance of Learning Exercise 1D: Evaluating An Oral Student Presentation 71 Assurance of Learning Exercise 1E: Strategic Planning at Nestle 71 Assurance of Learning Exercise 1F: Interviewing Local Strategists 72

Chapter 2 Outside-USA Strategic Planning 75 HONDA: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 76

Multinational Organizations 79 Advantages and Disadvantages of International Operations 80 The Global Challenge 81

Globalization 82

Corporate Tax Rates Globally 82

United States versus Foreign Business Cultures 84 Communication Differences Across Countries 87 Business Culture Across Countries 87

Mexico— Business Culture 88 ■ Japan—Business Culture 89 ■ Brazil—Business Culture 90 ■ Germany— Business Culture 90 ■ Egypt—Business Culture 91 ■ China— Business Culture 92 ■ India— Business Culture 92 ■ Nigeria—Business Culture 93

Business Climate Across Countries/Continents 94 Union Membership Across Europe 94 ■ African Countries 95 ■ China 97 ■ Philippines 99 ■ Taiwan 99 ■ India 99 ■ Germany 100 ■ Mexico 101

Special Note to Students 102 ASSURANCE OF LEARNING EXERCISES 104 Assurance of Learning Exercise 2A: The adidas Group wants to enter Africa. Help them. 104 Assurance of Learning Exercise 2B: Assessing Differences in Culture Across Countries 105 Assurance of Learning Exercise 2C: Honda Motor Company wants to enter the Vietnamese market. Help them. 105 Assurance of Learning Exercise 2D: Does My University Recruit in Foreign Countries? 106

Chapter 3 Ethics/Social Responsibility/ Sustainability 109

Business Ethics 110 NESTLE: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 110 Code of Business Ethics 112 ■ An Ethics Culture 113 ■ Whistle-Blowing 113 ■ Bribes 114 ■ Workplace Romance 115

Social Responsibility 117 Social Policy 118 ■ Social Policies on Retirement 118

Environmental Sustainability 119 What Is a Sustainability Report? 120 ■ Lack of Standards Changing 120 ■ Managing Environmental Affairs in the Firm 121 ■ IS0 14000/14001 Certification 122 ■ Wildlife 122 ■ Solar Power 123

Special Note to Students 124 ASSURANCE OF LEARNING EXERCISES 126 Assurance of Learning Exercise 3A: Sustainability and Nestle 126 Assurance of Learning Exercise 3B: How Does My Municipality Compare To Others on Being Pollution-Safe? 127 Assurance of Learning Exercise 3C: Compare adidas AG versus Nike on Social Responsibility 127 Assurance of Learning Exercise 3D: How Do You Rate adidas AG's Sustainability Efforts? 127 Assurance of Learning Exercise 3E: How Do You Rate Nestles Sustainability Efforts? 127 Assurance of Learning Exercise 3F:The Ethics of Spying on Competitors 128

7

8 CONTENTS

Chapter 4 Types of Strategies 131 Long-Term Objectives 132

The Nature of Long-Term Objectives 132 PETRONAS: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 132 Financial versus Strategic Objectives 133 ■ Not Managing by Objectives 134

Types of Strategies 134 Levels of Strategies 136

Integration Strategies 137 Forward Integration 137 ■ Backward Integration 139 ■ Horizontal Integration 140

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

Diversification Strategies 143 Related Diversification 144 ■ Unrelated Diversification 145

Defensive Strategies 146 Retrenchment 146 ■ Divestiture 147 ■ Liquidation 148

Michael Porter's Five Generic Strategies 149 Cost Leadership Strategies (Type 1 and Type 2) 149 ■ Differentiation Strategies (Type 3) 151 ■ Focus Strategies (Type 4 and Type 5) 152 ■ Strategies for Competing in Turbulent, High-Velocity Markets 153

Means for Achieving Strategies 153 Cooperation Among Competitors 153 ■ Joint Venture and Partnering 154 ■ Merger/Acquisition 155 ■ Private-Equity Acquisitions 157 ■ First Mover Advantages 157 ■ Outsourcing and Reshoring 158

Strategic Management in Nonprofit and Governmental Organizations 159

Educational Institutions 159 ■ Medical Organizations 160 ■ Governmental Agencies and Departments 160

Strategic Management in Small Firms 161 Special Note to Students 161

ASSURANCE OF LEARNING EXERCISES 164 Assurance of Learning Exercise 4A: Market Development: Petronas 164 Assurance of Learning Exercise 4B: Alternative Strategies for Petronas 164 Assurance of Learning Exercise 4C: Private-Equity Acquisitions 164 Assurance of Learning Exercise 4D: The strategies of adidas AG: 2013-2015 165 Assurance of Learning Exercise 4E: Lessons in Doing Business Globally 165 Assurance of Learning Exercise 4F: Petronas 2013-2015 165 Assurance of Learning Exercise 4G: What Strategies Are Most Risky? 166 Assurance of Learning Exercise 4H: Exploring Bankruptcy 166 Assurance of Learning Exercise 41: Examining Strategy Articles 166 Assurance of Learning Exercise 4J: Classifying Some Strategies 166

Chapter 5 Vision and Mission Analysis 169 SAMSUNG: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 170

What Do We Want to Become? 171 What Is Our Business? 171

Vision versus Mission 173 ■ Vision Statement Analysis 173 « T h e Process of Developing Vision and Mission Statements 173

Importance (Benefits) of Vision and Mission Statements 174 A Resolution of Divergent Views 174

Characteristics of a Mission Statement 176 A Declaration of Attitude 176 ■ A Customer Orientation 177 ■ Mission Statement Components 177

Writing and Evaluating Mission Statements 179 Special Note to Students 180

ASSURANCE OF LEARNING EXERCISES 182 Assurance of Learning Exercise 5A: Examining Potential Changes Needed in a Firm's Vision/Mission 182 Assurance of Learning Exercise 5B: Studying an Alternative View of Mission Statement Content 183 Assurance of Learning Exercise 5C: Evaluating Mission Statements 183 Assurance of Learning Exercise 5D: Evaluating the Mission Statement of Under Armour—a Competitor of adidas AG 184 Assurance of Learning Exercise 5E: Selecting the Best Vision and Mission Statements in a Given Industry 184 Assurance of Learning Exercise 5F: Writing an Excellent Vision and Mission Statement for Novartis AG 185

Chapter 6 The Internal Audit 187 The Nature of an Internal Audit 188

VOLKSWAGEN: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 188 Key Internal Forces 189 ■ The Process of Performing an Internal Audit 190

The Resource-Based View 191 Integrating Strategy and Culture 192 Management 194

Planning 194 ■ Organizing 196 ■ Motivating 197 ■ Staffing 197 ■ Controlling 198 ■ Management Audit Checklist of Questions 198

Marketing 198 Customer Analysis 199 ■ Selling Products and Services 199 ■ Product and Service Planning 200 ■ Pricing 200 ■ Distribution 201 ■ Marketing Research 201 ■ CostI Benefit Analysis 202 ■ Marketing Audit Checklist of Questions 202

Finance and Accounting 202 Finance and Accounting Functions 202 ■ Basic Types of Financial Ratios 204

Breakeven Analysis 207 Finance and Accounting Audit Checklist 209

Production and Operations 209 Production and Operations Audit Checklist 211

Research and Development 211 Internal and External Research and Development 212 ■ Research and Development Audit 213

Management Information Systems 213 Management Information Systems Audit 213

Value Chain Analysis 213 Benchmarking 214

The Internal Factor Evaluation Matrix 216 Special Note to Students 218

ASSURANCE OF LEARNING EXERCISES 221 Assurance of Learning Exercise 6A: Develop a Corporate IFE Matrix for Volkswagen Group 221 Assurance of Learning Exercise 6B: Should VW Deploy More Resources or Less Outside of the USA? 222

CONTENTS 9

Assurance of Learning Exercise 6C: Apply Breakeven Analysis 222 Assurance of Learning Exercise 6D: Performing a Financial Ratio Analysis for adidas AG 222 Assurance of Learning Exercise 6E: Constructing an IFE Matrix for adidas AG 222 Assurance of Learning Exercise 6F: Analyzing Your College or University's Internal Strategic Situation 223

Chapter 7 The External Audit 225 The Nature of an External Audit 226

MICHELIN: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 226 Key External Forces 227 ■ The Process of Performing an External Audit 228

The Industrial Organization (I/O) View 229 Economic Forces 229 Social, Cultural, Demographic, and Natural Environment Forces 231 Political, Governmental, and Legal Forces 232

Labor Unions 234 Technological Forces 236 Competitive Forces 237

Competitive Intelligence Programs 238 ■ Market Commonality and Resource Similarity 239

Competitive Analysis: Porter's Five-Forces Model 239 Rivalry Among Competing Firms 240 ■ Potential Entry of New Competitors 240 ■ Potential Development of Substitute Products 241 ■ Bargaining Power of Suppliers 241 ■ Bargaining Power of Consumers 242

Sources of External Information 242 Forecasting Tools and Techniques 243

Making Assumptions 243 Industry Analysis: The External Factor Evaluation Matrix 244 The Competitive Profile Matrix 245 Special Note To Students 247

ASSURANCE OF LEARNING EXERCISES 250 Assurance of Learning Exercise 7A: Michelin and Africa: An External Assessment 250 Assurance of Learning Exercise 7B: Preparing a CPM for Michelin Based on Countries Rather than Companies 251 Assurance of Learning Exercise 7C: Develop Divisional Michelin EFE Matrices 251 Assurance of Learning Exercise 7D: Developing an EFE Matrix for adidas AG 251 Assurance of Learning Exercise 7E: The External Assessment 252 Assurance of Learning Exercise 7F: Developing a CPM for Michelin 252 Assurance of Learning Exercise 7G: Developing a CPM for adidas AG 252 Assurance of Learning Exercise 7H: Analyzing Your College or University's External Strategic Situation 253

Chapter 8 Strategy Generation and Selection 255

The Nature of Strategy Analysis and Choice 256 The Process of Generating and Selecting Strategies 256

UNILEVER: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 256

A Comprehensive Strategy-Formulation Analytical Framework 258 The Input Stage 259

The Matching Stage 259 The SWOT Matrix 259 The Strategic Position and Action Evaluation (SPACE) Matrix 262 The Boston Consulting Group (BCG) Matrix 267 The Internal-External (IE) Matrix 270 The Grand Strategy Matrix 273 The Decision Stage 275 The Quantitative Strategic Planning Matrix (QSPM) 275

Positive Features and Limitations of the QSPM 280 Cultural Aspects of Strategy Choice 280 The Politics of Strategy Choice 280 Governance Issues 281 Special Note to Students 284

ASSURANCE OF LEARNING EXERCISES 287 Assurance of Learning Exercise 8A: Should Unilever Penetrate Southeast Asia Further? 287 Assurance of Learning Exercise 8B: Perform a SWOT Analysis for Unilever's Global Operations 288 Assurance of Learning Exercise 8C: Preparing a BCG Matrix for Unilever 288 Assurance of Learning Exercise 8D: Developing a SWOT Matrix for adidas AG 288 Assurance of Learning Exercise 8E: Developing a SPACE Matrix for adidas AG 289 Assurance of Learning Exercise 8F: Developing a BCG Matrix for adidas AG 289 Assurance of Learning Exercise 8G: Developing a QSPM for adidas AG 289 Assurance of Learning Exercise 8H: Developing a SWOT Matrix for Unilever 289 Assurance of Learning Exercise 81: Developing a SPACE Matrix for Unilever 290 Assurance of Learning Exercise 8J: Developing a BCG Matrix for your College or University 290 Assurance of Learning Exercise 8K: Developing a QSPM for a Company that You Are Familiar With 290 Assurance of Learning Exercise 8L: Formulating Individual Strategies 291 Assurance of Learning Exercise 8M: The Mach Test 291

Chapter 9 Strategy Implementation 295 The Nature of Strategy Implementation 296

ROYAL DUTCH SHELL: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 296

Current Marketing Issues 297 New Principles of Marketing 298

Market Segmentation 299 Retention-Based Segmentation 300 ■ Does the Internet Make Market Segmentation Easier? 302

Product Positioning/Perceptual Mapping 302 Finance and Accounting Issues 304

Acquiring Capital to Implement Strategies 305 ■ Projected Financial Statements 310 ■ Projected Financial Statement Analysis for Whole Foods Market 312 ■ Financial Budgets 313 ■ Company Valuation 315 ■ Deciding Whether to Go Public 319 ■ Research and Development (R&D) Issues 320

Management Information Systems (MIS) Issues 322 Business Analytics 322

Special Note to Students 323 ASSURANCE OF LEARNING EXERCISES 326 Assurance of Learning Exercise 9A: Preparing an EPS/EBIT Analysis for Royal Dutch Shell pic 326

10 CONTENTS

Assurance of Learning Exercise 9B: Developing a Product-Positioning Map for adidas AG 327 Assurance of Learning Exercise 9C: Performing an EPS/EBIT Analysis for adidas AG 327 Assurance of Learning Exercise 9D: Preparing Projected Financial Statements for adidas AG 327 Assurance of Learning Exercise 9E: Determining the Cash Value of adidas AG 328 Assurance of Learning Exercise 9F: Developing a Product-Positioning Map for My College 328 Assurance of Learning Exercise 9G: Do Banks Require Projected Financial Statements? 328

Chapter 10 Strategy Execution 331 The Nature of Strategy Implementation 332

ACCENTURE: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 332 Management Perspectives 334

Annual Objectives 335 Policies 337 Resource Allocation 339 Managing Conflict 339 Matching Structure with Strategy 340

The Functional Structure 341 ■ The Divisional Structure 342 ■ The Strategic Business Unit (SBU) Structure 345 ■ The Matrix Structure 346 ■ Some Do's and Don’ts in Developing Organizational Charts 348

Restructuring 350 Restructuring 350

Linking Performance and Pay to Strategies 351 Managing Resistance to Change 353 Creating a Strategy-Supportive Culture 354 Production and Operations Concerns When Implementing Strategies 355 Human Resource Concerns When Implementing Strategies 356

Employee Stock Ownership Plans (ESOPs) 358 ■ Balancing Work Life and Home Life 359 ■ Benefits of a Diverse Workforce 361 ■ Corporate Wellness Programs 361

Special Note to Students 363 ASSURANCE OF LEARNING EXERCISES 366 Assurance of Learning Exercise 10A: Developing an Organizational Chart for Accenture pic 366 Assurance of Learning Exercise 10B: Assessing Accenture's Philanthrophy Efforts 367 Assurance of Learning Exercise 10C: Revising adidas AG's Organizational Chart 367 Assurance of Learning Exercise 10D: Exploring Objectives 367 Assurance of Learning Exercise 10E: Understanding My University's Culture 368

Chapter 11 Strategy Monitoring 371 The Nature of Strategy Evaluation 372

BHP BILLITON: EXCELLENT STRATEGIC MANAGEMENT SHOWCASED 372 The Process of Evaluating Strategies 375

A Strategy-Evaluation Framework 376 Reviewing Bases of Strategy 376 ■ Measuring Organizational Performance 378 ■ Taking Corrective Actions 379

The Balanced Scorecard 381 Published Sources of Strategy-Evaluation Information 382 Characteristics of an Effective Evaluation System 383 Contingency Planning 384 Auditing 385 21st-Century Challenges in Strategic Management 386

The Art or Science Issue 386 ■ The Visible or Hidden Issue 386 ■ The Top-Down or Bottom-Up Approach 387

Special Note to Students 387 ASSURANCE OF LEARNING EXERCISES 390 Assurance of Learning Exercise 11 A: Evaluating BHP Billiton's Strategies 390 Assurance of Learning Exercise 11B: Preparing a Strategy-Evaluation Report for adidas AG 390 Assurance of Learning Exercise 11C: Preparing a Strategy-Evaluation Report for adidas AG 390 Assurance of Learning Exercise 11D: Evaluate My University's Strategies 390

Appendix 1 Guidelines for Case Analysis 393 What Is a Strategic-Management Case? 394 Guidelines for Preparing Case Analyses 394

The Need for Practicality 394 ■ The Need for Justification 394 ■ The Need for Realism 394 ■ The Need for Specificity 394 ■ The Need for Originality 395 ■ The Need to Contribute 395

Preparing a Case for Class Discussion 395 The Case Method versus Lecture Approach 395

The Cross-Examination 396 Preparing a Written Case Analysis 396

The Executive Summary 396 ■ The Comprehensive Written Analysis 396 ■ Steps in Preparing a Comprehensive Written Analysis 397

Making an Oral Presentation 397 Organizing the Presentation 397 ■ Controlling Your Voice 398 ■ Managing Body Language 398 ■ Speaking from Notes 398 ■ Constructing Visual Aids 398 ■ Answering Questions 398

Tips for Success in Case Analysis 399 Content Tips 399 ■ Process Tips 400 ■ Sample Case Analysis Outline 400 STEPS IN PRESENTING AN ORAL CASE ANALYSIS 401 Oral Presentation— Step 1: Introduction (2 minutes) 401 Oral Presentation—Step 2: Mission and Vision (4 minutes) 401 Oral Presentation—Step 3: Internal Assessment (8 minutes) 401 Oral Presentation—Step 4: External Assessment (8 minutes) 402 Oral Presentation—Step 5: Strategy Formulation (14 minutes) 402 Oral Presentation—Step 6: Strategy Implementation (8 minutes) 402 Oral Presentation—Step 7: Strategy Evaluation (2 minutes) 403 Oral Presentation—Step 8: Conclusion (4 minutes) 403

Glossary 662

Name Index 673

Subject Index 677

Cases Service Firms

1ẻ Ryanair 406 2. The Emirates Group 418

3. UPS 427 4. Amazon 438

5ế Netflix 450

6. Gap 462 7. Walt Disney 474 8. Staples Inc. 484

9. Office Depot Inc. 496 10. Domino's Pizza Inc. 505 11 ề Royal Caribbean Cruises 515

12. Carnival Corp. 524 13. JPMorgan Chase & Co. 535

Manufacturing Firms

14. Proctor and Gamble 546

15. Avon Products Inc. 556

16. Revlon 564

17. L'Oréal 575

18. Dr Pepper Snapple Group 583

19. The Coca-Cola Company 593

20. Starbucks 602

21. Pearson PLC 610

22. BMW 619

23ế Apple 626

24. Microsoft Corp. 636

25. Lenovo 645

26. Netgear 654

11

Welcome Forest, and Thank You:

• For joining me as a coauthor on this 15th edition • For preparing the Case Instructor's Manual for this textbook and five previous editions • For publishing many strategic management papers and articles with me and other authors • For your wise strategic-management counsel over many years as this textbook has evolved • For assisting students for many years through the Strategy Club (www.strategyclub.com) that now also

offers your free Excel Student Template • For developing an outstanding Case MyLab testing feature for this edition • For preparing the Chapter Instructor's Manual for this edition

http://www.strategyclub.com
Preface

Why Adopt This Text? This textbook is trusted around the world to provide managers the latest skills and concepts needed to effectively formulate and efficiently implement a strategic plan— a game plan, if you will— that can lead to sustainable competitive advantage for any type of business. The Association to Advance Collegiate Schools of Business (AACSB) increasingly advocates a more skills-oriented. practical approach in business books, which the David text provides, rather than a theory-based approach. This textbook meets all AACSB-International guidelines for the strategic-managcment course at both the graduate and undergraduate levels, and previ­ ous editions have been used at more than 500 colleges and universities around the world. We believe you will find this edition to be the best textbook available for communicating both the excitement and value of strategic management. Concise and exceptionally well orga­ nized. this text is now published in English. Chinese. Spanish, Thai. German, Japanese, Farsi, Indonesian, Indian, and Arabic. A version in Russian is being negotiated. Not only universi­ ties, but also hundreds of companies, organizations, and governmental bodies use this text as a management guide.

In contrast to many other strategic-management textbooks, the David book provides:

1. An effective process for developing a clear strategic plan, rather than simply presenting seminal theories in strategy, and

2. An effective model or flow for actually doing strategic planning.

Eric N. Sims, a professor w'ho in 2013 adopted the David book for his classes at Sonoma State University in California, says:

“I have read many strategy books. I am going to use the David book. What I like— to steal a line from Alabama coach Nick Saban— is your book teaches ‘a process.’ I believe at the end of your book, you can actually help a company do strategic planning. In contrast, the other books teach a number of near and far concepts related to strategy.”

A recent reviewer of this textbook says:

“One thing I admire most about the David text is that it follows the fundamental sequence of strategy formulation, implementation, and evaluation. There is a basic flow from vision/ mission to internal/external environmental scanning, to strategy development, selection, implementation, and evaluation. This has been, and continues to be, a hallmark of the David text. Many other strategy texts are more disjointed in their presentation, and thus confusing to the student, especially at the undergraduate level.”

New Chapter Features 1. The fifteenth edition is 40 percent new and improved from the prior edition. 2. Chapter 2, Outside-USA Strategic Planning, is expanded 30 percent with new coverage of

cultural and conceptual strategic-management differences across countries. Doing business globally has become a necessity in most industries. Nearly all strategic decisions today are affected by global issues and concerns.

3. Chapter 3, Ethics/Social Responsibility/Sustainability, is expanded 30 percent, provid­ ing extensive new coverage of ethics, workplace romance, and sustainability. This text emphasizes that “good ethics is good business.” Unique to strategic-management texts, the sustainability discussion is strengthened in this edition to promote and encourage firms to conduct operations in an environmentally sound manner. Respect for the natural environment has become an important concern for consumers, companies, society, and AACSB-International.

15

16 PREFACE

4. An updated Cohesion Case on adidas AG is provided, adidas is one of the most suc­ cessful, well-known, and best-managed global companies in the world. Students apply strategy concepts to adidas at the end of each chapter through brand new Assurance of Learning Exercises.

5. New or improved Assurance of Learning Exercises appear at the end of all chapters to apply chapter concepts. The exercises prepare students for strategic-management case analysis.

6. A new boxed insert at the beginning of each chapter showcases a company doing strategic management exceptionally well.

7. There are all new examples in all the chapters. 8. There is new narrative on strategic-management theory and concepts in every chapter. 9. On average, 10 new review questions are provided at the end of each chapter.

10. New color photographs bring this new edition to life and illustrate “the practice of strategic management.”

11. All current readings at the end of all chapters are new, as new research and theories of sem­ inal thinkers arc included. However, practical aspects of strategic management are center stage and the trademark of this text.

12. For the first time ever, the Excel Student Template is provided free at www.strategyclub. com to all students who use this textbook. Widely used for more than a decade by both students and businesses, and improved dramatically just for this edition, the free Excel Student Template enables students to more easily apply strategic-management concepts while engaging in assurance of learning exercises or case analysis. Using the Template, students can devote more time to applying strategy concepts and less time to the mechanics of formatting strategy matrices, tables, and PowerPoints.

13. Every sentence and paragraph has been scrutinized, modified, clarified, deleted, stream­ lined, updated, and improved to enhance the content and caliber of presentation.

New Case Features 1. All 26 cases are on student-friendly, well-known companies, thus exciting and effective for

applying strategy concepts; 2. All 26 cases are undisguised, featuring real organizations in real industries using real

names (nothing is fictitious in any case); 3. All 26 cases feature an organization and industry undergoing strategic change; 4. All 26 cases provide ample, excellent quantitative information, so students can prepare a

defensible strategic plan; 5. All 26 cases are written in a lively, concise writing style that captures the reader's

interest; 6. All 26 cases are “comprehensive,” focusing on multiple business functions, rather than a

single problem or issue; 7. All 26 cases include financial statements for the firm, so students can show the impact of a

proposed strategic plan; 8. All 26 cases provide an organizational chart and a vision and mission statement—

important strategy concepts; 9. Certain cases are supported by an excellent teacher’s note, provided to professors in a new

Case Instructor's Manual; 10. All 26 cases have been class-tested to ensure that they are interesting, challenging, and

effective for illustrating strategy concepts; 11. The 26 case companies provide an excellent mix of firms performing really well and some

performing very poorly, including service-based and manufacturing-based firms, and a good mix of small cap to large cap firms.

12. All 26 case companies have excellent websites in English that provide detailed financial information, history, sustainability statements, ethics statements, and press releases, so students can easily access current information to apply strategy concepts.

http://www.strategyclub
PREFACE 17

13. Certain cases are written by the authors, to ensure maximum control and effectiveness in applying strategic-management concepts through case analysis.

14. A Case MyLab testing feature (for 12 cases) has been carefully developed and designed specifically to apply strategic-management concepts through case analysis. The Case MyLab product assures that the cases apply the concepts, simplifies grading for professors, and achieves AACSB’s key assurance of learning objectives— even in purely or partly on­ line class settings. The new Case MyLab testing feature enables professors to use the cases to monitor student learning of strategy concepts, as revealed in the Concepts by Cases Matrix given below.

Time-Tested Features 1. This text meets all AACSB-International guidelines that support a practitioner orientation

rather than a theory/research approach. This text offers a skills-oriented process for devel­ oping a vision and mission statement; performing an external audit; conducting an internal assessment; and formulating, implementing, and evaluating strategies.

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

3. A simple, integrative strategic-management model appears in all chapters and on the inside front cover. The model is widely used by strategic planning consultants and companies worldwide.

4. An exciting, updated Cohesion Case on adidas AG follows Chapter 1 and is revisited at the end of each chapter, allowing students to apply strategic-management concepts and tech­ niques to a real company as chapter material is covered, thus preparing students for case analysis as the course evolves.

5. End-of-chapter Assurance of Learning Exercises apply chapter concepts and techniques in a challenging, meaningful, and enjoyable manner.

6. There is excellent pedagogy, including learning objectives opening each chapter and key terms, current readings, discussion questions, and assurance of learning exercises ending each chapter.

7. There is excellent coverage of strategy formulation issues, such as business ethics, global versus domestic operations, vision and mission, matrix analysis, partnering, joint ventur­ ing, competitive analysis, value chain analysis, governance, and matrices for assimilating and evaluating information.

8. There is excellent coverage of strategy implementation issues such as corporate cul­ ture, organizational structure, outsourcing, marketing concepts, financial analysis, business ethics, whistleblowing, bribery, pay and performance linkages, and workplace romance.

9. A systematic, analytical “process” is presented that includes nine matrices; 1FEM, EFEM, CPM. SWOT, BCG, IE, GRAND. SPACE, and QSPM.

10. Both the chapter material and case material is published in four colors. 11. For the chapter material, an outstanding ancillary package includes a comprehensive

Instructor’s Manual, Test Bank, TestGen, and Chapter PowerPoints.

Instructor Supplements At www.pearsonglobaleditions.com /david, instructors can access a variety of resources that accompany this new edition. Registration is easy, please contact your Pearson Sales Representative who will provide you with the access information you need.

If you ever need assistance, our dedicated technical support team is ready to help with the media supplements that accompany this text. Visit http://247.pearsoned.coni/ for answers to frequently asked questions and toll-free user support phone numbers.

http://www.pearsonglobaleditions.com/david
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18 PREFACE

The following supplements are available to adopting instructors:

• Chapter Instructor's Manual • Case Instructor’s Manual • Chapter PowerPoints • Test Bank • TestGen

CourseSmart* Textbooks Online CourseSmart eTextbooks were developed for students looking to save the cost on required or recommended textbooks. Students simply select their eText by title or author and purchase immediate 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 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.

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20 PREFACE

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Marshall University Graduate College

Marymount University— Arlington Medgar Evers College

Medical Careers Institute/Newport News

Mercer University— Atlanta

Mercer University— Macon

Miami-Dade College— Homestead

Miami-Dade College— Kendal

Miami-Dade College— North

M i am i - Dade Col lege—Wolf son

Michigan State University

Mid-America Christian

Millersville University

Mississippi University for Women

Morgan State University

Morrison College of Reno

Mount Marty College— South Dakota

Mount Mercy University Mount Wachusett Community College Mt. Hood Community College

Ml. Vernon Nazarene MTI Western Business College

Muhlenberg College Murray State University

New England College

New Mexico State University

New York University North Carolina Wesleyan College

North Central College

North Central State College

Northwest Arkansas Community College

Northwestern College

Northwood University— Cedar Hill

Notre Dame of Maryland University

Nyack College

Oakland University

Ohio Dominican University

Oklahoma Christian University

Oklahoma State University

Olivet College Oral Roberts University

Pace University— Pleasantville

Park University

Penn State University— Abington

Penn State University— Hazleton

Pensacola State College

Philadelphia University

Point Park University Prince George's Community College

Queens College of CUNY

Richard Stockton University

Rider University

Roger Williams University

Saint Edwards University

Saint Leo University

Saint Mary’s College

Saint Mary’s College— Indiana

Saint Xavier University

San Antonio College

Santa Fe College Savannah State University

PREFACE 23

Shippcnsburg University

Siena Heights University

Southern Nazarene University

Southern New Hampshire University

Southern Oregon University

Southern University— Baton Rouge

Southern Wesleyan University

Southwest Baptist University

Southwest University

St. Bonaventure University

St. Francis University St. Louis University

St. Martins University Sterling College

Stevenson University

Slraycr University— DC Texas A&M University— Commerce Texas A&M University—Texarkana

Texas A&M— San Antonio

Texas Tech University

The College of St. Rose The Masters College

Tri-County Technical College

Trinity Christian College

Troy State University

Troy University— Dothan

Troy University— Main Campus

Troy University—Montgomery

University Alabama— Birmingham

University Maryland— College Park University of Arkansas— Fayetteville

University of Findlay University of Houston—Clearlake

University of Louisiana at Monroe

University of Maine at Augusta

University of Maine— Fort Kent

University of Maryland

University of Massachusetts— Boston Harbor University of Massachusetts— Dartmouth

University of Miami

University of Michigan— Flint

University of Minnesota— Crookston

University of Mobile

University of Montevallo

University of Nebraska— Omaha

University of Nevada Las Vegas

PREFACE

University of New Orleans

University of North Texas

University of North Texas— Dallas

University of Pikeville

University of Sioux Falls

University of South Florida

University of St. Joseph

University of Tampa

University of Texas—Pan American

University of The Incarnate Word

University of Toledo

Upper Iowa University

Valley City State University

Virginia Community College System

Virginia State University

Virginia Tech

Wagner College

Wake Forest University

Washington University

Webber International University

Webster University

West Chester University

West Liberty University

West Valley College

West Virginia Wesleyan College

Western Connecticut State University

Western Kentucky University

Western Michigan University

Western Washington University

William Jewell College

W'illiams Baptist College

Winona State University

Winston-Salem State University

WSU Vancouver

Sample of Countries Outside the USA Where This Textbook is Very Widely Used Mexico, China, Japan, Australia, Singapore, Canada. Indonesia, Pakistan, Iran. Kenya, Congo. Hong Kong, India, England, Argentina, Equador, Zambia, Guam, Italy, Cyprus, Colombia, Philippines, South Africa, Peru. Turkey, Malaysia, and Egypt

Acknowledgments

Many persons have contributed time, energy, ideas, and suggestions for improving this text over 15 editions. The strength of this text is largely attributed to the collective wisdom, work, and experiences of strategic-management professors, researchers, students, and practitioners. Names of particular individuals whose published research is referenced in this edition are listed alphabetically in the Name Index. To all individuals involved in making this text so popular and successful, we are indebted and thankful.

Many special persons and reviewers contributed valuable material and suggestions for this edition. We would like to thank our colleagues and friends at Auburn University. Mississippi State University, East Carolina University, the University of South Carolina, Campbell University, the University of North Carolina at Pembroke, and Francis Marion University. We have taught strategic management at all these universities. Scores of students and professors at these schools helped shape the development of this text. Many thanks go to the following reviewers whose comments shaped the fourteenth and fifteenth editions:

Moses Acquaah, University of North Carolina at Greensboro Gary L. Arbogast, Glenville State College

Charles M. Byles. Virginia Commonwealth University Charles J. Capps III. Sam Houston State University

Neil Dworkin, Western Connecticut State University

Jacalyn M. Florn. University of Toledo

John Frankenstein. Brooklyn College/City University of New York

Bill W. Godair, Landmark College, Community College of Vermont

Carol Jacobson, Purdue University

Susan M. Jensen, University of Nebraska at Kearney

Dmitry Khanin, California State University at Fullerton

Thomas E. Kulik, Washington University at St. Louis

Jerrold K. Leong, Oklahoma State University

Trina Lynch-Jackson, Indiana University

Elouise Mintz, Saint Louis University

Raza Mir, William Paterson University

Gerry N. Muuka, Murray State University

Braimoh Oseghale, Fairleigh Dickinson University

Lori Radulovich, Baldwin-W'allace College

Thomas W. Sharkey, University of Toledo

Frederick J. Slack, Indiana University of Pennsylvania Daniel Slater, Union University

Demetri Tsanacas, Ferrum College

Jill Lynn Vihtelic, Saint M ary’s College

Michael W. Wakefield, Colorado State University-Pueblo Don Wicker, Brazosport College

We want to thank you, the reader, for investing the time and effort to read and study this text. It will help you formulate, implement, and evaluate strategies for any organization with which you become associated. We hope you come to share our enthusiasm for the rich subject area of strategic management and for the systematic learning approach taken in this text. We want

ACKNOW LEDGM ENTS

to welcome and invite your suggestions, ideas, thoughts, comments, and questions regarding any part of this text or the ancillary materials. Please contact Dr. Fred R. David at the following e-mail freddavid9@gmail.com, or write him at the School of Business, Francis Marion University, Florence, SC 29501. We sincerely appreciate and need your input to continually improve this text in future editions. Your willingness to draw my attention to specific errors or deficiencies in coverage or exposition will especially be appreciated.

Thank you for using this text. Fred R. David and Forest R. David

Pearson would also like to thank and acknowledge Ivan Ninov, The Emirates Academy of Hospitality Management, and Aykut Arslan, Haliç Üniversitesi, for reviewing the Global Edition.

mailto:freddavid9@gmail.com
About the Authors

Fred R. and Forest R. David, a father-son team, have published more than 50 journal articles in outlets such as Academy o f Management Review, Academy o f Management Executive, Journal o f Applied Psychology, Long Range Planning, International Journal o f Management, Journal o f Business Strategy, and Advanced Management Journal. Fred and Forest’s February 2011 Business Horizons article titled “What are Business Schools Doing for Business Today?” is changing the way many business schools view their curricula.

Fred and Forest are coauthors of Strategic Management: Concepts and Cases that has been on a two-year revision cycle since 1986 when the first edi­ tion was published. This text is among the best-selling strategic-management textbooks in the world. This text has led the field of strategic management for more than two decades in providing an applications, practitioner-approach to the discipline. More than 500 colleges and universities have used this textbook Fred R. David over the years, including Harvard University, Duke University, Carnegie- Mellon University, Johns Hopkins University, the University of Maryland, University of North Carolina, University of Georgia, San Francisco State University, University of South Carolina, Wake Forest University, and count­ less universities in Japan, China, Australia, Mexico, and the Middle East. For six editions of this book. Forest has been sole author of the Case Instructor's Manual, having developed extensive teachers’ notes (solutions) for all the cases. Forest is author of the Case MyLab ancillary and the free Excel Student Template that accompany this fifteenth edition.

Fred and Forest actively assist businesses globally in doing strategic planning. They have written and published more than 100 strategic manage­ ment cases. Fred and Forest were recently keynote speakers at the Pearson International Forum in Monterrey. Mexico. With a PhD in Management from the University of South Carolina. Fred is the TranSouth Professor of Strategic Planning at Francis Marion University (FMU) in Florence, South Carolina. Forest has taught strategic-management courses at Mississippi State University, Campbell University, and FMU.

Forest R. David

27

The Case Rationale Case analysis remains the primary learning vehicle used in most strategic-management classes, for five important reasons:

1. Analyzing cases gives students the opportunity to work in teams to evaluate the internal operations and external issues facing various organizations and to craft strategies that can lead these firms to success. Working in teams gives students practical experience solving problems as part of a group. In the business world, important decisions are generally made within groups; strategic-management students learn to deal with overly aggressive group members and also timid, noncontributing group members. This experience is valuable because strategic-management students are near graduation and soon enter the working world full-time.

2. Analyzing cases enables students to improve their oral and written communication skills as well as their analytical and interpersonal skills by proposing and defending particular courses of action for the case companies.

3. Analyzing cases allows students to view a company, its competitors, and its industry con­ currently, thus simulating the complex business world. Through case analysis, students learn how to apply concepts, evaluate situations, formulate strategies, and resolve imple­ mentation problems.

4 . Analyzing cases allows students to apply concepts learned in many business courses. Students gain experience dealing with a wide range of organizational problems that impact all the business functions.

5. Analyzing cases gives students practice in applying concepts, evaluating situations, formu­ lating a “game plan,” and resolving implementation problems in a variety of business and industry settings.

Case MyLab Testing Feature New to this edition is an enhanced MyLab with some new cases that include gradeable outcomes. This feature assures that the cases are excellent for testing student learning of the key strategic-management concepts, thus serving as a great mechanism for professors to achieve AACSB's Assurance of Learning Objectives. This new testing feature simplifies grading for professors in both traditional and online class settings.

The Case MyLab testing feature includes multiple choice questions for some of the cases, comprised of Basic questions that simply test whether the student read the case before class, and Applied questions that test the student’s ability to apply various strategic-management concepts. In addition, there arc Discussion questions per case. This testing feature enables professors to determine, before class if desired, whether students 1) read the case in Basic terms, and/or 2) are able to Apply strategy concepts to resolve issues in the case. For example, the MyLab case Basic question may be: In what country is BMW headquartered? Whereas, a MyLab case Applied question may be: What are three aspects of the organizational chart given in the BMW case that violate strategic-management guidelines? The Answers to these questions can be found in the Case Instructor's Manual.

30 CONCEPTS BY CASES MATRIX

Case Information Matrix

Case Company Stock Symbol Headquarters URL

Number of Employees

Financials (US$, millions)

Case Year

Profit Revenue %

C o h e s io n C a s e adidas Group ADS Her/.ogenaurach. Germany www.adidas.com 46,300 1,599 19,558 8.2' 2013

S e rv ice F ir m s Ryanair Holdings, pic RYAAY Dublin, Ireland www.ryanair.ie 7,200 413 4,043 10.2 2011

The Emirates Group n/a Garhoud. Dubai. UAE www.theemiratesgroup.com 67,000 986 20,934 4.7" 2013

United Parcel Service, Inc. UPS Atlanta. GA. USA www.ups.com 399,000 869 12.124 7.2 2013

Amazon.com, Inc. AMZN Seattle, WA, USA ww w.amazon .com 33,700 1,152 34.204 3.3 2011

Netflix. Inc. NFLX Los Gatos, CA, USA www.netflix.com 2,500 160 2,162 7.4 2011

Gap Inc. GPS San Fransisco, CA. USA www.gapinc.com 135,000 1,102 14.197 7.7 2011

Walt Disney Company DIS Burbank, CA, USA www.disney.com 166.000 6,173 42,278 14.6 2013

Staples, Inc. SPLS Farmingham, MA. USA www.staples.com 54,100 881 25,545 3.4 2011

Office Depot Inc. ODP Boca Raton. FL, USA www.officcdepot.com 41,000 34 11.633 0.3 2011

Domino’s Pizza, Inc. DPZ Ann Arbor. MI. USA www.dominos.com 10,000 112 1,678 6.7 2013

Royal Caribbean RCL Miami, FL. USA www.royalcaribbean.com 57,000 547 6,752 8.1 2011 Cruises Ltd.

Carnival Corporation CCL Miami, FL, USA www.carnivalcorp.com 85,200 1,978 14.469 13.6 2011 & pic

J PM organ Chase & Co. JPM New York, NY, USA www.jpmorganchase.com 240.000 21,284 97,031 21.9 2013

http://www.adidas.com
http://www.ryanair.ie
http://www.theemiratesgroup.com
http://www.ups.com
http://www.netflix.com
http://www.gapinc.com
http://www.disney.com
http://www.staples.com
http://www.officcdepot.com
http://www.dominos.com
http://www.royalcaribbean.com
http://www.carnivalcorp.com
http://www.jpmorganchase.com
CONCEPTS BY CASES MATRIX 31

Case Company Stock Symbol Headquarters URL

Number of Employees

Financials (US$, millions)

Case Year

Profit Revenue %

M a n u f a c t u r in g F ir m s Proctor & Gamble Company

PC. Cincinnati. OH. USA www.pg.com 127,(XX) 12,736 78,938 16.1 2011

Avon Products, Inc. AVP New York, NY, USA www.avoncompany.coni 39,100 314 10,717 2.9 2013 Revlon. Inc. REV New York, NY, USA www.revlon.com 4,800 327 1,321 24.7 2011 L’Oreal SA LRLCF Clichy. France www.loreal.com 72,600 2.867 22,462 12.8 2013 Dr Pepper Snapple Group Inc.

DPS Plano, TX, USA www'.drpeppersnapple.com 19,000 528 5.636 9.4 2011

Coca-Cola Company KO Atlanta. GA, USA www.coca-colacompany.com 5,200 38 1.442 4.3 2011 Starbucks Corporation SBUX Seattle, WA, USA www.starbucks.com 137,000 945 10,707 8.8 2011 Pearson PLC PSORF London. UK www.pearson.com 37.000 824 8,094 10.2"* 2013 Bayerische Motoren Werke (BMW) Group

BMW Munich, Germany www.bmwgroup.com 105.000 4.226 79,386 5.3’ 2013

Apple, Inc. AAPL Cupertino, CA, USA www.apple.com 46.600 14,013 65,225 21.5 2011 Microsoft Corporation MSFT Redmond, WA, USA www'.microsoft.com 94.000 16,978 73,723 23.0 2013 Lenovo Group Limited LNVGY Beijing, China w'w'w.lenovo.com 27,000 631 33,873 1.9 2013 Netgcar. Inc. NTGR San Jose, CA, USA www.netgear.com 850 86 1,271 6.8 2013

'Originally reported in EUR - converted at rate of 1EUR = 1.35USD "Originully reported in AED - converted at rate of 1AED = 0.27USD "'Originally reported in GBP - converted at rate of 1GBP = 1.6USD

http://www.pg.com
http://www.avoncompany.coni
http://www.revlon.com
http://www.loreal.com
http://www.coca-colacompany.com
http://www.starbucks.com
http://www.pearson.com
http://www.bmwgroup.com
http://www.apple.com
http://www.netgear.com
32 CONCEPTS BY CASES MATRIX

Topical Content Areas

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

C o h e s io n C a s e

adidas Group Y N Y Y N Y N N Y Y N N Y Y

S e r v ic e F ir m s

Ryanair Y Y Y Y Y Y Y Y Y Y Y N Y Y

The Emirates Group Y Y Y Y N N N N Y N N N Y Y

UPS Y Y Y Y Y Y Y Y Y N Y Y N N

Amazon Y Y Y Y Y Y Y Y Y N N Y N N

Netflix Y Y Y N Y Y Y Y Y N N Y N N

Gap Y Y Y N Y Y Y Y Y N N Y N N

Walt Disney Y Y Y Y N N N Y Y N N N Y N

Staples Inc. Y Y Y Y Y Y Y Y Y N N N Y N

Office Depot Inc. Y Y Y Y Y Y Y Y Y Y Y N Y N

Domino’s Pizza Inc. Y Y Y Y Y N N N Y N N Y N N

Royal Caribbean Cruises Y Y Y Y Y Y Y Y Y N N Y N N

Carnival Corp. Y Y Y Y Y Y Y Y Y N N Y N N

JPMorgan Chase & Co. Y Y Y Y Y N Y Y Y Y N Y N N

CONCEPTS BY CASES MATRIX 33

M a n u f a c t u r in g F ir m s

Proctor and Gamble Y Y Y Y Y N Y Y Y N Y N Y N

Avon Products Inc. Y Y Y Y N Y N N Y Y Y Y N N

Revlon Y Y Y Y N N Y Y Y N N N Y N

L’Ore'al Y Y Y N N Y N N Y N N Y N Y

Dr Pepper Snapple Group Y Y Y N Y Y Y Y Y N Y N Y N

The Coca-Cola Company Y Y Y Y Y Y Y Y Y N N Y N N

Starbucks Y Y Y Y Y Y Y Y Y N N N Y N

Pearson PLC Y Y Y N N N N Y Y N Y Y N Y

BMW Y Y Y N N N N N Y N N Y N Y

Apple Y Y Y Y Y N N Y Y N N N Y N

Microsoft Corp. Y Y Y Y N N N N Y N Y Y N N

Lenovo Y Y Y N Y N Y Y Y N N Y N Y

Netgear Y Y Y N N N N N Y N Y Y N N

1. Financial Statements Provided? 2. Organizational Chart Provided? 3. Does Company Do Business Outside the United States? 4. Is a Vision or Mission Statement Provided? 5. Business Ethics Issues Included? 6. Sustainability Issues Included? 7. Strategy Formulation Emphasis? 8. Strategy Implementation Emphasis? 9. By-Segment Financial Data Included?

10. Firm Has Declining Revenues? 11. Firm Has Declining Net Income? 12. Case Company Appears in Text for First Time? 13. Case Company Appeared in Prior Edition and Updated Now? 14. Firm Headquartered Outside the United States?

STRATEGIC MANAGEMENT ’ Concepts and Cases A COM PETITIVE ADVANTAGE APPRO ACH

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MyManagementLab® Improve Your Grade! Over 10 million students improved their results using the Pearson MyLabs. Visit m ym anag em entlab .co m for simulations, tutorials, and end-of-chapter problems.

36

Strategie Management Essentials C H A P T E R O B J E C T IV E S After studying this chapter, you should be able to do the following:

1. Discuss the nature and role of a chief strategy officer (CSO). 2. Describe the strategic-management process. 3. Explain the need for integrating analysis and intuition in strategic management. 4 . Define and give examples of key terms in strategic management. 5. Discuss the nature of strategy formulation, implementation, and evaluation

activities.

6. Describe the benefits of good strategic management.

7. Discuss the relevance of Sun Tzu's The Art of War to strategic management. 8. Discuss how a firm may achieve sustained competitive advantage.

A S S U R A N C E O F L E A R N IN G EXERCISES The following exercises are found at the end of this chapter.

Assess Singapore Airline’s Most Recent Quarterly Performance Data

Gathering Strategy Information on adidas AG

Getting Familiar with the Free Excel Student Template Evaluating An Oral Student Presentation

Strategic Planning at Nestle

Interviewing Local Strategists

EX ER C ISE 1A

EX ER C ISE 1B

EX ER C ISE 1C

EX ER C ISE 1 D

EX ER C ISE 1 E

EX ER C ISE 1F

38 CHAPTER 1 • STRATEGIC M ANAGEM ENT ESSENTIALS

When CEOs from the big three U.S. automakers— Ford, General Motors (GM), and Chrysler—showed up a few years ago without a clear strategic plan to ask congressional leaders for bailout monies, they were sent home w'ith instructions to develop a clear strategic plan for the future. Austan Goolsbce, one of President Barack Obama’s

top economic advisers, said, “Asking for a bailout without a convincing business plan was crazy.” Goolsbee also said, “If the three auto CEOs need a bridge, it’s got to be a bridge to somewhere, not a bridge to nowhere.” 1 This textbook gives the instructions on how to develop a clear strategic plan—a bridge to somewhere rather than nowhere.

This chapter provides an overview of strategic management. It introduces a practical, integrative model of the strategic-management process; it defines basic activities and terms in strategic management.

This chapter also introduces the notion of boxed inserts. A boxed insert at the beginning of each chapter reveals how' some firms are doing really well competing in a growing economy. The firms showcased are utilizing excellent strategic management to prosper as their rivals weaken. Each boxed insert examines the strategics of firms doing great amid rising consumer demand and intense price competition. The first company featured for excellent performance is the 5-star airline— Singapore Airlines Limited (SIA).

adidas AG is featured as the new Cohesion Case because it is a well-known global firm undergoing strategic change and is well managed. By working through the adidas AG-related Assurance of Learning Exercises at the end of each chapter, you will be well prepared to develop an effective strategic plan for any company assigned to you this semester. The end- of-chapter exercises apply chapter tools and concepts.

EXCELLENT STRATEGIC MANAGEMENT SHOWCASED

Singapore Airlines Singapore Airlines Limited (SIA) is the 5-star airline of Singapore. Singapore Airlines operates trans-Pacific flights, including the world's longest non-stop commercial flights from Singapore to Los Angeles and Newark on the Airbus A340-500. In late 2013, the company ceased offering those two long flights although Los Angeles is still served via Tokyo-Narita. The luxury airline has a strong presence in Asia. A mem­ ber of the Star Alliance, Singapore Airlines carried around 18 million passengers in 2012, up from 16.9 million in 2011.

Singapore Airlines is very well managed strategically. The company has diversified airline-related businesses, such as aircraft handling and engineering, and owns SilkAir that manages regional flights to secondary cities with smaller capacity requirements. Singapore Airlines operates passenger sen/ices to more than 60 cities in over 30 countries around the world. Within Asia, passengers can connect to over 30 cities served by SilkAir. The company is the official sponsor of Singapore national football team and has been marketing Singapore Girl as central image to the airline's brand. Fortune in 2013 ranked Singapore Airlines as the 31st most admired company in the world outside the United States. In December 2012, Singapore Airlines sold its 49 percent stake in Virgin Atlantic for US$360 million.

In April 2012, Singapore Airlines phased out the 747 from its fleet after 40 years of service. A final round-trip commemorative flight was operated from Singapore to Hong Kong. In December 2012, Singapore Airlines began using the A380 to San Francisco via Hong Kong as a win­ ter seasonal service, but still uses a Boeing 777-300ER for the remainder

of the year. In May 2013, S i n g a p o r e Airlines made a commitment to order 30 Boeing 787-1 OX to be delivered in 2018-2019 timeframe. In September 2013, Singapore Airlines began using the Airbus A380 on selected flights to and from Shanghai, China.

Singapore Airlines' passenger carriage (measured in revenue pas­ senger kilometers) grew 8.6 percent in August 2013 year-on-year along with a 3.1 percent increase in capacity (measured in available seat kilometers). The company's passenger load factor (PLF) improved by 4.1 percentage points to 82.4 percent as the number of passengers carried in August 2013 increased by 11.7 percent to 1.7 million. Load factors improved across all regions, bolstered by strong leisure travel demand during the Lebaran/Hari Raya holidays, coupled with returning summer traffic. Traffic to West Asia and Africa also saw improvements.

SilkAir's systemwide passenger carriage in August 2013 increased 10.7 percent year-on-year along with a 13.4 percent growth in capacity. For that month, SilkAir's PLF was 1.8 percentage points lower at 71.7 percent. Singapore Airlines' cargo traffic (measured in freight- tonne-kilometres) was 5.7 percent lower in August 2013 year-on-year, while cargo capacity was reduced by 5.0 percent.

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 39

What Is Strategic Management? Once there were two company presidents who competed in the same industry. These two presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into the woods. Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled. Instantly, the first president took off his knapsack and got out a pair of jogging shoes. The second president said, “Hey. you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you!” This story captures the notion of strategic management, which is to achieve and maintain competitive advantage.

Defining Strategic Management Strategic management can be defined as the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. As this definition implies, strategic management focuses on integrating management, marketing, finance and accounting, production and operations, research and development, and information systems to achieve organizational success. The term strategic management in this text is used synonymously with the term strategic planning. The latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation and strategic planning referring only to strategy formulation. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today.

The term strategic planning originated in the 1950s and was popular between the mid-1960s and the mid-1970s. During these years, strategic planning was widely believed to be the answer for all problems. At the time, much of corporate America was “obsessed” with strate­ gic planning. Following that boom, however, strategic planning was cast aside during the 1980s as various planning models did not yield higher returns. The 1990s, however, brought the revival of strategic planning, and the process is widely practiced today in the business world. Many companies today have a chief strategy officer (CSO).

A strategic plan is, in essence, a company’s game plan. Just as a football team needs a good game plan to have a chance for success, a company must have a good strategic plan to compete successfully. Profit margins among firms in most industries are so slim that there is little room for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations in lieu of other, “less desirable” courses of action.

The term strategic management is used at many colleges and universities as the title for the capstone course in business administration. This course integrates material from all business courses, and, in addition, introduces new strategic management concepts and techniques being widely used by firms in strategic planning.

Stages of Strategic Management The strategic-management process consists o f three stages: strategy formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue. Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, whether to expand operations or diversify, whether to enter international markets, whether to merge or form a joint venture, and how to avoid a hostile takeover.

Because no organization has unlimited resources, strategists must decide which alternative strategies will benefit the firm most. Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period of time. Strategies determine long-term competitive advantages. For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization. Top managers have the best perspective to understand fully the ramifications of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation.

40 CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS

Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and using information systems, and linking employee compensation to organizational performance.

Strategy implementation often is called the “action stage” of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strategies into action. Often considered to be the most difficult stage in strategic management, strategy implementation requires personal discipline, commitment, and sacrifice. Successful strategy implementation hinges on managers’ ability to motivate employees, which is more an arL than a science. Strategies formulated but not implemented serve no useful purpose.

Interpersonal skills are especially critical for successful strategy implementation. Strategy-implementation activities affect all employees and managers in an organization. Every division and department must decide on answers to questions such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?” The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives.

Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well: strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because external and internal factors are constantly changing. Three fundamental strategy-evaluation activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complaccnt organizations experience demise.

Formulation, implementation, and evaluation of strategy activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functional. By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels. Nevertheless, managers and employees at these two levels should be actively involved in strategic-management activities.

Peter Drucker says the prime task of strategic management is thinking through the overall mission of a business:

that is, of asking the question, “What is our business?” This leads to the setting of objectives, the development of strategies, and the making of today’s decisions for tomorrow’s results. This clearly must be done by a part of the organization that can see the entire business; that can balance objectives and the needs of today against the needs of tomorrow; and that can allocate resources of men and money to key results.“

Integrating Intuition and Analysis Edward Deming once said, “In God we trust. All others bring data.” The strategic-management process can be described as an objective, logical, systematic approach for making major decisions in an organization. It attempts to organize qualitative and quantitative information in a way that allows effective decisions to be made under conditions of uncertainty. Yet strategic management is not a pure science that lends itself to a nice, neat, one-two-three approach.

Based on past experiences, judgment, and feelings, most people recognize that intuition is essential to making good strategic decisions. Intuition is particularly useful for making decisions in situations of great uncertainty or little precedent. It is also helpful when highly interrelated variables exist or when it is necessary to choose from several plausible alternatives. Some managers and owners of businesses profess to have extraordinary abilities for using intuition alone in devising brilliant strategies. For example. Will Durant, who organized GM. was described by Alfred Sloan as “a man who would proceed on a course of action guided solely, as far as I could tell, by some intuitive flash of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at times, he was astoundingly correct in his judgment.”3 Albert Einstein acknowledged the importance of intuition when he said, “I believe in intuition

CHAPTER 1 • STRATEGIC MANAGEMENT ESSENTIALS 41

and inspiration. At times I feel certain that I am right while not knowing the reason. Imagination is more important than knowledge, because knowledge is limited, whereas imagination embraces the entire world:'4

Although some organizations today may survive and prosper because they have intuitive geniuses managing them, most are not so fortunate. Most organizations can benefit from strategic management, which is based on integrating intuition and analysis in decision making. Choosing an intuitive or analytic approach to decision making is not an either-or proposition. Managers at all levels in an organization inject their intuition and judgment into strategic- management analyses. Analytical thinking and intuitive thinking complement each other.

Operating from the Tve-already-made-up-my-mind-don't-bother-me-with-the-facts mode is not management by intuition; it is management by ignorance.'5 Drucker says, “I believe in intuition only if you discipline it. 'Hunch’ artists, who make a diagnosis but don’t check it out with the facts, are the ones in medicine who kill people, and in management kill businesses.’’6 As Henderson notes:

The accelerating rate of change today is producing a business world in which customary managerial habits in organizations are increasingly inadequate. Experience alone was an adequate guide when changes could be made in small increments. But intuitive and experience-based management philosophies are grossly inadequate when decisions are strategic and have major, irreversible consequences.7

In a sense, the strategic-management process is an attempt to duplicate what goes on in the mind of a brilliant, intuitive person who knows the business and assimilates and integrates that knowledge using analysis to formulate effective strategies.

Adapting to Change The strategic-management process is based on the belief that organizations should continually monitor internal and external events and trends so that timely changes can be made as needed. The rate and magnitude of changes that affect organizations are increasing dramatically, as evidenced by how the global economic recession caught so many firms by surprise. Firms, like organisms, must be “adept at adapting” or they will not survive.

One company trying hard to adapt is the Washington Post Company, best known as publisher of the Washington Post newspaper that has a circulation of 525.000 in the Washington, DC area. But the newspaper industry is in decline globally, so the Washington Post Company recently diversified by acquiring Celtic Healthcare, a provider of hospice and home health care facilities in Pennsylvania and Maryland. Treating patients at home instead of paying for hospital stays is a much faster growing industry than selling newspapers. The Washington Post Company also owns Kaplan, a well-known source of test preparation materials, and six TV stations.

To survive, all organizations must astutely identify and adapt to change. The strategic- management process is aimed at allowing organizations to adapt effectively to change over the long run. As Waterman has noted:

In today’s business environment, more than in any preceding era, the only constant is change. Successful organizations effectively manage change, continuously adapting their bureaucracies, strategies, systems, products, and cultures to survive the shocks and prosper from the forces that decimate the competition.8

On a political map, the boundaries between countries may be clear, but on a competitive map showing the real flow of financial and industrial activity, the boundaries have largely disappeared. The speedy flow of information has eaten away at national boundaries so that people worldwide readily see for themselves how other people live and work. We have become a borderless world with global citizens, global competitors, global customers, global suppliers, and global distributors! U.S. firms are challenged by large rival companies in many industries. For example, Samsung recently surpassed Apple and Lenovo surpassed HP and Dell in revenues.

The need to adapt to change leads organizations to key strategic-management questions, such as “What kind of business should we become?” “Are we in the right fteld(s)?” “Should we reshape our business?” “What new competitors are entering our industry?” “What strategies

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should we pursue?” “How are our customers changing?” “Are new technologies being developed that could put us out of business?”

The Internet promotes endless comparison shopping, which thus enables consumers worldwide to band together to demand discounts. The Internet has transferred power from businesses to individuals. Buyers used to face big obstacles when attempting to get the best price and service, such as limited time and data to compare, but now consumers can quickly scan hundreds of vendor offerings. Both the number of people shopping online and the average amount they spend is increasing dramatically. Digital communication has become the name of the game in marketing. Consumers today are flocking to blogs, sending tweets, watching and posting videos on YouTube, and spending hours on Tumbler, Facebook, Reddit, Instagram, and Linkedln instead of watching television, listening to the radio, or reading newspapers, and magazines. Facebook and Myspace recently unveiled features that further marry these social sites to the wider Internet. Users on these social sites now can log on to many business shopping sites from their social site so their friends can see what items they have purchased on various shopping sites. Both of these social sites want their members to use their identities to manage all their online identities. Most traditional retailers have learned that their online sales can boost in-store sales if they use their websites to promote in-store promotions.