This page intentionally left blank Strategic Management CONCEPTS AND CASES Editorial Director: Sally Yagan Editor in Chief: Eric Svendsen Acquisitions Editor: Kim Norbuta Product Development Manager: Ashley Santora Editorial Project Manager: Claudia Fernandes Editorial Assistant: Meg O’Rourke Director of Marketing: Patrice Lumumba Jones Marketing Manager: Nikki Ayana Jones Marketing Assistant: Ian Gold Senior Managing Editor: Judy Leale Associate Production Project Manager: Ana Jankowski Operations Specialist: Ilene Kahn Art Director: Steve Frim Text and Cover Designer: Judy Allan Manager, Visual Research: Beth Brenzel Manager, Rights and Permissions: Zina Arabia Image Permission Coordinator: Cynthia Vincenti Manager, Cover Visual Research & Permissions: Karen Sanatar Cover Art: Vetta TM Collection Dollar Bin: istockphoto Editorial Media Project Manager: Ashley Lulling Production Media Project Manager: Lisa Rinaldi Full-Service Project Management: Thistle Hill Publishing Services, LLC Composition: Integra Software Services, Ltd. Printer/Binder: Courier/Kendallville Cover Printer: Lehigh-Phoenix Color/Hagerstown Text Font: 10/12 Times Credits and acknowledgments borrowed from other sources and reproduced, with permission, in this textbook appear on appropriate page within text. Copyright © 2011, 2009, 2007 by Pearson Education, Inc., publishing as Prentice Hall, One Lake Street, Upper Saddle River, New Jersey 07458. All rights reserved. Manufactured in the United States of America. This publication is protected by Copyright, and permission should be obtained from the publisher prior to any prohibited reproduction, storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise. To obtain permission(s) to use material from this work, please submit a written request to Pearson Education, Inc., Permissions Department, One Lake Street, Upper Saddle River, New Jersey 07458. Many of the designations by manufacturers and seller to distinguish their products are claimed as trademarks. Where those designations appear in this book, and the publisher was aware of a trademark claim, the designations have been printed in initial caps or all caps. Library of Congress Cataloging-in-Publication Data David, Fred R. Strategic management: concepts and cases / Fred R. David.—13th ed. p. cm. Includes bibliographical references and index. ISBN-13: 978-0-13-612098-8 (casebound) ISBN-10: 0-13-612098-9 (casebound) 1. Strategic planning. 2. Strategic planning—Case studies. I. Title. HD30.28.D385 2011 658.4'012—dc22 2009052036 10 9 8 7 6 5 4 3 2 ISBN 10: 0-13-612098-9 ISBN 13: 978-0-13-612098-8 THIRTEENTH EDITION Strategic Management CONCEPTS AND CASES Fred R. David Francis Marion University Florence, South Carolina Prentice Hall Boston Columbus Indianapolis New York San Francisco Upper Saddle River Amsterdam Cape Town Dubai London Madrid Milan Munich Paris Montreal Toronto Delhi Mexico City Sao Paulo Sydney Hong Kong Seoul Singapore Taipei Tokyo To Joy, Forest, Byron, and Meredith— my wife and children— for their encouragement and love. This page intentionally left blank This page intentionally left blank Brief Contents Preface xvii About the Author xxvii Part 4 Strategy Evaluation 284 Part 1 Overview of Strategic Management 2 Chapter 9 Strategy Review, Evaluation, and Control 284 Acknowledgments xxiii Chapter 1 The Nature of Strategic Management 2 THE COHESION CASE: MCDONALD’S — 2009 27 Part 5 Key Strategic-Management Topics 308 Part 2 Strategy Formulation 40 Chapter 10 Business Ethics/Social Responsibility/ Environmental Sustainability 308 Chapter 2 The Business Vision and Mission 40 Chapter 11 Global/International Issues 328 Chapter 3 The External Assessment 58 Part 6 Strategic-Management Case Analysis 346 Chapter 4 The Internal Assessment 90 Chapter 5 Strategies in Action 130 Chapter 6 Strategy Analysis and Choice 172 How to Prepare and Present a Case Analysis 346 Name Index 359 Subject Index 363 Part 3 Strategy Implementation 210 Chapter 7 Implementing Strategies: Management and Operations Issues 210 Chapter 8 Implementing Strategies: Marketing, Finance/ Accounting, R&D, and MIS Issues 250 vii This page intentionally left blank Contents Preface xvii Acknowledgments xxiii About the Author xxvii Part 1 Overview of Strategic Management 2 Chapter 1 The Nature of Strategic Management 2 MCDONALD’S CORPORATION: DOING GREAT IN A WEAK ECONOMY 4 What Is Strategic Management? 5 Defining Strategic Management 6 & Stages of Strategic Management 6 & Integrating Intuition and Analysis 7 & Adapting to Change 8 Key Terms in Strategic Management 9 Competitive Advantage 9 & Strategists 10 & Vision and Mission Statements 11 & External Opportunities and Threats 11& Internal Strengths and Weaknesses 12 & Long-Term Objectives 13 & Strategies 13 & Annual Objectives 13 & Policies 14 The Strategic-Management Model 14 Benefits of Strategic Management 16 Financial Benefits 17 & Nonfinancial Benefits 18 Why Some Firms Do No Strategic Planning 18 Pitfalls in Strategic Planning 19 Guidelines for Effective Strategic Management 19 Comparing Business and Military Strategy 21 THE COHESION CASE: MCDONALD’S CORPORATION—2009 27 ASSURANCE OF LEARNING EXERCISES 37 Assurance of Learning Exercise 1A: Gathering Strategy Information 37 Assurance of Learning Exercise 1B: Strategic Planning for My University 37 Assurance of Learning Exercise 1C: Strategic Planning at a Local Company 38 Assurance of Learning Exercise 1D: Getting Familiar with SMCO 38 Part 2 Strategy Formulation 40 Chapter 2 The Business Vision and Mission 40 WAL-MART: DOING GREAT IN A WEAK ECONOMY 42 What Do We Want to Become? 43 What Is Our Business? 43 Vision versus Mission 45 & The Process of Developing Vision and Mission Statements 46 Importance (Benefits) of Vision and Mission Statements 47 A Resolution of Divergent Views 48 Characteristics of a Mission Statement 49 A Declaration of Attitude 49 & A Customer Orientation 50 & Mission Statement Components 51 Writing and Evaluating Mission Statements 53 ASSURANCE OF LEARNING EXERCISES 56 Assurance of Learning Exercise 2A: Evaluating Mission Statements 56 Assurance of Learning Exercise 2B: Writing a Vision and Mission Statement for McDonald’s Corporation 56 Assurance of Learning Exercise 2C: Writing a Vision and Mission Statement for My University 57 Assurance of Learning Exercise 2D: Conducting Mission Statement Research 57 Chapter 3 The External Assessment 58 DUNKIN' BRANDS, INC.: DOING GREAT IN A WEAK ECONOMY 60 The Nature of an External Audit 61 Key External Forces 61 & The Process of Performing an External Audit 62 The Industrial Organization (I/O) View 63 Economic Forces 63 Social, Cultural, Demographic, and Natural Environment Forces 66 Political, Governmental, and Legal Forces 68 Technological Forces 69 Competitive Forces 71 Competitive Intelligence Programs 72 & Market Commonality and Resource Similarity 74 Competitive Analysis: Porter’s Five-Forces Model 74 Rivalry Among Competing Firms 75 & Potential Entry of New Competitors 76 & Potential Development of Substitute Products 77 & Bargaining Power of Suppliers 77 & Bargaining Power of Consumers 77 Sources of External Information 78 Forecasting Tools and Techniques 78 Making Assumptions 79 ix x CONTENTS Industry Analysis: The External Factor Evaluation (EFE) Matrix 80 The Competitive Profile Matrix (CPM) 81 ASSURANCE OF LEARNING EXERCISES 86 Assurance of Learning Exercise 3A: Developing an EFE Matrix for McDonald’s Corporation 86 Assurance of Learning Exercise 3B: The External Assessment 86 Assurance of Learning Exercise 3C: Developing an EFE Matrix for My University 87 Assurance of Learning Exercise 3D: Developing a Competitive Profile Matrix for McDonald’s Corporation 87 Assurance of Learning Exercise 3E: Developing a Competitive Profile Matrix for My University 87 Chapter 4 The Internal Assessment 90 AMAZON.COM, INC.: DOING GREAT IN A WEAK ECONOMY. HOW? 92 The Nature of an Internal Audit 93 Key Internal Forces 93 & The Process of Performing an Internal Audit 93 The Resource-Based View (RBV) 96 Integrating Strategy and Culture 97 Management 99 Planning 100 & Organizing 100 & Motivating 101 & Staffing 102 & Controlling 102 & Management Audit Checklist of Questions 103 Marketing 103 Customer Analysis 103 & Selling Products/Services 103 & Product and Service Planning 104 & Pricing 105 & Distribution 105 & Marketing Research 106 & Cost/Benefit Analysis 106 & Marketing/Audit Checklist of Questions 106 Finance/Accounting 106 Finance/Accounting Functions 107 & Basic Types of Financial Ratios 108 & Finance/Accounting Audit Checklist 113 Production/Operations 113 Production/Operations Audit Checklist 115 Research and Development 115 Internal and External R&D 116 & Research and Development Audit 117 Management Information Systems 117 Strategic-Planning Software 118 & Management Information Systems Audit 119 Value Chain Analysis (VCA) 119 Benchmarking 120 The Internal Factor Evaluation (IFE) Matrix 122 Chapter 5 Strategies in Action 130 VOLKSWAGEN AG: DOING GREAT IN A WEAK ECONOMY. HOW? 132 Long-Term Objectives 133 The Nature of Long-Term Objectives 133 & Financial versus Strategic Objectives 134 & Not Managing by Objectives 135 The Balanced Scorecard 135 Types of Strategies 136 Levels of Strategies 138 Integration Strategies 139 Forward Integration 139 & Backward Integration 140 & Horizontal Integration 141 Intensive Strategies 141 Market Penetration 141 & Market Development 142 & Product Development 142 Diversification Strategies 143 Related Diversification 144 & Unrelated Diversification 144 Defensive Strategies 146 Retrenchment 146 & Divestiture 148 & Liquidation 149 Michael Porter’s Five Generic Strategies 151 Cost Leadership Strategies (Type 1 and Type 2) 152 & Differentiation Strategies (Type 3) 153 & Focus Strategies (Type 4 and Type 5) 154 & Strategies for Competing in Turbulent, High-Velocity Markets 155 Means for Achieving Strategies 155 Cooperation Among Competitors 155 & Joint Venture/ Partnering 156 & Merger/Acquisition 158 & First Mover Advantages 161 & Outsourcing 161 Strategic Management in Nonprofit and Governmental Organizations 162 Educational Institutions 162 & Medical Organizations 163 & Governmental Agencies and Departments 163 Strategic Management in Small Firms 164 ASSURANCE OF LEARNING EXERCISES 168 Assurance of Learning Exercise 5A: What Strategies Should McDonald’s Pursue in 2011–2013? 168 Assurance of Learning Exercise 5B: Examining Strategy Articles 168 Assurance of Learning Exercise 5C: Classifying Some Year 2009 Strategies 169 Assurance of Learning Exercise 5D: How Risky Are Various Alternative Strategies? 169 Assurance of Learning Exercise 5E: Developing Alternative Strategies for My University 170 Assurance of Learning Exercise 5F: Lessons in Doing Business Globally 170 ASSURANCE OF LEARNING EXERCISES 128 Assurance of Learning Exercise 4A: Performing a Financial Ratio Analysis for McDonald’s Corporation (MCD) 128 Assurance of Learning Exercise 4B: Constructing an IFE Matrix for McDonald’s Corporation 128 Assurance of Learning Exercise 4C: Constructing an IFE Matrix for My University 128 Chapter 6 Strategy Analysis and Choice 172 APPLE: DOING GREAT IN A WEAK ECONOMY. HOW? 174 The Nature of Strategy Analysis and Choice 175 The Process of Generating and Selecting Strategies 175 CONTENTS A Comprehensive Strategy-Formulation Framework 176 The Input Stage 177 The Matching Stage 177 The Strengths-Weaknesses-Opportunities-Threats (SMOT) Matrix 178 & The Strategic Position and Action Evaluation (SPACE) Matrix 181 & The Boston Consulting Group (BCG) Matrix 185 & The Internal-External (IE) Matrix 188 & The Grand Strategy Matrix 191 The Decision Stage 192 The Quantitative Strategic Planning Matrix (QSPM) 192 & Positive Features and Limitations of the QSPM 195 Cultural Aspects of Strategy Choice 196 The Politics of Strategy Choice 196 Governance Issues 198 ASSURANCE OF LEARNING EXERCISES 205 Assurance of Learning Exercise 6A: Developing a SWOT Matrix for McDonald’s 205 Assurance of Learning Exercise 6B: Developing a SPACE Matrix for McDonald’s 205 Assurance of Learning Exercise 6C: Developing a BCG Matrix for McDonald’s 205 Assurance of Learning Exercise 6D: Developing a QSPM for McDonald’s 206 Assurance of Learning Exercise 6E: Formulating Individual Strategies 206 Assurance of Learning Exercise 6F: The Mach Test 206 Assurance of Learning Exercise 6G: Developing a BCG Matrix for My University 208 Assurance of Learning Exercise 6H: The Role of Boards of Directors 208 Assurance of Learning Exercise 6I: Locating Companies in a Grand Strategy Matrix 209 Part 3 Strategy Implementation 210 Chapter 7 Implementing Strategies: Management and Operations Issues 210 GOOGLE: DOING GREAT IN A WEAK ECONOMY. HOW? 212 The Nature of Strategy Implementation 213 Management Perspectives 214 Annual Objectives 215 Policies 217 Resource Allocation 219 Managing Conflict 220 Matching Structure with Strategy 220 The Functional Structure 222 & The Divisional Structure 222 & The Strategic Business Unit (SBU) Structure 225 & The Matrix Structure 226 & Some Do’s and Don’ts in Developing Organizational Charts 228 Restructuring, Reengineering, and E-Engineering 229 Restructuring 230 & Reengineering 231 xi Linking Performance and Pay to Strategies 231 Managing Resistance to Change 234 Creating a Strategy-Supportive Culture 235 Production/Operations Concerns When Implementing Strategies 236 Human Resource Concerns When Implementing Strategies 237 Employee Stock Ownership Plans (ESOPs) 239 & Balancing Work Life and Home Life 240 & Benefits of a Diverse Workforce 242 & Corporate Wellness Programs 242 ASSURANCE OF LEARNING EXERCISES 248 Assurance of Learning Exercise 7A: Revising McDonald’s Organizational Chart 248 Assurance of Learning Exercise 7B: Do Organizations Really Establish Objectives? 248 Assurance of Learning Exercise 7C: Understanding My University’s Culture 249 Chapter 8 Implementing Strategies: Marketing, Finance/Accounting, R&D, and MIS Issues 250 The Nature of Strategy Implementation 252 JOHNSON & JOHNSON (J&J): DOING GREAT IN A WEAK ECONOMY. HOW? 252 Current Marketing Issues 253 New Principles of Marketing 254 & Advertising Media 256 & Purpose-Based Marketing 257 Market Segmentation 257 Does the Internet Make Market Segmentation Easier? 259 Product Positioning 260 Finance/Accounting Issues 261 Acquiring Capital to Implement Strategies 262 New Source of Funding 266 & Projected Financial Statements 266 & Projected Financial Statement for Mattel, Inc. 268 & Financial Budgets 271 & Evaluating the Worth of a Business 273 & Deciding Whether to Go Public 275 Research and Development (R&D) Issues 275 Management Information Systems (MIS) Issues 277 ASSURANCE OF LEARNING EXERCISES 282 Assurance of Learning Exercise 8A: Developing a ProductPositioning Map for McDonald’s 282 Assurance of Learning Exercise 8B: Performing an EPS/EBIT Analysis for McDonald’s 282 Assurance of Learning Exercise 8C: Preparing Projected Financial Statements for McDonald’s 282 Assurance of Learning Exercise 8D: Determining the Cash Value of McDonald’s 283 Assurance of Learning Exercise 8E: Developing a ProductPositioning Map for My University 283 Assurance of Learning Exercise 8F: Do Banks Require Projected Financial Statements? 283 xii CONTENTS Part 4 Strategy Evaluation 284 Chapter 9 Strategy Review, Evaluation, and Control 284 FAMILY DOLLAR STORES: DOING GREAT IN A WEAK ECONOMY. HOW? 286 The Nature of Strategy Evaluation 286 The Process of Evaluating Strategies 290 A Strategy-Evaluation Framework 290 Reviewing Bases of Strategy 290 & Measuring Organizational Performance 292 & Taking Corrective Actions 294 The Balanced Scorecard 295 Published Sources of Strategy-Evaluation Information 297 Characteristics of an Effective Evaluation System 298 Contingency Planning 299 Auditing 300 Twenty-First-Century Challenges in Strategic Management 301 The Art of Science Issue 301 & The Visible or Hidden Issue 301 & The Top-Down or Bottom-Up Approach 302 ASSURANCE OF LEARNING EXERCISES 306 Assurance of Learning Exercise 9A: Preparing a Strategy-Evaluation Report for McDonald’s Corp. 306 Assurance of Learning Exercise 9B: Evaluating My University’s Strategies 306 Part 5 Key Strategic-Management Topics 308 Chapter 10 Business Ethics/Social Responsibility/ Environmental Sustainability 308 WALT DISNEY: DOING GREAT IN A WEAK ECONOMY. HOW? 310 Business Ethics 311 Code of Business Ethics 312 & An Ethics Culture 313 & Bribes 314 & Love Affairs at Work 314 Social Responsibility 315 Social Policy 315 & Social Policies on Retirement 316 Environmental Sustainability 317 What Is a Sustainability Report? 317 & Lack of Standards Changing 318 & Obama Regulations 318 & Managing Environmental Affairs in the Firm 319 & Should Students Receive Environmental Training? 319 & Reasons Why Firms Should “Be Green” 320 & Be Proactive, Not Reactive 320 & ISO 14000/14001 Certification 320 & Electric Car Networks Are Coming 321 & The March 2009 Copenhagen Meeting 322 ASSURANCE OF LEARNING EXERCISES 326 Assurance of Learning Exercise 10A: Does McDonald’s Have a Code of Business Ethics? 326 Assurance of Learning Exercise 10B: The Ethics of Spying on Competitors 326 Assurance of Learning Exercise 10C: Who Prepares a Sustainability Report? 327 Chapter 11 Global/International Issues 328 MARRIOTT INTERNATIONAL: DOING GREAT IN A WEAK ECONOMY. HOW? 330 Multinational Organizations 331 Advantages and Disadvantages of International Operations 332 The Global Challenge 333 Globalization 334 & A Weak Economy 335 United States versus Foreign Business Cultures 335 The Mexican Culture 337 & The Japanese Culture 338 & Communication Differences Across Countries 338 Worldwide Tax Rates 339 Joint Ventures in India 339 ASSURANCE OF LEARNING EXERCISES 343 Assurance of Learning Exercise 11A: McDonald’s Wants to Enter Africa. Help Them. 343 Assurance of Learning Exercise 11B: Does My University Recruit in Foreign Countries? 343 Assurance of Learning Exercise 11C: Assessing Differences in Culture Across Countries 343 Assurance of Learning Exercise 11D: How Well Traveled Are Business Students at Your University? 344 Part 6 Strategic-Management Case Analysis 346 How to Prepare and Present a Case Analysis 346 What Is a Strategic-Management Case? 348 Guidelines for Preparing Case Analyses 348 The Need for Practicality 348 & The Need for Justification 348 & The Need for Realism 348 & The Need for Specificity 349 & The Need for Originality 349 & The Need to Contribute 349 Preparing a Case for Class Discussion 349 The Case Method versus Lecture Approach 349 & The CrossExamination 350 Preparing a Written Case Analysis 350 The Executive Summary 350 & The Comprehensive Written Analysis 351 & Steps in Preparing a Comprehensive Written Analysis 351 Making an Oral Presentation 351 Organizing the Presentation 351 & Controlling Your Voice 352 & Managing Body Language 352 & Speaking from Notes 352 & Constructing Visual Aids 352 & Answering Questions 353 & Tips for Success in Case Analysis 353 & Content Tips 353 & Process Tips 354 & Sample Case Analysis Outline 355 CONTENTS STEPS IN PRESENTING AN ORAL CASE ANALYSIS 356 Oral Presentation—Step 1: Introduction (2 minutes) 356 Oral Presentation—Step 2: Mission/Vision (4 minutes) 356 Oral Presentation—Step 3: Internal Assessment (8 minutes) 356 Oral Presentation—Step 4: External Assessment (8 minutes) 357 Oral Presentation—Step 5: Strategy Formulation (14 minutes) 357 xiii Oral Presentation—Step 6: Strategy Implementation (8 minutes) 357 Oral Presentation—Step 7: Strategy Evaluation (2 minutes) 358 Oral Presentation—Step 8: Conclusion (4 minutes) 358 Name Index 359 Subject Index 363 xiv CONTENTS Cases HOSPITALITY/ENTERTAINMENT 1. Walt Disney Company — 2009, Mernoush Banton 1 2. Merryland Amusement Park — 2009, Gregory Stone 14 AIRLINES 3. JetBlue Airways Corporation — 2009, Mernoush Banton 4. AirTran Airways, Inc. — 2009, Charles M. Byles 26 37 RETAIL STORES 5. Family Dollar Stores, Inc. — 2009, Joseph W. Leonard 50 6. Wal-Mart Stores, Inc. — 2009, Amit J. Shah and Michael L. Monahanat 7. Whole Foods Market, Inc. — 2009, James L. Harbin and Patricia Humphrey 73 8. Macy’s, Inc. — 2009, Rochelle R. Brunson and Marlene M. Reed 83 INTERNET BASED 9. Yahoo! Inc. — 2009, Hamid Kazeroony 10. eBay Inc. — 2009, Lori Radulovich 91 99 FINANCIAL 11. Wells Fargo Corporation — 2009, Donald L. Crooks, Robert S. Goodman, and John Burbridge 111 RESTAURANTS 12. Krispy Kreme Doughnuts (KKD) — 2009, John Burbridge and Coleman Rich 120 13. Starbucks Corporation — 2009, Sharynn Tomlin 129 NONPROFIT 14. The United States Postal Service (USPS) — 2009, Fred and Forest David 138 15. National Railroad Passenger Corporation (AMTRAK) — 2009, Kristopher J. Blanchard 150 16. Goodwill of San Francisco, San Mateo and Marin Counties — 2009, Mary E. Vradelis 158 TRANSPORTATION 17. Harley-Davidson, Inc. — 2009, Carol Pope and Joanne Mack 18. Ford Motor Company — 2009, Alen Badal 166 176 FOOD 19. Kraft Foods Inc. — 2009, Kristopher J. Blanchard 184 20. Hershey Company — 2009, Anne Walsh and Ellen Mansfield PERSONAL CARE 21. Johnson & Johnson — 2009, Sharynn Tomlin, Matt Milhauser, Bernhard Gierke, Thibault Lefebvre, and Mario Martinez 201 22. Avon Products Inc. — 2009, Rochelle R. Brunson and Marlene M. Reed 212 BEVERAGE 23. Molson Coors — 2009, Amit J. Shah 24. PepsiCo — 2009, John and Sherry Ross 220 232 192 59 CONTENTS HEALTH CARE 25. Pfizer, Inc. — 2009, Vijaya Narapareddy 243 26. Merck & Company Inc. — 2010, Mernoush Banton 252 SPORTS 27. Nike, Inc. — 2010, Randy Harris 261 28. Callaway Golf Company — 2009, Amit J. Shah 272 ENERGY 29. Chevron Corporation — 2009, Linda Herkenhoff 282 xv This page intentionally left blank Preface Why the Need for This New Edition? The global economic recession has created a business world today that is quite different and more complex than it was just two years ago when the previous edition of this text was published. Thousands of businesses have vanished, and consumers have become extremely price sensitive and oftentimes reluctant purchasers of products and services. Very tight credit markets, high unemployment, and millions of new entrepreneurs have also changed the business landscape. Business firms that have survived the last three years of global economic turmoil are today leaner and meaner than ever before. Gaining and sustaining competitive advantage is harder than ever. Social networking and e-commerce have altered marketing to its core since the prior edition. This new edition reveals how to conduct effective strategic planning in this new world order. Since the prior edition, thousands of liquidations, bankruptcies, divestitures, mergers, alliances, and partnerships captured the news. Corporate scandals highlighted the need for improved business ethics and corporate disclosure of financial transactions. Downsizing, rightsizing, and reengineering contributed to a permanently altered corporate landscape. Thousands of firms began doing business globally, and thousands more closed their global operations. Thousands prospered, and yet thousands failed in the last two years as the global recession spared few. Long-held competitive advantages have eroded as new ones formed. This new edition captures the complexity of this world business environment. Both the challenges and opportunities facing organizations of all sizes today are greater than ever. There is less room than ever for error in the formulation and implementation of a strategic plan. This new edition provides a systematic effective approach for developing a clear strategic plan, even in the worst of times. Changes made in this edition are aimed squarely at illustrating the effect of new business concepts and techniques on strategic-management theory and practice. Due to the magnitude of recent changes affecting companies, cultures, and countries, every page of this edition has been updated. The first edition of this text was published in 1986. Since then, this textbook has grown to be one of the most widely read strategicmanagement books, perhaps the most widely read, in the world. This text is now published in nine languages. What Is New in This Edition? This edition includes exciting new features, changes, and content designed to position this text as the clear leader and best choice for teaching strategic management. Here is a summary of what is new in this edition: • A new Chapter 10, “Business Ethics/Social Responsibility/Environmental Sustainability”; there is extensive new coverage of ethics and sustainability because this text emphasizes that “good ethics is good business.” Unique to strategic-management texts, the natural environment discussion is strengthened in this edition to promote and encourage firms to conduct operations in an environmentally sound manner. Respect for the natural environment has become an important concern for consumers, companies, society, and AACSB-International. • A new Chapter 11, “Global/International Issues”; there is extensive new coverage of cultural and conceptual strategic-management differences across countries. Doing business globally has become a necessity, rather than a luxury in most industries because nearly all strategic decisions today are affected by global xviii PREFACE • • • • • • • • • • • issues and concerns. Every case company in this edition does business globally, providing students ample opportunity to evaluate and consider international aspects of doing business. A new boxed insert at the beginning of each chapter showcases a company that has done exceptionally well in the 2008–2010 global economic recession and reveals their strategy. Hundreds of new examples abound in every chapter. A new cohesion case on McDonald’s Corporation (2010); this is one of the most successful, well-known, and best managed global companies in the world; students apply strategy concepts to McDonald’s at the end of each chapter through new Assurance of Learning Exercises. Thirty-two new tables in the chapters to better capture key strategic-management concepts. A revised comprehensive strategic management model to reflect the new chapters. Extensive new narrative on strategic management theory and concepts in every chapter to illustrate the new business world order. On average, 15 new review questions at the end of each chapter. Forty-eight new Assurance of Learning Exercises at the end of chapters that apply chapter concepts; the exercises prepare students for strategic-management case analysis. Twenty-four new color photographs bring the edition to life and illustrate companies/concepts. All new current readings at the end of each chapter; new research and theories of seminal thinkers in strategy development, such as Ansoff, Chandler, Porter, Hamel, Prahalad, Mintzberg, and Barney are provided in the chapters; practical aspects of strategic management, however, are still center stage and the trademark of this text below. Twenty-nine new cases—grouped by industry; great mix of profit/nonprofit, large/small, and manufacturing/service organizations; all the cases have a 2009–2010 time setting; all the cases are “comprehensive” in the sense that each focuses on multiple business functions, rather than addressing one particular business problem or issue; all the cases are undisguised and feature real organizations in real industries using real names and real places (nothing is fictitious in any case); all the cases feature an organization “undergoing strategic change,” thus offering students up-to-date issues to evaluate and consider; all the cases are written in a lively, concise writing style that captures the reader’s interest and establishes a time setting, usually in the opening paragraph; all the cases provide excellent quantitative information such as numbers, ratios, percentages, dollar values, graphs, statistics, and maps so students can prepare a more specific, rational, and defensible strategic plan for the organization; all the cases provide excellent information about the industry and competitors. This edition continues to offer many special time-tested features and content that have made this text so successful for over 20 years. Historical trademarks of this text that are strengthened in this edition are described below. Chapters: Time-Tested Features • This text meets AACSB-International guidelines that support a practitioner orientation rather than a theory/research approach. It offers a skills-oriented approach to developing a vision and mission statement; performing an external audit; conducting an internal assessment; and formulating, implementing, and evaluating strategies. • The author’s writing style is concise, conversational, interesting, logical, lively, and supported by numerous current examples throughout. PREFACE • A simple, integrative strategic-management model appears in all chapters and on the inside front cover of the text. This model is widely used for strategic planning among consultants and companies worldwide. One reviewer said, “One thing I have admired about David’s text is that he follows the fundamental sequence of strategy formulation, implementation, and evaluation. There is a basic flow from mission/purposes to internal/external environmental scanning to strategy 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.” • A Cohesion Case follows Chapter 1 and is revisited at the end of each chapter. This Cohesion Case allows students to apply strategic-management concepts and techniques to a real organization as chapter material is covered, which readies students for case analysis in the course. • End-of-chapter Assurance of Learning Exercises effectively apply concepts and techniques in a challenging, meaningful, and enjoyable manner. Eighteen exercises apply text material to the Cohesion Case; 10 apply textual material to a college or university; another 10 exercises send students into the business world to explore important strategy topics. The exercises are relevant, interesting, and contemporary. • There is excellent pedagogy in this text, including notable quotes and objectives to open each chapter, and key terms, current readings, discussion questions, and experiential exercises to close each chapter. • There is excellent coverage of strategy formulation issues, such as business ethics, global versus domestic operations, vision/mission, matrix analysis, partnering, joint venturing, competitive analysis, governance, and guidelines for conducting an internal/external strategy assessment. • There is excellent coverage of strategy implementation issues such as corporate culture, organizational structure, outsourcing, marketing concepts, financial analysis, and business ethics. • A systematic, analytical approach is presented in Chapter 6, including matrices such as the SWOT, BCG, IE, GRAND, SPACE, and QSPM. • The chapter material is again published in a four-color format. • A chapters-only paperback version of the text is available. • Custom-case publishing is available whereby an instructor can combine chapters from this text with cases from a variety of sources or select any number of cases desired from the 29 cases in the full text. • For the chapter material, the outstanding ancillary package includes a comprehensive Instructor’s Manual, computerized test bank, and PowerPoints. *The comprehensive strategic-management model is displayed on the inside front cover of the text. At the start of each chapter, the section of the comprehensive strategy model covered in that chapter is highlighted and enlarged so students can see the focus of each chapter in the basic unifying comprehensive model. *The Case Information Matrix and Case Description Matrix provided in the preface reveal (1) topical areas emphasized in each case and (2) contact and location information for each case company. These matrices provide suggestions on how the cases deal with concepts in the 11 chapters. Cases: Time-Tested Features • This edition contains the most current set of cases in any strategic-management text on the market. All cases include year-end 2009 financial data and information. • The cases focus on well-known firms in the news making strategic changes. All cases are undisguised, and most are exclusively written for this text to reflect xix xx PREFACE • • • • • • current strategic-management problems and practices. These are all “studentfriendly” cases. Organized conveniently by industry (usually two competing firms per industry), the cases feature a great mix of small business, international, and not-for-profit firms. All cases have been class tested to ensure that they are interesting, challenging, and effective for illustrating strategic-management concepts. All the cases provide complete financial information about the firm, as well as an organizational chart and a vision and mission statement for the organization if those were available. Customized inclusion of cases to comprise a tailored text is available to meet the special needs of some professors. For the cases, the outstanding ancillary package includes an elaborate Case Solutions Manual and support from the www.strategyclub.com Web site. All of the cases are comprehensive in the sense that each provides a full description of the firm and its operations rather than focusing on one issue or problem such as a plant closing. Each case thus lends itself to students preparing a three-year strategic plan for the firm. Special Note to Students Welcome to strategic management. This is a challenging and exciting capstone course that will allow you to function as the owner or chief executive officer of different organizations. Your major task in this course will be to make strategic decisions and to justify those decisions through oral and written communication. Strategic decisions determine the future direction and competitive position of an enterprise for a long time. Decisions to expand geographically or to diversify are examples of strategic decisions. Strategic decision-making occurs in all types and sizes of organizations, from Exxon and IBM to a small hardware store or small college. Many people’s lives and jobs are affected by strategic decisions, so the stakes are very high. An organization’s very survival is often at stake. The overall importance of strategic decisions makes this course especially exciting and challenging. You will be called upon in this course to demonstrate how your strategic decisions could be successfully implemented. In this course, you can look forward to making strategic decisions both as an individual and as a member of a team. No matter how hard employees work, an organization is in real trouble if strategic decisions are not made effectively. Doing the right things (effectiveness) is more important than doing things right (efficiency). For example, many American newspapers are faltering as consumers increasingly switch to interactive media for news. You will have the opportunity in this course to make actual strategic decisions, perhaps for the first time in your academic career. Do not hesitate to take a stand and defend specific strategies that you determine to be the best, based on tools and concepts in this textbook. The rationale for your strategic decisions will be more important than the actual decision, because no one knows for sure what the best strategy is for a particular organization at a given point in time. This fact accents the subjective, contingency nature of the strategic-management process. Use the concepts and tools presented in this text, coupled with your own intuition, to recommend strategies that you can defend as being most appropriate for the organizations that you study. You will also need to integrate knowledge acquired in previous business courses. For this reason, strategic management is often called a capstone course; you may want to keep this book for your personal library. A trademark of this text is its practitioner and applications orientation. This book presents techniques and content that will enable you to actually formulate, implement, and PREFACE evaluate strategies in all kinds of profit and nonprofit organizations. The end-of-chapter Assurance of Learning Exercises allow you to apply what you’ve read in each chapter to the new McDonald’s Cohesion Case and to your own university. Definitely visit the Strategic Management Club Online at www.strategyclub.com. The templates and links there will save you time in performing analyses and will make your work look professional. Work hard in this course and have fun. Good luck! xxi This page intentionally left blank Acknowledgments Many persons have contributed time, energy, ideas, and suggestions for improving this text over 12 editions. The strength of this text is largely attributed to the collective wisdom, work, and experiences of strategic-management professors, researchers, students, and practitioners. Names of particular individuals whose published research is referenced in this edition of this text are listed alphabetically in the Name Index. To all individuals involved in making this text so popular and successful, I am indebted and thankful. Many special persons and reviewers contributed valuable material and suggestions for this edition. I would like to thank my colleagues and friends at Auburn University, Mississippi State University, East Carolina University, and Francis Marion University. I have served on the management faculty at all these universities. Scores of students and professors at these schools helped shape the development of this text. Many thanks go to the following 15 reviewers of the prior edition whose comments shaped this thirteenth edition: Moses Acquaah, The University of North Carolina at Greensboro Charles M. Byles, Virginia Commonwealth University Charles J. Capps III, Sam Houston State University Neil Dworkin, Western Connecticut State University John Frankenstein, Brooklyn College/City University of New York Bill W. Godair, Landmark College, Community College of Vermont Carol Jacobson, Purdue University Susan M. Jensen, University of Nebraska at Kearney Thomas E. Kulik, Washington University at St. Louis Jerrold K. Leong, Oklahoma State University Trina Lynch-Jackson, Indiana University NW, Purdue Calumet, Calumet College of St. Joseph, Indiana Wesleyan University Raza Mir, William Paterson University Thomas W. Sharkey, University of Toledo Jill Lynn Vihtelic, Saint Mary’s College Michael W. Wakefield, Colorado State University–Pueblo Individuals who develop cases for the North American Case Research Association Meeting, the Midwest Society for Case Research Meeting, the Eastern Case Writers Association Meeting, the European Case Research Association Meeting, and Harvard Case Services are vitally important for continued progress in the field of strategic management. From a research perspective, writing strategic management cases represents a valuable scholarly activity among faculty. Extensive research is required to structure business policy cases in a way that exposes strategic issues, decisions, and behavior. Pedagogically, strategic management cases are essential for students in learning how to apply concepts, evaluate situations, formulate a “game plan,” and resolve implementation problems. Without a continuous stream of updated business policy cases, the strategic-management course and discipline would lose much of its energy and excitement. Professors who teach this course supplement lecture with simulations, guest speakers, experiential exercises, class projects, and/or outside readings. Case analysis, however, is typically the backbone of the learning process in most strategic-management courses across the country. Case analysis is almost always an integral part of this course. Analyzing strategic-management cases gives students the opportunity to work in teams to evaluate the internal operations and external issues facing various organizations and to craft strategies that can lead these firms to success. Working in teams gives students practical experience solving problems as part of a group. In the business world, important decisions are generally made within groups; strategic-management students learn to deal xxiv ACKNOWLEDGMENTS with overly aggressive group members and also timid, noncontributing group members. This experience is valuable as strategic-management students near graduation and soon enter the working world a full time. Students can improve their oral and written communication skills as well as their analytical and interpersonal skills by proposing and defending particular courses of action for the case companies. Analyzing cases allows students to view a company, its competitors, and its industry concurrently, thus simulating the complex business world. Through case analysis, students learn how to apply concepts, evaluate situations, formulate strategies, and resolve implementation problems. Instructors typically ask students to prepare a three-year strategic plan for the firm. Analyzing a strategic-management case entails students applying concepts learned across their entire business curriculum. Students gain experience dealing with a wide range of organizational problems that impact all the business functions. The following people wrote cases that were selected for inclusion in this thirteenth edition. These persons helped develop the most current compilation of cases ever assembled in a strategic-management text: Dr. Alen Badal, The Union Institute Dr. Mernoush Banton, Florida International University Dr. Rochelle R. Brunson, Baylor University Dr. John J. Burbridge, Elon University Dr. Charles M. Byles, Virginia Commonwealth University Dr. Donald Crooks, Wagner College Forest R. David, MBA, Francis Marion University Dr. James Harbin, Texas A&M University–Texarkana Dr. Randall D. Harris, California State University–Stanislaus Dr. Linda Herkenhoff, Saint Mary’s College Dr. Patricia Humphrey, Texas A&M University–Texarkana Dr. Hamid H. Kazeroony, William Penn University Dr. Joe W. Leonard, Miami University Dr. Joanne Mack, Alverno College Dr. Ellen Mansfield, La Salle University Dr. Vijaya Narapareddy, University of Denver Dr. Carol V. Pope, Alverno College Dr. Lori Radulovich, Baldwin-Wallace College Dr. John Ross III, Southwest Texas State University–San Marcos Sherry Ross, Southwest Texas State University–San Marcos Dr. Amit J. Shah, Frostburg State University Dr. Greg Stone, Regent University Dr. Sharynn M. Tomlin, Angelo State University Mary Vradelis, Consultant in Berkeley, California Dr. Anne M. Walsh, La Salle University Scores of Prentice Hall employees and salespersons have worked diligently behind the scenes to make this text a leader in strategic management. I appreciate the continued hard work of all those professionals, such as Sally Yagan, Kim Norbuta, Claudia Fernandes, Ann Pulido, and Ana Jankowski. I also want to thank you, the reader, for investing the time and effort to read and study this text. It will help you formulate, implement, and evaluate strategies for any organization with which you become associated. I hope you come to share my enthusiasm for the rich subject area of strategic management and for the systematic learning approach taken in this text. ACKNOWLEDGMENTS Finally, I want to welcome and invite your suggestions, ideas, thoughts, comments, and questions regarding any part of this text or the ancillary materials. Please call me at 910-612-5343, fax me at 910-579-5132, e-mail me at freddavid9@gmail.com, or write me at the School of Business, Francis Marion University, Florence, SC 29501. I sincerely appreciate and need your input to continually improve this text in future editions. Your willingness to draw my attention to specific errors or deficiencies in coverage or exposition will especially be appreciated. Thank you for using this text. Fred R. David xxv This page intentionally left blank About the Author Dr. Fred R. David is the sole author of two mainstream strategicmanagement textbooks: (1) Strategic Management: Concepts and Cases, and (2) Strategic-Management Concepts. These texts have been on a two-year revision cycle since 1986 when the first edition was published. They are among the best if not the best-selling strategicmanagement textbooks in the world and have been used at more than 500 colleges and universities, including Harvard University, Duke University, Carnegie-Mellon University, Johns Hopkins University, the University of Maryland, University of North Carolina, University of Georgia, San Francisco State University, University of South Carolina, and Wake Forest University. This textbook has been translated and published in Chinese, Japanese, Farsi, Spanish, Indonesian, Indian, Thai, and Arabic and is widely used across Asia and South America. It is the best-selling strategic-management textbook in Mexico, China, Peru, Chile, Japan, and number two in the United States. Approximately 90,000 students read Dr. David’s textbook annually as well as thousands of businesspersons. The book has led the field of strategic management for more than a decade in providing an applications/practitioner approach to the discipline. A native of Whiteville, North Carolina, Fred David received a BS degree in mathematics and an MBA from Wake Forest University before being employed as a bank manager with United Carolina Bank. He received a PhD in Business Administration from the University of South Carolina, where he majored in management. Currently the TranSouth Professor of Strategic Management at Francis Marion University (FMU) in Florence, South Carolina, Dr. David has also taught at Auburn University, Mississippi State University, East Carolina University, the University of South Carolina, and the University of North Carolina at Pembroke. He is the author of 152 referred publications, including 40 journal articles and 55 proceedings publications. David has articles published in such journals as Academy of Management Review, Academy of Management Executive, Journal of Applied Psychology, Long Range Planning, and Advanced Management Journal. Dr. David received a Lifetime Honorary Professorship Award from the Universidad Ricardo Palma in Lima, Peru. He delivered the keynote speech at the twenty-first Annual Latin American Congress on Strategy hosted by the Centrum School of Business in Peru. Dr. David recently delivered an eight-hour Strategic Planning Workshop to the faculty at Pontificia Universidad Catolica Del in Lima, Peru, and an eight-hour Case Writing/ Analyzing Workshop to the faculty at Utah Valley State College in Orem, Utah. He has received numerous awards, including FMU’s Board of Trustees Research Scholar Award, the university’s Award for Excellence in Research given annually to the best faculty researcher on campus, and the Phil Carroll Advancement of Management Award, given annually by the Society for the Advancement of Management (SAM) to a management scholar for outstanding contributions in management research. He recently gave the graduation commencement speech at Troy University. xxviii CASE COMPANY INFORMATION MATRIX Case Information Matrix Case Company Stock Symbol Headquarters Web Site Address 2008 Revenues #Employees in $millions Cohesion Case McDonald’s Corp. MCD Oak Brook, IL www.mcdonalds.com 400,000 23,522 DIS Burbank, CA Kansas City, MO www.disney.com 150,000 100 37,843 0.890 Airlines 3. JetBlue Airways 4. AirTran Airways JBLU AAI Forest Hills, NY Orlando, FL www.jetblue.com www.airtran.com 10,047 7,850 3,388 2,552 Retail Stores 5. Family Dollar Stores 6. Wal-Mart Stores 7. Whole Foods Market 8. Macy’s FDO WMT WFMI M Charlotte, NC Bentonville, AR Austin, TX Cincinnati, Ohio www.familydollar.com www.walmartstores.com www.wholefoodsmarket.com www.macysinc.com 25,000 2.1M 46,800 167,000 6,983 405,607 7,953 24,892 Internet Based 9. Yahoo 10. eBay Inc. YHOO EBAY Sunnyvale, CA San Jose, CA www.yahoo.com www.ebay.com 13,600 16,200 7,208 8,541 Financial 11. Wells Fargo WFC San Francisco, CA www.wellsfargo.com 272,800 52,389 Restaurants 12. Krispy Kreme 13. Starbucks Corporation KKD SBUX Winston-Salem, NC Seattle, WA www.krispykreme.com www.starbucks.com 2,700 176,000 383 10,383 Washington, DC www.usps.com 764,000 75,000 Washington, DC San Francisco, CA of San Francisco, San Mateo and Marin Counties www.amtrak.com www.sfgoodwill.org/ storeLocations2.aspx 19,000 500 2,400 28.1 10,100 213,000 5,971 146,277 98,000 12,800 42,201 5,132 SERVICE FIRMS Hospitality/Entertainment 1. Walt Disney Co. 2. Merryland Amusement Park Nonprofit 14. The United States Postal Service 15. Amtrak (NRPC) 16. Goodwill Industries MANUFACTURING Transportation 17. Harley-Davidson 18. Ford Motor HOG FORD Milwaukee, WI Dearborn, MI www.harlety-davidson.com www.ford.com Food 19. Kraft Foods 20. Hershey Foods KFT HSY Norfield, IL Hershey, PA www.kraft.com www.hersheys.com (continued) CASE COMPANY INFORMATION MATRIX xxix Case Information Matrix (continued) Case Company Stock Symbol Headquarters Web Site Address 2008 Revenues #Employees in $millions Personal Care 21. Johnson & Johnson JNJ www.jnj.com 118,700 63,747 22. Avon Products AVP New Brunswick, NJ New York, NY www.avon.com 42,000 10,690 Beverage 23. Molson Coors TAP Denver, CO www.molsoncoors.com 14,000 4,774 Brewing 24. PepsiCo PEP Purchase, NY www.pepsico.com 198,000 43,251 Health Care 25. Pfizer 26. Merck PFE MRK New York, NY www.pfizer.com Whitehouse Station, NJ www.merck.com 81,800 55,200 48,296 23,850 Sports 27. Nike 28. Callaway Golf NKE ELY Beaverton, OR Carlsbad, CA www.nike.com www.callawaygolf.com 32,500 2,700 18,627 1,117 Energy 29. Chevron CVX San Ramon, CA www.chevron.com 67,000 273,005 xxx CASE COMPANY INFORMATION MATRIX Case Description Matrix Topical Content Areas (Y = Yes and N = No) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Cohesion Case – McDonald’s Corp. Y Y Y Y Y Y Y Y Y N N Y Y N Service Firms Hospitality/Entertainment 1. Walt Disney Company 2. Merryland Amusement Park Y Y Y Y Y Y Y Y Y N N Y Y N Y Y Y Y Y Y Y Y Y Y Y Y Y N Airlines 3. JetBlue Airways 4. AirTran Airways Y N Y Y Y Y Y Y Y Y N Y Y N Y Y Y Y Y Y Y Y Y Y Y Y Y N Retail Stores 5. Family Dollar Stores 6. Wal-Mart Stores 7. Whole Foods Market 8. Macy’s Y Y Y Y Internet Based 9. Yahoo 10. eBay Inc. Y Y Y N Y Y Y Y Y Y Y Y Y N Y Y Y Y Y Y Y Y Y N Y Y Y N Financial 11. Wells Fargo Y Y Y Y Y Y Y Y N N Y Y Y Y Restaurants 12. Krispy Kreme 13. Starbucks Corporation Y Y N Y Y Y Y Y Y N N Y Y N Y Y Y Y Y Y Y Y Y Y N Y Y Y Nonprofit 14. The United States Postal Service 15. Amtrak 16. Goodwill Industries of San Francisco, San Mateo and Marin Counties Y Y Y Y Y Y Y Y N N N N Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y N N N N N N N N Y Y Y Y Y Y Y Y N N N N Y Y N N Y Y Y Y Y N Y Y Y N Y N Y Y Y Y Y Y Y Y Y Y Y N Y N Y Y Y Y Y Y Y Y Y Y Y N Manufacturing Firms Transportation 17. Harley-Davidson 18. Ford Motor Y Y Y Y Y Y Y Y Y N N Y Y N Y Y Y Y Y Y Y Y Y N Y Y Y N Food 19. Kraft Foods 20. Hershey Foods Y Y Y N Y Y Y Y Y Y N Y Y N Y Y Y Y Y Y Y Y Y Y Y Y Y N Personal Care 21. Johnson & Johnson 22. Avon Products Y Y Y N Y Y Y Y Y Y Y Y Y N Y Y Y N Y Y Y Y Y N N Y Y N Beverage 23. Molson Coors Brewing 24. PepsiCo Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y N Y N Y Y Y Y Y N N Y Y N Health Care 25. Pfizer 26. Merck Y Y Y Y Y Y Y Y Y N N Y Y Y Y Y Y Y Y Y Y Y Y N Y Y Y N (continued) CASE COMPANY INFORMATION MATRIX Case Description Matrix (continued) Topical Content Areas (Y = Yes and N = No) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Sports 27. Nike 28. Callaway Golf Company Y N Y N Y Y Y Y Y N Y Y Y N Y Y Y Y Y Y Y Y Y N N Y Y N Energy 29. Chevron Y Y Y Y Y N Y Y Y Y Y Y Y N 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. Year-end 2006 Financial Statements Included? Is Organizational Chart Included? Does Company Do Business Outside the United States? Is a Vision or Mission Statement Included? E-Commerce Issues Included? Natural Environment Issues Included? Strategy Formulation Emphasis? Strategy Implementation Included? By-Segment Financial Data Included? Firm Has Declining Revenues? Firm Has Declining Net Income? Discussion of Competitors is Provided? Case Appears in Text for the First Time Ever? Is Firm Headquartered Outside the United States? xxxi This page intentionally left blank Strategic Management CONCEPTS PART 1 Overview of Strategic Management CHAPTER 1 The Nature of Strategic Management CHAPTER OBJECTIVES After studying this chapter, you should be able to do the following: 1. Describe the strategic-management process. 5. Describe the benefits of good strategic management. 2. Explain the need for integrating analysis and intuition in strategic management. 6. Discuss the relevance of Sun Tzu’s The Art of War to strategic management. 3. Define and give examples of key terms in strategic management. 7. Discuss how a firm may achieve sustained competitive advantage. 4. Discuss the nature of strategy formulation, implementation, and evaluation activities. Assurance of Learning Exercise 1A Assurance of Learning Exercise 1B Assurance of Learning Exercise 1C Assurance of Learning Exercise 1D Gathering Strategy Information Strategic Planning for My University Strategic Planning at a Local Company Getting Familiar with SMCO Source: Shutterstock/Photographer Jim Lopes “Notable Quotes” "If we know where we are and something about how we got there, we might see where we are trending—and if the outcomes which lie naturally in our course are unacceptable, to make timely change." —Abraham Lincoln "Most of us fear change. Even when our minds say change is normal, our stomachs quiver at the prospect. But for strategists and managers today, there is no choice but to change." —Robert Waterman Jr. "Without a strategy, an organization is like a ship without a rudder, going around in circles. It’s like a tramp; it has no place to go." —Joel Ross and Michael Kami "If a man takes no thought about what is distant, he will find sorrow near at hand. He who will not worry about what is far off will soon find something worse than worry." —Confucius "Plans are less important than planning." —Dale McConkey "The formulation of strategy can develop competitive advantage only to the extent that the process can give meaning to workers in the trenches." —David Hurst 4 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT When CEOs from the big three American automakers, Ford, General Motors (GM), and Chrysler, showed up without a clear strategic plan to ask congressional leaders for bailout monies, they were sent home with instructions to develop a clear strategic plan for the future. Austan Goolsbee, one of President Obama’s top economic advisers, said, “Asking for a bailout without a convincing business plan was crazy.” Goolsbee also said, “If the three auto CEOs need a bridge, it’s got to be a bridge to somewhere, not a bridge to nowhere.”1 This textbook gives the instructions on how to develop a clear strategic plan— a bridge to somewhere rather than nowhere. This chapter provides an overview of strategic management. It introduces a practical, integrative model of the strategic-management process; it defines basic activities and terms in strategic management. This chapter also introduces the notion of boxed inserts. A boxed insert is provided in each chapter to examine how some firms are doing really well competing in a global economic recession. Some firms are strategically capitalizing on the harsh business climate and prospering as their rivals weaken. These firms are showcased in this edition to reveal how those companies achieved prosperity. Each boxed insert examines the strategies of firms doing great amid the worst recession in almost 30 years, the biggest stock market decline since 1937, high unemployment, record high and then record low oil prices, low consumer confidence, low interest rates, bankruptcies, liquidations, unavailability of credit, falling consumer demand for almost everything, and intense price competition as Doing Great in a Weak Economy MCDonald’s Corporation W hen most firms were struggling in 2008, McDonald’s increased its revenues from $22.7 billion in 2007 to $23.5 billion in 2008. Headquartered in Oak Brook, Illinois McDonald’s net income nearly doubled during that time from $2.4 billion to $4.3 billion—quite impressive. Fortune magazine in 2009 rated McDonald’s as their 16th “Most Admired Company in the World” in terms of their management and performance. McDonald’s added 650 new outlets in 2009 when many restaurants struggled to keep their doors open. McDonald’s low prices and expanded menu items have attracted millions of new customers away from sit-down chains and independent eateries. Jim Skinner, CEO of McDonald’s, says, “We do so well because our strategies have been so well planned out.” McDonald’s served about 60 million customers every day in 2009, 2 million more than in 2008. Nearly 80 percent of McDonald’s are run by franchisees (or affiliates). CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT McDonald’s in 2009 spent $2.1 billion to remodel many of its 32,000 restaurants and build new ones at a more rapid pace than in recent years. This is in stark contrast to most restaurant chains that are struggling to survive, laying off employees, closing restaurants, and reducing expansion plans. McDonald's restaurants are in 120 countries. Going out to eat is one of the first activities that customers cut in tough times. A rising U.S. dollar is another external factor that hurts McDonald’s. An internal weakness of McDonald’s is that the firm now offers upscale coffee drinks like lattes and cappuccinos in over 7,000 locations just as budgetconscious consumers are cutting back on such extravagances. About half of McDonald’s 31,000 locations are outside the United States. But McDonald’s top management team says everything the firm does is for the long term. McDonald’s for several years referred to their strategic plan as “Plan to Win.” This strategy has been to increase sales at existing locations by improving the menu, remodeling dining rooms, extending hours, and adding snacks. The company has avoided deep price cuts on its menu items. McDonald’s was only one of three large U.S. firms that saw its stock price rise in 2008. The other two firms were Wal-Mart and Family Dollar Stores. Other strategies being pursued currently by McDonald’s include replacing gasoline-powered cars with energy-efficient cars, lowering advertising rates, halting building new outlets on street corners where nearby development shows signs of weakness, boosting the firm’s coffee business, and improving the drive-through windows to increase sales and efficiency. McDonald’s receives nearly two thirds of its revenues from outside the United States. The company has 14,000 U.S. outlets and 18,000 outlets outside the United States. McDonald’s feeds 58 million customers every day. The company operates Hamburger University in suburban Chicago. McDonald's reported that first quarter 2009 profits rose 4 percent and same-store sales rose 4.3 percent across the globe. Same-store sales in the second quarter of 2009 were up another 4.8 percent. Source: Based on Janet Adamy, “McDonald’s Seeks Way to Keep Sizzling,” Wall Street Journal (March 10, 2009): A1, A11. Also, Geoff Colvin, “The World’s Most Admired Companies,” Fortune (March 16, 2009): 76–86. consumers today purchase only what they need rather than what they want. Societies worldwide confront the most threatening economic conditions in nearly a century. The boxed insert in each chapter showcases excellent strategic management under harsh economic times. The first company featured for excellent performance in the global recession is McDonald’s Corporation, also showcased as the Cohesion Case in this 13th edition. McDonald’s is featured as the Cohesion Case also because it is a well-known global firm undergoing strategic change and well managed. By working through McDonald’s-related Assurance of Learning Exercises at the end of each chapter, you will be well prepared to develop an effective strategic plan for any company assigned to you this semester. The end-of-chapter exercises apply chapter tools and concepts. What Is Strategic Management? Once there were two company presidents who competed in the same industry. These two presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into the woods. Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled. Instantly, the first president took off his knapsack and got out a pair of jogging shoes. The second president said, “Hey, you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you!” This story captures the notion of strategic management, which is to achieve and maintain competitive advantage. 5 6 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT 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/accounting, production/operations, research and development, and information systems to achieve organizational success. The term strategic management in this text is used synonymously with the term strategic planning. The latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today. The term strategic planning originated in the 1950s and was very popular between the mid-1960s and the mid-1970s. During these years, strategic planning was widely believed to be the answer for all problems. At the time, much of corporate America was “obsessed” with strategic planning. Following that “boom,” however, strategic planning was cast aside during the 1980s as various planning models did not yield higher returns. The 1990s, however, brought the revival of strategic planning, and the process is widely practiced today in the business world. A strategic plan is, in essence, a company’s game plan. Just as a football team needs a good game plan to have a chance for success, a company must have a good strategic plan to compete successfully. Profit margins among firms in most industries have been so reduced by the global economic recession that there is little room for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations in lieu of other, “less desirable” courses of action. The term strategic management is used at many colleges and universities as the subtitle for the capstone course in business administration. This course integrates material from all business courses. The Strategic Management Club Online at www.strategyclub.com offers many benefits for business policy and strategic management students. Professor Hansen at Stetson University provides a strategic management slide show for this entire text (www.stetson.edu/~rhansen/strategy). Stages of Strategic Management The strategic-management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue. Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, how to allocate resources, whether to expand operations or diversify, whether to enter international markets, whether to merge or form a joint venture, and how to avoid a hostile takeover. Because no organization has unlimited resources, strategists must decide which 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. 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 utilizing information systems, and linking employee compensation to organizational performance. CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT 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 upon managers’ ability to motivate employees, which is more an art than a science. Strategies formulated but not implemented serve no useful purpose. Interpersonal skills are especially critical for successful strategy implementation. Strategy-implementation activities affect all employees and managers in an organization. Every division and department must decide on answers to questions, such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?” The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives. Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because external and internal factors are constantly changing. Three fundamental strategy-evaluation activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complacent organizations experience demise. Strategy formulation, implementation, and evaluation activities occur at three 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.2 Integrating Intuition and Analysis Edward Deming once said, “In God we trust. All others bring data.” The strategicmanagement 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 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 7 8 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT 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 upon 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 I’ve-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 both to duplicate what goes on in the mind of a brilliant, intuitive person who knows the business and to couple it with analysis. 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 how the global economic recession has caught so many firms by surprise. Firms, like organisms, must be “adept at adapting” or they will not survive. Corporate bankruptcies and defaults more than doubled in 2009 from an already bad 2008 year. All industries were hit hard, especially retail, chemicals, autos, and financial. As lenders tightened restrictions on borrowers, thousands of firms could not avoid bankruptcy. Even the economies of China, Japan, and South Korea stalled as demand for their goods from the United States and Europe dried up. China’s annual growth slowed from 13 percent in 2007 to 9 percent in 2008 and then 5 percent for 2009. Consumer confidence indexes were falling all over the world as were housing prices. Nine of 10 stocks in the S&P 1500 lost value in 2008. The Nasdaq composite index fell 40.5 percent in 2008, its worst year ever. S&P 500 stocks lost 38.5 percent of their value in 2008, the worst year since 1937. The Dow Jones Industrial Average lost 33.8 percent of its value in 2008, the worst loss since 1931 as shareholders lost $6.8 trillion in wealth. Only three S&P 500 stocks rose in 2008: Family Dollar up 38 percent, making it the best performer in the S&P 500; Wal-Mart Stores up 18 percent; and McDonald’s up nearly 6 percent. The biggest decliner on the Dow in 2008 was GM, whose stock fell 87 percent. Citigroup lost 77 percent of its stock value in 2008. Even General Electric lost 56 percent of its value. Fannie Mae and Freddie Mac each slid 98 percent as did Fleetwood Enterprises, which makes recreational vehicles. And losses were also extensive worldwide. For example, Vanguard’s Europe/Pacific Index, composed of stocks firms based on those continents, fell 43 percent in 2008. To survive, all organizations must astutely identify and adapt to change. The strategicmanagement 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 CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT E-commerce and globalization are external changes that are transforming business and society today. 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. To say U.S. firms are being challenged in the automobile industry is an understatement. But this situation is true in many industries. 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 field(s)?” “Should we reshape our business?” “What new competitors are entering our industry?” “What strategies should we pursue?” “How are our customers changing?” “Are new technologies being developed that could put us out of business?” Key Terms in Strategic Management Before we further discuss strategic management, we should define nine key terms: competitive advantage, strategists, vision and mission statements, external opportunities and threats, internal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies. Competitive Advantage Strategic management is all about gaining and maintaining competitive advantage. This term can be defined as “anything that a firm does especially well compared to rival firms.” When a firm can do something that rival firms cannot do, or owns something that rival firms desire, that can represent a competitive advantage. For example, in a global economic recession, simply having ample cash on the firm’s balance sheet can provide a major competitive advantage. Some cash-rich firms are buying distressed rivals. For example, BHP Billiton, the world’s largest miner, is seeking to buy rival firms in Australia and South America. Freeport-McMoRan Copper & Gold Inc. also desires to expand its portfolio by acquiring distressed rival companies. French drug company SanofiAventis SA also is acquiring distressed rival firms to boost its drug development and diversification. Cash-rich Johnson & Johnson in the United States also is acquiring distressed rival firms. This can be an excellent strategy in a global economic recession. Having less fixed assets than rival firms also can provide major competitive advantages in a global recession. For example, Apple has no manufacturing facilities of its own, and rival Sony has 57 electronics factories. Apple relies exclusively on contract manufacturers for production of all of its products, whereas Sony owns its own plants. Less fixed assets has enabled Apple to remain financially lean with virtually no long-term debt. Sony, in contrast, has built up massive debt on its balance sheet. CEO Paco Underhill of Envirosell says, “Where it used to be a polite war, it’s now a 21st-century bar fight, where everybody is competing with everyone else for the customers’ money.” Shoppers are “trading down,” so Nordstrom is taking customers from Neiman Marcus and Saks Fifth Avenue, T.J. Maxx and Marshalls are taking customers from most other stores in the mall, and even Family Dollar is taking revenues from Wal-Mart.9 Getting and keeping competitive advantage is essential for long-term success in an organization. The Industrial/Organizational (I/O) and the Resource-Based View (RBV) theories of organization (as discussed in Chapters 3 and 4, respectively) present different perspectives on how best to capture and keep competitive advantage—that is, how best to manage strategically. Pursuit of competitive advantage leads to organizational success or failure. Strategic management researchers and practitioners alike desire to better understand the nature and role of competitive advantage in various industries. Normally, a firm can sustain a competitive advantage for only a certain period due to rival firms imitating and undermining that advantage. Thus it is not adequate to simply obtain competitive advantage. A firm must strive to achieve sustained competitive advantage by 9 10 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT (1) continually adapting to changes in external trends and events and internal capabilities, competencies, and resources; and by (2) effectively formulating, implementing, and evaluating strategies that capitalize upon those factors. For example, newspaper circulation in the United States is steadily declining. Most national newspapers are rapidly losing market share to the Internet, and other media that consumers use to stay informed. Daily newspaper circulation in the United States totals about 55 million copies annually, which is about the same as it was in 1954. Strategists ponder whether the newspaper circulation slide can be halted in the digital age. The six broadcast networks—ABC, CBS, Fox, NBC, UPN, and WB—are being assaulted by cable channels, video games, broadband, wireless technologies, satellite radio, high-definition TV, and digital video recorders. The three original broadcast networks captured about 90 percent of the prime-time audience in 1978, but today their combined market share is less than 50 percent.10 An increasing number of companies are gaining a competitive advantage by using the Internet for direct selling and for communication with suppliers, customers, creditors, partners, shareholders, clients, and competitors who may be dispersed globally. E-commerce allows firms to sell products, advertise, purchase supplies, bypass intermediaries, track inventory, eliminate paperwork, and share information. In total, e-commerce is minimizing the expense and cumbersomeness of time, distance, and space in doing business, thus yielding better customer service, greater efficiency, improved products, and higher profitability. The Internet has changed the way we organize our lives; inhabit our homes; and relate to and interact with family, friends, neighbors, and even ourselves. 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, short-post forums such as Twitter, video sites such as YouTube, and social networking sites such as Facebook, MySpace, and LinkedIn instead of television, radio, 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 with their IDs 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 IDs to manage all their online identities. Most traditional retailers have learned that their online sales can boost in-store sales as they utilize their Web sites to promote in-store promotions. Strategists Strategists are the individuals who are most responsible for the success or failure of an organization. Strategists have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur. Jay Conger, professor of organizational behavior at the London Business School and author of Building Leaders, says, “All strategists have to be chief learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model.” Strategists help an organization gather, analyze, and organize information. They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they typically have considerable authority for decision making in the firm. The CEO is the most visible and critical strategic manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist). In the last five years, the position of chief strategy officer (CSO) has emerged as a new addition to the top management ranks of many organizations, including Sun Microsystems, Network Associates, Clarus, Lante, Marimba, Sapient, Commerce One, CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT BBDO, Cadbury Schweppes, General Motors, Ellie Mae, Cendant, Charles Schwab, Tyco, Campbell Soup, Morgan Stanley, and Reed-Elsevier. This new corporate officer title represents recognition of the growing importance of strategic planning in the business world.11 Strategists differ as much as organizations themselves, and these differences must be considered in the formulation, implementation, and evaluation of strategies. Some strategists will not consider some types of strategies because of their personal philosophies. Strategists differ in their attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style. The founder of Hershey Foods, Milton Hershey, built the company to manage an orphanage. From corporate profits, Hershey Foods today cares for over a thousand boys and girls in its School for Orphans. Vision and Mission Statements Many organizations today develop a vision statement that answers the question “What do we want to become?” Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Many vision statements are a single sentence. For example, the vision statement of Stokes Eye Clinic in Florence, South Carolina, is “Our vision is to take care of your vision.” Mission statements are “enduring statements of purpose that distinguish one business from other similar firms. A mission statement identifies the scope of a firm’s operations in product and market terms.”12 It addresses the basic question that faces all strategists: “What is our business?” A clear mission statement describes the values and priorities of an organization. Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities. A mission statement broadly charts the future direction of an organization. A mission statement is a constant reminder to its employees of why the organization exists and what the founders envisioned when they put their fame and fortune at risk to breathe life into their dreams. Here is an example of a mission statement for Barnes & Noble: Our mission is to operate the best specialty retail business in America, regardless of the product we sell. Because the product we sell is books, our aspirations must be consistent with the promise and the ideals of the volumes which line our shelves. To say that our mission exists independent of the product we sell is to demean the importance and the distinction of being booksellers. As booksellers we are determined to be the very best in our business, regardless of the size, pedigree, or inclinations of our competitors. We will continue to bring our industry nuances of style and approaches to bookselling which are consistent with our evolving aspirations. Above all, we expect to be a credit to the communities we serve, a valuable resource to our customers, and a place where our dedicated booksellers can grow and prosper. Toward this end we will not only listen to our customers and booksellers but embrace the idea that the Company is at their service. (www.missionstatements.com) External Opportunities and Threats External opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future. Opportunities and threats are largely beyond the control of a single organization—thus the word external. In a global economic recession, a few opportunities and threats that face many firms are listed here: • • • • • Availability of capital can no longer be taken for granted. Consumers expect green operations and products. Marketing has moving rapidly to the Internet. Consumers must see value in all that they consume. Global markets offer the highest growth in revenues. 11 12 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT • As the price of oil has collapsed, oil rich countries are focused on supporting their own economies, rather than seeking out investments in other countries. • Too much debt can crush even the best firms. • Layoffs are rampant among many firms as revenues and profits fall and credit sources dry up. • The housing market is depressed. • Demand for health services does not change much in a recession. For example, Almost Family Inc., a Louisville, Kentucky, provider of home nursing care, more than doubled its stock price in 2008 to $45. • Dramatic slowdowns in consumer spending are apparent in virtually all sectors, except some discount retailers and restaurants. • Emerging countries' economies could manage to grow 5 percent in 2009, but that is three full percentage points lower than in 2007. • U.S. unemployment rates continue to rise to 10 percent on average. • Borrowers are faced with much bigger collateral requirements than in years past. • Equity lines of credit often now are not being extended. • Firms that have cash or access to credit have a competitive advantage over debt-laden firms. • Discretionary spending has fallen dramatically; consumers buy only essential items; this has crippled many luxury and recreational businesses such as boating and cycling. • The stock market crash of 2008 left senior citizens with retirement worries, so millions of people cut back on spending to the bare essentials. • The double whammy of falling demand and intense price competition is plaguing most firms, especially those with high fixed costs. • The business world has moved from a credit-based economy to a cash-based economy. • There is reduced capital spending in response to reduced consumer spending. The types of changes mentioned above are creating a different type of consumer and consequently a need for different types of products, services, and strategies. Many companies in many industries face the severe external threat of online sales capturing increasing market share in their industry. Other opportunities and threats may include the passage of a law, the introduction of a new product by a competitor, a national catastrophe, or the declining value of the dollar. A competitor’s strength could be a threat. Unrest in the Middle East, rising energy costs, or the war against terrorism could represent an opportunity or a threat. A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and to avoid or reduce the impact of external threats. For this reason, identifying, monitoring, and evaluating external opportunities and threats are essential for success. This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis. Lobbying is one activity that some organizations utilize to influence external opportunities and threats. Internal Strengths and Weaknesses Internal strengths and internal weaknesses are an organization’s controllable activities that are performed especially well or poorly. They arise in the management, marketing, finance/accounting, production/operations, research and development, and management information systems activities of a business. Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategicmanagement activity. Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses. Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information. Also, strengths and weaknesses can be determined by elements of being rather than performance. For example, a strength may involve ownership of natural resources or a historic reputation for quality. Strengths and weaknesses may be determined relative to a firm’s own objectives. For example, high levels of inventory turnover may not be a strength to a firm that seeks never to stock-out. CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT Internal factors can be determined in a number of ways, including computing ratios, measuring performance, and comparing to past periods and industry averages. Various types of surveys also can be developed and administered to examine internal factors such as employee morale, production efficiency, advertising effectiveness, and customer loyalty. Long-Term Objectives Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission. Long-term means more than one year. Objectives are essential for organizational success because they state direction; aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing, motivating, and controlling activities. Objectives should be challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives should be established for the overall company and for each division. Strategies Strategies are the means by which long-term objectives will be achieved. Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures. Strategies currently being pursued by some companies are described in Table 1-1. Strategies are potential actions that require top management decisions and large amounts of the firm’s resources. In addition, strategies affect an organization’s long-term prosperity, typically for at least five years, and thus are future-oriented. Strategies have multifunctional or multidivisional consequences and require consideration of both the external and internal factors facing the firm. Annual Objectives Annual objectives are short-term milestones that organizations must achieve to reach longterm objectives. Like long-term objectives, annual objectives should be measurable, quantitative, challenging, realistic, consistent, and prioritized. They should be established at the TABLE 1-1 Sample Strategies in Action in 2009 Best Buy As soon as Best Buy Company became victorious over longtime archrival Circuit City Stores, Best Buy ran head on into a much larger, formidable competitor: Wal-Mart Stores. Based in Richfield, Minnesota, and having 3,900 stores worldwide, Best Buy reported a 20 percent decline in March 2009 earnings as its new rival Wal-Mart gained thousands of the old Circuit City customers. But Best Buy now meets Wal-Mart’s prices on electronics items and provides great one-on-one customer service with its blue-shirted employees. Best Buy remains well ahead of Wal-Mart in U.S. electronics sales, but Wal-Mart is gaining strength. Levi Strauss San Francisco-based Levi Strauss added 30 new stores and acquired 72 others during the second quarter of 2009. Known worldwide for its jeans, Levi Strauss is expanding and entrenching worldwide while other retailers are faltering in the ailing economy. For that quarter, Levi’s revenues in the Americas were up 8 percent to $518 million, although its Europe and Asia/Pacific revenues declined 17 percent and 13 percent respectively. Levi’s CEO John Anderson says slim fit and skinny jeans are selling best; and the two most popular colors today are very dark and the distressed look. New York Times Company New York Times Company’s CEO, Janet Robinson, says her company is selling off assets and investing heavily in Internet technology in order to convince advertisers that the newspaper is getting ahead of technological changes rapidly eroding the newspaper business. Ms. Robinson is considering plans to begin charging customers for access to the newspaper’s online content, because online advertising revenues are not sufficient to support the business. The 160-year-old New York Times Company’s advertising revenues fell 30 percent in the second quarter of 2009. 13 14 PART 1 • OVERVIEW OF STRATEGIC MANAGEMENT TABLE 1-2 Country Greece Russia Austria Spain U.K. France Germany Italy Belgium Switzerland USA Percentage of People Who Smoke in Selected Countries Percentage 50 High Low 19 Source: Based on Christina Passariello, “Smoking Culture Persists in Europe, Despite Bans,” Wall Street Journal (January 2, 2009): A5. corporate, divisional, and functional levels in a large organization. Annual objectives should be stated in terms of management, marketing, finance/accounting, production/operations, research and development, and management information systems (MIS) accomplishments. A set of annual objectives is needed for each long-term objective. Annual objectives are especially important in strategy implementation, whereas long-term objectives are particularly important in strategy formulation. Annual objectives represent the basis for allocating resources. Policies Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and address repetitive or recurring situations. Policies are most often stated in terms of management, marketing, finance/accounting, production/operations, research and development, and computer information systems activities. Policies can be established at the corporate level and apply to an entire organization at the divisional level and apply to a single division, or at the functional level and apply to particular operational activities or departments. Policies, like annual objectives, are especially important in strategy implementation because they outline an organization’s expectations of its employees and managers. Policies allow consistency and coordination within and between organizational departments. Substantial research suggests that a healthier workforce can more effectively and efficiently implement strategies. Smoking has become a heavy burden for Europe’s state-run social welfare systems, with smoking-related diseases costing well over $100 billion a year. Smoking also is a huge burden on companies worldwide, so firms are continually implementing policies to curtail smoking. Table 1-2 gives a ranking of some countries by percentage of people who smoke. The Strategic-Management Model The strategic-management process can best be studied and applied using a model. Every model represents some kind of process. The framework illustrated in Figure 1-1 is a widely accepted, comprehensive model of the strategic-management process.13 This model does not guarantee success, but it does represent a clear and practical approach for formulating, implementing, and evaluating strategies. Relationships among major components of the strategic-management process are shown in the model, which appears in all subsequent CHAPTER 1 • THE NATURE OF STRATEGIC MANAGEMENT FIGURE 1-1 A Comprehen...
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