Essentials of strategic management 2nd hill jone

Running Case Featuring Wal-MartWal-Mart’s Competitive Advantage Chapter 1●Working Conditions at Wal-Mart Chapter 2●Wal-Mart’s Bargaining Power over Suppliers Chapter 3●Human Resource Str

Running Case Featuring Wal-Mart

Wal-Mart’s Competitive Advantage (Chapter 1)●Working Conditions at Wal-Mart (Chapter 2)●Wal-Mart’s

Bargaining Power over Suppliers (Chapter 3)●Human Resource Strategy and Productivity at Wal-Mart ter 4)●How Wal-Mart Became a Cost Leader (Chapter 5)●Wal-Mart’s Global Expansion (Chapter 6)●Wal-

(Chap-Mart Internally Ventures a New Kind of Retail Store (Chapter 8)●Sam Walton’s Approach to Implementing

Wal-Mart’s Strategy (Chapter 9)

Strategy in Action Features

A Strategic Shift at Microsoft (Chapter 1)●The Agency Problem at Tyco (Chapter 2)●Circumventing Entry

Barriers into the Soft Drink Industry (Chapter 3)●Learning Effects in Cardiac Surgery (Chapter 4)●How

to Make Money in the Vacuum Tube Business (Chapter 5)●The Evolution of Strategy at Procter & Gamble

(Chapter 6)●Diversification at 3M: Leveraging Technology (Chapter 7)●News Corp’s Successful Acquisition

Strategy (Chapter 8)●How to Flatten and Decentralize Structure (Chapter 9)

Practicing Strategic Management

Application-based activities intended to get your students thinking beyond the book.

Small-Group Exercises

Short experiential exercises that ask students to

coordinate and collaborate on group work focused on

an aspect of strategic management.

● Designing a Planning System (Chapter 1)

● Evaluating Stakeholder Claims (Chapter 2)

● Competing with Microsoft (Chapter 3)

● Analyzing Competitive Advantage (Chapter 4)

● How to Keep the Salsa Hot (Chapter 5)

● Developing a Global Strategy (Chapter 6)

● Comparing Vertical Integration Strategies

Exploring the Web

Internet exercises that require students to explore company websites and answer chapter-related questions.

● Visiting 3M (Chapter 1)

● Visiting Merck (Chapter 2)

● Visiting Boeing and Airbus (Chapter 3)

● Visiting Johnson & Johnson (Chapter 4)

● Visiting the Luxury-Car Market (Chapter 5)

● Visiting IBM (Chapter 6)

● Visiting Motorola (Chapter 7)

● Visiting UTC (Chapter 8)

● Visiting Google’s Control System (Chapter 9)

Closing Cases

The Best-Laid Plans—Chrysler Hits the Wall (Chapter 1)●Google’s Mission, Ethical Principles,

and Involvement in China (Chapter 2)●The Pharmaceutical Industry (Chapter 3)●Starbucks (Chapter 4)●

Nike’s Business-Level Strategies (Chapter 5)●IKEA—The Global Retailer (Chapter 6)●United Technologies

Has an ACE in Its Pocket (Chapter 7)●Oracle’s Growing Portfolio of Businesses (Chapter 8)●Ford Has a New

CEO and a New Global Structure (Chapter 9)

Essentials of Strategic Management

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1 2 3 4 5 6 7 12 11 10 09 08

For my children: Elizabeth,

Charlotte, and Michelle

Charles W L Hill

For Nicholas and Julia

and Morgan and Nia

Gareth R Jones

Brief Contents

Chapter 1 The Strategy-Making Process 1

Chapter 2 Stakeholders, the Mission, Governance, and

Business Ethics 26

Chapter 3 External Analysis: The Identification of Opportunities

and Threats 52

Chapter 4 Building Competitive Advantage 77

Chapter 5 Business-Level Strategy and Competitive Positioning 109 Chapter 6 Strategy in the Global Environment 137

Chapter 7 Corporate-Level Strategy and Long-Run Profitability 162

Chapter 8 Strategic Change: Implementing Strategies to Build and

Develop a Company 188

Chapter 9 Implementing Strategy Through Organizational Design 214

Case 1 Boeing Commercial Aircraft: Comeback? C1

Case 2 Apple Computer C17

Contents

Preface xiii

Competitive Advantage and Superior Performance 2Strategic Managers 3

● Running Case:Wal-Mart’s Competitive Advantage 4

Corporate-Level Managers 4Business-Level Managers 6Functional-Level Managers 6The Strategy-Making Process 7

A Model of the Strategic Planning Process 7The Feedback Loop 10

Strategy as an Emergent Process 10

Strategy Making in an Unpredictable World 11Autonomous Action: Strategy Making by Lower-Level Managers 11

● Strategy in Action:A Strategic Shift at Microsoft 12

Serendipity and Strategy 12Intended and Emergent Strategies 13Strategic Planning in Practice 14

Scenario Planning 14Decentralized Planning 15Strategic Intent 16

Strategic Decision Making 17

Cognitive Biases 17Improving Decision Making 18Strategic Leadership 19

Vision, Eloquence, and Consistency 19

Being Well Informed 20Willingness to Delegate and Empower 20The Astute Use of Power 20

Emotional Intelligence 20Summary of Chapter ● Discussion Questions

● Practicing Strategic Management 22

Small-Group Exercise: Designing a Planning System ●

Exploring the Web: Visiting 3M

● Closing Case:The Best-Laid Plans—Chrysler Hits the Wall 23Test Prepper 25

Chapter 2 Stakeholders, the Mission, Governance, and

Business Ethics 26

Stakeholders 27The Mission Statement 28

The Mission 28

Major Goals 30Corporate Governance and Strategy 31

The Agency Problem 32

● Strategy in Action:The Agency Problem at Tyco 35

Ethics and Strategy 40

Ethical Issues in Strategy 40

● Running Case:Working Conditions at Wal-Mart 42

The Roots of Unethical Behavior 44Behaving Ethically 45

Final Words 47Summary of Chapter ● Discussion Questions

● Practicing Strategic Management 49

Small-Group Exercise: Evaluating Stakeholder Claims ●

Exploring the Web: Visiting Merck

● Closing Case:Google’s Mission, Ethical Principles, and Involvement in China 49Test Prepper 51

and Threats 52

Analyzing Industry Structure 53

Risk of Entry by Potential Competitors 54

● Strategy in Action:Circumventing Entry Barriers into the Soft Drink Industry 56

Rivalry Among Established Companies 57The Bargaining Power of Buyers 60The Bargaining Power of Suppliers 61

● Running Case:Wal-Mart’s Bargaining Power over Suppliers 62

Threat of Substitute Products 63

Strategic Groups Within Industries 63

Implications of Strategic Groups 64The Role of Mobility Barriers 65Industry Life Cycle Analysis 65

Embryonic Industries 66Growth Industries 66Industry Shakeout 67Mature Industries 68Declining Industries 68

The Macroenvironment 69

Macroeconomic Forces 69Global Forces 70

Technological Forces 70Demographic Forces 71Social Forces 71Political and Legal Forces 71Summary of Chapter ● Discussion Questions

● Practicing Strategic Management 73

Small-Group Exercise: Competing with Microsoft ●

Exploring the Web: Visiting Boeing and Airbus

● Closing Case:The Pharmaceutical Industry 74Test Prepper 75

Competitive Advantage: Value Creation, Low Cost, and Differentiation 78The Generic Building Blocks of Competitive Advantage 80

Efficiency 80Quality as Excellence and Reliability 81Innovation 83

Customer Responsiveness 83The Value Chain 84

Primary Activities 84Support Activities 86Functional Strategies and the Generic Building Blocks ofCompetitive Advantage 86

Increasing Efficiency 87

● Strategy in Action:Learning Effects in Cardiac Surgery 89

● Running Case:Human Resource Strategy and Productivity at Wal-Mart 91

Increasing Quality 94Increasing Innovation 96Achieving Superior Customer Responsiveness 99Distinctive Competences and Competitive Advantage 100

Resources and Capabilities 101The Durability of Competitive Advantage 102Summary of Chapter ● Discussion Questions

● Practicing Strategic Management 105

Small-Group Exercise: Analyzing Competitive Advantage ●

Exploring the Web: Visiting Johnson & Johnson

● Closing Case:Starbucks 105Test Prepper 107

The Nature of Competitive Positioning 110

Customer Needs and Product Differentiation 110

Customer Groups and Market Segmentation 110Distinctive Competences 111

Choosing a Business-Level Strategy 111

Cost-Leadership Strategy 111

● Running Case:How Wal-Mart Became a Cost Leader 113

Differentiation Strategy 114Cost Leadership and Differentiation 116Focus Strategy 117

Stuck in the Middle 119Competitive Positioning in Different Industry Environments 120

Strategies in Fragmented and Growing Industries 121Strategies in Mature Industries 123

Strategies in Declining Industries 128

● Strategy in Action:How to Make Money in the Vacuum Tube Business 130

Summary of Chapter ● Discussion Questions

● Practicing Strategic Management 133

Small-Group Exercise: How to Keep the Salsa Hot ●

Exploring the Web: Visiting the Luxury-Car Market

● Closing Case:Nike’s Business-Level Strategies 134Test Prepper 135

The Global Environment 138Increasing Profitability Through Global Expansion 139

● Running Case:Wal-Mart’s Global Expansion 140

Expanding the Market: Leveraging Products and Competences 140Realizing Economies of Scale 142

Realizing Location Economies 142Leveraging the Skills of Global Subsidiaries 143Cost Pressures and Pressures for Local Responsiveness 144

Pressures for Cost Reductions 145Pressures for Local Responsiveness 145Choosing a Global Strategy 147

Global Standardization Strategy 148

● Strategy in Action:The Evolution of Strategy at Procter & Gamble 149

Localization Strategy 149Transnational Strategy 150International Strategy 151Changes in Strategy over Time 151Choices of Entry Mode 152

Exporting 152Licensing 153Franchising 154Joint Ventures 155Wholly Owned Subsidiaries 155Choosing an Entry Strategy 156Summary of Chapter ● Discussion Questions

● Practicing Strategic Management 159

Small-Group Exercise: Developing a Global Strategy ●

Exploring the Web: Visiting IBM

● Closing Case:IKEA—The Global Retailer 160Test Prepper 161

Concentration on a Single Industry 163

Horizontal Integration 164Benefits and Costs of Horizontal Integration 164Outsourcing Functional Activities 167

Vertical Integration 168

Arguments for Vertical Integration 170Arguments Against Vertical Integration 173Vertical Integration and Outsourcing 174Entering New Industries Through Diversification 175

Creating Value Through Diversification 175

● Strategy in Action:Diversification at 3M: Leveraging Technology 178

Related versus Unrelated Diversification 180Restructuring and Downsizing 181

Why Restructure? 181Exit Strategies 182Summary of Chapter ● Discussion Questions

● Practicing Strategic Management 184

Small-Group Exercise: Comparing Vertical Integration Strategies ●

Exploring the Web: Visiting Motorola

● Closing Case:United Technologies Has an ACE in Its Pocket 185Test Prepper 186

Develop a Company 188

Strategic Change 189

Types of Strategic Change 189

A Model of the Change Process 190Analyzing a Company as a Portfolio of Core Competences 193

Fill in the Blanks 194Premier Plus 10 194White Spaces 194Mega-Opportunities 195Implementing Strategy Through Internal New Ventures 195

Pitfalls with Internal New Ventures 196Guidelines for Successful Internal New Venturing 198

● Running Case:Wal-Mart Internally Ventures a New Kind of Retail Store 199

Implementing Strategy Through Acquisitions 200

Pitfalls with Acquisitions 200Guidelines for Successful Acquisition 202

● Strategy in Action:News Corp’s Successful Acquisition Strategy 203Implementing Strategy Through Strategic Alliances 204

Advantages of Strategic Alliances 204Disadvantages of Strategic Alliances 205Making Strategic Alliances Work 206Summary of Chapter ● Discussion Questions

● Practicing Strategic Management 210

Small-Group Exercise: Identifying News Corp’s Strategies ●

Exploring the Web: Visiting UTC

General Task 210

● Closing Case:Oracle’s Growing Portfolio of Businesses 210Test Prepper 212

The Role of Organization Structure 215

Building Blocks of Organization Structure 216Vertical Differentiation 216

Problems with Tall Structures 217Centralization or Decentralization? 219

● Strategy in Action:How to Flatten and Decentralize Structure 220Horizontal Differentiation 221

Functional Structure 221Product Structure 223Product-Team Structure 224Geographic Structure 225Multidivisional Structure 226Integration and Organizational Control 230

Forms of Integrating Mechanisms 231Differentiation and Integration 233The Nature of Organizational Control 234

Strategic Controls 234Financial Controls 236Output Controls 238Behavior Controls 238

● Running Case:Sam Walton’s Approach to Implementing Wal-Mart’s Strategy 242Summary of Chapter ● Discussion Questions

● Practicing Strategic Management 244

Small-Group Exercise: Speeding Up Product Development ●

Exploring the Web: Visiting Google’s Control System

● Closing Case:Ford Has a New CEO and a New Global Structure 244Test Prepper 246

Case 1 Boeing Commercial Aircraft: Comeback? C1

Charles W L Hill, University of Washington

Has Boeing’s turnaround in 2005–2006 been merely cosmetic, or has itfundamentally improved its strategic position?

Case 2 Apple Computer C17

Charles W L Hill, University of Washington

The rise, fall, and resurrection of Apple Computer, focusing on its corecompetences and resources

Case 3 Amazon.com C33

Gareth R Jones, Texas A&M University

The business model and strategy of one of the most profitable based businesses and its emerging competitive challenges

Internet-Case 4 Blockbuster’s Challenges in the Video Rental Industry C44

Gareth R Jones, Texas A&M University

Blockbuster faces disruptive technologies and serious questions about thecontinued viability of its business model

Case 5 Whole Foods Market: Will There Be Enough Organic Food to Satisfy

the Growing Demand? C60

Patricia Harasta and Alan N Hoffman, Bentley College

How an entrepreneurial idea takes on a life of its own, grows rapidly into amulti-country phenomenon, and faces issues of stability and consolidation

of growth, without destroying its roots and culture

Case 6 3M in 2006 C69

Charles W L Hill, University of Washington

A company known for innovation uses new products as the basis ofits corporate strategy, providing insight into its culture and evolving global strategy

Case 7 Philips versus Matsushita: A New Century, a New Round C85

Christopher A Bartlett, Harvard Business School

A contrast of the strategy development and operations of a European and aJapanese electronic conglomerate

Case 8 Mired in Corruption—Kellogg Brown & Root in Nigeria C100

Charles W L Hill, University of Washington

A profile of the difference between legal and ethical acts and an evaluation

of KBR’s actions and systems with regard to ethical and legal conduct

Notes N1

Test Prepper Answers A1

Index I1

Preface

The first edition of Essentials of Strategic Management was well received by

in-structors and students alike Based on the feedback of users and reviewers, werevised our book in ways that help students understand the importance ofstrategic management in today’s global world It is clear that strategic managementinstructors share with us a concern for currency in text and examples to ensure thatcutting-edge issues and new developments in strategic management are addressed.And, in the revision, we have updated all the text material and the cases at the end ofthe book to present a clear and current account of strategic management

Our goal in this revision is to explain in a clear, comprehensive, but concise way why strategic management is important to people, the companies they work for,and the societies in which they live Often people are unaware of how the strategy-making process affects them We are all used to going to work and visiting com-panies such as restaurants, stores, and banks to buy the goods and services we need

to satisfy our many needs However, the actual strategic management activities andprocesses that are required to make these goods and services available to us com-monly go unappreciated Similarly, we know that companies exist to make a “profit,”but what is profit, how is it created, and what is it used for? Moreover, what are theactual strategic management activities involved in the creation of goods and ser-vices, and why is it that some companies seem to be more effective and more “prof-itable” than others? Our goal is to provide the “big picture” of what strategic man-agement is, what strategic managers do, and how the strategy-making process affectscompany performance The book provides a focused, integrated approach that givesstudents a solid understanding of the nature, functions, and main building blocks ofstrategic management

Organization of the Book

The book presents a broad overview of the nature and functions of strategic

man-agement in nine chapters Part 1, Introduction to Strategic Manman-agement, explains

what strategic management is and provides a framework for understanding whatstrategic managers do Chapter 1 discusses the relationship between strategic man-agement and strategic leadership and shows how competitive advantage results insuperior performance It also describes the plan of this book and discusses the prin-cipal functions of strategic managers Chapter 2 discusses the ways in which compa-nies affect their stakeholders and why it is necessary to create corporate governancemechanisms that ensure that strategic managers work to further the interests ofstakeholders and behave ethically

In Part 2, The Nature of Competitive Advantage, we discuss the factors and forces

both external and internal to an organization that determine its choice of strategiesfor creating a competitive advantage and achieving above-average profitability

Chapter 3 looks at opportunities, threats, and competition in the external ment Chapter 4 examines how a company can build competitive advantage byachieving superior efficiency, quality, innovation, and responsiveness to customers.

environ-It also discusses how managers can craft functional-level strategies that will allow anorganization to achieve these goals

In Part 3, Building and Sustaining Long-Run Competitive Advantage, we provide a

streamlined discussion of the different levels of strategy that must be developed tobuild and sustain a long-term competitive advantage Chapter 5 considers how touse business-level strategies to optimize competitive positioning and outperform in-dustry rivals Chapter 6 discusses how to strengthen competitive advantage by ex-panding globally into new national markets Chapter 7 then examines the variouscorporate-level strategies, such as vertical integration, diversification, and outsourc-ing, that are used to protect and strengthen competitive advantage and sustain long-run profitability

Finally, in Part 4, Strategy Implementation, we examine the many operational

is-sues involved in putting all these strategies into action simultaneously Chapter 8first discusses the importance of strategic change in today’s fast-moving global envi-ronment and the issues and problems involved in managing the change process ef-fectively Then it outlines how to build and develop a company’s business throughthe use of internal new venturing, acquisitions, and strategic alliances and considersthe pros and cons of these different methods Chapter 9 discusses how to implementstrategy through the design of organization structure and the operational issues in-volved in selecting structures to match the needs of particular strategies It also looks

at the organizational control systems necessary to fit strategy to structure and therole of organizational culture in developing competitive advantage

As you can see by perusing the table of contents, the approach we take in tials of Strategic Management parallels that of our other book, Strategic Management:

Essen-An Integrated Approach Our goal is to offer a contemporary, integrated account of

strategic management, but one that is streamlined and focused only on the essentials

of this complex and fascinating subject

Learning Features

Nothing makes the practice of strategic management come alive more than vividstories and examples about people and companies that demonstrate clearly themeaning of the chapter material Hands-on exercises offer students the opportunity

to actively think about and engage in strategic-management issues and decisionmaking We paid considerable attention to creating and developing both in-chapterand end-of-chapter features and exercises that would offer the most learning value

to students while economizing on their valuable learning time

Each of the chapters has been revised Several new Strategy in Action boxes have

been carefully selected and written to raise students’ interest; these have been grated seamlessly into the text so as not to disrupt its flow Many books have examplesthat disrupt students’ thought processes or distract them with enormous amounts of

inte-unnecessary detail; Essentials of Strategic Management avoids these pitfalls.

Similarly, in the revised edition, the end-of-chapter learning features include fourtypes of exercises, each of which offers additional insight into the chapter material tobuild students’ learning experience Exercises are designed to create lively discussion

at the level of either the whole class, small groups, or the individual In practice, structors will have to decide which of these exercises to use in any particular class pe-riod and which to use as homework assignments Frequently, instructors find thatvarying the exercises they use over the semester is the best way to engage students.

in-● Discussion Questions Among these chapter-related questions and points for

re-flection are some that ask students to research actual management issues andlearn firsthand from practicing managers

● Small-Group Exercise Each interactive experiential exercise is designed to be

uti-lized in groups of three to four students The instructor calls on students tobreak up into small groups simply by turning to people around them, and allstudents participate in the exercise in class In each chapter, the exercise dealswith a chapter-related issue guaranteed to lead to debate among students Amechanism is provided for the different groups to share what they have learnedwith one another

● Exploring the Web This exercise asks the student to visit the website of a

com-pany and use the information contained on that website to answer a series ofchapter-related questions

Each chapter also ends with a short case, which can be used for further analysis

of chapter issues These cases have been carefully chosen to reflect contemporary sues and problems in strategic management and to offer further information onchapter issues The accompanying discussion questions encourage students to readabout and analyze how managers approach real problems in the strategic manage-ment world

is-Finally, in the revised edition, a new set of eight longer cases is included at theend of the book to allow students to perform an in-depth analysis of the way a com-pany has formulated and implemented its strategy These cases are often focused on

a specific strategic management topic—for example, analyzing the competitive ronment (Blockbuster’s Challenges in the Video Rental Industry; Whole Foods Mar-ket: Will There Be Enough Organic Food to Satisfy the Growing Demand?); buildingcompetitive advantage (3M in 2006); developing business-level strategy (AppleComputer; Amazon.com); changing corporate and global strategy over time (BoeingCommercial Aircraft: Comeback?; Philips versus Matsushita: A New Century, a New Round); and evaluating ethical and legal conduct (Mired in Corruption—Kellogg Brown & Root in Nigeria) Students can be asked to collect additional infor-mation on the companies in these cases, both to bring the analysis up to date and tosee how managers have worked to increase competitive advantage and performanceover time

needed to continually improve and refine a new product Then we are grateful toSuzanna Bainbridge for taking on the task of ensuring that the book would meet theneeds of its users and satisfy students and for providing us with useful feedback andinformation from professors and reviewers that have allowed us to shape the book

to meet the needs of its intended market Third, we are grateful to Margaret Bridgesfor so ably coordinating the book’s progress All these people have been instrumen-tal in creating a product we hope will meet its goal of helping students better under-stand strategic management and the many ways in which it affects companies andthe people who work in them

Finally, we are indebted to the many colleagues and reviewers who provided uswith useful and detailed feedback, perceptive comments, and valuable suggestionsfor improving the manuscript

Kevin Banning, Auburn University Robert D’Intino, Rowan University Scott Droege, Western Kentucky University Deborah Francis, Brevard College

Sanjay Goel, University of Minnesota Leslie Haugen, University of St Thomas Todd Hostager, University of Wisconsin—Eau Claire John Humphreys, Eastern New Mexico University Deborah Johnson, Franklin University

Kevin L Johnson, Baylor University Elene Kent, Capital University Subodh Kulkarni, Howard University Kamalesh Kumar, University of Michigan—Dearborn Paul Mallette, Colorado State University

Josetta McLaughlin, Roosevelt University Tom Morris, Radford University

David Olson, California State—Bakersfield William Ritchie, Florida Gulf Coast University Tim Rogers, Ozarks Technical College

Stuart Rosenberg, Dowling College Manjula Salimath, University of North Texas Thomas Sgritta, University of North Carolina—Charlotte Chanchai Tangpong, North Dakota State University Michael Wakefield, Colorado State University—Pueblo Edward Ward, St Cloud State University

Kenneth Wendeln, University of San Diego Garland Wiggs, Hamline University Jun Zhao, Governors State University

Charles W L Hill, Seattle, Washington Gareth R Jones, College Station, Texas

4. Discuss the main pitfalls

of planning, and how

those pitfalls can be

avoided

5. Outline the cognitive

biases that might lead to

poor strategic decisions,

and explain how these

biases can be overcome

6. Discuss the role played

by strategic leaders in the

strategy-making process

The Strategy-Making Process

Chapter Outline

I Competitive Advantageand Superior Performance

II Strategic Managers

a Corporate-LevelManagers

b Business-LevelManagers

c Functional-LevelManagersIII The Strategy-MakingProcess

a A Model of the StrategicPlanning Process

b The Feedback Loop

IV Strategy as an EmergentProcess

a Strategy Making in anUnpredictable World

b Autonomous Action:

Strategy Making byLower-Level Managers

c Serendipity andStrategy

d Intended and EmergentStrategies

V Strategic Planning inPractice

VII Strategic Leadership

a Vision, Eloquence, andConsistency

b Commitment

c Being Well Informed

d Willingness to Delegateand Empower

e The Astute Use ofPower

f Emotional Intelligence

Overview Why do some companies succeed while others fail? In the fast-evolving world of the

Internet, for example, how is it that companies like Yahoo!, Amazon.com, eBay, andGoogle have managed to attract millions of customers, while others like online gro-cer Webvan, software retailer Egghead.com, and the online pet supplies retailerPets.com all went bankrupt? Why has Wal-Mart been able to do so well in thefiercely competitive retail industry, while others like Kmart have struggled? In thepersonal computer industry, what distinguishes Dell from less successful companiessuch as Gateway? In the airline industry, how has Southwest Airlines managed tokeep increasing its revenues and profits through both good times and bad, while ri-vals such as US Airways and United Airlines have had to seek bankruptcy protec-tion? What explains the persistent growth and profitability of Nucor Steel, now thelargest steel maker in America, during a period when many of its once larger rivalshave disappeared into bankruptcy?

In this book, we argue that the strategies a company’s managers pursue have amajor impact on its performance relative to rivals A strategyis a set of actions thatmanagers take to increase their company’s performance relative to rivals If a com-

pany’s strategy does result in superior performance, it is said to have a competitive advantage.

Much of this book is about identifying and describing the strategies that agers can pursue to achieve superior performance A central aim of this book is togive you a thorough understanding of the analytical techniques and skills necessary

man-to identify and implement strategies successfully The first step man-toward achieving this

objective is to describe in more detail what superior performance and competitive vantage mean.

ad-strategy

A set of actions that

managers take to increase

their company’s

performance relative to

rivals.

profitability

The return that a company

makes on the capital

invested in the enterprise.

competitive advantage

The advantage over

rivals achieved when a

Competitive Advantage and Superior Performance

Superior performance is typically thought of in terms of one company’s profitabilityrelative to that of other companies in the same or a similar kind of business or in-dustry The profitabilityof a company can be measured by the return that it makes

on the capital invested in the enterprise.1The return on invested capital that a pany earns is defined as its profit over the capital invested in the firm (profit/capital

com-invested) By profit, we mean after-tax earnings By capital, we mean the sum of

money invested in the company—that is, stockholders’ equity plus debt owed tocreditors This capital is used to buy the resources a company needs to produce andsell goods and services A company that uses its resources efficiently makes a positivereturn on invested capital The more efficient a company is, the higher are its prof-itability and return on invested capital

A company’s profitability—its return on invested capital—is determined by thestrategies its managers adopt For example, Wal-Mart’s strategy of focusing on therealization of cost savings from efficient logistics and information systems, and thenpassing on the bulk of these cost savings to customers in the form of lower prices,has enabled the company to gain ever more market share, reap significant econo-mies of scale, and further lower its cost structure, thereby boosting profitability (fordetails, see the Running Case on Wal-Mart)

A company is said to have a competitive advantageover its rivals when its itability is greater than the average profitability for all firms in its industry Thegreater the extent to which a company’s profitability exceeds the average profitabilityfor its industry, the greater is its competitive advantage A company is said to have a

prof-sustained competitive advantage when it is able to maintain above-average itability for a number of years Companies like Wal-Mart, Southwest, and Dell havehad a significant and sustained competitive advantage because they have pursuedfirm-specific strategies that result in superior performance

prof-It is important to note that, in addition to its strategies, a company’s performance

is also determined by the characteristics of the industry the company competes in.Different industries are characterized by different competitive conditions In some,demand is growing rapidly, while in others it is contracting Some might be beset byexcess capacity and persistent price wars, others by excess demand and rising prices

In some, technological change might be revolutionizing competition Others might

be characterized by a lack of technological change In some industries, high itability among incumbent companies might induce new companies to enter the in-

prof-general managers

Managers who bear

responsibility for the

overall performance of the

company or for that of one

of its major self-contained

subunits or divisions.

functional managers

Managers responsible for

supervising a particular

function—that is, a task,

activity, or operation like

accounting, marketing,

R&D, information

technology, or logistics.

multidivisional company

A company that competes in

several different businesses

and has created a separate

self-contained division to

manage each of them.

dustry, and these new entrants might depress prices and profits In other industries,new entry might be difficult, and periods of high profitability might persist for a con-siderable time Thus, average profitability is higher in some industries and lower inother industries because competitive conditions vary from industry to industry.2

Strategic Managers

Managers are the linchpin in the strategy-making process It is individual managerswho must take responsibility for formulating strategies to attain a competitive ad-vantage and putting those strategies into effect They must lead the strategy-makingprocess Here we look at the strategic roles of different types of managers Later inthe chapter, we discuss strategic leadership, which is how managers can effectivelylead the strategy-making process

In most companies, there are two main types of managers: general managers,

who bear responsibility for the overall performance of the company or for one of itsmajor self-contained subunits or divisions, and functional managers,who are re-sponsible for supervising a particular function—that is, a task, activity, or operationlike accounting, marketing, R&D, information technology, or logistics

A company is a collection of functions or departments that work together tobring a particular product or service to the market If a company provides severaldifferent kinds of products or services, it often duplicates these functions and creates

a series of self-contained divisions (each of which contains its own set of functions)

to manage each different product or service The general managers of these divisionsthen become responsible for their particular product line The overriding concern ofgeneral managers is the health of the whole company or division under their direc-tion; they are responsible for deciding how to create a competitive advantage andachieve high profitability with the resources and capital they have at their disposal.Figure 1.1 shows the organization of a multidivisional company—that is, a com-pany that competes in several different businesses and has created a separate self-contained division to manage each of these As you can see, there are three main

Corporate Level

CEO, board of directors, and corporate staff

Business Level

Divisional managers and staff

Functional Level

Functional managers

Business functions

Business functions

Head Office

Division B

Business functions

F i g u r e 1 1

Levels of Strategic

Management

Wal-Mart’s Competitive Advantage

which earned 11.9% and 12.6%, respectively (another majorrival, Kmart, emerged from bankruptcy protection in 2004) Asshown in the accompanying figure, Wal-Mart has been consis-tently more profitable than its rivals for years, although of lateits rivals have been closing the gap

Wal-Mart’s persistently superior profitability reflects acompetitive advantage that is based upon a number of strate-gies Back in 1962, Wal-Mart was one of the first companies toapply the self-service supermarket business model developed bygrocery chains to general merchandise (two of its rivals, Kmartand Target, were established in the same year) Unlike its rivals,

R U N N I N G C A S E

Wal-Mart is one of the most extraordinary success stories in

business history Started in 1962 by Sam Walton, Wal-Mart has

grown to become the world’s largest corporation In the

finan-cial year ending January 31, 2007, the discount retailer, whose

mantra is “everyday low prices,” had sales of nearly $345

bil-lion, 7,600 stores in fifteen countries (some 4,600 are in the

United States), and 1.9 million employees Some 8% of all

re-tail sales in the United States are made at a Wal-Mart store

Wal-Mart is not only large; it is also very profitable In 2006,

the company earned a return on invested capital of 14.1%,

do-ing better than its well-managed rivals Costco and Target,

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

18 16 14 12 10 8 6 4 2 0

Profitability in the U.S Retail Industry, 1994–2006

Source: Data from Value Line Investment Survey.

levels of management: corporate, business, and functional General managers arefound at the first two of these levels, but their strategic roles differ depending ontheir sphere of responsibility

● Corporate-Level

Managers

The corporate level of management consists of the chief executive officer (CEO), other senior executives, the board of directors, and corporate staff These in-dividuals occupy the apex of decision making within the organization The CEO isthe principal general manager In consultation with other senior executives, the role

which focused on urban and suburban locations, Sam Walton’s

Wal-Mart concentrated on small southern towns Wal-Mart

grew quickly by pricing lower than local mom-and-pop

retail-ers, often putting them out of business By the time Kmart and

Target realized that small towns could support a large discount

general merchandise store, Wal-Mart had already pre-empted

them These towns, which were large enough to support one

discount retailer, but not two, provided a secure profit base for

Wal-Mart

The company was also an innovator in information

sys-tems, logistics, and human resource practices Taken together,

these strategies resulted in higher productivity and lower costs,

which enabled the company to earn a high profit while

charg-ing low prices Wal-Mart led the way among American retailers

in developing and implementing sophisticated product

track-ing systems ustrack-ing bar-code technology and checkout scanners

This information technology enabled Wal-Mart to track what

was selling and adjust its inventory accordingly, so that the

products found in a store matched local demand By avoiding

overstocking, Wal-Mart did not have to hold periodic sales to

shift unsold inventory Over time, Wal-Mart linked this

infor-mation system to a nationwide network of distribution centers,

where inventory was stored and then shipped to stores within a

400-mile radius on a daily basis The combination of

distribu-tion centers and informadistribu-tion centers enabled Wal-Mart to

re-duce the amount of inventory it held in stores, thereby

devot-ing more of that valuable space to selldevot-ing and reducdevot-ing the

amount of capital it had tied up in inventory

With regard to human resources, the tone was set by Sam

Walton, who held a strong belief that employees should be

re-spected and rewarded for helping to improve the profitability

of the company Underpinning this belief, Walton referred to

employees as “associates.” He established a profit-sharingscheme for all employees and, after the company went public

in 1970, a program that allowed employees to purchase Mart stock at a discount to its market value Wal-Mart was re-warded for this approach by high employee productivity, whichtranslated into lower operating costs and higher profitability

Wal-As Wal-Mart grew larger, the sheer size and purchasingpower of the company enabled it to drive down the prices that

it paid suppliers Passing on those savings to customers in theform of lower prices enabled Wal-Mart to gain more marketshare and hence demand even lower prices To take the stingout of the persistent demands for lower prices, Wal-Martshared its sales information with suppliers on a daily basis, en-abling them to gain efficiencies by configuring their own pro-duction schedules to sales at Wal-Mart

By the time the 1990s came along, Wal-Mart was already thelargest general seller of general merchandise in America To keepits growth going, Wal-Mart started to diversify into the grocerybusiness, opening 200,000-square-foot supercenter stores thatsold groceries and general merchandise under the same roof.Wal-Mart also diversified into the warehouse club business withthe establishment of Sam’s Club The company began expandinginternationally in 1991 with its entry into Mexico

For all its success, however, Wal-Mart is now encounteringvery real limits to profitable growth The U.S market is ap-proaching saturation, and growth overseas has proved moredifficult than the company had hoped The company wasforced to exit Germany and South Korea after losing moneythere, and it has found it tough going in several other devel-oped nations such as Britain Moreover, rivals Target andCostco have continued to improve their performance and arenow snapping at Wal-Mart’s heels.a

of corporate-level managers is to oversee the development of strategies for the whole

organization This role includes defining the goals of the organization, determiningwhat businesses it should be in, allocating resources among the different businesses,formulating and implementing strategies that span individual businesses, and pro-viding leadership for the entire organization

Consider General Electric (GE) as an example GE is active in a wide range ofbusinesses, including lighting equipment, major appliances, motor and transporta-tion equipment, turbine generators, construction and engineering services, indus-trial electronics, medical systems, aerospace, aircraft engines, and financial services

The main strategic responsibilities of its CEO, Jeffrey Immelt, are setting overallstrategic goals, allocating resources among the different business areas, decidingwhether the firm should divest itself of any of its businesses, and determiningwhether it should acquire any new ones In other words, it is up to Immelt to de-velop strategies that span individual businesses; his concern is with building andmanaging the corporate portfolio of businesses to maximize corporate profitability.

It is not Immelt’s specific responsibility to develop strategies for competing in

the individual business areas, such as financial services The development of suchstrategies is the responsibility of the general managers of these different businesses,

or business-level managers However, it is Immelt’s responsibility to probe the

gic thinking of business-level managers to make sure that they are pursuing gies that will contribute toward the maximization of GE’s long-run profitability, tocoach and motivate those managers, to reward them for attaining or exceedinggoals, and to hold them to account for poor performance

strate-Corporate-level managers also provide a link between the people who see the strategic development of a firm and those who own it (the shareholders).Corporate-level managers, and particularly the CEO, can be viewed as the agents ofshareholders.3 It is their responsibility to ensure that the corporate and businessstrategies that the company pursues are consistent with maximizing profitability andprofit growth If they are not, then ultimately the CEO is likely to be called to ac-count by the shareholders

over-● Business-Level

Managers

Abusiness unitis a self-contained division (with its own functions—for example,finance, purchasing, production, and marketing departments) that provides a prod-uct or service for a particular market The principal general manager at the businesslevel, or the business-level manager, is the head of the division The strategic role ofthese managers is to translate the general statements of direction and intent thatcome from the corporate level into concrete strategies for individual businesses.Thus, whereas corporate-level general managers are concerned with strategies thatspan individual businesses, business-level general managers are concerned withstrategies that are specific to a particular business At GE, a major corporate goal is

to be first or second in every business in which the corporation competes Then thegeneral managers of each division work out for their business the details of a busi-ness model that is consistent with this objective

business unit

A self-contained division

(with its own functions—

for example, finance,

purchasing, production,

and marketing

departments) that provides

a product or service for a

op-so on) that constitute a company or one of its divisions Thus, a functional

man-ager’s sphere of responsibility is generally confined to one organizational activity, whereas general managers oversee the operation of a whole company or division Al-

though they are not responsible for the overall performance of the organization,functional managers nevertheless have a major strategic role: to develop functionalstrategies in their area that help fulfill the strategic objectives set by business- andcorporate-level general managers

In GE’s aerospace business, for instance, manufacturing managers are ble for developing manufacturing strategies consistent with the corporate objective

responsi-of being first or second in that industry Moreover, functional managers providemost of the information that makes it possible for business- and corporate-levelgeneral managers to formulate realistic and attainable strategies Indeed, becausethey are closer to the customer than the typical general manager is, functional man-agers themselves may generate important ideas that subsequently become major

strategies for the company Thus, it is important for general managers to listenclosely to the ideas of their functional managers An equally great responsibility formanagers at the operational level is strategy implementation: the execution of cor-porate- and business-level plans.

strategy formulation

Analyzing the

organization’s external and

internal environments and

then selecting appropriate

strategies.

strategy implementation

Putting strategies into

action.

The Strategy-Making Process

Now that we know something about the strategic roles of managers, we can turn ourattention to the process by which managers formulate and implement strategies.Many writers have emphasized that strategy is the outcome of a formal planningprocess and that top management plays the most important role in this process.4

Although this view has some basis in reality, it is not the whole story As we shall seelater in the chapter, valuable strategies often emerge from deep within the organiza-tion without prior planning Nevertheless, a consideration of formal, rational plan-ning is a useful starting point for our journey into the world of strategy Here weconsider what might be described as a typical formal strategic planning model formaking strategy

● A Model of the

Strategic Planning

Process

The formal strategic planning process has five main steps:

1 Select the corporate mission and major corporate goals

2 Analyze the organization’s external competitive environment to identify nities and threats.

opportu-3 Analyze the organization’s internal operating environment to identify the

orga-nization’s strengths and weaknesses.

4 Select strategies that build on the organization’s strengths and correct its nesses in order to take advantage of external opportunities and counter externalthreats These strategies should be consistent with the mission and major goals

weak-of the organization They should be congruent and constitute a viable businessmodel

5 Implement the strategies

The task of analyzing the organization’s external and internal environments andthen selecting appropriate strategies is known as strategy formulation.In contrast,

strategy implementation involves putting the strategies (or plan) into action Thisincludes taking actions consistent with the selected strategies of the company at thecorporate, business, and functional levels, allocating roles and responsibilitiesamong managers (typically through the design of organization structure), allocatingresources (including capital and people), setting short-term objectives, and design-ing the organization’s control and reward systems These steps are illustrated in Fig-ure 1.2 (which can also be viewed as a plan for the rest of this book)

Each step in Figure 1.2 constitutes a sequential step in the strategic planning

process In step 1, each round or cycle of the planning process begins with a ment of the corporate mission and major corporate goals As shown in Figure 1.2,this statement is shaped by the existing business model of the company The missionstatement is followed by the foundation of strategic thinking: external analysis, in-ternal analysis, and strategic choice The strategy-making process ends with the de-sign of the organization structure, culture, and control systems necessary to imple-ment the organization’s chosen strategy

state-Some organizations go through a new cycle of the strategic planning processevery year This does not necessarily mean that managers choose a new strategy eachyear In many instances, the result is simply to modify and reaffirm a strategy andstructure already in place The strategic plans generated by the planning processgenerally look out over a period of one to five years, with the plan being updated, or

rolled forward, every year In most organizations, the results of the annual strategic

planning process are used as input into the budgetary process for the coming year sothat strategic planning is used to shape resource allocation within the organization

M ISSION S TATEMENT The first component of the strategic management process iscrafting the organization’s mission statement, which provides the framework or con-text within which strategies are formulated A mission statement has four main

components: a statement of the raison d’être of a company or organization—its son for existence—which is normally referred to as the mission; a statement of some desired future state, usually referred to as the vision; a statement of the key values that the organization is committed to; and a statement of major goals.

rea-For example, the current mission of Microsoft is “to enable people and nesses throughout the world to realize their full potential.” The vision of the com-pany—the overarching goal—is to be the major player in the software industry Thekey values that the company is committed to include “integrity and honesty,” “pas-sion for our customers, our partners, and our technology,” “openness and respectful-ness,” and “taking on big challenges and seeing them through.” Microsoft’s missionstatement has absolutely set the context for strategy formulation within the com-pany Thus, the company’s perseverance—first with Windows and now with Xbox,both of which took a long time to bear fruit—exemplifies the idea of “taking on bigchallenges and seeing them through.”5

busi-We shall return to this topic and discuss it in depth in the next chapter

Progress Review (Against Plan)

External Analysis:

Opportunities and Threats (Chapter 3)

Internal Analysis: Strengths and Weaknesses (Chapter 4)

SWOT Analysis:

Formulate Strategies Functional Business Corporate (Chapters 4–8)

Strategy Implementation (Chapters 9–10)

Mission, Vision, Values, and Goals (Chapter 2)

F i g u r e 1 2

A Model of the Strategic

Management Process

E XTERNAL A NALYSIS The second component of the strategic management process is

an analysis of the organization’s external operating environment The essential

pur-pose of the external analysis is to identify strategic opportunities and threats in the

organization’s operating environment that will affect how it pursues its mission

Three interrelated environments should be examined at this stage: the industry ronment in which the company operates, the country or national environment, and the wider socioeconomic environment or macroenvironment.

envi-Analyzing the industry environment requires an assessment of the competitivestructure of the company’s industry, including the competitive position of the com-pany and its major rivals It also requires analysis of the nature, stage, dynamics, andhistory of the industry Because many markets are now global markets, analyzing theindustry environment also means assessing the impact of globalization on competi-tion within an industry Such an analysis may reveal that a company should movesome production facilities to another nation, that it should aggressively expand inemerging markets such as China, or that it should beware of new competition fromemerging nations Analyzing the macroenvironment consists of examining macro-economic, social, governmental, legal, international, and technological factors thatmay affect the company and its industry We consider these issues in Chapter 3 andChapter 6 (where we discuss global issues)

I NTERNAL A NALYSIS Internal analysis, the third component of the strategic planning

process, serves to pinpoint the strengths and weaknesses of the organization Such

issues as identifying the quantity and quality of a company’s resources and abilities and ways of building unique skills and company-specific or distinctive competencies are considered here when we probe the sources of competitive ad-vantage Building and sustaining a competitive advantage requires a company toachieve superior efficiency, quality, innovation, and responsiveness to its customers.Company strengths lead to superior performance in these areas, whereas com-pany weaknesses translate into inferior performance We discuss these issues inChapter 4

cap-SWOT A NALYSIS The next component of strategic thinking requires the generation

of a series of strategic alternatives, or choices of future strategies to pursue, given thecompany’s internal strengths and weaknesses and its external opportunities andthreats The comparison of strengths, weaknesses, opportunities, and threats is nor-mally referred to as a SWOT analysis.6Its central purpose is to identify the strategies

that will create a company-specific business model that will best align, fit, or match a

company’s resources and capabilities to the demands of the environment in which itoperates Managers compare and contrast the various alternative possible strategiesagainst each other with respect to their ability to achieve a competitive advantage.Thinking strategically requires managers to identify the set of strategies that will cre-ate and sustain a competitive advantage:

● Functional-level strategy, directed at improving the effectiveness of operations,

such as manufacturing, marketing, materials management, product ment, and customer service, within a company We consider functional-levelstrategies in Chapter 4

develop-● Business-level strategy, which encompasses the business’s overall competitive

theme, the way it positions itself in the marketplace to gain a competitive vantage, and the different positioning strategies that can be used in different

Strategy as an Emergent Process

industry settings—for example, cost leadership, differentiation, focusing on a ticular niche or segment of the industry, or some combination of these We con-

par-sider business-level strategies in Chapter 5

● Global strategy, which addresses how to expand operations outside the home

country to grow and prosper in a world where competitive advantage is mined at a global level We consider global strategies in Chapter 6

deter-● Corporate-level strategy, which answers these primary questions: What business

or businesses should we be in to maximize the long-run profitability and profitgrowth of the organization? How should we enter and increase our presence inthese businesses to gain a competitive advantage? We consider corporate-levelstrategies in Chapters 7 and 8

The strategies identified through a SWOT analysis should be congruent with eachother Thus, functional-level strategies should be consistent with, or support, thebusiness-level strategy and global strategy of the company Moreover, as we explainlater in this book, corporate-level strategies should support business-level strategies

S TRATEGY I MPLEMENTATION Having chosen a set of congruent strategies to achieve acompetitive advantage and increase performance, managers must put those strate-gies into action: strategy has to be implemented Strategy implementation involvestaking actions at the functional, business, and corporate levels to execute a strategicplan Thus, implementation can include, for example, putting quality improvementprograms into place, changing the way a product is designed, positioning the prod-uct differently in the marketplace, segmenting the marketing and offering differentversions of the product to different consumer groups, implementing price increases

or decreases, expanding through mergers and acquisitions, or downsizing by closingdown or selling off parts of the company All of this and much more is discussed indetail in Chapters 4 through 8

Strategy implementation also entails designing the best organization structure,culture, and control systems to put a chosen strategy into action We discuss the or-ganization structure, culture, and controls required to implement strategy in Chap-ters 9 and 10

● The Feedback Loop The feedback loop in Figure 1.2 indicates that strategic planning is ongoing; it never

ends Once a strategy has been implemented, its execution must be monitored to termine the extent to which strategic goals and objectives are actually being achievedand to what degree competitive advantage is being created and sustained Thisknowledge is passed back up to the corporate level through feedback loops and be-comes the input for the next round of strategy formulation and implementation.Top managers can then decide whether to reaffirm existing strategies and goals orsuggest changes for the future For example, a strategic goal may prove to be too op-timistic, and so the next time a more conservative goal is set Or feedback may revealthat the strategy is not working, so managers may seek ways to change it

de-The basic planning model suggests that a company’s strategies are the result of aplan, that the strategic planning process itself is rational and highly structured, andthat the process is orchestrated by top management Several scholars have criticized

uncer-A dramatic example of this occurred in 1994 and 1995 when Microsoft CEO BillGates shifted the company strategy after the unanticipated emergence of the WorldWide Web (see the Strategy in Action feature) According to critics of formal sys-tems, such a flexible approach to strategy making is not possible within the frame-work of a traditional strategic planning process, with its implicit assumption that anorganization’s strategies need to be reviewed only during the annual strategic plan-ning exercise.

Autonomous action may be particularly important in helping established panies to deal with the uncertainty created by the arrival of a radical new technologythat changes the dominant paradigm in an industry.12Top managers usually rise topreeminence by successfully executing the established strategy of the firm Thus,they may have an emotional commitment to the status quo and are often unable tosee things from a different perspective In this sense, they are a conservative forcethat promotes inertia Lower-level managers, however, are less likely to have thesame commitment to the status quo and have more to gain from promoting newtechnologies and strategies within the firm Thus, they may be first to recognize newstrategic opportunities (as was the case at Microsoft) and lobby for strategic change

com-autonomous action

Action taken by lower-level

managers who, on their

own initiative, formulate

new strategies and work

Business history is replete with examples of accidental events that helped to pushcompanies in new and profitable directions What these examples suggest is thatmany successful strategies are not the result of well-thought-out plans but ofserendipity—that is, stumbling across good things unexpectedly One such exampleoccurred at 3M during the 1960s At that time, 3M was producing fluorocarbons forsale as coolant liquid in air-conditioning equipment One day, a researcher workingwith fluorocarbons in a 3M lab spilled some of the liquid on her shoes Later thatday, when she spilled coffee over her shoes, she watched with interest as the coffeeformed into little beads of liquid and then ran off her shoes without leaving a stain.Reflecting on this phenomenon, she realized that a fluorocarbon-based liquid mightturn out to be useful for protecting fabrics from liquid stains, and so the idea forScotchgard was born Subsequently, Scotchgard became one of 3M’s most profitableproducts and took the company into the fabric protection business, an area it hadnever planned to participate in.13

A Strategic Shift at Microsoft

The Internet has been around since the 1970s, but prior to the

early 1990s it was a drab place, lacking the color, content, and

richness of today’s environment What changed the Internet

from a scientific tool to a consumer-driven media environment

was the invention of hypertext markup language (HTML) and

the related invention of a browser for displaying graphics-rich

webpages based on HTML The combination of HTML and

browsers effectively created the World Wide Web (WWW)

This was a development that was unforeseen

A young programmer at the University of Illinois in 1993,

Mark Andreesen, had developed the first browser, known as

Mosaic In 1994, he left Illinois and joined a start-up company,

Netscape, which produced an improved browser, the Netscape

Navigator, along with software that enabled organizations to

create webpages and host them on computer servers These

de-velopments led to a dramatic and unexpected growth in the

number of people connecting to the Internet In 1990, the

In-ternet had 1 million users By early 1995, the number had

ex-ceeded 80 million and was growing exponentially

Prior to the emergence of the Web, Microsoft did have a

strategy for exploiting the Internet, but it was one that

empha-sized set-top boxes, video on demand, interactive TV, and an

online service, MSN, modeled after AOL and based on

propri-etary standards In early 1994, Gates received emails from two

young employees, Jay Allard and Steve Sinofsky, who argued

that Microsoft’s current strategy was misguided and ignored

the rapidly emerging Web In companies with a more chical culture, such action might have been ignored, but at Mi-crosoft, which operates as a meritocracy in which good ideastrump hierarchical position, it produced a very different re-sponse Gates convened a meeting of senior executives in April

hierar-1994, then wrote a memo to senior executives arguing that theInternet represented a sea change in computing and that Mi-crosoft had to respond

What ultimately emerged was a 180-degree shift in crosoft’s strategy Interactive TV was placed on the backburner, and MSN was relaunched as a Web service based onHTML Microsoft committed to developing its own browsertechnology and within a few months had issued Internet Ex-plorer to compete with Netscape’s Navigator (the underlyingtechnology was gained by an acquisition) Microsoft licensedJava, a computer language designed to run programs on theWeb, from a major competitor, Sun Microsystems Internetprotocols were built into Windows 95 and Windows NT, andGates insisted that henceforth Microsoft’s applications, such asthe ubiquitous Office, embrace the WWW and have the ability

Mi-to convert documents inMi-to an HTML format The new strategywas given its final stamp of approval on December 7, 1995,Pearl Harbor Day, when Gates gave a speech arguing that theInternet was now pervasive in everything Microsoft was doing

By then, Microsoft had been pursuing the new strategy for ayear In short, Microsoft quickly went from a proprietary stan-dards approach to one that embraced the public standards onthe WWW.b

Strategy in Action

● Serendipity

and Strategy

Serendipitous discoveries and events can open up all sorts of profitable avenuesfor a company But some companies have missed out on profitable opportunities be-cause serendipitous discoveries or events were inconsistent with their prior(planned) conception of what their strategy should be In one of the classic exam-ples of such myopia, a century ago the telegraph company Western Union turneddown an opportunity to purchase the rights to an invention made by AlexanderGraham Bell The invention was the telephone, a technology that subsequently madethe telegraph obsolete.

strate-They are not the product of formal top-down planning mechanisms Mintzberg

maintains that emergent strategies are often successful and may be more appropriatethan intended strategies Moreover, as Mintzberg has noted, strategies can take rootvirtually wherever people have the capacity to learn and the resources to supportthat capacity

In practice, the strategies of most organizations are probably a combination ofthe intended (planned) and the emergent The message for management is that itneeds to recognize the process of emergence and to intervene when appropriate,killing off bad emergent strategies but nurturing potentially good ones.15 To makesuch decisions, managers must be able to judge the worth of emergent strategies

They must be able to think strategically Although emergent strategies arise from

within the organization without prior planning—that is, without going through the

steps illustrated in Figure 1.3 in a sequential fashion—top management still has to

evaluate emergent strategies Such evaluation involves comparing each emergent

emergent strategies

Strategies that “emerge”

in the absence of planning.

Unrealized Strategy

Deliberate Strategy

Emergent Strategy

Unplanned Shift by Top-Level Managers Autonomous Action by Lower-Level Managers

Unpredicted Change

Serendipity

Realized Strategy

Planned Strategy

F i g u r e 1 3

Emergent and

Deliberate Strategies

Source: Adapted from

H Mintzberg and A McGugh,

“Strategy Formulation in an

Adhocracy,” Administrative

Science Quarterly 30:2

(June 1985).

strategy with the organization’s goals, external environmental opportunities andthreats, and internal strengths and weaknesses The objective is to assess whether theemergent strategy fits the company’s needs and capabilities In addition, Mintzbergstresses that an organization’s capability to produce emergent strategies is a function

of the kind of corporate culture that the organization’s structure and control tems foster In other words, the different components of the strategic managementprocess are just as important from the perspective of emergent strategies as they arefrom the perspective of intended strategies

sys-Strategic Planning in Practice

Despite criticisms, research suggests that formal planning systems do help managersmake better strategic decisions.16For strategic planning to work, however, it is impor-

tant that top-level managers not just plan in the context of the current competitive

en-vironment but also try to find the strategy that will best allow them to achieve a

com-petitive advantage in the future comcom-petitive environment To try to forecast what that

future will look like, managers can use scenario-planning techniques to plan for ent possible futures They can also involve operating managers in the planning processand seek to shape the future competitive environment by emphasizing strategic intent

differ-● Scenario Planning One reason that strategic planning may fail over the long run is that managers, in

their initial enthusiasm for planning techniques, may forget that the future is ently unpredictable Even the best-laid plans can fall apart if unforeseen contingen-cies occur, and that happens all the time in the real world Scenario planning isbased upon the realization that the future is inherently unpredictable, and that anorganization should plan for not just one future, but a range of possible futures

inher-Scenario planninginvolves formulating plans that are based upon “what if ” ios about the future In the typical scenario-planning exercise, some scenarios areoptimistic and some pessimistic Teams of managers are asked to develop specificstrategies to cope with each scenario A set of indicators is chosen, and the indicatorsare used as “signposts” to track trends and identify the probability that any particu-lar scenario will come to pass The idea is to get managers to understand the dy-namic and complex nature of their environment, to think through problems in astrategic fashion, and to generate a range of strategic options that might be pursuedunder different circumstances.17 Use of the scenario approach to planning has

scenar-spread rapidly among large companies One survey found that over 50% of the tune 500 companies use some form of scenario-planning methods.18

For-The oil company Royal Dutch Shell has perhaps done more than most to pioneerthe concept of scenario planning and its experience demonstrates the power of the ap-proach.19 Shell has been using scenario planning since the 1980s Today, it uses twomain scenarios to refine its strategic planning The scenarios relate to future demandfor oil One, called “Dynamics as Usual,” sees a gradual shift from carbon fuels, such asoil and natural gas, to renewable energy The second scenario, “The Spirit of the Com-ing Age,” looks at the possibility that a technological revolution will lead to a rapid shift

to new energy sources.20Shell is making investments that will ensure the profitability ofthe company whichever scenario comes to pass, and it is carefully tracking technologi-cal and market trends for signs of which scenario is becoming more likely over time.The great virtue of the scenario approach to planning is that it can push man-agers to think outside of the box, to anticipate what they might have to do in differ-

scenario planning

Formulating plans that

are based on “what if”

scenarios about the future.

ent situations, and to learn that the world is a complex and unpredictable place thatplaces a premium on flexibility, rather than inflexible plans based on assumptionsabout the future that may turn out to be incorrect In many cases, as a result of sce-nario planning organizations might pursue one dominant strategy, related to thescenario that is judged to be most likely, but make some investments that will pay off

if other scenarios come to the fore (see Figure 1.4) Thus the current strategy ofShell is based on the assumption that the world will only gradually shift away fromcarbon-based fuels (its “Dynamics as Usual” scenario), but the company is alsohedging its bets by investing in new energy technologies and mapping out a strategy

to pursue should its second scenario come to pass

Identify different possible futures (scenarios).

Formulate plans

to deal with those futures.

Switch strategy if tracking of signposts shows alternative scenarios becoming more likely.

Invest in one plan but

Hedge your bets

by preparing for other scenarios and

This ivory tower approach can result in strategic plans formulated in a vacuum by

top managers who have little understanding or appreciation of current operating alities Consequently, top managers may formulate strategies that do more harmthan good For example, when demographic data indicated that houses and familieswere shrinking, planners at GE’s appliance group concluded that smaller applianceswere the wave of the future Because they had little contact with homebuilders andretailers, they did not realize that kitchens and bathrooms were the two rooms that

re-were not shrinking Nor did they appreciate that working women wanted big

refrig-erators to cut down on trips to the supermarket GE ended up wasting a lot of timedesigning small appliances with limited demand

The ivory tower concept of planning can also lead to tensions between rate-, business-, and functional-level managers The experience of GE’s appliancegroup is again illuminating Many of the corporate managers in the planning groupwere recruited from consulting firms or top-flight business schools Many of thefunctional managers took this pattern of recruitment to mean that corporate man-agers did not think they were smart enough to think through strategic problems forthemselves They felt shut out of the decision-making process, which they believed

corpo-to be unfairly constituted Out of this perceived lack of procedural justice grew anus-versus-them mindset that quickly escalated into hostility As a result, even whenthe planners were right, operating managers would not listen to them For example,the planners correctly recognized the importance of the globalization of the appli-ance market and the emerging Japanese threat However, operating managers, whothen saw Sears Roebuck as the competition, paid them little heed

Finally, ivory tower planning ignores the important strategic role of autonomousaction by lower-level managers and serendipity

Correcting the ivory tower approach to planning requires recognizing that

suc-cessful strategic planning encompasses managers at all levels of the corporation.

Much of the best planning can and should be done by business and functional agers who are closest to the facts; planning should be decentralized The role of cor-

man-porate-level planners should be that of facilitators who help business and functional

managers do the planning by setting the broad strategic goals of the organizationand providing the resources required to identify the strategies that might be neces-sary to attain those goals

● Strategic Intent The formal strategic planning model has been characterized as the fit model of

strat-egy making This is because it attempts to achieve a fit between the internal sources and capabilities of an organization and external opportunities and threats inthe industry environment Gary Hamel and C K Prahalad have criticized the fitmodel because it can lead to a mindset in which management focuses too much on

re-the degree of fit between re-the existing resources of a company and current mental opportunities, and not enough on building new resources and capabilities to create and exploit future opportunities.21Strategies formulated with only the present

environ-in menviron-ind, argue Prahalad and Hamel, tend to be more concerned with today’s lems than with tomorrow’s opportunities As a result, companies that rely exclu-sively on the fit approach to strategy formulation are unlikely to be able to build andmaintain a competitive advantage This is particularly true in a dynamic competitiveenvironment, where new competitors are continually arising and new ways of doingbusiness are constantly being invented

prob-As Prahalad and Hamel note, again and again, companies using the fit approachhave been surprised by the ascent of competitors that initially seemed to lack the re-sources and capabilities needed to make them a real threat This happened to Xerox,which ignored the rise of Canon and Ricoh in the photocopier market until theyhad become serious global competitors; to General Motors, which initially over-looked the threat posed by Toyota and Honda in the 1970s; and to Caterpillar, whichignored the danger Komatsu posed to its heavy earth-moving business until it wasalmost too late to respond

The secret of the success of companies like Toyota, Canon, and Komatsu, ing to Prahalad and Hamel, is that they all had bold ambitions that outstripped theirexisting resources and capabilities All wanted to achieve global leadership, and theyset out to build the resources and capabilities that would enable them to attain thisgoal Consequently, top management created an obsession with winning at all levels

accord-of the organization that was sustained over a ten- to twenty-year quest for globalleadership It is this obsession that Prahalad and Hamel refer to as strategic intent.They stress that strategic intent is more than simply unfettered ambition It encom-passes an active management process, which includes “focusing the organization’sattention on the essence of winning; motivating people by communicating the value

of the target; leaving room for individual and team contributions; sustaining siasm by providing new operational definitions as circumstances change; and usingintent consistently to guide resource allocations.”22

enthu-Thus, underlying the concept of strategic intent is the notion that strategic ning should be based on setting an ambitious vision and goals that stretch a companyand then finding ways to build the resources and capabilities necessary to attain thevision and goals As Prahalad and Hamel note, in practice the two approaches tostrategy formulation are not mutually exclusive All the components of the strategicmanagement process that we discussed earlier (see Figure 1.2) are important

plan-In addition, say Prahalad and Hamel, the strategic management process shouldbegin with a challenging vision, such as attaining global leadership, which stretchesthe organization Throughout the subsequent process, the emphasis should be onfinding ways (strategies) to develop the resources and capabilities necessary to

achieve these goals rather than on exploiting existing strengths to take advantage of existing opportunities The difference between strategic fit and strategic intent,

therefore, may just be one of emphasis Strategic intent is more internally focused and is concerned with building new resources and capabilities Strategic

fit focuses more on matching existing resources and capabilities to the external environment

Strategic Decision Making

Even the best-designed strategic planning systems will fail to produce the desired results

if managers do not use the information at their disposal effectively Consequently, it isimportant that strategic managers learn to make better use of the information theyhave and understand the reasons they sometimes make poor decisions One importantway in which managers can make better use of their knowledge and information is tounderstand and manage their emotions during the course of decision making.23

● Cognitive Biases The rationality of human decision makers is bounded by our own cognitive

capabil-ities.24It is difficult for us absorb and process large amounts of information tively As a result, when making decisions we tend to fall back on certain rules of

effec-thumb, or heuristics, that help us to make sense out of a complex and uncertain

world These heuristics can be quite useful, but sometimes their application can result in severe and systematic errors in the decision-making process.25Systematicerrors are those that appear time and time again They seem to arise from a series

of cognitive biases in the way that human decision makers process information and reach decisions Because of cognitive biases, many managers end up makingpoor decisions, even when they have good information at their disposal and use agood decision-making process that is consistent with the rational decision-makingmodel

Several biases have been verified repeatedly in laboratory settings, so we can

be reasonably sure that they exist and that we are all prone to them.26 Theprior hypothesis biasrefers to the fact that decision makers who have strong prior beliefsabout the relationship between two variables tend to make decisions on the basis ofthese beliefs, even when presented with evidence that their beliefs are wrong More-over, they tend to seek and use information that is consistent with their prior beliefs,while ignoring information that contradicts these beliefs To put this bias in a strate-gic context, it suggests that a CEO who has a strong prior belief that a certain strat-egy makes sense might continue to pursue that strategy, despite evidence that it isinappropriate or failing

Another well-known cognitive bias,escalating commitment,occurs when sion makers, having already committed significant resources to a project, commiteven more resources if they receive feedback that the project is failing.27This may be

deci-an irrational response; a more logical response would be to abdeci-andon the project deci-andmove on (that is, to cut your losses and run), rather than escalate commitment Feel-ings of personal responsibility for a project apparently induce decision makers tostick with a project despite evidence that it is failing

cognitive biases

Systematic errors in human

decision making that arise

from the way people

process information.

prior hypothesis bias

A cognitive bias that occurs

when decision makers who

have strong prior beliefs

tend to make decisions on

the basis of these beliefs,

even when presented with

evidence that their beliefs

are wrong.

escalating commitment

A cognitive bias that occurs

when decision makers,

having already committed

significant resources to a

project, commit even more

resources if they receive

feedback that the project is

failing.

A third bias,reasoning by analogy,involves the use of simple analogies to makesense out of complex problems The problem with this heuristic is that the analogymay not be valid A fourth bias,representativeness, is rooted in the tendency togeneralize from a small sample or even a single vivid anecdote This bias violates thestatistical law of large numbers, which says that it is inappropriate to generalize from

a small sample, let alone from a single case In many respects, the dot-com boom ofthe late 1990s was based on reasoning by analogy and representativeness Prospec-tive entrepreneurs saw some of the early dot-com companies such as Amazon and Ya-hoo! achieve rapid success, at least as judged by some metrics Reasoning by analogyfrom a very small sample, they assumed that any dot-com could achieve similar suc-cess Many investors reached similar conclusions The result was a massive wave ofstart-ups that jumped into the Internet space in an attempt to capitalize on the per-ceived opportunities That the vast majority of these companies subsequently wentbankrupt is testament to the fact that the analogy was wrong and the success of thesmall sample of early entrants was no guarantee that other dot-coms would succeed.Another cognitive bias is known as the illusion of control,which is the tendency

to overestimate one’s ability to control events People seem to have a tendency to tribute their success in life to their own good decision making and their failures to badluck.28General or top managers seem to be particularly prone to this bias: having risen

at-to the at-top of an organization, they tend at-to be overconfident about their ability at-to ceed.29According to Richard Roll, such overconfidence leads to what he has termed

suc-the hubris hyposuc-thesis of takeovers.30Roll argues that top managers are typically confident about their abilities to create value by acquiring another company Hence,they end up making poor acquisition decisions, often paying far too much for thecompanies they acquire Subsequently, servicing the debt taken on to finance such anacquisition makes it all but impossible to make money from the acquisition

over-reasoning by analogy

A cognitive bias that

involves the use of simple

analogies to make sense

out of complex problems.

representativeness

A cognitive bias rooted in

the tendency to generalize

from a small sample or

even a single vivid

decision-making group acts as a

devil’s advocate, bringing

out all the considerations

that might make the

proposal unacceptable.

dialectic inquiry

The generation of a plan

(a thesis) and a counterplan

(an antithesis) that reflect

plausible but conflicting

courses of action.

● Improving

Decision Making

The existence of cognitive biases raises the issue of how to bring critical information

to bear on the decision mechanism so that a company’s strategic decisions are tic and based on thorough evaluation Two techniques known to enhance strategicthinking and counteract groupthink and cognitive biases are devil’s advocacy anddialectic inquiry.31 Devil’s advocacy requires the generation of both a plan and acritical analysis of the plan One member of the decision-making group acts as thedevil’s advocate, bringing out all the reasons that might make the proposal unac-ceptable In this way, decision makers can become aware of the possible perils of rec-ommended courses of action

realis-Dialectic inquiry is more complex, for it requires the generation of a plan (a

thesis) and a counterplan (an antithesis) that reflect plausible but conflicting courses

of action.32Strategic managers listen to a debate between advocates of the plan andcounterplan and then make a judgment about which plan will lead to higher per-formance The purpose of the debate is to reveal problems with definitions,recommended courses of action, and assumptions of both plans As a result of thisexercise, strategic managers are able to form a new and more encompassing concep-tualization of the problem, which becomes the final plan (a synthesis) Dialectic in-quiry can promote thinking strategically

Another technique for countering cognitive biases, championed by Nobel Prizewinner Daniel Kahneman and his associates, is known as the outside view.33 Theoutside view requires planners to identify a reference class of analogous past strate-gic initiatives, determine whether those initiatives succeeded or failed, and evaluatethe project at hand against those prior initiatives According to Kahneman, this tech-nique is particularly useful for countering biases such as the illusion of control

(hubris), reasoning by analogy, and representativeness Thus, for example, whenconsidering a potential acquisition, planners should look at the track record ofacquisitions made by other enterprises (the reference class), determine if they suc-ceeded or failed, and objectively evaluate the potential acquisition against that refer-ence class Kahneman argues that such a “reality check” against a large sample ofprior events tends to constrain the inherent optimism of planners and producemore realistic assessments and plans.

Strategic Leadership

One of the key strategic roles of both general and functional managers is to use alltheir knowledge, energy, and enthusiasm to provide strategic leadership for theirsubordinates and develop a high-performing organization Several authors haveidentified a few key characteristics of good strategic leaders that do lead to high per-formance: (1) vision, eloquence, and consistency, (2) commitment, (3) being wellinformed, (4) willingness to delegate and empower, (5) astute use of power, and (6)emotional intelligence.34

● Vision, Eloquence,

and Consistency

One of the key tasks of leadership is to give an organization a sense of direction.Strong leaders seem to have a clear and compelling vision of where the organizationshould go, are eloquent enough to communicate this vision to others within the or-ganization in terms that energize people, and consistently articulate their vision un-til it becomes part of the culture of the organization.35

Examples of strong business leaders include Microsoft’s Bill Gates; Jack Welch,the former CEO of General Electric; and Sam Walton, Wal-Mart’s founder Foryears, Bill Gates’s vision of a world in which there would be a Windows-based per-sonal computer on every desk was a driving force at Microsoft More recently, the vi-sion has evolved into one of a world in which Windows-based software can be found

on any computing device—from PCs and servers to video game consoles (Xbox),cell phones, and hand-held computers At GE, Jack Welch was responsible for articu-lating the simple but powerful vision that GE should be first or second in every busi-ness in which it competed or exit from that business Similarly, it was Sam Waltonwho established and articulated the vision that has been central to Wal-Mart’s suc-cess—passing on cost savings from suppliers and operating efficiencies to customers

in the form of everyday low prices

● Commitment Strong leaders demonstrate their commitment to their vision and business model by

actions and words, and they often lead by example Consider Nucor’s former CEO,Ken Iverson Nucor is a very efficient steel maker with perhaps the lowest cost struc-ture in the steel industry Because of a relentless focus on cost minimization, it hasturned in thirty years of profitable performance in an industry where most othercompanies have lost money In his tenure as CEO, Iverson set the example: He an-swered his own phone, employed only one secretary, drove an old car, flew coach

class, and was proud of the fact that his base salary was the lowest in the Fortune 500

(Iverson made most of his money from performance-based pay bonuses) This mitment was a powerful signal to employees that Iverson was serious about doingeverything possible to minimize costs It earned him the respect of Nucor employ-ees, which made them more willing to work hard Although Iverson has retired, hislegacy lives on in the cost-conscious organizational culture that has been built atNucor, and like that of all other great leaders, his impact will extend beyond histenure as a leader

or by gatekeepers—managers who may misrepresent the true state of affairs withinthe company to the leader, as may have happened at Enron People like Kelleher,who regularly interact with employees at all levels, are better able to build informalinformation networks than leaders who closet themselves and never interact withlower-level employees.

High-performance leaders are skilled at delegation They recognize that unless theylearn how to delegate effectively, they can quickly become overloaded with responsi-bilities They also recognize that empowering subordinates to make decisions is agood motivation tool Delegating also makes sense when it results in decisions beingmade by those who must implement them At the same time, astute leaders recog-nize that they need to maintain control over certain key decisions Thus, although

they will delegate many important decisions to lower-level employees, they will not delegate those that they judge to be of critical importance to the future success of the

organization under their leadership—such as articulating the vision and businessmodel

● The Astute Use

of Power

In a now classic article on leadership, Edward Wrapp noted that effective leaders tend

to be very astute in their use of power.36He argued that strategic leaders must oftenplay the power game with skill and attempt to build consensus for their ideas ratherthan use their authority to force ideas through; they act as members or democraticleaders of a coalition rather than as dictators Jeffery Pfeffer has articulated a similarvision of the politically astute manager who gets things done in organizations by theintelligent use of power.37In Pfeffer’s view, power comes from control over resources:budgets, capital, positions, information, and knowledge that is important to the orga-nization Politically astute managers use these resources to acquire another critical re-source: critically placed allies who can help a manager attain preferred strategic ob-jectives Pfeffer stresses that one does not need to be a CEO to assemble power in anorganization Sometimes quite junior functional managers can build a surprisinglyeffective power base and use it to influence organizational outcomes

● Emotional

Intelligence

Emotional intelligence is a term that Daniel Goldman coined to describe a bundle of

psychological attributes that many strong and effective leaders exhibit:38

● Self-awareness—the ability to understand one’s own moods, emotions, and drives, as well as their effect on others

● Self-regulation—the ability to control or redirect disruptive impulses or moods(i.e., to think before acting)

● Motivation—a passion for work that goes beyond money or status and apropensity to pursue goals with energy and persistence

● Empathy—understanding the feelings and viewpoints of subordinates and ing those into account when making decisions

tak-● Social skills—friendliness with a purpose

According to Goldman, leaders who possess these attributes—who exhibit a highdegree of emotional intelligence—tend to be more effective than those who lack theseattributes Their self-awareness and self-regulation help to elicit the trust and confi-dence of subordinates In Goldman’s view, people respect leaders who, because theyare self-aware, recognize their own limitations and, because they are self-regulating,consider decisions carefully Goldman also argues that self-aware and self-regulatingindividuals tend to be more self-confident and therefore better able to cope with am-biguity and more open to change A strong motivation exhibited in a passion forwork can also be infectious, helping to persuade others to join together in pursuit of acommon goal or organizational mission Finally, strong empathy and social skills canhelp leaders earn the loyalty of subordinates Empathetic and socially adept individu-als tend to be skilled at managing disputes between managers, better able to findcommon ground and purpose among diverse constituencies, and better able to movepeople in a desired direction than leaders who lack these skills In short, Goldman’sarguments are that the psychological makeup of a leader matters.

Summary of Chapter

1.A strategy is an action that a company takes to attain

one or more of its goals

2.A company has a competitive advantage over its

ri-vals when it is more profitable than the average for

all firms in its industry It has a sustained

competi-tive advantage when it is able to maintain

above-average profitability over a number of years In

gen-eral, a company with a competitive advantage will

grow its profits more rapidly than rivals

3.General managers are responsible for the overall

per-formance of the organization or for one of its major

self-contained divisions Their overriding strategic

concern is for the health of the total organization

under their direction

4.Functional managers are responsible for a particular

business function or operation Although they lack

general management responsibilities, they play a

very important strategic role

5.Formal strategic planning models stress that an

orga-nization’s strategy is the outcome of a rational

plan-ning process The major components of the strategic

management process are defining the mission, vision,

and major goals of the organization; analyzing the

external and internal environments of the

tion; choosing strategies that align or fit an

organiza-tion’s strengths and weaknesses with external

envi-ronmental opportunities and threats; and adopting

organization structures and control systems to

imple-ment the organization’s chosen strategy

6.Strategy can emerge from deep within an tion in the absence of formal plans, as lower-levelmanagers respond to unpredicted situations

organiza-7.Strategic planning often fails because executives donot plan for uncertainty and because ivory towerplanners lose touch with operating realities

8.The fit approach to strategic planning has been cized for focusing too much on the degree of fit be-tween existing resources and current opportunitiesand not enough on building new resources and capa-bilities to create and exploit future opportunities

criti-9.Strategic intent refers to an obsession with achieving

an objective that stretches the company and requires

it to build new resources and capabilities

10. In spite of systematic planning, companies mayadopt poor strategies if their decision-making pro-cesses are vulnerable to the intrusion of individualcognitive biases

11. Devil’s advocacy, dialectic inquiry, and the outsideview are techniques for enhancing the effectiveness

of strategic decision making

12. Good leaders of the strategy-making process have anumber of key attributes: vision, eloquence, andconsistency; commitment; being well informed; awillingness to delegate and empower; political as-tuteness; and emotional intelligence

Discussion Questions

1.What do we mean by strategy? How is a business

model different from a strategy?

2.What do you think are the sources of sustained

supe-rior profitability?

3.What are the strengths of formal strategic planning?

What are its weaknesses?

4.Discuss the accuracy of this statement: Formal

strategic planning systems are irrelevant for firms

competing in high-technology industries where thepace of change is so rapid that plans are routinelymade obsolete by unforeseen events

5.Pick the current or a past president of the UnitedStates and evaluate his performance against the lead-ership characteristics discussed in the text On thebasis of this comparison, do you think that the presi-dent was/is a good strategic leader? Why?

SMALL-GROUP EXERCISE

Designing a Planning System

Break up into groups of three to five people and discuss the

following scenario Appoint one group member as a

spokes-person who will communicate your findings to the class when

called upon to do so by the instructor

You are a group of senior managers working for a

fast-growing computer software company Your product allows

users to play interactive role-playing games over the Internet

In the past three years, your company has gone from being a

start-up enterprise with 10 employees and no revenues to a

company with 250 employees and revenues of $60 million It

has been growing so rapidly that you have not had time to

cre-ate a strcre-ategic plan, but now your board of directors is telling

you that they want to see a plan, and they want it to drive

deci-sion making and resource allocation at the company They

want you to design a planning process that will have the

fol-lowing attributes:

1 It will be democratic, involving as many key employees as

possible in the process

2 It will help to build a sense of shared vision within the

company about how to continue to grow rapidly

3 It will lead to the generation of three to five key strategies

for the company

4 It will drive the formulation of detailed action plans, andthese plans will be subsequently linked to the company’sannual operating budget

Design a planning process to present to your board of rectors Think carefully about who should be included in thisprocess Be sure to outline the strengths and weaknesses of theapproach you choose, and be prepared to justify why your ap-proach might be superior to alternative approaches

di-EXPLORING THE WEB

Visiting 3M

Go to the website of 3M (www.3m.com) and visit the section that describes its history (www.3m.com/profile/looking/index jhtml) Using the information contained there, map out the

evolution of strategy at 3M from its establishment to the ent day To what degree do you think that this evolution wasthe result of detailed long-term strategic planning, and to whatdegree was it the result of unplanned actions taken in response

pres-to unpredictable circumstances?

suffi-cient information to map out the evolution of that company’sstrategy over a significant period of time What drove this evolu-tion? To what degree was it the result of detailed long-term strate-gic planning, and to what degree was it the result of unplannedactions taken in response to unpredictable circumstances?

Practicing Strategic Management