hello this is a final project paper with a group of students that each one will do a specific part of it that at the end should be connected. the topic will be about Target. and my part is Analysis of business-level strategy used by the firm . I will attach the syllabus so would read through it and have a better understanding. keep in mind there will be several revision with the group so we could make all connected and make sense at the end. the paper in total should not be more than 10 pages so my part should be between 2 to 3 pages. again the syllabus will be attached and the book too if needed. thank you

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MGT 429 Executive Strategies & Policies 4 QUIZZES (40 points) Prior to attending a class, students should complete a chapter quiz on Canvas. The quiz questions will help you understand the important concepts in the chapter/case and familiarize you with the course materials. Please complete them in a timely manner. EXAMS (100 points) There will be three close-book close-note pencil-only exams. The exams will consist of multiplechoice questions and will be based on materials drawn from both the textbook and lectures. Exam 1 (60 questions, 30 points) will cover Chapters 1-3, Exam 2 (60 questions, 30 points) will cover Chapter 5, 6, and 8, and Exam 3 (80 questions, 40 points) will cover Chapters 9-13. There will be no make-ups on exams unless permission to be absent was obtained prior to the exam. You must present a valid and reasonable reason to reschedule an exam. CAPSTONE PROJECT There will be a semester-long group project focusing on a specific firm. The project includes forming into groups, selecting a firm, applying strategic management tools to analyze the firm, writing an in-depth report, and presenting your findings and recommendations to the class. You cannot select a firm from those discussed in the weekly cases or a firm from the following list: 3M, Adidas, Airbnb, Airbus, Amazon, Anheuser Busch, Apple, AT&T, Best Buy, Boeing, Coca-Cola, Costco, Dell, Delta Airlines, Domino’s, Dow Chemical, FCA, FedEx, Ford, General Electric, General Motors, Google, Hershey’s, Hulu, Intel, Ikea, JPMorgan Chase Bank, Lyft, McDonald’s, Meijer, Mercedes-Benz, Microsoft, Netflix, Nike, Patagonia, PepsiCo, Pizza Hut, Procter & Gamble, Samsung, Sony, Southwest, Sprint, Starbucks, T-Mobile, Target, Tesla, Tim Hortons, Toyota, Under Armor, Uber, UPS, Verizon, Wal-Mart. You are expected to research multiple sources to access the latest information and to effectively analyze the firm. Your choice of industry and firm must be made and approved by Week 2. The major deliverables include an in-depth project paper and an in-class oral presentation. In addition you are also required to submit a group contribution report which gives me the information about who did what and allows me to assign individual grades if necessary. For this reason, the report needs to be fair, honest, detailed and accurate. Groups will also be evaluated on how well they comment on (or behave during) the presentations of other groups. Besides the final paper, each group should also turn in a project status report by Week 7. PROJECT PAPER (75 points) Your written report must include (but is not limited to) the following components: 1. Executive Summary (5%) This section should include an overview of the entire report and highlight the important findings. This section usually should not exceed one page. 2. External Analysis (Industry Analysis) (20%) MGT 429 Executive Strategies & Policies 5 You may use analytical tools such as Porter’s Five Forces (required), industry life cycle, and strategic group analysis. Exemplar questions may include: • • • • • Who are the competitors and what are their market shares? What products or services are produced in this industry? How have demographic, social, or technological trends influenced this industry? What key opportunities exist for this industry? Which company (or companies) is most likely to take advantage of these opportunities? Why? What key threats (in terms of new entrants, product life cycle, product obsolescence, substitute products, etc.) exist for this industry? 3. Internal Analysis, including the assessment of the firm’s strengths and weaknesses (20%) You may discuss in greater details here about the firm’s history, products, markets, culture, vision, and so on. Some specific questions may include: • • • • Which functional areas within the firm are particularly strong and which are particularly weak? Why? Are any of the firm’s resources/capabilities sources of competitive advantage? Are those advantages sustainable? What are the firm’s distinctive/core competences? What do the firm’s financial statements say about its health? Comparison to competitors? What has the firm’s non-financial performance (corporate governance, employment stability/growth, innovation, customer relations, etc.) been like over the past three to five years? 4. Analysis of business-level strategy used by the firm (20%) • • • • • What is the firm’s primary industry? What is the generic strategy (cost leadership, differentiation, and focus) used by the firm in this industry? What customer needs do the firm’s products/services satisfy? What market segment does the firm serve? How does the firm use its distinctive competencies to serve the customer needs? How is (or is not) the business-level strategy supported by its functional strategies? Is the chosen generic strategy appropriate given the firm’s external and internal environments? Why or why not? Does the firm use other business-level strategies to compete e.g. chaining, franchising, product proliferation, product development etc.? How effective are these strategies? 5. Analysis of the corporate-level strategy of the firm (20%) • • • Identify the businesses the firm is in (or is considering entering), how they are related (or unrelated), and whether and how they create additional value in their combination. Be specific and detailed. If it is unclear that value is created, try to assess why the firm might have chosen to enter those businesses. Has the firm used any horizontal or vertical integration strategies in the past? What are the rationales and effects of these strategies? Has the firm formed any strategic alliances or used strategic outsourcing? Analyze the rationales and effects. Analyze the global strategy used by the firm (if it is a multinational company) and the rationale of using that global strategy. What entry modes did the firm use to enter those countries? Were the methods of entry used (or proposed) the best choice given the firm’s objectives, environment, strengths, weaknesses, and strategy? Be sure to include any appropriate financial analysis to support your assessment. MGT 429 Executive Strategies & Policies 6 6. Recommendations (10%) Recommendations should respond to the key issues identified earlier, and must be specific and actionable. They should be consistent with the analysis. You should evaluate the impact of each recommendation on the firm’s environment, strengths, weaknesses, and strategy. Also highlight why they are feasible to the firm. Do not forget to consider the firm’s financial standing when making recommendations. 7. A bibliography of your sources. Any external information used must be properly referenced. Failure to properly reference any external source constitutes plagiarism. Use the APA format for the bibliography. Your final paper should be in an agreeable and professional format. Be sure to use headings for each section in the paper. It also needs to follow correct form, spelling, and grammar. (5%) The final paper should be no more than 10 pages in length (excluding references and appendix), US letter size, single-spaced, 12-point Times New Roman font, with one inch margins all around. Upload a Word document containing the entire paper on Canvas by the due date. IN-CLASS ORAL PRESENTATION (50 points) Groups will be presenting their projects around the semester end. Each group member must present orally and use PowerPoint slides or other visual aids in an appropriate manner. Each group will have 20 minutes to present their work and additional 10 minutes will be used for questions and discussion. Please upload your PowerPoint slides on Canvas prior to your presentation. It will make your presentation more appealing if you prepare handouts for your classmates. You will be asked to evaluate other groups’ presentations. PROJECT STATUS REPORT (10 points) This one page status report should be turned in on Canvas by Week 7 and list the following: 1) A brief description of the company and industry being studied 2) A brief description of the analysis conducted/in progress 3) Anticipated key findings from your analysis (3-4 of the most important points) 4) Some likely recommendations to respond to your findings. Follow the format of US letter size, single-spaced, 12-point Times New Roman font, with one inch margins all around. PEER EVALUATION (25 points) Each member of a group will evaluate the performance of others in the group. Peer evaluation forms will be available on Canvas and are required for all students. Each individual student’s average rating from peers will be used to measure his/her overall performance on the group project. Upload the peer evaluation form on or before the last day of project presentation. 9th Edition Str ategic Management Theory AN INTEGRATED APPROACH This page intentionally left blank 9th Edition Str ategic Management Theory AN INTEGRATED APPROACH Charles W. L. Hill University of Washington Gareth R. Jones Texas A&M University Australia • Brazil • Japan • Korea • Mexico • Singapore • Spain • United Kingdom • United States Strategic Management Theory: An Integrated Approach, Ninth Edition Charles W. L. Hill and Gareth R. Jones Vice President of Editorial, Business: Jack W. Calhoun Vice President/Editor-in-Chief: Melissa Acuna Sr. Acquisitions Editor: Michele Rhoades Sr. Editorial Assistant: Ruth Belanger Developmental Editor: Suzanna Bainbridge Marketing Manager: Nathan Anderson © 2010, 2008 South-Western, Cengage Learning ALL RIGHTS RESERVED. No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution, information storage and retrieval systems, or in any other manner—except as may be permitted by the license terms herein. For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions. Further permissions questions can be e-mailed to permissionrequest@cengage.com Marketing Coordinator: Suellen Ruttkay Marketing Communications Manager: Jim Overly Assoc. Content Project Manager: Jana Lewis Assoc. Media Editor: Danny Bolan ExamView® is a registered trademark of eInstruction Corp. Windows is a registered trademark of the Microsoft Corporation used herein under license. Macintosh and Power Macintosh are registered trademarks of Apple Computer, Inc. used herein under license. © 2008 Cengage Learning. All Rights Reserved. Sr. Manufacturing Buyer: Sandee Milewski Cengage Learning WebTutor™ is a trademark of Cengage Learning. Production Service: S4Carlisle Publishing Services Library of Congress Control Number: 2009934265 Sr. Art Director: Tippy McIntosh ISBN-13: 978-0-538-75107-0 Internal Designer: Stratton Design ISBN-10: 0-538-75107-X Cover Designer: Stratton Design Cover Image: iStock South-Western Cengage Learning 5191 Natorp Boulevard Mason, OH 45040 USA Cengage Learning products are represented in Canada by Nelson Education, Ltd. For your course and learning solutions, visit www.cengage.com Purchase any of our products at your local college store or at our preferred online store www.ichapters.com Printed in the United States of America 1 2 3 4 5 6 7 12 11 10 09 Brief Contents PART ONE INTRODUCTION TO STRATEGIC MANAGEMENT 1 2 Strategic Leadership: Managing the StrategyMaking Process for Competitive Advantage External Analysis: The Identification of Opportunities and Threats 1 38 PART TWO THE NATURE OF COMPETITIVE ADVANTAGE 3 4 Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability Building Competitive Advantage Through Functional-Level Strategy PART THREE 5 6 7 8 9 10 72 106 STRATEGIES Building Competitive Advantage Through BusinessLevel Strategy Business-Level Strategy and the Industry Environment Strategy and Technology Strategy in the Global Environment Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing Corporate-Level Strategy: Related and Unrelated Diversification 142 176 209 242 283 311 PART FOUR IMPLEMENTING STRATEGY 11 12 13 Corporate Performance, Governance, and Business Ethics Implementing Strategy in Companies That Compete in a Single Industry Implementing Strategy in Companies That Compete across Industries and Countries 345 378 421 v vi Contents Contents Preface PART ONE Chapter 1 xix INTRODUCTION TO STRATEGIC MANAGEMENT Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage 1 Opening Case: Walmart’s Competitive Advantage 1 Strategic Leadership, Competitive Advantage, and Superior Performance Superior Performance 4 Competitive Advantage and a Company’s Business Model 6 Industry Differences in Performance 7 Performance in Nonprofit Enterprises 8 Strategic Managers 9 Corporate-Level Managers 10 Business-Level Managers 11 Functional-Level Managers 11 The Strategy-Making Process 11 A Model of the Strategic Planning Process 12 Mission Statement 14 Major Goals 16 External Analysis 17 Strategy in Action 1.1: Strategic Analysis at Time Inc. 18 Internal Analysis 19 SWOT Analysis and the Business Model 19 Strategy Implementation 20 The Feedback Loop 21 Strategy as an Emergent Process 21 Strategy Making in an Unpredictable World 21 Autonomous Action: Strategy Making by Lower-Level Managers Strategy in Action 1.2: Starbucks’s Music Business 22 Strategy in Action 1.3: A Strategic Shift at Charles Schwab Serendipity and Strategy 23 Intended and Emergent Strategies 24 Strategic Planning in Practice 26 Scenario Planning 26 Decentralized Planning 27 Strategic Decision Making 28 Cognitive Biases and Strategic Decision Making 28 Techniques for Improving Decision Making 29 Strategic Leadership 30 vi 23 22 4 Contents vii Vision, Eloquence, and Consistency 30 Articulation of the Business Model 31 Commitment 31 Being Well Informed 32 Willingness to Delegate and Empower 32 The Astute Use of Power 32 Emotional Intelligence 33 Practicing Strategic Management 35 Closing Case: Planning for the Chevy Volt Chapter 2 36 External Analysis: The Identification of Opportunities and Threats Opening Case: The United States Steel Industry Defining an Industry 40 Industry and Sector 41 Industry and Market Segments 41 Changing Industry Boundaries 42 Porter’s Five Forces Model 42 Risk of Entry by Potential Competitors 43 38 38 Strategy in Action 2.1: Circumventing Entry Barriers into the Soft Drink Industry 45 Rivalry Among Established Companies 46 Strategy in Action 2.2: Price Wars in the Breakfast Cereal Industry The Bargaining Power of Buyers 50 Running Case: Walmart’s Bargaining Power over Suppliers The Bargaining Power of Suppliers 52 Substitute Products 53 A Sixth Force: Complementors 54 Porter’s Model Summarized 54 Strategic Groups within Industries 54 Implications of Strategic Groups 56 The Role of Mobility Barriers 56 Industry Life Cycle Analysis 57 Embryonic Industries 58 Growth Industries 58 Industry Shakeout 58 Mature Industries 59 Declining Industries 60 Industry Life Cycle Summary 60 Limitations of Models for Industry Analysis 61 Life Cycle Issues 61 Innovation and Change 61 Company Differences 63 The Macroenvironment 63 Macroeconomic Forces 64 Global Forces 65 52 49 viii Contents Technological Forces 66 Demographic Forces 66 Social Forces 66 Political and Legal Forces 67 Practicing Strategic Management 69 Closing Case: The United States Beer Industry PART TWO Chapter 3 70 THE NATURE OF COMPETITIVE ADVANTAGE Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability 72 Opening Case: Regaining McDonald’s Competitive Advantage 72 The Roots of Competitive Advantage 74 Distinctive Competencies 74 Competitive Advantage, Value Creation, and Profitability The Value Chain 81 Primary Activities 81 Strategy in Action 3.1: Value Creation at Burberry Support Activities 84 83 Strategy in Action 3.2: Competitive Advantage at Zara The Building Blocks of Competitive Advantage 85 Efficiency 86 Quality as Excellence and Reliability 86 Innovation 88 Customer Responsiveness 89 Business Models, the Value Chain, and Generic Distinctive Competencies 90 Analyzing Competitive Advantage and Profitability 91 Running Case: Comparing Walmart and Target The Durability of Competitive Advantage 95 Barriers to Imitation 96 Capability of Competitors 97 Industry Dynamism 98 Summarizing Durability of Competitive Advantage 98 Avoiding Failure and Sustaining Competitive Advantage 99 Why Companies Fail 99 93 Strategy in Action 3.3: The Road to Ruin at DEC Steps to Avoid Failure 101 Practicing Strategic Management 104 Closing Case: Southwest Airlines 105 101 85 77 Contents Chapter 4 Building Competitive Advantage Through Functional-Level Strategy ix 106 Opening Case: Productivity Improvement at United Technologies 106 Achieving Superior Efficiency 108 Efficiency and Economies of Scale 108 Efficiency and Learning Effects 110 Efficiency and the Experience Curve 111 Strategy in Action 4.1: Learning Effects in Cardiac Surgery 112 Efficiency, Flexible Production Systems, and Mass Customization Strategy in Action 4.2: Mass Customization at Lands’ End Marketing and Efficiency 117 Materials Management, Just-in-Time, and Efficiency 118 R&D Strategy and Efficiency 119 Human Resource Strategy and Efficiency 120 114 116 Running Case: Human Resource Strategy and Productivity at Walmart 121 Information Systems and Efficiency 122 Infrastructure and Efficiency 123 Summary: Achieving Efficiency 123 Achieving Superior Quality 124 Attaining Superior Reliability 125 Strategy in Action 4.3: GE’s Six Sigma Quality Improvement Process 126 Implementing Reliability Improvement Methodologies Improving Quality as Excellence 128 Achieving Superior Innovation 130 The High Failure Rate of Innovation 131 Reducing Innovation Failures 132 Strategy in Action 4.4: Corning: Learning from Innovation Failures 134 Achieving Superior Responsiveness to Customers Focusing on the Customer 135 Satisfying Customer Needs 136 Practicing Strategic Management 139 Closing Case: Boosting Efficiency at Matsushita PART THREE Chapter 5 126 134 140 STRATEGIES Building Competitive Advantage Through Business-Level Strategy Opening Case: Sony’s Failure in Competitive Positioning Competitive Positioning and the Business Model 145 142 142 x Contents Formulating the Business Model: Customer Needs and Product Differentiation 145 Formulating the Business Model: Customer Groups and Market Segmentation 147 Implementing the Business Model: Building Distinctive Competencies 150 Running Case: Walmart’s Business Model and Competitive Positioning 151 Competitive Positioning and Business-Level Strategy 151 Competitive Positioning: Generic Business-Level Strategies 154 Cost Leadership 155 Strategy in Action 5.1: Ryanair Takes Control over the Sky in Europe 157 Focused Cost Leadership 158 Differentiation 161 Focused Differentiation 163 Strategy in Action 5.2: L.L.Bean’s New Business Model The Dynamics of Competitive Positioning 165 164 Strategy in Action 5.3: Zara Uses IT to Change the World of Fashion 166 Competitive Positioning for Superior Performance: Broad Differentiation 167 Competitive Positioning and Strategic Groups 168 Strategy in Action 5.4: Toyota’s Goal? A High-Value Vehicle to Match Every Customer Need 169 Failures in Competitive Positioning 170 Practicing Strategic Management 174 Closing Case: Holiday Inns on Six Continents Chapter 6 174 Business-Level Strategy and the Industry Environment Opening Case: Competition in the Microchip Business Speeds Up 176 Strategies in Fragmented Industries 178 Chaining 179 Franchising 180 Horizontal Merger 180 Using Information Technology and the Internet 180 Strategy in Action 6.1: Clear Channel Creates a National Chain of Local Radio Stations 181 Strategies in Embryonic and Growth Industries 181 The Changing Nature of Market Demand 183 Strategic Implications: Crossing the Chasm 185 Strategic Implications of Market Growth Rates 186 Strategy in Action 6.2: AOL, Prodigy, and the Chasm between Innovators and the Early Majority 187 176 Contents xi Navigating Through the Life Cycle to Maturity 188 Embryonic Strategies 189 Growth Strategies 190 Shakeout Strategies 190 Maturity Strategies 191 Strategy in Mature Industries 192 Strategies to Deter Entry: Product Proliferation, Price Cutting, and Maintaining Excess Capacity 192 Strategies to Manage Rivalry 195 Strategy in Action 6.3: Nonprice Competitive Strategies at Nike 200 Strategies in Declining Industries 202 The Severity of Decline 202 Choosing a Strategy 203 Strategy in Action 6.4: How to Make Money in the Vacuum Tube Business 205 Practicing Strategic Management 207 Closing Case: Warfare in Toyland 207 Chapter 7 Strategy and Technology 209 Opening Case: The Format War in Smartphones 209 Technical Standards and Format Wars 211 Examples of Standards 212 Benefits of Standards 213 Establishment of Standards 214 Network Effects, Positive Feedback, and Lockout 215 Strategy in Action 7.1: How Dolby Became the Standard in Sound Technology 217 Strategies for Winning a Format War 219 Ensure a Supply of Complements 219 Leverage Killer Applications 220 Aggressively Pricing and Marketing 220 Cooperate with Competitors 220 License the Format 221 Costs in High-Technology Industries 222 Comparative Cost Economics 222 Strategic Significance 223 Strategy in Action 7.2: Lowering the Cost of Ultrasound Equipment Through Digitalization 224 Capturing First-Mover Advantages 225 First-Mover Advantages 226 First-Mover Disadvantages 227 Strategies for Exploiting First-Mover Advantages 228 Technological Paradigm Shifts 231 Paradigm Shifts and the Decline of Established Companies 231 xii Contents Strategy in Action 7.3: Disruptive Technology in Mechanical Excavators 235 Strategic Implications for Established Companies Strategic Implications for New Entrants 237 236 Practicing Strategic Management 239 Closing Case: Blu-Ray versus HD DVD 240 Chapter 8 Strategy in the Global Environment 242 Opening Case: The Evolving Strategy of Coca-Cola 242 The Global and National Environments 244 The Globalization of Production and Markets 245 National Competitive Advantage 246 Strategy in Action 8.1: Finland’s Nokia 247 Increasing Profitability and Profit Growth Through Global Expansion 250 Expanding the Market: Leveraging Products 251 Realizing Cost Economies from Global Volume 251 Running Case: Walmart’s Global Expansion 252 Realizing Location Economies 254 Leveraging the Skills of Global Subsidiaries 255 Cost Pressures and Pressures for Local Responsiveness 256 Pressures for Cost Reductions 257 Pressures for Local Responsiveness 258 Choosing a Global Strategy 260 Global Standardization Strategy 260 Localization Strategy 261 Strategy in Action 8.2: The Evolution of Strategy at Procter & Gamble 262 Transnational Strategy 263 International Strategy 264 Changes in Strategy over Time 265 The Choice of Entry Mode 266 Exporting 266 Licensing 267 Franchising 268 Joint Ventures 269 Wholly Owned Subsidiaries 270 Choosing an Entry Strategy 271 Global Strategic Alliances 273 Advantages of Strategic Alliances 273 Strategy in Action 8.3: Cisco and Fujitsu 274 Disadvantages of Strategic Alliances 275 Making Strategic Alliances Work 275 Practicing Strategic Management 280 Closing Case: MTV Networks: A Global Brand Goes Local 281 Contents Chapter 9 Corporate-Level Strategy: Horizontal Integration, Vertical Integration, and Strategic Outsourcing Opening Case: News Corp Forges Ahead 283 Corporate-Level Strategy and the Multibusiness Model Horizontal Integration: Single-Industry Strategy 286 Benefits of Horizontal Integration 288 xiii 283 285 Strategy in Action 9.1: Oracle Strives to Become the Biggest and the Best 289 Running Case: Walmart’s Growing Chain of “Neighborhood Markets” 291 Problems with Horizontal Integration 292 Vertical Integration: Entering New Industries to Strengthen the “Core” Business Model 292 Increasing Profitability through Vertical Integration 294 Strategy in Action 9.2: Specialized Assets and Vertical Integration in the Aluminum Industry 296 Strategy in Action 9.3: McDonald’s: A Leader at Vertical Integration Problems with Vertical Integration 298 The Limits of Vertical Integration 299 Alternatives to Vertical Integration: Cooperative Relationships 300 Short-Term Contracts and Competitive Bidding 300 Strategic Alliances and Long-Term Contracting 301 Building Long-Term Cooperative Relationships 302 Strategic Outsourcing 303 Benefits of Outsourcing 304 Risks of Outsourcing 306 Practicing Strategic Management 309 Closing Case: Beating Dell: Why HP Acquired Compaq Chapter 10 Corporate-Level Strategy: Related and Unrelated Diversification Opening Case: Samsung’s Success Depends on Many Corporate Strategies 311 Increasing Profitability Through Diversification 313 Transferring Competencies 314 Leveraging Competencies 315 Sharing Resources and Capabilities 316 Using Product Bundling 317 Utilizing General Organizational Competencies 318 Two Types of Diversification 320 Related Diversification 320 Strategy in Action 10.1: Cisco Systems Is Entering Many New Industries 321 Unrelated Diversification 323 297 310 311 xiv Contents The Limits and Disadvantages of Diversification 323 Changes in the Industry or Company 323 Diversification for the Wrong Reasons 324 The Bureaucratic Costs of Diversification 325 Choosing a Strategy 327 Related versus Unrelated Diversification 327 Strategy in Action 10.2: United Technologies Has an “ACE” in Its Pocket 328 The Web of Corporate-Level Strategy 329 Entering New Industries: Internal New Ventures 330 The Attractions of Internal New Venturing 331 Pitfalls of New Ventures 331 Guidelines for Successful Internal New Venturing 333 Entering New Industries: Acquisitions 334 The Attraction of Acquisitions 334 Acquisition Pitfalls 335 Guidelines for Successful Acquisition 337 Entering New Industries: Joint Ventures 339 Restructuring 340 Why Restructure? 340 Practicing Strategic Management 342 Closing Case: Tyco’s Changing Corporate-Level Strategies PART FOUR 343 IMPLEMENTING STRATEGY Chapter 11 Corporate Performance, Governance, and Business Ethics Opening Case: The Fall of John Thain 345 Stakeholders and Corporate Performance 347 Stakeholder Impact Analysis 348 The Unique Role of Stockholders 349 Profitability, Profit Growth, and Stakeholder Claims 345 349 Strategy in Action 11.1: Price Fixing at Sotheby’s and Christie’s Agency Theory 352 Principal-Agent Relationships 353 The Agency Problem 353 Governance Mechanisms 356 Strategy in Action 11.2: Self-Dealing at Computer Associates The Board of Directors 358 Stock-Based Compensation 359 Financial Statements and Auditors 360 The Takeover Constraint 361 Governance Mechanisms inside a Company 362 Ethics and Strategy 364 Ethical Issues in Strategy 365 352 357 Contents Strategy in Action 11.3: Nike: The Sweatshop Debate Running Case: Working Conditions at Walmart 369 The Roots of Unethical Behavior 370 Behaving Ethically 371 Practicing Strategic Management 376 Closing Case: The Rise and Fall of Dennis Kozlowski 366 376 Chapter 12 Implementing Strategy in Companies That Compete in a Single Industry 378 Opening Case: A New Look for Liz Claiborne 378 Implementing Strategy through Organizational Design Building Blocks of Organizational Structure 381 Grouping Tasks, Functions, and Divisions 382 Allocating Authority and Responsibility 383 Strategy in Action 12.1: Bob Iger Flattens Disney Integration and Integrating Mechanisms 386 xv 380 385 Strategy in Action 12.2: To Centralize or Decentralize? That Is the Question 387 Strategic Control Systems 388 Levels of Strategic Control 390 Types of Strategic Control Systems 390 Using Information Technology 393 Strategic Reward Systems 394 Organizational Culture 394 Culture and Strategic Leadership 395 Running Case: Sam Walton Created Walmart’s Culture 396 Traits of Strong and Adaptive Corporate Cultures 397 Building Distinctive Competencies at the Functional Level 398 Functional Structure: Grouping by Function 398 The Role of Strategic Control 399 Developing Culture at the Functional Level 400 Functional Structure and Bureaucratic Costs 402 The Outsourcing Option 403 Implementing Strategy in a Single Industry 403 Implementing Cost Leadership 405 Implementing Differentiation 405 Product Structure: Implementing a Wide Product Line 406 Market Structure: Increasing Responsiveness to Customer Groups Geographic Structure: Expanding Nationally 408 Strategy in Action 12.3: Macy’s Changes its Geographic Structure Matrix and Product-Team Structures: Competing in Fast-Changing, High-Tech Environments 410 Focusing on a Narrow Product Line 414 Restructuring and Reengineering 414 408 410 xvi Contents Practicing Strategic Management 418 Closing Case: Strategy Implementation at Dell Computer 419 Chapter 13 Implementing Strategy in Companies That Compete across Industries and Countries 421 Opening Case: Avon Is Calling for a New Global Structure 421 Managing Corporate Strategy Through the Multidivisional Structure 423 Advantages of a Multidivisional Structure 426 Problems in Implementing a Multidivisional Structure 427 Structure, Control, Culture, and Corporate-Level Strategy 429 The Role of Information Technology 432 Strategy in Action 13.1: SAP’s ERP System 433 Implementing Strategy across Countries 434 Implementing a Localization Strategy 435 Implementing an International Strategy 436 Implementing a Global Standardization Strategy Implementing a Transnational Strategy 438 437 Running Case: How Walmart Implements Global Expansion 439 Strategy in Action 13.2: Nestlé’s Global Matrix Structure 441 Entry Mode and Implementation 442 Internal New Venturing 442 Joint Ventures 443 Mergers and Acquisitions 445 Information Technology, the Internet, and Outsourcing 446 Information Technology and Strategy Implementation 447 Strategic Outsourcing and Network Structure 448 Strategy in Action 13.3: Oracle’s New Approach to Control 449 Strategy in Action 13.4: Li & Fung’s Global Supply-Chain Management 450 Practicing Strategic Management 453 Closing Case: Ford’s CEO Designs a New Global Structure PART FIVE 454 CASES IN STRATEGIC MANAGEMENT Introduction: Analyzing a Case Study and Writing a Case Study Analysis What Is Case Study Analysis? C1 Analyzing a Case Study C2 Writing a Case Study Analysis C6 The Role of Financial Analysis in Case Study Analysis Profit Ratios C8 Liquidity Ratios C9 Activity Ratios C10 C1 C8 Contents Leverage Ratios C10 Shareholder-Return Ratios Cash Flow C12 Conclusion C12 xvii C11 Notes N1 Index I1 This page intentionally left blank Preface Since the eighth edition was published, this book has strengthened its position as a market leader in the Strategic Management market. This tells us that we continue to meet the expectations of existing users and attract many new users to our book. It is clear that most strategy instructors share with us a concern for our currency in the text and its examples to ensure that cutting-edge issues and new developments in strategic management are continually addressed. Just as in the last edition, our objective in writing the ninth edition has been to maintain all that was good about prior editions. As we move steadily into the second decade of the 21st Century, we continue to refine our approach by expanding our discussion of established strategic management issues and adding new material as management trends develop to present a more complete, clear, and current account of strategic management. We believe that the result is a book that is more closely aligned with the needs of today’s professors and students and with the realities of competition in the global environment. Comprehensive and Up-to-Date Cover age We have updated many of the features running throughout the chapters, including all new Opening Cases and Running Cases. For the Running Cases, Walmart is the focus corporation. In this edition, we have made no changes to the number or sequencing of our chapters. However, we have made many significant changes inside each chapter to refine and update our presentation of strategic management. Continuing real-world changes in strategic management practices such as the increased use of cost reduction strategies like global outsourcing, ethical issues, and lean production, and a continued emphasis on the business model as the driver of differentiation and competitive advantage, have led to many changes in our approach. To emphasize the importance of ethical decision making in strategic management, we have included a new marginal feature—Ethical Dilemma—that asks students to make sound management decisions while considering ethical ramifications in business. Throughout the revision process, we have been careful to preserve the balanced and integrated nature of our account of strategic management. As we have continued to add new material, we have also shortened or deleted coverage of out-of-date or less important models and concepts to help students identify and focus on the core concepts and issues in the field. We have also paid close attention to retaining the book’s readability. xix xx Preface Pr acticing Str ategic Management: An Inter active Approach We have received a lot of positive feedback about the usefulness of the end-ofchapter exercises and assignments in the Practicing Strategic Management sections in our book. They offer a wide range of hands-on learning experiences for students. Following the Chapter Summary and Discussion Questions, each chapter contains the following exercises and assignments: • • • • Small group exercise. This short (20-minute) experiential exercise asks students to divide into groups and discuss a scenario concerning some aspect of strategic management. For example, the scenario in Chapter 11 asks students to identify the stakeholders of their educational institution and evaluate how stakeholders’ claims are being and should be met. Article file. As in the last edition, this exercise requires students to search business magazines to identify a company that is facing a particular strategic management problem. For instance, students are asked to locate and research a company pursuing a low-cost or a differentiation strategy, and to describe this company’s strategy, its advantages and disadvantages, and the core competencies required to pursue it. Students’ presentations of their findings lead to lively class discussions. Strategic management project. In small groups, students choose a company to study for the whole semester and then analyze the company using the series of questions provided at the end of every chapter. For example, students might select Ford Motor Co. and, using the series of chapter questions, collect information on Ford’s top managers, mission, ethical position, domestic and global strategy and structure, and so on. Students write a case study of their company and present it to the class at the end of the semester. In the past, we also had students present one or more of the cases in the book early in the semester, but now in our classes, we treat the students’ own projects as the major class assignment and their case presentations as the climax of the semester’s learning experience. Closing case study. A short closing case provides an opportunity for a short class discussion of a chapter-related theme. In creating these exercises, it is not our intention to suggest that they should all be used for every chapter. For example, over a semester, an instructor might combine a group Strategic Management Project with five to six Article File assignments, while incorporating eight to ten Small Group Exercises in class. We have found that our interactive approach to teaching strategic management appeals to students. It also greatly improves the quality of their learning experience. Our approach is more fully discussed in the Instructor’s Resource Manual. Teaching and Learning Aids Taken together, the teaching and learning features of Strategic Management provide a package that is unsurpassed in its coverage and that supports the integrated approach that we have taken throughout the book. Preface For the Instructor • • • • • • The Instructor’s Resource Manual: Theory has been completely revised. For each chapter, we provide a clearly focused synopsis, a list of teaching objectives, a comprehensive lecture outline, teaching notes for the Ethical Dilemma feature, suggested answers to discussion questions, and comments on the end-of-chapter activities. Each Opening Case, Strategy in Action boxed feature, and Closing Case has a synopsis and a corresponding teaching note to help guide class discussion. ExamView Test Bank offers a set of comprehensive true/false, multiple-choice, and essay questions for each chapter in the book. The mix of questions has been adjusted to provide fewer fact-based of simple memorization items and to provide more items that rely on synthesis or application. Also, more items now reflect real or hypothetical situations in organizations. Every question is keyed to the Learning Objectives outlined in the text and includes an answer and text page reference. Case Teaching Notes include a complete list of case discussion questions as well as a comprehensive teaching note for each case, which gives a complete analysis of case issues. DVD program highlights many issues of interest and can be used to spark class discussion. It offers a compilation of footage from the Videos for Humanities video series. Companion website contains many features to aid instructors, including instructor-based PowerPoint, a DVD guide, and access to the student website. WebTutor is a web platform containing premium content such as unique web quizzes, audio summary and quiz files, lecture PowerPoint slides, and crossword puzzles for key terms from the text. For the Student • Companion Website includes chapter summaries, learning objectives, web quizzes, glossary, and flashcards. Acknowledgments This book is the product of far more than two authors. We are grateful to our Acquisitions Editor, Michele Rhoades; our developmental editor, Suzanna Bainbridge; and our Marketing Manager, Nathan Anderson, for their help in developing and promoting the book and for providing us with timely feedback and information from professors and reviewers, which allowed us to shape the book to meet the needs of its intended market. We are also grateful to Jana Lewis and Tiffany Timmerman, project editors, for their adept handling of production. We are also grateful to the case authors for allowing us to use their materials. We also want to thank the departments of management at the University of Washington and Texas A&M University for providing the setting and atmosphere in which the book could be written, and the students of these universities who react to and provide input for many of our ideas. In addition, the following reviewers of this and earlier editions gave us valuable suggestions for improving the manuscript from its original version to its current form: xxi xxii Preface Ken Armstrong, Anderson University Richard Babcock, University of San Francisco Kunal Banerji, West Virginia University Kevin Banning, Auburn University – Montgomery Glenn Bassett, University of Bridgeport Thomas H. Berliner, The University of Texas at Dallas Bonnie Bollinger, Ivy Technical Community College Richard G. Brandenburg, University of Vermont Steven Braund, University of Hull Philip Bromiley, University of Minnesota Geoffrey Brooks, Western Oregon State College Amanda Budde, University of Hawaii Lowell Busenitz, University of Houston Charles J. Capps III, Sam Houston State University Don Caruth, Texas A&M Commerce Gene R. Conaster, Golden State University Steven W. Congden, University of Hartford Catherine M. Daily, Ohio State University Robert DeFillippi, Suffolk University Sawyer School of Management Helen Deresky, SUNY – Plattsburgh Fred J. Dorn, University of Mississippi Gerald E. Evans, The University of Montana John Fahy, Trinity College, Dublin Patricia Feltes, Southwest Missouri State University Bruce Fern, New York University Mark Fiegener, Oregon State University Chuck Foley, Columbus State Community College Isaac Fox, Washington State University Craig Galbraith, University of North Carolina at Wilmington Scott R. Gallagher, Rutgers University Eliezer Geisler, Northeastern Illinois University Gretchen Gemeinhardt, University of Houston Lynn Godkin, Lamar University Sanjay Goel, University of Minnesota – Duluth Robert L. Goldberg, Northeastern University James Grinnell, Merrimack College Russ Hagberg, Northern Illinois University Allen Harmon, University of Minnesota – Duluth David Hoopes, California State University – Dominguez Hills Todd Hostager, University of Wisconsin – Eau Claire Graham L. Hubbard, University of Minnesota Tammy G. Hunt, University of North Carolina at Wilmington James Gaius Ibe, Morris College W. Grahm Irwin, Miami University Homer Johnson, Loyola University – Chicago Jonathan L. Johnson, University of Arkansas – Walton College of Business Administration Marios Katsioloudes, St. Joseph’s University Robert Keating, University of North Carolina at Wilmington Geoffrey King, California State University – Fullerton Preface Rico Lam, University of Oregon Robert J. Litschert, Virginia Polytechnic Institute and State University Franz T. Lohrke, Louisiana State University Paul Mallette, Colorado State University Daniel Marrone, SUNY Farmingdale Lance A. Masters, California State University – San Bernardino Robert N. McGrath, Embry-Riddle Aeronautical University Charles Mercer, Drury College Van Miller, University of Dayton Tom Morris, University of San Diego Joanna Mulholland, West Chester University of Pennsylvania James Muraski, Marquette University John Nebeck, Viterbo University Francine Newth, Providence College Don Okhomina, Fayetteville State University Phaedon P. Papadopoulos, Houston Baptist University John Pappalardo, Keene State College Paul R. Reed, Sam Houston State University Rhonda K. Reger, Arizona State University Malika Richards, Indiana University Simon Rodan, San Jose State Stuart Rosenberg, Dowling College Douglas Ross, Towson University Ronald Sanchez, University of Illinois Joseph A. Schenk, University of Dayton Brian Shaffer, University of Kentucky Leonard Sholtis, Eastern Michigan University Pradip K. Shukla, Chapman University Mel Sillmon, University of Michigan – Dearborn Dennis L. Smart, University of Nebraska at Omaha Barbara Spencer, Clemson University Lawrence Steenberg, University of Evansville Kim A. Stewart, University of Denver Ted Takamura, Warner Pacific College Scott Taylor, Florida Metropolitan University Thuhang Tran, Middle Tennessee University Bobby Vaught, Southwest Missouri State Robert P. Vichas, Florida Atlantic University John Vitton, University of North Dakota Edward Ward, St. Cloud State University Kenneth Wendeln, Indiana University Daniel L. White, Drexel University Edgar L. Williams, Jr., Norfolk State University Jun Zhao, Governors State University Charles W.L.Hill Gareth R. Jones xxiii This page intentionally left blank 1 Str ategic Leadership: Managing the Str ategy-Making Process for Competitive Advantage L E A R N I N G O B J E C T I V E S After reading this chapter, you should be able to Explain what is meant by “competitive advantage” Discuss the strategic role of managers at different levels in an organization • Identify the main steps in a strategic planning process • Discuss the main pitfalls of planning and how those pitfalls can be avoided • • Outline the cognitive biases that might lead to poor strategic decisions and explain how these biases can be overcome • Discuss the role played by strategic leaders in the strategy-making process • Walmart’s Competitive Advantage Walmart is one of the most extraordinary success stories in business history. Started in 1962 by Sam Walton, Walmart has grown to become the world’s largest corporation. In 2008, the discount retailer whose mantra is “everyday low prices” had sales of $410 billion, 7,400 stores in 15 countries and 2 million employees. Some 8% of all retail sales in the United States are made at a Walmart store. Walmart is not only large; it is also very profitable. In 2008, the company earned a return on invested capital of 14.5%, better than its well-managed rivals Costco and Target, which earned 11.7% and 9.5%, respectively. As shown in Figure 1.1, Walmart has been consistently more profitable than its rivals for years, although of late its rivals have been closing the gap. Walmart’s consistently superior profitability reflects a competitive advantage that is based on a number of strategies. Back in 1962, Walmart was one of the first companies to apply the self-service supermarket business model developed by grocery chains to general merchandise. Unlike its rivals such as Kmart and Target who focused on urban and suburban locations, Sam Walton’s Walmart concentrated on small southern towns that were ignored by its rivals. Walmart grew quickly by pricing lower than local retailers, often putting them out of business. By the time its rivals realized that small towns could support large discount, general merchandise stores, Walmart had already preempted them. These towns, which were large enough to support one discount retailer—but not two—provided a secure profit base for Walmart. The company was also an innovator in information systems, logistics, and human resource practices. These strategies resulted in higher productivity and lower costs than its rivals, which enabled the company to earn a high profit while charging low prices. Walmart led the way among American retailers in developing and implementing sophisticated product tracking systems by using bar code technology and checkout scanners. This information technology enabled Walmart to track what was selling and adjust its inventory accordingly so that the products found in a store matched local demand. By avoiding overstocking, Walmart did not have to hold periodic sales to shift unsold inventory. Over time, Walmart linked this information system to a nationwide network of distribution centers where inventory was stored and then shipped to stores within a 250-mile radius on a daily basis. The combination of distribution centers and information centers enabled Walmart to reduce the amount of inventory it held in stores, thereby devoting more of that valuable space to selling and reducing the amount of capital it had tied up in inventory. With regard to human resources, the tone was set by Sam Walton. He had a strong belief that employees should be respected and rewarded for helping to improve the profitability of the company. Underpinning this belief, Walton referred to employees as associates. 2 He established a profit-sharing plan for all employees and, after the company went public in 1970, a program that allowed employees to purchase Walmart stock at a discount to its market value. Walmart was rewarded for this approach by high employee productivity, which translated into lower operating costs and higher profitability. As Walmart grew larger, the sheer size and purchasing power of the company enabled it to drive down the prices that it paid suppliers, passing on those saving to customers in the form of lower prices, which enabled Walmart to gain more market share and hence demand even lower prices. To take the sting out of the persistent demands for lower prices, Walmart shared its sales information with suppliers on a daily basis, enabling them to gain efficiencies by configuring their own production schedules to sales at Walmart. By the 1990s, Walmart was already the largest general seller of general merchandise in America. To keep its growth going, Walmart started to diversify into the grocery business, opening 200,000-square-foot supercenter stores that sold groceries and general merchandise under one roof. Walmart also diversified into the warehouse club business with the establishment of Sam’s Club. The company began expanding internationally in 1991 with its entry into Mexico. For all its success, however, Walmart is now encountering very real limits to profitable growth. The U.S. market is approaching saturation, and growth overseas has proved more difficult than the company hoped. The company was forced to exit Germany and South Korea after losing money there and has found it tough going into several other developed nations, such as Britain. Moreover, rivals Target and Costco have continued to improve their performances and are now snapping at Walmart’s heels.1 Chapter 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage Figure 1.1 Profitability of Walmart and Competitors 18 Return on Invested Capital (%) 16 14 12 10 8 6 4 2 9 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 8 19 9 7 19 9 6 19 9 5 19 9 19 9 19 9 4 0 Walmart Target Costco Source: Value Line Calculations. Data for 2008 are estimates based on three quarters. Overview Why do some companies succeed while others fail? Why has Walmart been able to consistently outperform its well-managed rivals? In the airline industry, how is it that Southwest Airlines has managed to keep increasing its revenues and profits through both good times and bad, while rivals such as US Airways and United Airlines have had to seek bankruptcy protection? What explains the consistent growth and profitability of Nucor Steel, now the largest steelmaker in America, during a period when many of its once larger rivals disappeared into bankruptcy? In this book, we argue that the strategies that a company’s managers pursue have a major impact on its performance relative to its competitors. A strategy is a set of related actions that managers take to increase their company’s performance. For most, if not all, companies, achieving superior performance relative to rivals is the ultimate challenge. If a company’s strategies result in superior performance, it is said to have a competitive advantage. Walmart’s strategies produced superior performance from 1994 to 2008; as a result, Walmart has enjoyed a competitive advantage over its rivals. How did Walmart achieve this competitive advantage? As explained in the opening case, it was due to the successful pursuit of a number of strategies by Walmart’s managers, most notably the company’s founder, Sam Walton. These strategies enabled the company to lower its cost structure, charge low prices, gain market share, and become more profitable than its rivals. (We will return to the example of Walmart several times throughout this book in a running case that examines various aspects of Walmart’s strategy and performance.) This book identifies and describes the strategies that managers can pursue to achieve superior performance and provide their company with a competitive advantage. One of its central aims is to give you a thorough understanding of the analytical techniques and skills necessary to identify and implement strategies successfully. The first step toward achieving this objective is to describe in detail what superior 3 4 Part 1 Introduction to Strategic Management performance and competitive advantage mean and to explain the pivotal roles that managers play in leading the strategy-making process. Strategic leadership is about how to most effectively manage a company’s strategy-making process to create competitive advantage. The strategy-making process is the process by which managers select and then implement a set of strategies that aim to achieve a competitive advantage. Strategy formulation is the task of selecting strategies, whereas strategy implementation is the task of putting strategies into action, which includes designing, delivering, and supporting products; improving the efficiency and effectiveness of operations; and designing a company’s organizational structure, control systems, and culture. By the end of this chapter, you will understand how strategic leaders can manage the strategy-making process by formulating and implementing strategies that enable a company to achieve a competitive advantage and superior performance. Moreover, readers will learn how the strategy-making process can go wrong and what managers can do to make this process more effective. Str ategic Leadership, Competitive Advantage, and Superior Performance Strategic leadership is concerned with managing the strategy-making process to increase the performance of a company, thereby increasing the value of the enterprise to its owners and shareholders. As shown in Figure 1.2, to increase shareholder value, managers must pursue strategies that increase the profitability of the company and ensure that profits grow. (For more details please see the Appendix to Chapter 1 on the text companion website.) To do this, a company must be able to outperform its rivals; it must have a competitive advantage. Superior Performance Maximizing shareholder value is the ultimate goal of profit-making companies for two reasons. First, shareholders provide a company with the risk capital that enables managers to buy the resources needed to produce and sell goods and services. Figure 1.2 Determinants of Shareholder Value Profitability (ROIC) Effectiveness of strategies Shareholder value Profit growth Chapter 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage Risk capital is capital that cannot be recovered if a company fails and goes bankrupt. In the case of Walmart, for example, shareholders provided Sam Walton’s company with the capital it used to build stores and distribution centers, invest in information systems, purchase inventory to sell to customers, and so on. Had Walmart failed, its shareholders would have lost their money; their shares would have been worthless. Thus, shareholders will not provide risk capital unless they believe that managers are committed to pursuing strategies that give them a good return on their capital investment. Second, shareholders are the legal owners of a corporation, and their shares represent a claim on the profits generated by a company. Thus, managers have an obligation to invest those profits in ways that maximize shareholder value. Of course, as explained later in this book, managers must behave in a legal, ethical, and socially responsible manner while at the same time working to maximize shareholder value. By shareholder value we mean the returns that shareholders earn from purchasing shares in a company. These returns come from two sources: (1) capital appreciation in the value of a company’s shares and (2) dividend payments. For example, between January 2 and December 31, 2008, the value of one share in Walmart increased from $46.90 to $56.06, which represents a capital appreciation of $9.16. In addition, Walmart paid out a dividend of $0.95 per share during 2008. Thus, if an investor had bought one share of Walmart on January 2 and held onto it for the entire year, his or her return would have been $10.11 ($9.16 ⫹ $0.95), an impressive 21.6% return on investment in a year when the stock market as a whole was down 35%! One reason Walmart’s shareholders did so well during 2008 was that investors believed that managers were pursuing strategies that would both increase the long-term profitability of the company and significantly grow its profits in the future. One way of measuring the profitability of a company is by the return that it makes on the capital invested in the enterprise.2 The return on invested capital (ROIC) that a company earns is defined as its net profit over the capital invested in the firm (profit/capital invested). By net profit we mean net income after tax. By capital we mean the sum of money invested in the company: that is, stockholders’ equity plus debt owed to creditors. Thus, profitability is the result of how efficiently and effectively managers use the capital at their disposal to produce goods and services that satisfy customer needs. A company that uses its capital efficiently and effectively makes a positive return on invested capital. The profit growth of a company can be measured by the increase in net profit over time. A company can grow its profits if it sells products in markets that are growing rapidly, gains market share from rivals, increases the amount it sells to existing customers, expands overseas, or diversifies profitably into new lines of business. For example, between 1994 and 2008 Walmart increased its net profit from $2.68 billion to $13.8 billion. It was able to do this because the company (1) took market share from rivals, (2) established stores in nine foreign nations that collectively generated $70 billion in sales by 2008, and (3) entered the grocery business. Due to the increase in net profit, Walmart’s earnings per share increased from $0.59 to $3.50, making each share more valuable, and leading, in turn, to appreciation in the value of Walmart’s shares. Together, profitability and profit growth are the principal drivers of shareholder value (see the Appendix to Chapter 1 on the text companion website). To boost profitability and grow profits over time, managers must formulate and implement strategies that give their companies a competitive advantage over their rivals. Walmart’s strategies have enabled the company to maintain a high level of profitability 5 6 Part 1 Introduction to Strategic Management and to simultaneously grow its profits over time. As a result, investors who purchased Walmart’s stock in January 1994 when the shares were trading at $11 would have made a return of more than 500% if they had held onto them through December 2008. By pursuing strategies that lead to high and sustained profitability and profit growth, Walmart’s managers have thus rewarded shareholders for their decisions to invest in the company. One of the key challenges managers face is to simultaneously generate high profitability and increase the profits of the company. Companies that have high profitability but whose profits are not growing will not be as highly valued by shareholders as a company that has both high profitability and rapid profit growth (see Appendix to Chapter 1 on the text companion website). At the same time, managers need to be aware that if they grow profits but profitability declines, that too will not be as highly valued by shareholders. What shareholders want to see, and what managers must try to deliver through strategic leadership, is profitable growth: that is, high profitability and sustainable profit growth. This is not easy, but some of the most successful enterprises of our era have achieved it, companies such as Microsoft, Google, Intel, and Walmart. Competitive Advantage and a Company’s Business Model Managers do not make strategic decisions in a competitive vacuum. Their company is competing against other companies for customers. Competition is a roughand-tumble process in which only the most efficient and effective companies win out. It is a race without end. To maximize shareholder value, managers must formulate and implement strategies that enable their companies to outperform rivals and give them a competitive advantage. A company is said to have a competitive advantage over its rivals when its profitability is greater than the average profitability and profit growth of other companies competing for the same set of customers. The higher its profitability relative to rivals, the greater its competitive advantage will be. A company has a sustained competitive advantage when its strategies enable it to maintain above-average profitability for a number of years. As discussed in the opening case, Walmart had a significant and sustained competitive advantage over rivals such as Target, Costco, and Kmart between 1994 and 2008. If a company has a sustained competitive advantage, it is likely to gain market share from its rivals and thus grow its profits more rapidly than those of rivals. In turn, competitive advantage will also lead to higher profit growth than that shown by rivals. The key to understanding competitive advantage is appreciating how the different strategies managers pursue over time can create activities that fit together to make a company unique or different from its rivals and able to consistently outperform them. A business model is a manager’s conception of how the set of strategies his company pursues should mesh together into a congruent whole, enabling the company to gain a competitive advantage and achieve superior profitability and profit growth. In essence, a business model is a kind of mental model, or gestalt, of how the various strategies and capital investments made by a company should fit together to generate above-average profitability and profit growth. A business model encompasses the totality of how a company will • • • Select its customers. Define and differentiate its product offerings. Create value for its customers. Chapter 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage • • • • • • • • Acquire and keep customers. Produce goods or services. Lower costs. Deliver those goods and services to the market. Organize activities within the company. Configure its resources. Achieve and sustain a high level of profitability. Grow the business over time. The business model at discount stores such as Walmart, for example, is based on the idea that costs can be lowered by replacing a full-service retail format with a self-service format and a wider selection of products sold in a large footprint store that contains minimal fixtures and fittings. These savings are passed on to consumers in the form of lower prices, which in turn grow revenues and help the company to achieve further cost reductions from economies of scale. Over time, this business model has proved superior to the business models adopted by smaller, full-service mom and pop stores and traditional high service department stores such as Sears Roebuck and Co. The business model—known as the self-service supermarket business model—was first developed by grocery retailers in the 1950s and later refined and improved on by general merchandisers such as Walmart. More recently, the same basic business model has been applied to toys (Toys“R”Us), office supplies (Staples, Office Depot), and home improvement supplies (Home Depot and Lowes). Walmart outperformed close rivals who adopted the same basic business model as Kmart because of key differences in strategies and because they implemented the business model more effectively. As a result, over time Walmart created unique activities that have become the foundation of its competitive advantage. For example, Walmart was one of the first retailers to make strategic investments in distribution centers and information systems, which lowered the costs of managing inventory (see the opening case). This gave Walmart a competitive advantage over rivals such as Kmart, which suffered from poor inventory controls and thus higher costs. So although Walmart and Kmart pursued similar business models, they were not identical. Key differences in the choice of strategies and the effectiveness of implementation created two unique organizations: one that attained a competitive advantage, and one that ended up with a competitive disadvantage. The business model that managers develop may not only lead to higher profitability and thus competitive advantage at a certain point in time, but it may also help the firm to grow its profits over time, thereby maximizing shareholder value while maintaining or even increasing profitability. Thus, Walmart’s business model was so efficient and effective that it enabled the company to take market share from rivals such as Kmart, thereby growing profits over time. In addition, as alluded to earlier, Walmart was able to grow profits by applying its business model to new international markets, opening stores in nine different countries, and adding groceries to its product mix in large Walmart supercenters. Industry Differences in Performance It is important to recognize that in addition to its business model and associated strategies, a company’s performance is also determined by the characteristics of the industry in which it competes. Different industries are characterized by different competitive conditions. In some, demand is growing rapidly; in others, it is contracting. 7 8 Part 1 Introduction to Strategic Management Some might be beset by excess capacity and persistent price wars, others by strong demand and rising prices. In some, technological change might be revolutionizing competition. Others might be characterized by stable technology. In some industries, high profitability among incumbent companies might induce new companies to enter the industry, and these new entrants might subsequently depress prices and profits in the industry. In other industries, new entry might be difficult, and periods of high profitability might persist for a considerable period of time. Thus, the different competitive conditions prevailing in different industries might lead to differences in profitability and profit growth. For example, average profitability might be higher in some industries and lower in other industries because competitive conditions vary from industry to industry. Figure 1.3 shows the average profitability, measured by ROIC, among companies in several different industries between 2004 and 2008. The drug industry had a favorable competitive environment: demand for drugs was high and competition was generally not based on price. Just the opposite occured in the air transport industry, which was extremely price competitive. Exactly how industries differ is discussed in detail in Chapter 2. For now, the important point to remember is that the profitability and profit growth of a company are determined by two main factors: its relative success in its industry and the overall performance of its industry relative to other industries.3 Performance in Nonprofit Enterprises A final point concerns the concept of superior performance in the nonprofit sector. By definition, nonprofit enterprises such as government agencies, universities, and charities are not in “business” to make profits. Nevertheless, they are expected to use their resources efficiently and operate effectively, and their managers set goals to Figure 1.3 Return on Invested Capital in Selected Industries, 2004–2008 Return on Invested Capital (%) 25 20 15 10 5 0 2004 2005 Software 2006 Telecommunications services Source: Value Line Investment Survey. 2007 Air transport 2008 Drug Chapter 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage measure their performance. The performance goal for a business school might be to get its programs ranked among the best in the nation. The performance goal for a charity might be to prevent childhood illnesses in poor countries. The performance goal for a government agency might be to improve its services while not exceeding its budget. The managers of nonprofits need to map out strategies to attain these goals. They also need to understand that nonprofits compete with each other for scarce resources, just as businesses do. For example, charities compete for scarce donations, and their managers must plan and develop strategies that lead to high performance and demonstrate a track record of meeting performance goals. A successful strategy gives potential donors a compelling message about why they should contribute additional donations. Thus, planning and thinking strategically are as important for managers in the nonprofit sector as they are for managers in profitseeking firms. Str ategic Managers Managers are the linchpins in the strategy-making process. Individual managers must take responsibility for formulating strategies to attain a competitive advantage and for putting those strategies into effect. They must lead the strategymaking process. The strategies that made Walmart so successful were not chosen by some abstract entity known as “the company”; they were chosen by the company’s founder, Sam Walton, and the managers he hired. Walmart’s success was based in large part on how well the company’s managers performed their strategic roles. In this section, we look at the strategic roles of different managers. Later in the chapter, we discuss strategic leadership, which is how managers can effectively lead 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 its major self-contained subunits or divisions and functional managers who are responsible for supervising a particular function, that is, a task, an activity, or an operation, such as accounting, marketing, research and development (R&D), information technology, or logistics. A company is a collection of functions or departments that work together to bring a particular good or service to the market. If a company provides several different kinds of goods 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 good or service. The general managers of these divisions then become responsible for their particular product line. The overriding concern of general managers is for the health of the whole company or division under their direction; they are responsible for deciding how to create a competitive advantage and achieve high profitability with the resources and capital they have at their disposal. Figure 1.4 shows the organization of a multidivisional company, that is, a company that competes in several different businesses and has created a separate, self-contained division to manage each. There are three main levels of management: corporate, business, and functional. General managers are found at the first two of these levels, but their strategic roles differ depending on their spheres of responsibility. 9 10 Part 1 Introduction to Strategic Management Figure 1.4 Levels of Strategic Management Head Office Corporate Level CEO, board of directors, and corporate staff Business Level Divisional managers and staff Division A Division B Division C Functional Level Functional managers Business functions Business functions Business functions Market A Market B Market C Corporate-Level Managers The corporate level of management consists of the chief executive officer (CEO), other senior executives, and corporate staff. These individuals occupy the apex of decision making within the organization. The CEO is the principal general manager. In consultation with other senior executives, the role of corporate-level managers is to oversee the development of strategies for the whole organization. This role includes defining the goals of the organization, determining what businesses it should be in, allocating resources among the different businesses, formulating and implementing strategies that span individual businesses, and providing leadership for the entire organization. Consider General Electric as an example. GE is active in a wide range of businesses, including lighting equipment, major appliances, motor and transportation equipment, turbine generators, construction and engineering services, industrial electronics, medical systems, aerospace, aircraft engines, and financial services. The main strategic responsibilities of its CEO, Jeffrey Immelt, are setting overall strategic goals, allocating resources among the different business areas, deciding whether the firm should divest itself of any of its businesses, and determining whether it should acquire any new ones. In other words, it is up to Immelt to develop strategies that span individual businesses; his concern is with building and managing 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 such strategies is the responsibility of the general managers in these different businesses, known as business-level managers. It is, however, Immelt’s responsibility to probe the strategic thinking of business-level managers to make sure that they are pursuing robust business models and strategies that will contribute toward the maximization of GE’s long-run profitability, to coach and motivate those managers, to reward them for attaining or exceeding goals, and to hold them accountable for poor performance. Chapter 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage Corporate-level managers also provide a link between the people who oversee 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 of shareholders.4 It is their responsibility to ensure that the corporate and business strategies that the company pursues are consistent with maximizing profitability and profit growth. If they are not, then ultimately the CEO is likely to be called to account by the shareholders. Business-Level Managers A business unit is a self-contained division (with its own functions, for example, finance, purchasing, production, and marketing departments) that provides a product or service for a particular market. The principal general manager at the business level, or the business-level manager, is the head of the division. The strategic role of these managers is to translate the general statements of direction and intent that come from the corporate level into concrete strategies for individual businesses. Whereas corporate-level general managers are concerned with strategies that span individual businesses, business-level managers are concerned with strategies 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. The general managers in each division work out for their business the details of a business model that is consistent with this objective. Functional-Level Managers Functional-level managers are responsible for the specific business functions or operations (human resources, purchasing, product development, customer service, and so on) that constitute a company or one of its divisions. Thus, a functional manager’s sphere of responsibility is generally confined to one organizational activity, whereas general managers oversee the operation of a whole company or division. Although they are not responsible for the overall performance of the organization, functional managers nevertheless have a major strategic role: to develop functional strategies in their area that help fulfill the strategic objectives set by business- and corporate-level managers. In GE’s aerospace business, for instance, manufacturing managers are responsible for developing manufacturing strategies consistent with corporate objectives. Moreover, functional managers provide most of the information that makes it possible for business- and corporate-level managers to formulate realistic and attainable strategies. Indeed, because they are closer to the customer than is the typical general manager, functional managers themselves may generate important ideas that subsequently become major strategies for the company. Thus, it is important for general managers to listen closely to the ideas of their functional managers. An equally great responsibility for managers at the operational level is strategy implementation: the execution of corporate- and business-level plans. The Str ategy-Making Process We can now turn our attention to the process by which managers formulate and implement strategies. Many writers have emphasized that strategy is the outcome of a formal planning process and that top management plays the most important role in this process.5 Although this view has some basis in reality, it is not the whole story. 11 12 Part 1 Introduction to Strategic Management As we shall see later in the chapter, valuable strategies often emerge from deep within the organization without prior planning. Nevertheless, a consideration of formal, rational planning is a useful starting point for our journey into the world of strategy. Accordingly, we consider what might be described as a typical formal strategic planning model for making 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 opportunities and threats. 3. Analyze the organization’s internal operating environment to identify the organization’s strengths and weaknesses. 4. Select strategies that build on the organization’s strengths and correct its weaknesses in order to take advantage of external opportunities and counter external threats. These strategies should be consistent with the mission and major goals of the organization. They should be congruent and constitute a viable business model. 5. Implement the strategies. The task of analyzing the organization’s external and internal environments and then selecting appropriate strategies constitutes strategy formulation. In contrast, as noted earlier, strategy implementation involves putting the strategies (or plan) into action. This includes taking actions consistent with the selected strategies of the company at the corporate, business, and functional levels; allocating roles and responsibilities among managers (typically through the design of organizational structure); allocating resources (including capital and money); setting short-term objectives; and designing the organization’s control and reward systems. These steps are illustrated in Figure 1.5 (which can also be viewed as a plan for the rest of this book). Each step in Figure 1.5 constitutes a sequential step in the strategic planning process. At step 1, each round or cycle of the planning process begins with a statement of the corporate mission and major corporate goals. This statement is shaped by the existing business model of the company. The mission statement is followed by the foundation of strategic thinking: external analysis, internal analysis, and strategic choice. The strategy-making process ends with the design of the organizational structure and the culture and control systems necessary to implement the organization’s chosen strategy. This chapter discusses how to select a corporate mission and choose major goals. Other parts of strategic planning are reserved for later chapters, as indicated in Figure 1.5. Some organizations go through a new cycle of the strategic planning process every year. This does not necessarily mean that managers choose a new strategy each year. In many instances, the result is simply to modify or reaffirm a strategy and structure already in place. The strategic plans generated by the planning process generally look at 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 so that strategic planning is used to shape resource allocation within the organization. Chapter 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage Figure 1.5 Main Components of the Strategic Planning Process STRATEGY FORMULATION Existing Business Model Mission, Vision, Values, and Goals Chapter 1 FEEDBACK External Analysis: Opportunities and Threats Chapter 2 SWOT Strategic Choice Internal Analysis: Strengths and Weaknesses Chapter 3 Functional-Level Strategies Chapter 4 Business-Level Strategies Chapters 5, 6, and 7 Global Strategies Chapter 8 Corporate-Level Strategies Chapters 9 and 10 STRATEGY IMPLEMENTATION Governance and Ethics Chapter 11 Designing Organization Structure Chapters 12 and 13 Designing Organization Culture Chapters 12 and 13 Designing Organization Controls Chapters 12 and 13 13 14 Part 1 Introduction to Strategic Management Mission Statement The first component of the strategic management process is crafting the organization’s mission statement, which provides the framework or context 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 reason 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. The Mission A company’s mission describes what the company does. For example, the mission of Kodak is to provide “customers with the solutions they need to capture, store, process, output, and communicate images—anywhere, anytime.”6 In other words, Kodak exists to provide imaging solutions to consumers. This mission focuses on the customer needs that the company is trying to satisfy rather than on particular products. This is a customer-oriented rather than a product-oriented mission. An important first step in the process of formulating a mission is to arrive at a definition of the organization’s business. Essentially, the definition answers these questions: “What is our business? What will it be? What should it be?”7 The responses guide the formulation of the mission. To answer the question, “What is our business?” a company should define its business in terms of three dimensions: who is being satisfied (what customer groups); what is being satisfied (what customer needs); and how customers’ needs are being satisfied (by what skills, knowledge, or distinctive competencies).8 Figure 1.6 illustrates these dimensions. This approach stresses the need for a customer-oriented rather than a productoriented business definition. A product-oriented business definition focuses on the characteristics of the products sold and the markets served, not on which kinds of Figure 1.6 Defining the Business Who is being satisfied? What is being satisfied? Customer groups Customer needs Business Definition How are customer needs being satisfied? Distinctive competencies Chapter 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage customer needs the products are satisfying. Such an approach obscures the company’s true mission because a product is only the physical manifestation of applying a particular skill to satisfy a particular need for a particular customer group. In practice, that need may be served in many different ways, and a broad customer-oriented business definition that identifies these ways can safeguard companies from being caught unaware by major shifts in demand. By helping anticipate demand shifts, a customer-oriented mission statement can also assist companies in capitalizing on changes in their environments. It can help answer the question, “What will our business be?” Kodak’s mission statement—to provide “customers with the solutions they need to capture, store, process, output, and communicate images”—is a customer-oriented statement that focuses on customer needs rather than a particular product (or solution) for satisfying those needs, such as chemical film processing. For this reason, from the early 1990s on, it drove Kodak’s investments in digital imaging technologies, which have replaced much of Kodak’s traditional business based on chemical film processing. The need to take a customer-oriented view of a company’s business has often been ignored. History is littered with the wreckage of once-great corporations that did not define their businesses or defined them incorrectly so that ultimately they declined. In the 1950s and 1960s, many office equipment companies such as Smith Corona and Underwood defined their businesses as the production of typewriters. This product-oriented definition ignored the fact that they were really in the business of satisfying customers’ information-processing needs. Unfortunately for those companies, when new technology arrived that better served customer needs for information processing (computers), demand for typewriters plummeted. The last great typewriter company, Smith Corona, went bankrupt in 1996, a victim of the success of computer-based word-processing technology. In contrast, IBM correctly foresaw what its business would be. In the 1950s, IBM was a leader in the manufacture of typewriters and mechanical tabulating equipment using punch-card technology. However, unlike many of its competitors, IBM defined its business as providing a means for information processing and storage, rather than just supplying mechanical tabulating equipment and typewriters.9 Given this definition, the company’s subsequent move into computers, software systems, office systems, and printers was logical. Vision The vision of a company lays out some desired future state; it articulates, often in bold terms, what the company would like to achieve. Nokia, the world’s largest manufacturer of mobile (wireless) phones, has been operating with a very simple but powerful vision for some time: “If it can go mobile, it will!” This vision implied that not only would voice technology go mobile but also a host of other services based on data, such as imaging and Internet browsing. This vision led Nokia to become a leader in developing mobile handsets that not only can be used for voice communication but also take pictures, browse the Internet, play games, and manipulate personal and corporate information. Values The values of a company state how managers and employees should conduct themselves, how they should do business, and what kind of organization they should build to help a company achieve its mission. Insofar as they help drive and shape behavior within a company, values are commonly seen as the bedrock of a company’s organizational culture: the set of values, norms, and standards that control how employees work to achieve an organization’s mission and goals. An 15 16 Part 1 Introduction to Strategic Management organization’s culture is commonly seen as an important source of its competitive advantage.10 (We discuss the issue of organization culture in depth in Chapter 12.) For example, Nucor Steel is one of the most productive and profitable steel firms in the world. Its competitive advantage is based in part on the extremely high productivity of its workforce, which the company maintains is a direct result of its cultural values, which in turn determine how it treats its employees. These values are as follows: • Ethical Dilemma You are the general manager of a home mortgage lender within a large diversified financial services firm. The firm’s mission statement emphasizes the importance of acting with integrity at all times. The CEO describes this as “doing the right thing rather than trying to do all things right.” This same CEO has presented you with “nonnegotiable” challenging profitability and growth goals for the coming year. Achieving these goals may result in cash and promotion payoffs. Missing the goals may hurt your career. Hitting those goals will require you to lower lending standards and lend money to people who are unable to meet their mortgage payments. If people default on their loans, however, your company can seize their homes and resell them, mitigating the risk. What should you do? “Management is obligated to manage Nucor in such a way that employees will have the opportunity to earn according to their productivity.” • “Employees should be able to feel confident that if they do their jobs properly, they will have a job tomorrow.” • “Employees have the right to be treated fairly and must believe that they will be.” • “Employees must have an avenue of appeal when they believe they are being treated unfairly.”11 At Nucor, values emphasizing pay for performance, job security, and fair treatment for employees help to create an atmosphere within the company that leads to high employee productivity. In turn, this has helped to give Nucor one of the lowest cost structures in its industry, which helps to explain the company’s profitability in a very price-competitive business. In one study of organizational values, researchers identified a set of values associated with high-performing organizations that help companies achieve superior financial performance through their impact on employee behavior.12 These values included respect for the interests of key organizational stakeholders: individuals or groups that have an interest, claim, or stake in the company, in what it does, and in how well it performs.13 They include stockholders, bondholders, employees, customers, the communities in which the company does business, and the general public. The study found that deep respect for the interests of customers, employees, suppliers, and shareholders was associated with high performance. The study also noted that the encouragement of leadership and entrepreneurial behavior by mid- and lower-level managers and a willingness to support change efforts within the organization contributed to high performance. Companies that emphasize such values consistently throughout their organization include Hewlett-Packard, Walmart, and PepsiCo. The same study identified the values of poorly performing companies, values that, as might be expected, are not articulated in company mission statements: (1) arrogance, particularly to ideas from outside the company; (2) a lack of respect for key stakeholders; and (3) a history of resisting change efforts and “punishing” mid- and lower-level managers who showed “too much leadership.” General Motors was held up as an example of one such organization. According to the research, mid- or lower-level managers who showed too much leadership and initiative at GM were not promoted! Major Goals Having stated the mission, vision, and key values, strategic managers can take the next step in the formulation of a mission statement: establishing major goals. A goal is a precise and measurable desired future state that a company attempts to realize. In this context, the purpose of goals is to specify with precision what must be done if the company is to attain its mission or vision. Chapter 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage Well-constructed goals have four main characteristics:14 1. They are precise and measurable. Measurable goals give managers a yardstick or standard against which they can judge their performance. 2. They address crucial issues. To maintain focus, managers should select a limited number of major goals to assess the performance of the company. The goals that are selected should be crucial or important ones. 3. They are challenging but realistic. They give all employees an incentive to look for ways of improving the operations of an organization. If a goal is unrealistic in the challenges it poses, employees may give up; a goal that is too easy may fail to motivate managers and other employees.15 4. They specify a time period in which the goals should be achieved, when that is appropriate. Time constraints tell employees that success requires a goal to be attained by a given date, not after that date. Deadlines can inject a sense of urgency into goal attainment and act as a motivator. However, not all goals require time constraints. Well-constructed goals also provide a means by which the performance of managers can be evaluated. As noted earlier, although most companies operate with a variety of goals, the central goal of most corporations is to maximize shareholder returns; doing this requires both high profitability and sustained profit growth. Thus, most companies operate with goals for profitability and profit growth. However, it is important that top managers do not make the mistake of overemphasizing current profitability to the detriment of long-term profitability and profit growth.16 The overzealous pursuit of current profitability to maximize short-term ROIC can encourage such misguided managerial actions as cutting expenditures judged to be nonessential in the short run, for instance, expenditures for research and development, marketing, and new capital investments. Although cutting current expenditures increases current profitability, the resulting underinvestment, lack of innovation, and diminished marketing can jeopardize long-run profitability and profit growth. To guard against short-run behavior, managers need to ensure that they adopt goals whose attainment will increase the long-run performance and competitiveness of their enterprises. Long-term goals are related to such issues as product development, customer satisfaction, and efficiency, and they emphasize specific objectives or targets concerning such details as employee and capital productivity, product quality, innovation, customer satisfaction, and customer service. External Analysis The second component of the strategic management process is an analysis of the organization’s external operating environment. The essential purpose 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. Strategy in Action 1.1 describes how an analysis of opportunities and threats in the external environment led to a strategic shift at Time Inc. Three interrelated environments should be examined when undertaking an external analysis: the industry environment in which the company operates; the country or national environment; and the wider socioeconomic or macroenvironment. Analyzing the industry environment requires an assessment of the competitive structure of the company’s industry, including the competitive position of the company and its 17 18 Part 1 Introduction to Strategic Management 1.1 STRATEGY IN ACTION Strategic Analysis at Time Inc. Time Inc., the magazine publishing division of media conglomerate Time Warner, has a venerable history. Its magazine titles include Time, Fortune, Sports Illustrated, and People, all long-time leaders in their respective categories. By the mid–2000s, however, Time Inc. recognized that it needed to change its strategy. By 2005, circulation at Time was down by 12%; Fortune, by 10%; and Sports Illustrated, by 17%. An external analysis revealed what was going on. The readership of Time’s magazines was aging. Increasingly, younger readers were getting what they wanted from the Web. This was both a threat for Time Inc., because its Web offerings were not strong, and an opportunity, because with the right offerings Time Inc. could capture this audience. Time also realized that advertising dollars were migrating rapidly to the Web. If the company was going to hold onto its share, its Web offerings had to be every bit as good as its print offerings. An internal analysis revealed why, despite multiple attempts, Time had failed to capitalize on the opportunities offered by the emergence of the Web. Although Time had tremendous strengths, including powerful brands and strong reporting, development of its Web offerings had been hindered by a serious weakness—an editorial culture that regarded Web publishing as a backwater. At People, for example, the online operation was “like a distant moon” according to managing editor Martha Nelson. Managers at Time Inc. had also been worried that Web offerings would cannibalize print offerings and help accelerate the decline of magazine circulation, with dire financial consequences for the company. As a result of this culture, efforts to move publications onto the Web underfunded or stymied by a lack of management attention and commitment. It was Martha Nelson at People who, in 2003, showed the way forward for the company. Her strategy for overcoming the weakness at Time Inc. and better exploiting opportunities on the Web started with merging the print and online newsrooms at People, thus removing the distinction between them. Then she relaunched the magazine’s online site, made major editorial commitments to Web publishing, stated that original content should appear on the Web, and emphasized the importance of driving traffic to the site and earning advertising revenues. Over the next two years, page views at People. com increased fivefold. Ann Moore, the CEO at Time Inc., formalized this strategy in 2005, mandating that all print offerings should follow the lead of People.com, integrating print and online newsrooms and investing significantly more resources in Web publishing. To drive this home, Time hired several well-known bloggers to write for its online publications. Moore’s goal was to neutralize the cultural weakness that had hindered online efforts in the past at Time Inc. and to direct resources toward Web publishing. In 2006, Time made another strategic move designed to exploit the opportunities associated with the Web when it started a partnership with the 24-hour news channel, CNN, putting all of its financial magazines onto a site that is jointly owned, CNNMoney.com. The site, which offers free access to Fortune, Money, and Business 2.0, quickly took the third spot in online financial Web sites behind Yahoo finance and MSN. This was followed with a redesigned Web site for Sports Illustrated that has rolled out video downloads for iPods and mobile phones. To drive home the shift to Web-centric publishing, in 2007 Time announced another change in strategy—it would sell off 18 magazine titles that, while good performers, did not appear to have much traction on the Web. Ann Moore stated that going forward Time would be focusing its energy, resources, and investments on the company’s largest and most profitable brands, brands that have demonstrated an ability to draw large audiences in digital form. Sources: A. Van Duyn, “Time Inc. Revamp to Include Sale of 18 Titles,” Financial Times, September 13, 2006, 24. M. Karnitsching, “Time Inc. Makes New Bid to Be Big Web Player,” Wall Street Journal, March 29, 2006, B1. M. Flamm, “Time Tries the Web Again,” Crain’s New York Business, January 16, 2006, 3. Chapter 1 Strategic Leadership: Managing the Strategy-Making Process for Competitive Advantage major rivals. It also requires analysis of the nature, stage, dynamics, and history of the industry. Because many markets are now global markets, analyzing the industry environment also means assessing the impact of globalization on competition within an industry. Such an analysis may reveal that a company should move some production facilities to another nation, that it should aggressively expand in emerging markets such as China, or tha…
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