Strategic Management: A Competitive Advantage Approach, Concepts [Sixteenth edition] 9780134153971, 1292164972, 9781292164977, 0134153979, 9780134167848, 0134167848 - EBIN.PUB (2022)

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Strategic ManageMent concepts

A Competitive AdvAntAge ApproACh

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Strategic ManageMent Sixteenth edition

concepts

A Competitive AdvAntAge ApproACh globAl edition

Fred r. David Francis Marion University Florence, South Carolina

Forest r. David Strategic Planning Consultant

Boston

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acknowledgements of third party content appear on the appropriate page within the text, which constitutes an extension of this copyright page with the exception of the photo of the chocolate candies that appear throughout the text and is credited to Dan Kosmayer/123rf. PearSOn aLWaYS Learning and MYManageMentLaB® are exclusive trademarks owned by Pearson education, inc. or its affiliates in the U.S. and/or other countries. Pearson Education Limited edinburgh gate Harlow essex cM20 2Je england and associated companies throughout the world Visit us on the World Wide Web at: www.pearsonglobaleditions.com © Pearson education Limited 2017 the rights of Fred r. David and Forest r. David to be identified as the authors of this work have been asserted by them in accordance with the copyright, Designs and Patents act 1988. Authorized adaptation from the United States edition, entitled Strategic Management: A Competitive Advantage Approach, Concepts, 16th Edition, ISBN 978-0-13-415397-1 by Fred r. David and Forest r. David, published by Pearson Education © 2017. all rights reserved. no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without either the prior written permission of the publisher or a license permitting restricted copying in the United Kingdom issued by the copyright Licensing agency Ltd, Saffron House, 6–10 Kirby Street, London ec1n 8tS. all trademarks used herein are the property of their respective owners. the use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners. iSBn 10: 1-292-16497-2 iSBn 13: 978-1-292-16497-7 British Library Cataloguing-in-Publication Data a catalogue record for this book is available from the British Library 10 9 8 7 6 5 4 3 2 1 typeset in times nrMt Pro by integra Software Services, inc. Printed and bound by Vivar in Malaysia

Brief Contents

Preface

15

Acknowledgments

25

About the Authors

27

Chapter 1

Strategic Management Essentials

31

The Cohesion Case: nesTlé s.a., 2016 (nsRGY)

Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Appendix Glossary

54

Outside-USA Strategic Planning 67 Ethics, Social Responsibility, and Sustainability Types of Strategies 119 Vision and Mission Analysis 157 The Internal Audit 177 The External Audit 217 Strategy Generation and Selection 247 Strategy Implementation 285 Strategy Execution 321 Strategy Monitoring 359 Guidelines for Case Analysis

95

385

397

Name Index Subject Index

407 413

7

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Contents

Preface

15

Acknowledgments

25

About the Authors

27

Assurance of Learning Exercise 1E: Strategic Planning at Nestlé S.A. 65 Assurance of Learning Exercise 1F: Interview Local Strategists 65

Chapter 2 Outside-USA Strategic Planning

Chapter 1 Strategic Management Essentials

31

exemplaRY CompanY showCased: sinGapoRe aiRlines limiTed (sia) 32 What Is a Cohesion Case? Management 33

33 •

Defining Strategic

35

Key Terms in strategic management Competitive Advantage

36 •

36

Strategists 36

aCademiC ReseaRCh Capsule 1-1: when aRe Chief sTRaTeGY offiCeRs (Csos) hiRed/appoinTed? 37 Vision and Mission Statements 38 • External Opportunities and Threats 38 • Internal Strengths and Weaknesses 39 • LongTerm Objectives 40 • Strategies 40 • Annual Objectives 40 • Policies 41

The strategic-management model 42 Benefits of engaging in strategic management

43

aCademiC ReseaRCh Capsule 1-2: whaT aCTiviTY is mosT impoRTanT in The sTRaTeGiC-manaGemenT pRoCess? 43 Financial Benefits

44 •

Nonfinancial Benefits 45

why some firms do no strategic planning 45 pitfalls in strategic planning 46 Comparing Business and military strategy 46 impliCaTions foR sTRaTeGisTs 48 impliCaTions foR sTudenTs 49

Chapter summary 49 Key Terms and Concepts 50 Issues for Review and Discussion

50

mini-Case on RYanaiR limiTed (RYaaY): is RYanaiR’s weBsiTe iTs sTRaTeGiC maRKeTinG Tool? 52

Current Readings Endnotes 53

exemplaRY CompanY showCased: honda moToR CompanY (hmC) 68

The nature of doing Business Globally 68 Multinational Firms 70 • Different Languages Globally 71 • Labor Unions across Europe 71

aCademiC ReseaRCh Capsule 2-1: how manY lanGuaGes aRe TheRe GloBallY? 71

stages of strategic management 33 integrating intuition and analysis 34 Adapting to Change

67

53

The Cohesion Case: nesTlé s.a., 2016 54 assuRanCe of leaRninG exeRCises 63 Assurance of Learning Exercise 1A: Assess Singapore Airlines’ Most Recent Quarterly Performance Data 63 Assurance of Learning Exercise 1B: Gather Strategy Information on Nestlé S.A. 64 Assurance of Learning Exercise 1C: Get Familiar with the Free Excel Student Template 64 Assurance of Learning Exercise 1D: Evaluate an Oral Student Presentation 64

advantages and disadvantages of doing Business Globally 72 The Global Challenge 73 Tax Rates and Tax inversions 74 Tax Rates

74

aCademiC ReseaRCh Capsule 2-2: how do fiRms deCide wheRe To expand? 74 Tax Inversions

76

american versus foreign Business Culture Communication Differences across Countries

76 78

Business Culture across Countries 79 Mexico’s Business Culture 79 • Japan’s Business Culture 80 • China’s Business Culture 81 • India’s Business Culture 82

Business Climate across Countries

82

Africa’s Business Climate 83 • China’s Business Climate 84 • Brazil’s Business Climate 85 • Indonesia’s Business Climate 85 • India’s Business Climate 85 • Japan’s Business Climate 86 • Mexico’s Business Climate 86 • Vietnam’s Business Climate 87

impliCaTions foR sTRaTeGisTs 88 impliCaTions foR sTudenTs 88

Chapter summary 89 Key Terms and Concepts 89 Issues for Review and Discussion

89

assuRanCe of leaRninG exeRCises

90

Assurance of Learning Exercise 2A: Nestlé S.A. Wants to Enter Africa. Help Them. 90 Assurance of Learning Exercise 2B: Assess Differences in Culture across Countries 91 Assurance of Learning Exercise 2C: Honda Motor Company Wants to Do Business in Vietnam. Help Them. 91 Assurance of Learning Exercise 2D: Does My University Recruit in Foreign Countries? 92

mini-Case on aiRBus GRoup se (aiR.pa): how well is aiRBus peRfoRminG GloBallY? 92

Current Readings Endnotes 93

93

9

10

COnTEnTS

Chapter 3 Ethics, Social Responsibility, and Sustainability 95 exemplaRY CompanY showCased: BanK audi s.a.l

integration strategies 96

why “Good ethics is Good Business” 96 Does It Pay to Be Ethical?

97

aCademiC ReseaRCh Capsule 3-1: whaT Can we leaRn fRom hiGh-peRfoRmanCe Companies? 98 How to Establish an Ethics Culture

99

aCademiC ReseaRCh Capsule 3-2: who is pRone To Be uneThiCal in a Business? 99

whistle-Blowing, Bribery, and workplace Romance Whistle-Blowing Romance 102

100 • Avoid Bribery

social Responsibility and policy

100

101 • Workplace

aCademiC ReseaRCh Capsule 3-3: does iT paY To Be soCiallY ResponsiBle? 104

environmental sustainability

104 •

Social Policies on

105

What Firms Are the Best Stewards? 106 • Sustainability Reports 107 • The Office of Environmental Affairs 108 • ISO 14000/14001 Certification 108

wildlife welfare

111

112

assuRanCe of leaRninG exeRCises

113

Assurance of Learning Exercise 3A: Sustainability and Nestlé 113 Assurance of Learning Exercise 3B: How Does My Municipality Compare To Others on Being Pollution-Safe? 114 Assurance of Learning Exercise 3C: Compare Nestlé versus Mars, Inc. on Social Responsibility 114 Assurance of Learning Exercise 3D: How Do You Rate Nestlé’s Sustainability Efforts? 114 Assurance of Learning Exercise 3E: The Ethics of Spying on Competitors 115

mini-Case on eTihad aiRwaYs: how eThiCal and susTainaBle is eTihad aiRwaYs? 116

Current Readings 116 Endnotes 117

Chapter 4 Types of Strategies

119

exemplaRY CompanY showCased: peTRonas (pGas.Kl) 120

long-Term objectives

120

Characteristics and Benefits of Objectives 121 • Financial versus Strategic Objectives 121 • Avoid Not Managing by Objectives 122

Types of strategies Levels of Strategies

122 124

diversification strategies Related Diversification Retrenchment

Market Development 128 •

Product

129

130 •

Unrelated Diversification

130

131

131 •

Divestiture

132 •

michael porter’s five Generic strategies

Liquidation

133

134

Cost Leadership Strategies (Type 1 and Type 2) 135 • Differentiation Strategies (Type 3) 136 • Focus Strategies (Type 4 and Type 5) 137 Cooperation among Competitors Partnering 138

138 138 •

Joint Venture and

aCademiC ReseaRCh Capsule 4-1: aRe inTeRnaTional allianCes moRe effeCTive wiTh CompeTiToRs oR nonCompeTiToRs? 139 Merger/Acquisition

140 •

Private-Equity Acquisitions

Tactics to facilitate strategies First Mover Advantages

142 •

141

142 Outsourcing and Reshoring

142

Educational Institutions 144 • Medical Organizations 145 • Governmental Agencies and Departments 145 • Small Firms 145

impliCaTions foR sTRaTeGisTs 111 impliCaTions foR sTudenTs 112

Chapter summary 112 Key Terms and Concepts 112 Issues for Review and Discussion

128

Market Penetration 128 • Development 129

defensive strategies

126 •

strategic management in nonprofit, Governmental, and small firms 144

109

Food Suppliers and Animal Welfare

intensive strategies

Backward Integration

means for achieving strategies

103

Design and Articulate a Social Policy Retirement 104

124

Forward Integration 125 • Horizontal Integration 127

aCademiC ReseaRCh Capsule 4-2: whaT aTTRiBuTes do GReaT enTRepReneuRs possess? 146 impliCaTions foR sTRaTeGisTs 146 impliCaTions foR sTudenTs 147

Chapter summary 147 Key Terms and Concepts 148 Issues for Review and Discussion

148

assuRanCe of leaRninG exeRCises

150

Assurance of Learning Exercise 4A: Market Development for Petronas 150 Assurance of Learning Exercise 4B: Alternative Strategies for Petronas 150 Assurance of Learning Exercise 4C: Private-Equity Acquisitions 150 Assurance of Learning Exercise 4D: The Strategies of Nestlé S.A.: 2015–2017 151 Assurance of Learning Exercise 4E: Lessons in Doing Business Globally 151 Assurance of Learning Exercise 4F: What are Petronas’ Strategies in 2015–2017? 151 Assurance of Learning Exercise 4G: What Strategies Are Most Risky? 151 Assurance of Learning Exercise 4H: Explore Bankruptcy 152 Assurance of Learning Exercise 4I: Examine Strategy Articles 152 Assurance of Learning Exercise 4J: Classify Some Strategies 152

mini-Case on TiGeR BRands limiTed: is TiGeR BRands sTRaTeGiCallY ReadY To CompeTe and CoopeRaTe? 153

Current Readings Endnotes 154

154

COnTEnTS

Chapter 5 Vision and Mission Analysis

157

exemplaRY CompanY showCased: samsunG eleCTRoniCs Co. limiTed (ssnlf) 158

vision statements: what do we want to Become? Vision Statement Analysis

158

159

mission statements: what is our Business? 160 The process of developing vision and mission statements The importance (Benefits) of vision and mission statements 162

161

163

Characteristics of a mission statement A Customer Orientation

164

165

Components of a mission statement 165 evaluating and writing mission statements 166 Two Mission Statements Critiqued 167 • Five Mission Statements Revised 167 • Two Mission Statements Proposed 167

impliCaTions foR sTRaTeGisTs 169 impliCaTions foR sTudenTs 170

Chapter summary 170 Key Terms and Concepts 171 Issues for Review and Discussion

172

174

177

exemplaRY CompanY showCased: vodafone GRoup plC (vod) 178

The nature of an internal audit

191

191

Finance/Accounting Functions 191 • Financial Ratios 192 • Breakeven Analysis 195 • Finance/Accounting Audit Checklist 197

production/operations

197

Production/Operations Audit Checklist

Research and development

198

199

Internal and External Research and Development 199 • and Development Audit 200

Research

200 200

aCademiC ReseaRCh Capsule 6-2: new TRends in manaGinG BiG daTa 201

mini-Case on CiTizen holdinGs CompanY limiTed (Cizn): does CiTizen holdinGs’ have a CleaR vision oR mission? 174

Chapter 6 The Internal Audit

finance and accounting

Managing Voluminous Consumer Data

Assurance of Learning Exercise 5A: Examine Potential Changes Needed in a Firm’s Vision/Mission 172 Assurance of Learning Exercise 5B: Studying an Alternative View of Mission Statement Content 172 Assurance of Learning Exercise 5C: Evaluate Mission Statements 173 Assurance of Learning Exercise 5D: Evaluate the Vision and Mission Statements of Unilever, Nestlé’s Competitor 173 Assurance of Learning Exercise 5E: Selecting the Best Vision and Mission Statements in a Given Industry 174 Assurance of Learning Exercise 5F: Write an Excellent Vision and Mission Statement for Novartis AG 174

Current Readings Endnotes 175

188

Customer Analysis 188 • Selling Products and Services 188 • Product and Service Planning 189 • Pricing 189 • Distribution 190 • Marketing Research 190 • Cost/Benefit Analysis 190 • Marketing Audit Checklist of Questions

management information systems

171

assuRanCe of leaRninG exeRCises

182

Planning 184 • Organizing 185 • Motivating 186 • Staffing 186 • Controlling 187 • Management Audit Checklist of Questions 187

marketing

aCademiC ReseaRCh Capsule 5-1: The mission sTaTemenT/ fiRm peRfoRmanCe linKaGe 162 A Resolution of Divergent Views

integrating strategy and Culture management 184

11

178

Key Internal Forces 179 • The Process of Performing an Internal Audit 180 • The Resource-Based View 181

aCademiC ReseaRCh Capsule 6-1: does RBv TheoRY deTeRmine diveRsifiCaTion TaRGeTs? 181

Management Information Systems Audit

value Chain analysis Benchmarking

201

201

202

The internal factor evaluation matrix

204

impliCaTions foR sTRaTeGisTs 206 impliCaTions foR sTudenTs 208

Chapter summary 209 Key Terms and Concepts 209 Issues for Review and Discussion

210

assuRanCe of leaRninG exeRCises

211

Assurance of Learning Exercise 6A: Develop a Corporate IFE Matrix for Volkswagen Group 211 Assurance of Learning Exercise 6B: Should Volkswagen Deploy More (or Less) Resources Outside of Europe? 211 Assurance of Learning Exercise 6C: Apply Breakeven Analysis 212 Assurance of Learning Exercise 6D: Perform a Financial Ratio Analysis for Nestlé 212 Assurance of Learning Exercise 6E: Construct an IFE Matrix for Nestlé 212 Assurance of Learning Exercise 6F: Analyze Your College or University’s Internal Strategic Situation 213

mini-Case on BanK of China limiTed (BaChf): whaT is The naTuRe of BanK of China’s GRowTh? 213

Current Readings Endnotes 214

214

12

COnTEnTS

Chapter 7 The External Audit 217

The Process of Generating and Selecting Strategies 248

The strategy-formulation analytical framework

exemplaRY CompanY showCased: miChelin (mGddf) 218

The purpose and nature of an external audit

The Input Stage 251 • The Matching Stage • The Decision Stage 251

219

Key External Forces 219 • The Process of Performing an External Audit 220 • The Industrial Organization (I/O) View 221

Ten external forces That affect organizations 221 Economic Forces 221 • Social, Cultural, Demographic, and Natural Environment Forces 223 • Political, Governmental, and Legal Forces 224 • Technological Forces 226 • Competitive Forces 227

porter’s five-forces model

229

Rivalry Among Competing Firms 230 • Potential Entry of New Competitors 231 • Potential Development of Substitute Products 231 • Bargaining Power of Suppliers 231 • Bargaining Power of Consumers 232

233 •

Chapter summary 275 Key Terms And Concepts 276 Issues for Review and Discussion

241

assuRanCe of leaRninG exeRCises

269

276

assuRanCe of leaRninG exeRCises 242

Assurance of Learning Exercise 7A: Michelin and Africa: An External Assessment 242 Assurance of Learning Exercise 7B: Preparing a CPM for Michelin Based on Countries Rather Than Companies 242 Assurance of Learning Exercise 7C: Develop Divisional Michelin EFE Matrices 243 Assurance of Learning Exercise 7D: Developing an EFE Matrix for Nestlé S.A. 243 Assurance of Learning Exercise 7E: The External Audit 243 Assurance of Learning Exercise 7F: Develop a Competitive Profile Matrix for Michelin 244 Assurance of Learning Exercise 7G: Develop a Competitive Profile Matrix for Nestlé 244 Assurance of Learning Exercise 7H: Analyzing Your College or University’s External Strategic Situation 244

mini-Case on woolwoRThs limiTed (wow): is woolwoRThs losinG iTs edGe To aldi? 245

Current Readings 245 Endnotes 245

278

Assurance of Learning Exercise 8A: Should Unilever Penetrate Southeast Asia Further? 278 Assurance of Learning Exercise 8B: Perform a SWOT Analysis for Unilever’s Global Operations 278 Assurance of Learning Exercise 8C: Prepare a BCG Matrix for Unilever 278 Assurance of Learning Exercise 8D: Develop a SWOT Matrix for Nestlé S.A. 279 Assurance of Learning Exercise 8E: Develop a SPACE Matrix for Nestlé S.A. 279 Assurance of Learning Exercise 8F: Develop a BCG Matrix for Nestlé S.A. 279 Assurance of Learning Exercise 8G: Develop a QSPM for Nestlé S.A. 280 Assurance of Learning Exercise 8H: Develop a SPACE Matrix for Unilever 280 Assurance of Learning Exercise 8I: Develop a BCG Matrix for your College or University 280 Assurance of Learning Exercise 8J: Develop a QSPM for a Company that You Are Familiar With 280 Assurance of Learning Exercise 8H: Formulate Individual Strategies 281

mini-Case on hYundai moToR CompanY (hYmTf): how would a BCG foR hYundai looK liKe? 281

Current Readings Endnotes 282

Chapter 8 Strategy Generation andSelection 247 exemplaRY CompanY showCased: unileveR plC (ul)

The strategy analysis and Choice process

264

aCademiC ReseaRCh Capsule 8-2: how manY BoaRd of diReCToRs memBeRs aRe ideal? 273 impliCaTions foR sTRaTeGisTs 274 impliCaTions foR sTudenTs 274

235

impliCaTions foR sTRaTeGisTs 239 impliCaTions foR sTudenTs 240

Chapter summary 240 Key Terms and Concepts 241 Issues for Review and Discussion

aCademiC ReseaRCh Capsule 8-1: a new ie maTRix

The Grand strategy matrix 265 The decision stage: The Quantitative strategic planning matrix (Qspm) 266 Positive Features and Limitations of the QSPM

Business Analytics 234

The external factor evaluation matrix The Competitive profile matrix 236

The swoT matrix 251 The strategic position and action evaluation (spaCe) matrix 254 The Boston Consulting Group (BCG) matrix 258 The internal-external (ie) matrix 261

Cultural aspects of strategy analysis and Choice 270 The politics of strategy analysis and Choice 270 Boards of directors: Governance issues 271

sources of external information 232 forecasting Tools and Techniques 232 Making Assumptions

250

251

248

248

282

COnTEnTS

Chapter 9 Strategy Implementation

285

exemplaRY CompanY showCased: RoYal duTCh shell plC (Rds.a) 286

strategic marketing issues 286 social media marketing 287 market segmentation 289 product positioning and perceptual mapping Author Commentary

292

293

strategic finance/accounting issues 295 eps/eBiT analysis: acquire needed Capital projected financial statements 300 304

306

ipos, Cash management, and Corporate Bonds 308 Go Public With An IPO? 308 • Keep Cash Offshore is Earned Offshore? 309 • Issue Corporate Bonds for What Purpose? 309

strategic Research and development (R&d) issues 309 strategic management information systems (mis) issues 311 Mobile Tracking of Employees

312

Mobile Apps for Customers

Manage Conflict 329

The Functional Structure 330 • The Divisional Structure 331 • The Strategic Business Unit (SBU) Structure 333 • The Matrix Structure 334

dos and don’ts in developing organizational Charts 335 aCademiC ReseaRCh Capsule 10-1: whY is The Coo posiTion BeinG deleTed in manY oRGanizaTions? 337

strategic production/operations issues

338

Restructuring and Reengineering 338 • Manage Resistance to Change 339 • Decide Where and How to Produce Goods 339 • Employee Stock Ownership Plans (ESOPs) 340

341

aCademiC ReseaRCh Capsule 10-2: how do women vs. men Ceos peRfoRm? 345 Use Caution in Hiring a Rival’s Employees 345 • Create a StrategySupportive Culture 348 • Use Caution in Monitoring Employees’ Social Media 349 • Develop a Corporate Wellness Program 349

314 316

Assurance of Learning Exercise 9A: Prepare an EPS/EBIT Analysis for Royal Dutch Shell Plc 316 Assurance of Learning Exercise 9B: Develop a Product-Positioning Map for Nestlé S.A. 316 Assurance of Learning Exercise 9C: Perform an EPS/EBIT Analysis for Nestlé S.A. 316 Assurance of Learning Exercise 9D: Prepare Projected Financial Statements for Nestlé S.A. 317 Assurance of Learning Exercise 9E: Determine the Cash Value of Nestlé S.A. 317 Assurance of Learning Exercise 9F: Develop a Product-Positioning Map for Your College 317 Assurance of Learning Exercise 9G: Do Banks Require Projected Financial Statements? 318

mini-Case on TaTa moToRs limiTed (TTm)

319

327 •

Linking Performance and Pay to Strategy 341 • Balance Work Life and Home Life 343 • Develop a Diverse Workforce 344

313

assuRanCe of leaRninG exeRCises

Current Readings Endnotes 319

Transitioning from formulating to implementing strategies 322 The need for Clear annual objectives 324 The need for Clear policies 327 allocate Resources and manage Conflict 327

strategic human Resource issues

impliCaTions foR sTRaTeGisTs 312 impliCaTions foR sTudenTs 313

Chapter summary 313 Key Terms and Concepts 314 Issues for Review and Discussion

exemplaRY CompanY showCased: aCCenTuRe plC (aCn) 322

match structure with strategy 329 Types of organizational structure 330

296

aCademiC ReseaRCh Capsule 9-1: when should we oveRpaY To aCQuiRe a fiRm? 306 Corporate Valuation Methods

Chapter 10 Strategy Execution 321

Allocate Resources

Projected Financial Statement Analysis for D. R. Horton 302

Corporate valuation

13

318

impliCaTions foR sTRaTeGisTs 351 impliCaTions foR sTudenTs 352

Chapter summary 353 Key Terms and Concepts 353 Issues for Review and Discussion

353

assuRanCe of leaRninG exeRCises

355

Assurance of Learning Exercise 10A: Develop an Organizational Chart for Accenture Plc 355 Assurance of Learning Exercise 10B: Assess Accenture’s Philanthropy Efforts 355 Assurance of Learning Exercise 10C: Revise Nestlé’s Organizational Chart 355 Assurance of Learning Exercise 10D: Explore Objectives 355 Assurance of Learning Exercise 10E: Understanding Your University’s Culture 356

mini-Case on hoRizon phaRma (hznp): does hoRizon phaRma have a foRmal sTRuCTuRe? 356

Current Readings Endnotes 357

357

14

COnTEnTS

Chapter 11 Strategy Monitoring

359

Appendix Guidelines for Case Analysis 385

exemplaRY CompanY showCased: Bhp BilliTon (Bhp) 360

The strategy-evaluation process, Criteria, and methods 360 The Process of Evaluating Strategies

363

The Three strategy-evaluation activities

364

Reviewing Bases of Strategy 364 • Measuring Organizational Performance 366 • Taking Corrective Actions 367

The Balanced scorecard 369 published sources of strategy-evaluation information 371 Characteristics of an Effective Strategy EvaluationSystem 371 Contingency planning 372 auditing 373 Twenty-first-Century Challenges in strategic management 374 The Art or Science Issue 374 • The Visible or Hidden Issue 375 • The Top-Down or Bottom-Up Approach 376

Guidelines for effective strategic management

376

380

Assurance of Learning Exercise 11A: Evaluate BHP Billiton’s Strategies 380 Assurance of Learning Exercise 11B: Prepare a Strategy-Evaluation Report for Nestlé S.A. 381 Assurance of Learning Exercise 11C: Prepare a Balanced Scorecard for Nestlé S.A. 381 Assurance of Learning Exercise 11D: Evaluate Your University’s Strategies 381

mini-Case on BRoadCom limiTed (avGo): how Could a BalanCed sCoReCaRd BenefiT BRoadCom? 382

Current Readings 382 Endnotes 382

The Case method versus lecture approach The Cross-Examination

387

387

preparing a written Case analysis

388

The Executive Summary 388 • The Comprehensive Written Analysis 388 • Steps in Preparing a Comprehensive Written Analysis 388

making an oral presentation

389

Controlling Your Voice 389 • Managing Body Language 389 • Speaking from Notes 390 • Visual Aids 390 • Answering Questions 390

Tips for success in Case analysis

Glossary

379

assuRanCe of leaRninG exeRCises

The Need for Practicality 386 • The Need for Justification 386 • The Need for Realism 386 • The Need for Specificity 386 • The Need for Originality 387 • The Need to Contribute 387

Constructing

390

Sample Case Analysis Outline 391 • Recommended Time Allocation for Presenting a Case Analysis 393 Assurance of Learning Exercise: Strategic Planning for Gruma SAB 393

impliCaTions foR sTRaTeGisTs 378 impliCaTions foR sTudenTs 378

Chapter summary 379 Key Terms and Concepts 379 Issues for Review and Discussion

what is a strategic-management Case? 386 Guidelines for preparing Case analyses 386

397

Name Index Subject Index

407 413

Preface Why Adopt This Text? this textbook is trusted across five continents to provide managers the latest skills and concepts needed to effectively formulate and efficiently implement a strategic plan—a game plan, if you will—that can lead to sustainable competitive advantages for any type of business. the association to advance collegiate Schools of Business (aacSB) international increasingly advocates a more skills-oriented, practical approach in business books, which this text provides, rather than a theory-based approach. Strategic Management Concepts: A Competitive Advantage Approach meets all aacSB international guidelines for the strategic-management course at both the graduate and undergraduate levels, and previous editions have been used at more than 500 colleges and universities globally. We believe you will find this sixteenth edition to be the best textbook available for communicating both the excitement and value of strategic management. concise and exceptionally well organized, this text is now available in english, chinese, Spanish, thai, german, Japanese, Farsi, indonesian, indian, Vietnamese, and arabic. a version in russian is being negotiated. in addition to universities, hundreds of companies, organizations, and governmental bodies also use this text as a management guide. an MBa student using this text recently wrote the following: Dear Dr. David: i am in the midst of my MBa at adams State University here in colorado. i’m 7 of 12 classes in with a 4.0 average. as a result, i’ve been through about 14 textbooks (not to mention the 60 or so i went through for my BBa at the University of california (Uc)-Berkeley. this is the first time i’ve written to the author of a textbook. Why? Because the David book is by far the best textbook i have ever used. it’s clear. it’s accurate. it’s not full of opinion masquerading as fact! You, sir, are to be commended. Usually when i spend an insane amount of money on a text, i’m broke. But your text is worth every cent, and i’ll keep it forever. Well done sir! respectively, eric Seiden, MBa Student in Littleton, colorado (august 10, 2015) eric n. Sims, a professor who has used this text for his classes at Sonoma State University in california, says: i have read many strategy books. i am going to use the David book. What i like—to steal a line from alabama coach nick Saban—is your book teaches “a process.” i believe at the end of your book, you can actually help a company do strategic planning. in contrast, other books teach a number of near and far concepts related to strategy. a recent reviewer of this textbook shares his opinion: One thing i admire most about the David text is that it follows the fundamental sequence of strategy formulation, implementation, and evaluation. there is a basic flow from vision/mission to internal/external environmental scanning, to strategy development, selection, implementation, and evaluation. this has been, and continues to be, a hallmark of the David text. Many other strategy texts are more disjointed in their presentation, and thus confusing to the student, especially at the undergraduate level.

New to This Edition 1. this 16th edition is 40 percent new and improved from the prior edition. 2. a brand new COHESION CASE on nestlé S.a. (2016) is provided. nestlé is one of the largest and most successful food producing companies in the world, known for its innovations and effective management. Students apply strategy concepts to nestlé at the end of each chapter through new, innovative assurance of Learning exercises. 15

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3. Brand new, one-page MINI-CASES appear at the end of each chapter, complete with questions designed to apply chapter concepts. Provided for the first time ever in this text, the mini-cases focus on the following companies: chapter 1: ryanair Holdings PLc chapter 2: airbus group Se chapter 3: etihad airways chapter 4: tiger Brands chapter 5: citizen Holdings company chapter 6: Bank of china chapter 7: Woolworths Limited chapter 8: Hyundai Motor company chapter 9: tata Motors Limited chapter 10: Horizon Pharma chapter 11: Broadcom Limited 4. Original, half-page ACADEMIC RESEARCH CAPSULES are presented in each chapter to showcase how new strategic-management research is impacting business practice. two capsules per chapter are provided—for the first time ever in this text. 5. at the end of each chapter are new sections titled IMPLICATIONS FOR STRATEGISTS and IMPLICATIONS FOR STUDENTS that highlight how companies can best gain and sustain competitive advantages. 6. Brand new and updated, EXEMPLARY COMPANY CAPSULES appear at the beginning of each chapter and showcase a company that is employing strategic management exceptionally well. the capsules focus on the following companies: chapter 1: Singapore airlines Limited chapter 2: Honda Motor company chapter 3: Bank audi chapter 4: Petronas chapter 5: Samsung electronics Limited chapter 6: Vodafone chapter 7: Michelin chapter 8: Unilever chapter 9: royal Dutch Shell chapter 10: accenture chapter 11: BHP Billiton Limited 7. chapter 2, Outside-USa Strategic Planning, is shortened by 30 percent but provides new coverage of cultural and conceptual strategic-management differences across countries. Doing business globally has become a necessity in most industries. 8. chapter 3, ethics, Social responsibility, and Sustainability, provides extensive new coverage of ethics, workplace romance, flirting, hiring away rival firms’ employees, wildlife welfare, and sustainability. “good ethics is good business.” 9. chapter 5, Vision and Mission analysis, is 60 percent new, due to current research and practice that reveals the need for “these statements to be more customer-oriented.” Unique to strategic-management texts, the sustainability discussion is strengthened in this edition to promote and encourage firms to conduct operations with respect for the environment, an important concern for consumers, companies, society, and aacSB international. 10. twenty-four unique ASSURANCE OF LEARNING EXERCISES appear at the end of chapters to apply chapter concepts. the exercises prepare students for strategicmanagement case analysis. an additional excellent exercise for each chapter is provided in the Chapter Instructor’s Manual. 11. More than 200 new EXAMPLES bring the chapters to life. 12. at the end of chapters are 33 new REVIEW QUESTIONS related to chapter content. 13. all the current readings at the end of the chapters are new, and up-to-date research and theories of seminal thinkers are included. However, practical aspects of strategic management are center stage and the trademark of this text. 14. every sentence and paragraph has been scrutinized, modified, clarified, streamlined, updated, and improved to enhance the content and caliber of presentation.

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15. an enhanced, continually updated AUTHOR WEBSITE (www.strategyclub.com) provides new author videos, case and chapter updates, sample case analyses, and the popular, Free eXceL StUDent teMPLate. the template enables students to more easily develop strategic-planning matrices, tables, and analyses needed for case analysis.

New Case Features (available in the Concepts and Cases version) 1. all 29 cases focus on exciting, well-known companies, effective for students to apply strategy concepts. 2. all 29 cases are undisguised, featuring real organizations in real industries using real names (nothing is fictitious in any case). 3. all 29 cases feature an organization and industry undergoing strategic change. 4. all 29 cases provide ample, excellent quantitative information, so students can prepare a defensible strategic plan. 5. all 29 cases are written in a lively, concise writing style that captures the reader’s interest. 6. all 29 cases are “comprehensive,” focusing on multiple business functions, rather than a single problem or issue. 7. all 29 cases provide an organizational chart and a vision and mission statement— important strategy concepts. 8. all 29 cases are supported by an excellent teacher’s note, provided to professors in a new Case Instructor’s Resource Manual. 9. all 29 cases facilitate coverage of all strategy concepts, but as revealed in the new concepts by cases Matrix, some cases especially exemplify some concepts, enabling professors to effectively use an assortment of cases with various chapters in the text. 10. all 29 cases have been class-tested to ensure that they are interesting, challenging, and effective for illustrating strategy concepts. 11. all 29 cases appear in no other textbooks, thus offering a truly fresh, new, up-to-date, learning platform. 12. the 29 cases represent an excellent mix of firms performing really well and some performing very poorly, including 12 service-based organizations, and 17 manufacturing-based firms. 13. all 29 case companies have excellent websites in english that provide detailed financial information, history, sustainability statements, ethics statements, and press releases, so students can easily access current information to apply strategy concepts.

Time-Tested Features 1. this text meets all aacSB international guidelines that support a practitioner orientation rather than a theory/research approach. it offers a skills-oriented process for developing a vision and mission statement; performing an external audit; conducting an internal assessment; and formulating, implementing, and evaluating strategies. 2. the author’s writing style is concise, conversational, interesting, logical, lively, and supported by numerous current examples. 3. a simple, integrative strategic-management model appears in all chapters and on the inside front cover. the model is widely used by strategic-planning consultants and companies worldwide. 4. an exciting, new cohesion case on nestlé S.a. (2016) follows chapter 1 and is revisited at the end of each chapter, allowing students to apply strategic-management concepts and techniques to a real company as the text develops, thus preparing students for case analysis as the course evolves. 5. end-of-chapter assurance of Learning exercises apply chapter concepts and techniques in a challenging, meaningful, and enjoyable manner. twenty-four exercises apply text material to the cohesion case; while others apply textual material to a college or university; and some exercises send students into the business world to explore important strategy topics.

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6. there is excellent pedagogy, including Learning Objectives opening each chapter as well as Key terms, current readings, Discussion Questions, and assurance of Learning exercises ending each chapter. 7. the various strategy-formulation issues are outstanding, covering topics such as business ethics, global versus domestic operations, vision and mission, matrix analysis, partnering, joint venturing, competitive analysis, value chain analysis, governance, and matrices for assimilating and evaluating information. 8. Strategy-implementation issues are covered thoroughly and include items such as corporate culture, organizational structure, outsourcing, marketing concepts, financial analysis, business ethics, whistleblowing, bribery, pay and performance linkages, and workplace romance. 9. a systematic, analytical “process” is presented that includes nine matrices: iFeM, eFeM, cPM, SWOt, Bcg, ie, granD, SPace, and QSPM. 10. Both the chapter material and case material is published in color. 11. chapters-only paperback and e-book versions of the text are available. 12. custom-case publishing is available whereby an instructor can combine chapters from this text with cases from a variety of sources or select any number of the 29 cases provided. 13. For the chapter material, an outstanding ancillary package includes a comprehensive Chapter Instructor’s Resource Manual, test Bank, testgen, and chapter PowerPoints, and vastly improved MyLab products to promote assurance of learning.

Why Is This Text Different/Better Than Others? Strategic Management Concepts: A Competitive Advantage Approach is by far the most practical, skills-oriented strategic-management textbook on the market. this text is designed to enable students to learn “how to do strategic planning,” rather than simply memorize seminal theories in strategy. Students using this text follow an integrative model that appears in every chapter as the “process” unfolds. Students learn how to construct strategic-planning matrices, such as the Strengths, Weaknesses, Opportunities, and threats (SWOt) and the Boston consulting group (Bcg) matrices. readers also learn how to perform strategic-planning analyses, such as earningsper-share/earnings-before-interest-and-taxes (ePS/eBit) and corporate Valuation. the focus throughout this text is on “learning by doing.” this overarching, differentiating aspect has been improved with every edition and has led to this text becoming perhaps the leading strategicmanagement text globally, now available in 10 languages. the practical, skills-oriented approach is manifested through eight specific features: 1. a cohesion case appears after chapter 1 with 24 end-of-chapter assurance of learning exercises, many that apply concepts to the cohesion case, thus allowing students to gain practice doing strategic planning by performing analysis. no other strategic-management textbook provides a cohesion case or an array of end-of-chapter exercises. 2. a strategy formulation analytical framework in chapter 8 integrates nine widely used planning matrices (iFeM, eFeM, cPM, SWOt, Bcg, ie, SPace, granD, and QSPM) into three stages (input, Matching, and Decision), which guide the strategic-planning process in all companies. Firms gather strategic information (input), array key external with internal factors (Matching), and then make strategic decisions (Decision). 3. a far wider coverage of strategy topics than any other strategic-management textbook, for two primary reasons: (a) as firms formulate and implement strategies, a wide variety of functional business topics arise, and (b) as the capstone, integrative course in nearly all Schools of Business, strategic management entails students applying functional business skills to case companies.

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4. the concepts and cases version of this text provides 29 comprehensive, exciting, exceptionally up-to-date cases designed to apply chapter concepts as students develop a strategic plan for the case companies. For example, every case includes (a) the company’s vision/ mission statements (if the firm has one); (b) the company’s by-segment revenue breakdown (since allocating resources divisions is perhaps the key strategy decision made by firms); (c) the company’s organizational chart (since structure is a key strategy topic); and (d) the company’s financial statements so students can show the impact of a proposed strategic plan on a firm’s financial statements. thus, the cases take a total-firm, multifunctional approach, which by definition is the nature of strategic management. in addition, this text offers end-of-chapter mini-cases to further apply chapter concepts. 5. More coverage of business ethics, social responsibility, and sustainability is provided in this text than in any other strategic-management textbook, including topics such as bribery, workplace romance, devising codes of ethics, taking a position (or not) on social issues, and wildlife welfare—topics that other textbooks do not mention, even though companies continually face strategic decisions in these areas. 6. this text offers more coverage of global/international issues than any other strategicmanagement textbook, including topics such as how business culture and practice vary across countries, as well as how taxes, tariffs, political stability, and economic conditions vary across countries—all framed from a strategic planning perspective. 7. the conversational, concise writing style is supported by hundreds of current examples, all aimed at arousing and maintaining the reader’s interest as the “process” unfolds from start to finish. the unique writing style is in stark contrast to some strategic-management books that seemingly randomly present theory and research for the sake of discussion, rather than material being presented in a logical flow that emulates the actual practice of strategic planning among companies and organizations. 8. this text is supported by outstanding ancillaries, including author-developed manuals, and an author website at www.strategyclub.com that offers practical author-developed videos, templates, sample case analyses, special resources, and even a Facebook page for the text. Pearson education also offers outstanding support materials for instructors and students. For more information, visit www.pearsonglobaleditions.com/David.

Instructor Resources at the instructor resource center, www.pearsonglobaleditions.com/David, instructors can easily register to gain access to a variety of instructor resources available with this text in downloadable format. if assistance is needed, our dedicated technical support team is ready to help with the media supplements that accompany this text. Visit https://support.pearson.com/getsupport/s/ for answers to frequently asked questions and toll-free user support phone numbers. the following supplements are available with this text: • • • •

Chapter Instructor’s Resource Manual Test Bank TestGen® Computerized Test Bank PowerPoint Presentation

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Sample of Universities Recently Using This Textbook abraham Baldwin agricultural college adelphi University akron institute albany State University albertus Magnus college albright college alcorn State University alvernia University ambassador college amberton University american intercontinental University—Weston american international college american international continental (aiU) University—Houston american international University american University anderson University angelo State University aquinas college arizona State University—Polytechnic campus art institute of california averett University avila University azusa Pacific University Baker college—Flint Baldwin Wallace college Barry University Belhaven University—Jackson Bellevue University Belmont abbey college Benedictine University Black Hills State University Bloomsburg University Briar cliff University Brooklyn college Broward college—central Broward college—north Broward college—South Bryant & Stratton—Orchard Park Buena Vista University—Storm Lake caldwell college california Polytechnic State University california State University—Sacramento california State University—San Bernadino

california University of Pa calumet college capella University carlow University carson-newman college catawba college catholic University of america cedar crest college central connecticut State University central Michigan University central new Mexico community college central Washington University chatham University chestnut Hill college chicago State University christian Brothers University claflin University clarion University of Pennsylvania clarkson college clatsop community college cleveland State University college of William & Mary colorado State University—Pueblo columbia college columbia Southern University—Online concordia University concordia University Wisconsin curry college cuyahoga community college Daniel Webster college Davis & elkins college Delaware State University Delaware technology & community college—Dover Delaware technology & community college—Wilmington DePaul University—Loop campus east Stroudsburg University eastern Michigan University eastern Oregon University eastern Washington University ecPi college of technology—charleston ecPi computer institute elmhurst college embry-riddle aero University—Prescott Ferrum college

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Florida agricultural & Mechanical University Florida Southern college Florida State University Florida technical college—Deland Florida technical college—Kissimmee Florida technical college—Orlando Fort Valley State college Francis Marion University Fresno Pacific University Frostburg State University george Fox University georgetown college georgia Southern University georgia Southwestern State University Hampton University Harding University Harris Stowe State University Herzing college—Madison Herzing college—new Orleans Herzing college—Winter Park Herzing University—atlanta High Point University Highline community college Hofstra University Hood college Hope international University Houghton college Huntingdon college indiana University Bloomington indiana Wesleyan caPS iona college iowa Lakes community college— emmetsburg Jackson community college Jackson State University John Brown University Johnson & Wales—charlotte Johnson & Wales—colorado Johnson & Wales—Miami Johnson & Wales—rhode island Johnson c. Smith University Kalamazoo college Kansas State University Keene State college Kellogg community college La Salle University Lake Michigan college

Lebanon Valley college Lee University Lehman college of cUnY Liberty University Limestone college—gaffney Lincoln Memorial University Loyola college Business center Loyola college—chennai Loyola University—Maryland Lyndon State college Madonna University Manhattan college Manhattanville college Marian University—indiana Marshall University Marshall University graduate college Marymount University—arlington Medgar evers college Medical careers institute/newport news Mercer University—atlanta Mercer University—Macon Miami-Dade college—Homestead Miami-Dade college—Kendal Miami-Dade college—north Miami-Dade college—Wolfson Michigan State University Mid-america christian Millersville University Mississippi University for Women Morgan State University Morrison college of reno Mount Marty college—South Dakota Mount Mercy University Mount Wachusett community college Mt. Hood community college Mt. Vernon nazarene Mti Western Business college Muhlenberg college Murray State University new england college new Mexico State University new York University north carolina Wesleyan college north central college north central State college northwest arkansas community college northwestern college northwood University—cedar Hill

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notre Dame of Maryland University nyack college Oakland University Ohio Dominican University Oklahoma christian University Oklahoma State University Olivet college Oral roberts University Pace University—Pleasantville Park University Penn State University—abington Penn State University—Hazleton Pensacola State college Philadelphia University Point Park University Prince george’s community college Queens college of cUnY richard Stockton University rider University roger Williams University Saint edwards University Saint Leo University Saint Mary’s college Saint Mary’s college—indiana Saint Xavier University San antonio college Santa Fe college Savannah State University Shippensburg University Siena Heights University Southern nazarene University Southern new Hampshire University Southern Oregon University Southern University—Baton rouge Southern Wesleyan University Southwest Baptist University Southwest University St. Bonaventure University St. Francis University St. Louis University St. Martins University Sterling college Stevenson University Strayer University—Dc texas a&M University—commerce texas a&M University—texarkana texas a&M—San antonio texas tech University the college of St. rose

the Masters college tri-county technical college trinity christian college troy State University troy University—Dothan troy University—Main campus troy University—Montgomery University of alabama—Birmingham University of arkansas—Fayetteville University of Findlay University of Houston—clearlake University of Louisiana at Monroe University of Maine at augusta University of Maine—Fort Kent University of Maryland University of Maryland—college Park University of Massachusetts—Boston Harbor University of Massachusetts—Dartmouth University of Miami University of Michigan—Flint University of Minnesota—crookston University of Mobile University of Montevallo University of nebraska—Omaha University of nevada Las Vegas University of new Orleans University of north texas University of north texas—Dallas University of Pikeville University of Sioux Falls University of South Florida University of St. Joseph University of tampa University of texas—Pan american University of the incarnate Word University of toledo Upper iowa University Valley city State University Virginia community college System Virginia State University Virginia tech Wagner college Wake Forest University Washington University Webber international University Webster University West chester University West Liberty University

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West Valley college West Virginia Wesleyan college Western connecticut State University Western Kentucky University Western Michigan University Western Washington University

William Jewell college Williams Baptist college Winona State University Winston-Salem State University WSU Vancouver

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Acknowledgments Many persons have contributed time, energy, ideas, and suggestions for improving this text over many editions. the strength of this text is largely attributed to the collective wisdom, work, and experiences of strategic-management professors, researchers, students, and practitioners. names of particular individuals whose published research is referenced in this edition are listed alphabetically in the name index. to all individuals involved in making this text so popular and successful, we are indebted and thankful. Many special persons and reviewers contributed valuable material and suggestions for this edition. We would like to thank our colleagues and friends at auburn University, Mississippi State University, east carolina University, the University of South carolina, campbell University, the University of north carolina at Pembroke, and Francis Marion University. We have taught strategic management at all these universities. Scores of students and professors at these schools helped shape the development of this text. We thank the following guest writers who contributed cases to the concepts and cases version of this sixteenth edition: Meredith e. David, Baylor University Mark L. Frigo, DePaul University Debora J. gilliard, Metropolitan State University of Denver David Lynn Hoffman, Metropolitan State University of Denver edward Moore, Liberty University alvaro Polanco, Baylor University Lori radulovich, Baldwin Wallace University raj Selladurai, indiana University northwest Diana tsaw, california Lutheran University John D. Varlaro, Johnson & Wales University Jason Willoughby, elizabethtown community college We thank you, the reader, for investing the time and effort to read and study this text. it will help you formulate, implement, and evaluate strategies for any organization with which you become associated. We hope you come to share our enthusiasm for the rich subject area of strategic management and for the systematic learning approach taken in this text. We want to welcome and invite your suggestions, ideas, thoughts, comments, and questions regarding any part of this text or the ancillary materials. Please contact Dr. Fred r. David at the following e-mail: [emailprotected], or write him at the School of Business, Francis Marion University, Florence, Sc 29501. We sincerely appreciate and need your input to continually improve this text in future editions. Your willingness to draw our attention to specific errors or deficiencies in coverage or exposition will especially be appreciated. thank you for using this text. Fred r. David and Forest r. David

Global Acknowledgments Pearson would also like to thank and acknowledge the following people for reviewing the global edition content and sharing their feedback to help improve the material nazih K. el-Jor, Lebanese american University georg Hauer, Stuttgart technology University of applied Sciences goh See Kwong, taylor’s University anneleen Michiels, University of Leuven Sununta Siengthai, asian institute of technology

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About the Authors Fred r. and Forest r. David, a father–son team, have published more than 50 articles in journals such as Academy of Management Review, Academy of Management Executive, Journal of Applied Psychology, Long Range Planning, International Journal of Management, Journal of Business Strategy, and Advanced Management Journal. Fred and Forest’s recent article titled “Mission Statement theory and Practice: a content analysis and new Direction,” published in the International Journal of Business, Marketing, and Decision Sciences, is changing the way organizations devise and use vision and mission statements. Fred and Forest are coauthors of Strategic Management: Concepts and Cases—A Competitive Advantage Approach that has been on a two-year revision cycle since 1987 when the first edition was published. this text has been a leader in the field of strategic management for almost three decades providing an applications, practitioner-approach to the discipline. More than 500 colleges and universities have used this textbook over the years. For seven editions of this book, Forest has been sole author of the Case Instructor’s Resource Manual, having developed extensive teachers’ notes (solutions) for all the cases. Forest is author of the case MyLab and chapter MyLab ancillaries, as well as the free excel Student template found on the author website. (www.strategyclub.com). the authors actively assist businesses globally in doing strategic planning. they have written and published more than 100 strategic-management cases. they were invited keynote speakers in September 2015 in Monterrey, Mexico, at the “XXii congreso industrial,” the largest congress of industrial engineering in Latin america. they were also invited keynote speakers at the Pearson international Forum in Monterrey, Mexico, delivering a one-hour presentation to 80 Spanish-speaking, management professors. With a Ph.D. in Management from the University of South carolina, Fred is the tranSouth Professor of Strategic Planning at Francis Marion University in Florence, South carolina. Forest has taught strategic-management courses at Mississippi State University, campbell University, and Francis Marion University.

Fred R. David

Forest R. David

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Strategic ManageMent concepts

A Competitive AdvAntAge ApproACh

Source: © musicman.Shutterstock

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Strategic Management Essentials learning Objectives After studying this chapter, you should be able to do the following: 1-1. Describe the strategic-management process. 1-2. Discuss the three stages of strategy formulation, implementation, and evaluation activities. 1-3. Explain the need for integrating analysis and intuition in strategic management. 1-4. Define and give examples of key terms in strategic management. 1-5. Illustrate the comprehensive strategic-management model. 1-6. Describe the benefits of engaging in strategic management. 1-7. Explain why some firms do no strategic planning. 1-8. Describe the pitfalls in actually doing strategic planning. 1-9. Discuss the connection between business and military strategy.

assurance Of learning exercises The following exercises are found at the end of this chapter: exercise 1a

exercise 1b exercise 1c exercise 1D exercise 1e exercise 1f

Assess Singapore Airlines’ Most Recent Quarterly Performance Data Gather Strategy Information on Nestlé S.A. Get Familiar with the Free Excel Student Template Evaluate an Oral Student Presentation Strategic Planning at Nestlé S.A. Interview Local Strategists

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hen CEOs from the big three U.S. automakers—Ford, General Motors (GM), and Chrysler—showed up several years ago without a clear strategic plan to ask congressional leaders for bailout monies, they were sent home with instructions to develop a clear strategic plan for the future. Austan Goolsbee, one of President Barack Obama’s top economic advisers, said, “Asking for a bailout without a convincing business plan was crazy.” Goolsbee also said, “If the three auto CEOs need a bridge, it’s got to be a bridge to somewhere, not a bridge to nowhere.”1 This text gives the instructions on how to develop a clear strategic plan—a bridge to somewhere rather than nowhere. The chapter provides an overview of strategic management. It introduces a practical, integrative model of the strategic-management process, and it defines basic activities and terms in strategic management. At the beginning of each chapter, a different company is showcased doing an exemplary job applying strategic-planning concepts, tools, and techniques. The first company featured for excellent strategic management practices is Singapore Airlines, Ltd., ranked amongst the top 15 carriers worldwide and one of the best managed companies in the world. In 2010, Goh Choon Phong was made the CEO of the flag carrier of Singapore. At the end of each chapter, a new, one-page, mini-case on a company is provided with respective questions that examine various concepts, tools, and techniques presented.

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

exemplary cOmpany shOwcaseD

Singapore Airlines Limited (SIA) A 5-star airline, Singapore Airlines (SIA) operates the world’s longest non-stop commercial flight from Singapore to Los Angeles and Newark and other trans-Pacific flights, and provides passenger services across more than 30 countries. Strategically well managed, its diversified businesses include aircraft handling and engineering. SIA owns SilkAir, an airline company overseeing regional flights catering to small capacity requirements in secondary cities, and Tigerair, a low fare airline that serves 37 destinations across 12 countries. In Asia, SilkAir helps passengers travel in over 30 cities. The company is the official sponsor of Singapore’s national football team and has continued to market the iconic Singapore Girl, a prominent element that depicts the flight attendants of the airline and is pegged as the central image for the brand. SIA was acknowledged as the best Asian airline in the Business Traveler Awards 2014. According to a survey by Fortune in 2015, it was ranked as the best international airline for business travel and best customer service. The airline has often ranked as one of the most admired company in the world outside the United States. Apart from being acknowledged for their service and efficient operations, SIA has also been commended for SIA’s 2014–2015 Annual Report reveals that the company carried 18,737 passengers that fiscal year, up from 18,628 the previous

year, and had revenue of $15,566 million, up from $15,244 the prior year. In their 2014– 2015 Annual Report, the company reported net profits of $368 million, up from $359 million the prior year. In July 2015, SIA reported that its net profit in the first quarter was twice the amount made in the previous year due to lower oil prices, hence, lower fuel expenses for the airline. The airline saw a net profit of SGD $91.2 million ($67 million), up 162 percent from the same period in the previous year. In July 2015, all talks about acquiring a stake in South Korea’s Jeju Air had ended. Instead SIA chose to respond to budget airlines, which were a bigger threat for SIA with their increasing market share in Southeast Asia, by focusing on expanding in Australia, Thailand, and India. An investment in Jeju Air would have given it more access in North Asia, including China. Source: Based on company documents.

CHAPTER1 • STRATEgiCMAnAgEMEnTESSEnTiAlS

outrun that bear, but I surely can outrun you!” This story captures the notion of strategic management, which is to gain and sustain competitive advantage.

What Is a Cohesion Case? A distinguishing, popular feature of this text is the Cohesion Case, named so because a written case on a company appears at the end of this chapter, and then all other chapters feature end-of-chapter Assurance of Learning Exercises to apply strategic-planning concepts, tools, and techniques to the Cohesion Case company. Nestlé S.A. is featured as the new Cohesion Case in this edition, because Nestlé is a well-known, well-managed global firmundergoing strategic change. By working through the Nestlé-related exercises at the endof each chapter, students become well prepared to develop an effective strategic plan for any company assigned to them (or their team) to perform a strategic-management caseanalysis. Case analysis is a core part of almost every strategic-management course globally.

Defining Strategic Management Strategic management is the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. As this definition implies, strategic management focuses on integrating management, marketing, finance and accounting, production and operations, research and development (R&D), and information systems to achieve organizational success. The term strategic management in this text is used synonymously with the term strategic planning. The latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term strategic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today. The term strategic planning originated in the 1950s and was popular between the mid-1960s and the mid-1970s. During these years, strategic planning was widely believed to be the answer for all problems. At the time, much of corporate America was “obsessed” with strategic planning. Following that boom, however, strategic planning was cast aside during the 1980s as various planning models did not yield higher returns. The 1990s, however, brought the revival of strategic planning, and the process is widely practiced today in the business world. Many companies today have a chief strategy officer (CSO). McDonald’s hired a new CSO in October 2015. A strategic plan is, in essence, a company’s game plan. Just as a football team needs a good game plan to have a chance for success, a company must have a good strategic plan to compete successfully. Profit margins among firms in most industries are so slim that there is little room for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, procedures, and operations in lieu of other, “less desirable” courses of action. The term strategic management is used at many colleges and universities as the title for the capstone course in business administration. This course integrates material from all business courses, and, in addition, introduces new strategic-management concepts and techniques being widely used by firms in strategic planning.

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

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Because no organization has unlimited resources, strategists must decide which alternative strategies will benefit the firm most. Strategy-formulation decisions commit an organization to specific products, markets, resources, and technologies over an extended period of time. Strategies determine long-term competitive advantages. For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization. Top managers have the best perspective to understand fully the ramifications of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation. Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and using information systems, and linking employee compensation to organizational performance. Strategy implementation often is called the “action stage” of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strategies into action. Often considered to be the most difficult stage in strategic management, strategy implementation requires personal discipline, commitment, and sacrifice. Successful strategy implementation hinges on managers’ ability to motivate employees, which is more an art than a science. Strategies formulated but not implemented serve no useful purpose. Interpersonal skills are especially critical for successful strategy implementation. Strategyimplementation activities affect all employees and managers in an organization. Every division and department must decide on answers to questions such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?” The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives. Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because external and internal factors constantly change. Three fundamental strategy-evaluation activities are (1)reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complacent organizations experience demise. Formulation, implementation, and evaluation of strategy activities occur at three hierarchical levels in a large organization: corporate, divisional or strategic business unit, and functional. By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels. Nevertheless, managers and employees at these two levels should be actively involved in strategic-management activities. Peter Drucker says the prime task of strategic management is thinking through the overall mission of a business— that is, of asking the question, “What is our business?” This leads to the setting of objectives, the development of strategies, and the making of today’s decisions for tomorrow’s results. This clearly must be done by a part of the organization that can see the entire business; that can balance objectives and the needs of today against the needs of tomorrow; and that can allocate resources of men and money to key results.2

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

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in situations of great uncertainty or little precedent. It is also helpful when highly interrelated variables exist or when it is necessary to choose from several plausible alternatives. Some managers and owners of businesses profess to have extraordinary abilities for using intuition alone in devising brilliant strategies. For example, Will Durant, who organized GM, was described by Alfred Sloan as “a man who would proceed on a course of action guided solely, as far as I could tell, by some intuitive flash of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at times, he was astoundingly correct in his judgment.”3 Albert Einstein acknowledged the importance of intuition when he said, “I believe in intuition and inspiration. At times I feel certain that I am right while not knowing the reason. Imagination is more important than knowledge, because knowledge is limited, whereas imagination embraces the entire world.”4 Although some organizations today may survive and prosper because they have intuitive geniuses managing them, many are not so fortunate. Most organizations can benefit from strategic management, which is based on integrating intuition and analysis in decision making. Choosing an intuitive or analytic approach to decision making is not an either-or proposition. Managers at all levels in an organization inject their intuition and judgment into strategicmanagement analyses. Analytical thinking and intuitive thinking complement each other. Operating from the I’ve-already-made-up-my-mind-don’t-bother-me-with-the-facts mode is not management by intuition; it is management by ignorance.5 Drucker says, “I believe in intuition only if you discipline it. ‘Hunch’ artists, who make a diagnosis but don’t check it out with the facts, are the ones in medicine who kill people, and in management kill businesses.”6 AsHenderson notes: The accelerating rate of change today is producing a business world in which customary managerial habits in organizations are increasingly inadequate. Experience alone was an adequate guide when changes could be made in small increments. But intuitive and experience-based management philosophies are grossly inadequate when decisions are strategic and have major, irreversible consequences.7 In a sense, the strategic-management process is an attempt to duplicate what goes on in the mind of a brilliant, intuitive person who knows the business and assimilates and integrates that knowledge using analysis to formulate effective strategies.

Adapting to Change The strategic-management process is based on the belief that organizations should continually monitor internal and external events and trends so that timely changes can be made as needed. The rate and magnitude of changes that affect organizations are increasing dramatically, as evidenced by how the drop in oil prices caught so many firms by surprise. Firms, like organisms, must be “adept at adapting” or they will not survive. To survive, all organizations must astutely identify and adapt to change. The strategic-management process is aimed at allowing organizations to adapt effectively to change over the long run. Waterman noted: In today’s business environment, more than in any preceding era, the only constant is change. Successful organizations effectively manage change, continuously adapting their bureaucracies, strategies, systems, products, and cultures to survive the shocks and prosper from the forces that decimate the competition.8 On a political map, the boundaries between countries may be clear, but on a competitive map showing the real flow of financial and industrial activity, the boundaries have largely disappeared. The speedy flow of information has eaten away at national boundaries so that people worldwide readily see for themselves how other people live and work. We have become a borderless world with global citizens, global competitors, global customers, global suppliers, and global distributors! Many firms headquartered in the United States are challenged by outside-U.S.–based companies in many industries. For example, Toyota, Honda, Yamaha, Suzuki, Volkswagen, Samsung, and Kia have huge market shares in the United States. The need to adapt to change leads organizations to key strategic-management questions, such as “What kind of business should we become?” “Are we in the right field(s)?” “Should we reshape our business?” “What new competitors are entering our industry?” “What strategies

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should we pursue?” “How are our customers changing?” “Are new technologies being developed that could put us out of business?” The Internet promotes endless comparison shopping, enabling consumers worldwide to band together to demand discounts. The Internet has transferred power from businesses to individuals. Buyers used to face big obstacles when attempting to get the best price and service, such as limited time and data to compare, but now consumers can quickly scan hundreds of vendor offerings. Both the number of people shopping online and the average amount they spend is increasing dramatically. Digital communication has become the name of the game in marketing. Consumers today are flocking to blogs, sending tweets, watching and posting videos on YouTube, and spending hours on Tumbler, Facebook, Reddit, Instagram, and LinkedIn, instead of watching television, listening to the radio, or reading newspapers and magazines. Facebook recently unveiled features that further marry these social sites to the wider Internet. Facebook users can now log onto various business shopping sites from their social site, so their friends can see what items they have purchased from what companies. Facebook wants their members to use their identities to manage all their online identities. Most traditional retailers boost in-store sales using their websites to promote in-store promotions.

Key Terms in Strategic Management Before we further discuss strategic management, we should define nine key terms: competitive advantage, strategists, vision and mission statements, external opportunities and threats, internal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.

Competitive Advantage Strategic management is all about gaining and maintaining competitive advantage. This term can be defined as any activity a firm does especially well compared to activities done by rival firms, or any resource a firm possesses that rival firms desire. Having fewer fixed assets than rival firms can provide major competitive advantages. For example, Apple has virtually no manufacturing facilities of its own, and rival Sony has 57 electronics factories. Apple relies almost entirely on contract manufacturers for production of all its products, whereas Sony owns its own plants. Having fewer fixed assets has enabled Apple to remain financially lean. According to CEO Paco Underhill of Envirosell, “Where it used to be a polite war, it’s now a 21st-century bar fight, where everybody is competing with everyone else for the customers’ money.” Shoppers are “trading down: Nordstrom is taking customers from Neiman Marcus and Saks Fifth Avenue, T.J. Maxx and Marshalls are taking customers from most other stores in the mall, and Family Dollar is taking revenues from Walmart.9 Getting and keeping competitive advantage is essential for long-term success in an organization. In mass retailing, big-box companies, such as Walmart, Best Buy, and Sears, are losing competitive advantage to smaller stores, reflecting the dramatic shift in mass retailing to becoming smaller. As customers shift more to online purchases, less brick and mortar is definitely better for sustaining competitive advantage in retailing. Walmart Express stores of less than 40,000 square feet each, rather than its 185,000-square-foot Supercenters, and Office Depot’s new 5,000-square-foot stores are examples of smaller is better. Normally, a firm can sustain a competitive advantage for only a certain period because of rival firms imitating and undermining that advantage. Thus, it is not adequate simply to obtain competitive advantage. A firm must strive to achieve sustained competitive advantage by (1) continually adapting to changes in external trends and events and internal capabilities, competencies, and resources; and (2) effectively formulating, implementing, and evaluating strategies that capitalize on those factors.

Strategists Strategists are the individuals most responsible for the success or failure of an organization. They have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, and entrepreneur. Jay Conger, professor of organizational

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behavior at the London Business School and author of Building Leaders, says, “All strategists have to be chief learning officers. We are in an extended period of change. If our leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model.” Strategists help an organization gather, analyze, and organize information. They track industry and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they typically have considerable authority for decision making in the firm. The CEO is the most visible and critical strategic manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist). In the last few years, the position of CSO has become common in many organizations, including Sun Microsystems, Network Associates, Clarus, Lante, Marimba, Sapient, Commerce One, BBDO, Cadbury Schweppes, General Motors, Ellie Mae, Cendant, Charles Schwab, Tyco, Campbell Soup, Morgan Stanley, and Reed-Elsevier. This corporate officer title represents recognition of the growing importance of strategic planning in business. Franz Koch, the CSO of German sportswear company Puma AG, was recently promoted to CEO of Puma. When asked about his plans for the company, Koch said on a conference call, “I plan to just focus on the long-term strategic plan.” Academic Research Capsule 1-1 reveals when CSOs are most often hired. Strategists differ as much as organizations do, and these differences must be considered in the formulation, implementation, and evaluation of strategies. Strategists differ in their attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern for profitability, concern for short-run versus long-run aims, and management style—some will not even consider various types of strategies because of their personal philosophies. The founder of Hershey, Milton Hershey, built the company so that he could afford to manage an orphanage. From corporate profits, Hershey today cares for about 900 boys and 1,000 girls in its boarding school for pre-K through grade 12. Athletic coaches are also strategists. Football, basketball, baseball, soccer, and in fact most athletic contests are often won or lost based a team’s game plan. For example, a basketball coach may plan to fast break and play up-tempo, rather than play more half court, if the players are smaller and faster, or if the team has more depth than the opposing team. A few great college basketball coaches today are Mike Krzyzewski at Duke, John Calipari at Kentucky, Jim Boeheim at Syracuse, and Tom Izzo at Michigan State. Great college basketball coaches years ago included John Wooden, Jim Valvano, Dean Smith, and Bobby Knight. Another great coach of yesteryear was Nolan Richardson, who developed excellent game plans and, in 1994, as the first black head coach at a major university in the South, led the Arkansas Razorbacks men’s basketball team to

acaDemic research capsule 1-1

When Are Chief Strategy Officers (CSOs) Hired/Appointed? An increasing number of firms are employing a chief strategy officer (CSO). In an article published in 2014, Menz and Sheef examined 200 S&P 500 firms over a 5-year period to examine what factors contribute to firms hiring a CSO and what factors contribute to a CSO affecting a firm’s financial performance. Of the sampled firms, on average, during the study, 42 percent employed a CSO. Although many factors may lead to a firm’s decision to appoint a CSO, the authors focused on five key areas that prior research suggests as most important and most likely to lead to a CSO appointment: 1) As the business portfolio increases (e.g., the firm becomes more diversified)

2) 3) 4) 5)

As acquisition activity expands As alliance activity increases As a firm’s size grows As top management team interdependence increases

Results of the Menz and Sheef study reveal that an increase in management interdependence and growth in acquisition activity were most commonly associated with hiring a new CSO. Source: Based on Markus Menz and Christine Sheef, “Chief Strategy Officers: Contingency Analysis of Their Presence in Top Management Teams,” Strategic Management Journal 35, no. 3 (March 2014): 461–471.

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Table 1-1 Ten Famous, Strategic-Planning–Relevant Quotes from NFL Coaches 1. “Perfection is not attainable. But if we chase perfection, we can catch excellence.” —Vince Lombardi, Head Coach Green Bay Packers (1959–67) 2. “Leadership is a matter of having people look at you and gain confidence…. If you’re in control, they’re in control.” —Tom Landry, Head Coach Dallas Cowboys (1960–88) 3. “On a team, it’s not the strength of the individual players, but it is the strength of the unit and how they all function together.” —Bill Belichick, Head Coach New England Patriots (2000– Present), New York Jets (1999), Cleveland Browns (1991–95) 4. “If you want to win, do the ordinary things better than anyone else does them day in and day out.” —Chuck Noll, Head Coach Pittsburgh Steelers (1969–91) 5. “Leaders are made, they are not born. They are made by hard effort, which is the price which all of us must pay to achieve any goal that is worthwhile.” —Vince Lombardi, Head Coach Green Bay Packers (1959–67) 6. “Try not to do too many things at once. Know what you want, the number one thing today and tomorrow. Persevere and get it done.” —George Allen, Head Coach Los Angeles Rams (1957, 1966–70), Chicago Bears (1958–65), Washington Redskins (1971–77) 7. “You fail all the time, but you aren’t a failure until you start blaming someone else.” —Bum Phillips, Head Coach Houston Oilers (1975–80), New Orleans Saints (1981–85) 8. “Success demands singleness of purpose.” —Vince Lombardi, Head Coach Green Bay Packers (1959–67) 9. “Stay focused. Your start does not determine how you’re going to finish.” —Herm Edwards, Head Coach New York Jets (2001–05), Kansas City Chiefs (2006–08) 10. “Nobody who ever gave his best regretted it.” —George S. Halas, Head Coach Chicago Bears (1933–42, 1946–55, 1958–67) Source: A variety of sources.

win the NCAA college basketball national championship versus Duke.10 Switching to football, some inspirational, strategic-planning–related quotes from legendary National Football League (NFL) coaches are provided in Table 1-1.

Vision and Mission Statements Many organizations today develop a vision statement that answers the question “What do we want to become?” Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Many vision statements are a single sentence. For example, the vision statement of Stokes Eye Clinic in Florence, South Carolina, is “Our vision is to take care of your vision.” Mission statements are “enduring statements of purpose that distinguish one business from other similar firms. A mission statement identifies the scope of a firm’s operations in product and market terms.”11 It addresses the basic question that faces all strategists: “What is our business?” A clear mission statement describes the values and priorities of an organization. Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities. A mission statement not only broadly charts the future direction of an organization but it also serves as a constant reminder to its employees of why the organization exists and what the founders envisioned when they put their fame and fortune (and names) at risk to breathe life into their dreams.

External Opportunities and Threats External opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future. Opportunities and threats are largely beyond the control of a single organization—thus the word external. Some general categories of opportunities and threats are listed in Table 1-2, but be mindful that dollars, numbers, percentages, ratios, and quantification are essential, so strategists can assess the magnitude

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Table 1-2 Some General Categories of Opportunities and Threats • • • • • • • • • • • • • • • • • • • • • •

Availability of capital can no longer be taken for granted. Consumers expect green operations and products. Marketing is moving rapidly to the Internet. Commodity food prices are increasing. An oversupply of oil is driving oil and gas prices down. Computer hacker problems are increasing. Intense price competition is plaguing most firms. Unemployment and underemployment rates remain high globally. Interest rates are low but rising. Product life cycles are becoming shorter. State and local governments are financially weak. Drug cartel–related violence is increasing in Mexico. Winters are colder and summers are hotter than usual. Birth rates are declining in most countries. Global markets offer the highest growth in revenues. New laws are passed. Competitors introduce new products. National catastrophes occur. The value of the Euro is rebounding. The separation between the rich and poor is growing. Social media networking is greatly expanding. The Russian ruble has dropped 60 percent in value.

of opportunities and threats and take appropriate actions. For example, in Table 1-2, rather than saying “Marketing is moving rapidly to the Internet,” strategists who take the time to do research would find, for example, that “spending on online advertisements globally rose about 25 percent in 2014, according to eMarketer, and represented about 39 percent of total advertising spending in the United States.12 Strategies must be formulated and implemented based on specific factual information to the extent possible—because so much is at stake in having a good game plan. External trends and events are creating a different type of consumer and consequently a need for different types of products, services, and strategies. Many companies in many industries face the severe threat of online sales eroding brick-and-mortar sales. A competitor’s strength could be a threat, or a rival firm’s weakness could be an opportunity. A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and avoid or reduce the impact of external threats. For this reason, identifying, monitoring, and evaluating external opportunities and threats are essential for success. This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis. Lobbying is one activity that some organizations use to influence external opportunities and threats.

Internal Strengths and Weaknesses Internal strengths and internal weaknesses are an organization’s controllable activities that are performed especially well or poorly. They arise in the management, marketing, finance/ accounting, production/operations, research and development, and management information systems (MIS) activities of a business. Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity. Organizations strive to pursue strategies that capitalize on internal strengths and eliminate internal weaknesses. Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information. Also, strengths and weaknesses can be determined by elements of being rather than performance. For example, a strength may involve ownership of

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natural resources or a historic reputation for quality. Strengths and weaknesses may be determined relative to a firm’s own objectives. For instance, high levels of inventory turnover may not be a strength for a firm that seeks never to stock-out. In performing a strategic-management case analysis, it is important to be as divisional as possible when determining and stating internal strengths and weaknesses. In other words, for a company such as Walmart saying, “Sam Club’s revenues grew 11 percent in the recent quarter,” is much better than Walmart couching all of its internal factors in terms of the firm as a whole. “Being divisional” will enable strategies to be more effectively formulated because in strategic planning, firms must allocate resources among divisions (segments) of the firm (that is, by product, region, customer, or whatever the various units of the firm are), such as Walmart’s Sam’s Club versus Walmart’s Supercenters, or Walmart’s Mexico segment versus Walmart’s Europe segment. Both internal and external factors should be stated as specifically as possible, using numbers, percentages, dollars, and ratios, as well as comparisons over time to rival firms. Specificity is important because strategies will be formulated and resources allocated based on this information. The more specific the underlying external and internal factors, the more effectively strategies can be formulated and resources allocated. Determining the numbers takes more time, but survival of the firm often is at stake, so doing some research and incorporating numbers associated with key factors is essential. Internal factors can be determined in a number of ways, including computing ratios, measuring performance, and comparing to past periods and industry averages. Various types of surveys also can be developed and administered to examine internal factors, such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.

Long-Term Objectives Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission. Long-term means more than one year. Objectives are essential for organizational success because they provide direction; aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing, motivating, and controlling activities. Objectives should be challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives are needed both for the overall company and each division.

Strategies Strategies are the means by which long-term objectives will be achieved. Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures. Strategies currently being pursued by some companies are described in Table 1-3. Strategies are potential actions that require top-management decisions and large amounts of the firm’s resources. They affect an organization’s long-term prosperity, typically for at least five years, and thus are future-oriented. Strategies also have multifunctional and multidivisional consequences and require consideration of both the external and internal factors facing the firm.

Annual Objectives Annual objectives are short-term milestones that organizations must achieve to reach longterm objectives. Like long-term objectives, annual objectives should be measurable, quantitative, challenging, realistic, consistent, and prioritized. They must also be established at the corporate, divisional, and functional levels in a large organization. Annual objectives should be stated in terms of management, marketing, finance/accounting, production/operations, R&D, and MIS accomplishments. A set of annual objectives is needed for each long-term objective. These objectives are especially important in strategy implementation, whereas long-term objectives are particularly important in strategy formulation. Annual objectives provide the basis for allocating resources.

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Table 1-3 Sample Strategies in Action in 2015 general electric company (ge) General Electric Company recently sold its appliance business to Sweden-based Electrolux AB for $3.3 billion, leaving GE focused almost entirely on finance and big-ticket industrial equipment, such as power turbines, locomotives, and aircraft engines. GE’s CEO Jeff Immelt, when asked “What is GE?,” recently responded with the word energy, rather than insurance, plastics, media, consumer finance, or appliances. Founded by Thomas Edison in 1889 and originally named Edison General Electric Company, GE is returning to its roots as an energy company. The company has spent about $14 billion lately buying oil-and-gas service companies, while divesting dishwashers, radios, stoves, microwaves, and toasters. chuy’s (cHUY) Chuy’s is a chain of 59 small Mexican restaurants scattered across the United States. It is not “fast casual,” like Chipotle Mexican Grill; rather, it is a sit-down, table-service restaurant that is uniquely festive, including, for example, Elvis shrines and complimentary Happy Hour nacho bars served out of makeshift car trunks. The décor also includes walls that feature customer-submitted snapshots of their pet dogs. Chuy’s uniqueness and strategies are working great, as revenue soared 20 percent to $64.1 million in its latest quarter. The company opened 11 more locations in the last 12 months. Atthe individual restaurant level, Chuy’s reported a 3 percent improvement in comps, comprised of a 1.3 percent increase in customers and a 1.7 percent bump in the average check. Chuy’s comparable restaurant sales have increased for 17 consecutive quarters. Unlike Chipotle, which recently increased prices, Chuy’s has absorbed numerous commodity increases, keeping most of its menu items below $10. Source: Company documents and a variety of sources.

Policies Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and address repetitive or recurring situations. Usually, policies are stated in terms of management, marketing, finance/accounting, production/ operations, R&D, and MIS activities. They may be established at the corporate level and apply to an entire organization, at the divisional level and apply to a single division, or they may be established at the functional level and apply to particular operational activities or departments. Like annual objectives, policies are especially important in strategy implementation because they outline an organization’s expectations of its employees and managers. Policies allow consistency and coordination within and between organizational departments. Policy change is sometimes difficult. For example, years ago, it was unquestioningly accepted that people could smoke in their offices, in restaurants, in hotels, and on airplanes. But as people and companies became educated about the harms of smoking—not only to smokers but also to nonsmokers —policy in businesses began to change. Even with the vast changes in smoking in public areas, smoking rates are still high. In the United States, Kentucky takes the lead in having more smokers than in any other state: 30.2 percent of residents, followed by West Virginia and Mississippi; Utah has the lowest rate (12.2%), followed by California and Minnesota.13 In the United States overall, 20.5 percent of men smoke, compared to 15.8 percent of women. For a brief time, people thought the answer might be “tobacco-less” cigarettes, as electronic cigarettes hit the market. Unfortunately, however, the product still injects nicotine into the smoker’s body. Substantial research suggests that a healthier workforce can more effectively and efficiently implement strategies. Smoking has become a heavy burden for Europe’s state-run social welfare systems, with smoking-related diseases costing more than $100 billion a year. Smoking also is a huge burden on companies worldwide, so firms are continually implementing policies to curtail smoking. Starbucks has banned smoking within 25 feet of its 7,000 stores not located inside another retail establishment.

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The Strategic-Management Model The strategic-management process can best be studied and applied using a model. Every model represents some kind of process. The framework illustrated in Figure 1-1 is a widely accepted, comprehensive model of the strategic-management process.14 This model does not guarantee success, but it does represent a clear and practical approach for formulating, implementing, and evaluating strategies. Relationships among major components of the strategic-management process are shown in the model, which appears in all subsequent chapters with appropriate areas shaped to show the particular focus of each chapter. This text is organized around this model because the model reveals how organizations actually do strategic planning. Three important questions to answer in developing a strategic plan are as follows: Where are we now? Where do we want to go? How are we going to get there?

Chapter 2: Outside-USA Strategic Planning

The Internal Audit Chapter 6

Vision and Mission Analysis Chapter 5

Types of Strategies Chapter 4

Strategy Generation and Selection Chapter 8

Strategy Implementation Chapter 9

Strategy Execution Chapter 10

Strategy Monitoring Chapter 11

The External Audit Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 1-1 A Comprehensive Strategic-Management Model Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.

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Identifying an organization’s existing vision, mission, objectives, and strategies is the logical starting point for strategic management because a firm’s present situation and condition may preclude certain strategies and may even dictate a particular course of action. Every organization has a vision, mission, objectives, and strategy, even if these elements are not consciously designed, written, or communicated. The answer to where an organization is going can be determined largely by where the organization has been! The strategic-management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. For instance, African countries coming online could represent a major opportunity and require a change in long-term objectives and strategies; a failure to accomplish annual objectives might require a change in policy; or a major competitor’s change in strategy might require a change in the firm’s mission. Therefore, strategy formulation, implementation, and evaluation activities should be performed on a continual basis, not just at the end of the year or semiannually. The strategic-management process never really ends. Note in the strategic-management model that business ethics, social responsibility, and environmental sustainability issues impact all activities in the model, as discussed in Chapter3. Also, note in the model that global and international issues impact virtually all strategic decisions, as described in detail in Chapter 2. The strategic-management process is not as cleanly divided and neatly performed in practice as the strategic-management model suggests. Strategists do not go through the process in lockstep fashion. Generally, there is give-and-take among hierarchical levels of an organization. Many organizations conduct formal meetings semiannually to discuss and update the firm’s vision, mission, opportunities, threats, strengths, weaknesses, strategies, objectives, policies, and performance. These meetings are commonly held off-premises and are called retreats. The rationale for periodically conducting strategic-management meetings away from the work site is to encourage more creativity and candor from participants. Good communication and feedback are needed throughout the strategic-management process. The Academic Research Capsule 1-2 reveals what activity is most important in the strategic-management process. Application of the strategic-management process is typically more formal in larger and wellestablished organizations. Formality refers to the extent that participants, responsibilities, authority, duties, and approach are specified. Smaller businesses tend to be less formal. Firms that compete in complex, rapidly changing environments, such as technology companies, tend to be more formal in strategic planning. Firms that have many divisions, products, markets, and technologies also tend to be more formal in applying strategic-management concepts. Greater formality in applying the strategic-management process is usually positively associated with organizational success.15

Benefits of Engaging in Strategic Management Strategic management allows an organization to be more proactive than reactive in shaping its own future; it allows an organization to initiate and influence (rather than just respond to) activities—and thus to exert control over its own destiny. Small business owners, chief executive

acaDemic research capsule 1-2

What Activity Is Most Important in the Strategic-Management Process? Recent research has examined the strategic-management process and concluded that perhaps the most important “activity” is the feedback loop, because strategy must be thought of as a “verb rather than a noun.” Rose and Cray contend that strategy is a “living, evolving conceptual entity,” and as such must be engulfed in flexibility. “Flexibility” should also be reflected in the structures put in place to monitor and modify strategic plans. Flexibility safeguards should increasingly be known and practiced throughout the firm, especially at lower levels of the organization. The stages of strategic management (formulation, implementation, and evaluation) are so fluid as

to be virtually indistinguishable when one starts and the other ends. Thus, in the comprehensive model illustrated, the encompassing feedback loop is vitally important to enable firms to readily adapt to changing conditions. A significant change in any activity (box) in the model could necessitate change(s) in other activities. Source: Based on Wade Rose and David Cray “The Role of Context in the Transformation of Planned Strategy into Implemented Strategy,” International Journal of Business Management and Economic Research 4, no. 3 (2013): 721–737.

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officers, presidents, and managers of many for-profit and nonprofit organizations have recognized and realized the benefits of strategic management. Historically, the principal benefit of strategic management has been to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach for decision making. In addition, the process, rather than the decision or document, is also a major benefit of engaging in strategic management. Through involvement in the process (i.e., dialogue and participation), managers and employees become committed to supporting the organization. Communication is a key to successful strategic management. Communication may be the most important word in management. Figure 1-2 illustrates this intrinsic benefit of a firm engaging in strategic planning. Note that all firms need all employees “on a mission” to help the firm succeed. Dale McConkey said, “Plans are less important than planning.” The manner in which strategic management is carried out is therefore exceptionally important. A major aim of the process is to achieve understanding and commitment from all managers and employees. Understanding may be the most important benefit of strategic management, followed by commitment. When managers and employees understand what the organization is doing and why, they often feel a part of the firm and become committed to assisting it. This is especially true when employees also understand links between their own compensation and organizational performance. Managers and employees become surprisingly creative and innovative when they understand and support the firm’s mission, objectives, and strategies. A great benefit of strategic management, then, is the opportunity that the process provides to empower individuals. Empowerment is the act of strengthening employees’ sense of effectiveness by encouraging them to participate in decision making and to exercise initiative and imagination, and rewarding them for doing so. William Fulmer said, “You want your people to run the business as it if were their own.” Strategic planning is a learning, helping, educating, and supporting process, not merely a paper-shuffling activity among top executives. Strategic-management dialogue is more important than a nicely bound strategic-management document. The worst thing strategists can do is develop strategic plans themselves and then present them to operating managers to execute. Through involvement in the process, line managers become “owners” of the strategy. Ownership of strategies by the people who have to execute them is a key to success! Although making good strategic decisions is the major responsibility of an organization’s owner or chief executive officer, both managers and employees must also be involved in strategy formulation, implementation, and evaluation activities. Participation is a key to gaining commitment for needed changes. An increasing number of corporations and institutions are using strategic management to make effective decisions. But strategic management is not a guarantee for success; it can be dysfunctional if conducted haphazardly.

Financial Benefits Organizations that use strategic-management concepts are generally more profitable and successful than those that do not. Businesses using strategic-management concepts show significant improvement in sales, profitability, and productivity compared to firms without systematic

Enhanced Communication a. Dialogue b. Participation

Deeper/Improved Understanding a. Of others’ views b. Of what the firm is doing/planning and why

Figure 1-2 Benefits to a Firm That Does Strategic Planning

Greater Commitment a. To achieve objectives b. To implement strategies c. To work hard

THE RESULT All Managers and Employees on a Mission to Help the Firm Succeed

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planning activities. High-performing firms tend to do systematic planning to prepare for future fluctuations in their external and internal environments. Firms with management systems that utilize strategic-planning concepts, tools, and techniques generally exhibit superior long-term financial performance relative to their industry. High-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences. In contrast, firms that perform poorly often engage in activities that are shortsighted and do not reflect good forecasting of future conditions. Strategists of low-performing organizations are often preoccupied with solving internal problems and meeting paperwork deadlines. They typically underestimate their competitors’ strengths and overestimate their own firm’s strengths. They often attribute weak performance to uncontrollable factors such as a poor economy, technological change, or foreign competition. More than 100,000 businesses in the United States fail annually. Business failures include bankruptcies, foreclosures, liquidations, and court-mandated receiverships. Although many factors besides a lack of effective strategic management can lead to business failure, the planning concepts and tools described in this text can yield substantial financial benefits for any organization.

Nonfinancial Benefits Besides helping firms avoid financial demise, strategic management offers other tangible benefits, such as enhanced awareness of external threats, improved understanding of competitors’ strategies, increased employee productivity, reduced resistance to change, and a clearer understanding of performance–reward relationships. Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels. Firms that have nurtured their managers and employees, shared organizational objectives with them, empowered them to help improve the product or service, and recognized their contributions can turn to them for help in a pinch because of this interaction. In addition to empowering managers and employees, strategic management often brings order and discipline to an otherwise floundering firm. It can be the beginning of an efficient and effective managerial system. Strategic management may renew confidence in the current business strategy or point to the need for corrective actions. The strategic-management process provides a basis for identifying and rationalizing the need for change to all managers and employees of a firm; it helps them view change as an opportunity rather than as a threat. Some nonfinancial benefits of a firm utilizing strategic management, according to Greenley, are increased discipline, improved coordination, enhanced communication, reduced resistance to change, increased forward thinking, improved decision making, increased synergy, and more effective allocation of time and resources.16

Why Some Firms Do No Strategic Planning Some firms do no strategic planning, and some firms do strategic planning but receive no support from managers and employees. Ten reasons (excuses) often given for poor or no strategic planning in a firm are as follows: 1. 2. 3. 4. 5. 6. 7. 8.

No formal training in strategic management No understanding of or appreciation for the benefits of planning No monetary rewards for doing planning No punishment for not planning Too busy “firefighting” (resolving internal crises) to plan ahead View planning as a waste of time, since no product/service is made Laziness; effective planning takes time and effort; time is money Content with current success; failure to realize that success today is no guarantee for success tomorrow; even Apple Inc. is an example 9. Overconfident 10. Prior bad experience with strategic planning done sometime/somewhere

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Pitfalls in Strategic Planning Strategic planning is an involved, intricate, and complex process that takes an organization into uncharted territory. It does not provide a ready-to-use prescription for success; instead, it takes the organization through a journey and offers a framework for addressing questions and solving problems. Being aware of potential pitfalls and being prepared to address them is essential to success. Here are some pitfalls to watch for and avoid in strategic planning: • • • • • • • • • • • • •

Using strategic planning to gain control over decisions and resources Doing strategic planning only to satisfy accreditation or regulatory requirements Too hastily moving from mission development to strategy formulation Failing to communicate the plan to employees, who continue working in the dark Top managers making many intuitive decisions that conflict with the formal plan Top managers not actively supporting the strategic-planning process Failing to use plans as a standard for measuring performance Delegating planning to a “planner” rather than involving all managers Failing to involve key employees in all phases of planning Failing to create a collaborative climate supportive of change Viewing planning as unnecessary or unimportant Becoming so engrossed in current problems that insufficient or no planning is done Being so formal in planning that flexibility and creativity are stifled17

Comparing Business and Military Strategy A strong military heritage underlies the study of strategic management. Terms such as objectives, mission, strengths, and weaknesses were first formulated to address problems on the battlefield. According to Webster’s New World Dictionary, strategy is “the science of planning and directing large-scale military operations, of maneuvering forces into the most advantageous position prior to actual engagement with the enemy.”18 The word strategy comes from the Greek strategos, which refers to a military general and combines stratos (the army) and ago (to lead). The history of strategic planning began in the military. A key aim of both business and military strategy is “to gain competitive advantage.” In many respects, business strategy is like military strategy, and military strategists have learned much over the centuries that can benefit business strategists today. Both business and military organizations try to use their own strengths to exploit competitors’ weaknesses. If an organization’s overall strategy is wrong (ineffective), then all the efficiency in the world may not be enough to allow success. Business or military success is generally not the happy result of accidental strategies. Rather, success is the product of both continuous attention to changing external and internal conditions and the formulation and implementation of insightful adaptations to those conditions. The element of surprise provides great competitive advantages in both military and business strategy; information systems that provide data on opponents’ or competitors’ strategies and resources are also vitally important. A fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with an assumption of competition, whereas military strategy is based on an assumption of conflict. Nonetheless, military conflict and business competition are so similar that many strategic-management techniques apply equally to both. Business strategists have access to valuable insights that military thinkers have refined over time. Superior strategy formulation and implementation can overcome an opponent’s superiority in numbers and resources. Born in Pella in 356 bce, Alexander the Great was king of Macedon, a state in northern ancient Greece. Tutored by Aristotle until the age of 16, Alexander had created one of the largest empires of the ancient world by the age of 30, stretching from the Ionian Sea to the Himalayas. Alexander was undefeated in battle and is considered one of history’s most successful commanders. He became the measure against which military leaders even today compare themselves, and

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military academies throughout the world still teach his strategies and tactics. Alexander the Great once said, “Greater is an army of sheep led by a lion, than an army of lions led by a sheep.” This quote reveals the overwhelming importance of an excellent strategic plan for any organization to succeed. The legendary Alabama football coach Bear Bryant asserted, “I will defeat the opposing coach’s team with my players, but if given a week’s notice, I could defeat the opposing coach’s team with his players and he take my players.” Both business and military organizations must adapt to change and constantly improve to be successful. Too often, firms do not change their strategies when their environment and competitive conditions dictate the need to change. Gluck offered a classic military example of this: When Napoleon won, it was because his opponents were committed to the strategy, tactics, and organization of earlier wars. When he lost—against Wellington, the Russians, and the Spaniards—it was because he, in turn, used tried-and-true strategies against enemies who thought afresh, who were developing the strategies not of the last war but of the next.19 Sun Tzu’s The Art of War has been applied to many fields well outside of the military. Much of the text is about how to fight wars without actually having to do battle: It gives tips on how to outsmart one’s opponent so that physical battle is not necessary. As such, the book has found application as a training guide for many competitive endeavors that do not involve actual combat, such as in devising courtroom trial strategy or acquiring a rival company. There are business books applying its lessons to office politics and corporate strategy. Many Japanese companies make the book required reading for their top executives. The book is a popular read among Western business managers who have turned to it for inspiration and advice on how to succeed in competitive business situations. The Art of War has also been applied in the world of sports in preparing for athletic contests. NFL coach Bill Belichick is known to have read the book and used its lessons to gain insights in preparing for games. Australian cricket coaches, as well as Brazilian association football coaches Luis Felipe Scolari and Carolos Alberto Parreira, embraced the text. Scolari made the Brazilian World Cup squad of 2002 study the ancient work during their successful campaign. Similarities can be construed from Sun Tzu’s writings to the practice of formulating and implementing strategies among businesses today. Table 1-4 provides narrative excerpts from The Art of War. As you read through the table, consider which of the principles of war apply to business strategy as companies today compete aggressively to survive and grow.

Table 1-4 Excerpts from Sun Tzu’s The Art of War Writings •

War is a matter of vital importance to the state: a matter of life or death, the road either to survival or ruin. Hence, it is imperative that it be studied thoroughly. Warfare is based on deception. When near the enemy, make it seem that you are far away; when far away, make it seem that you are near. Hold out baits to lure the enemy. Strike the enemy when he is in disorder. Avoid the enemy when he is stronger. If your opponent is of choleric temper, try to irritate him. If he is arrogant, try to encourage his egotism. If enemy troops are well prepared after reorganization, try to wear them down. If they are united, try to sow dissension among them. Attack the enemy where he is unprepared, and appear where you are not expected. These are the keys to victory for a strategist. It is not possible to formulate them in detail beforehand. A speedy victory is the main object in war. If this is long in coming, weapons are blunted and morale depressed. When the army engages in protracted campaigns, the resources of the state will fall short. Thus, while we have heard of stupid haste in war, we have not yet seen a clever operation that was prolonged. Generally, in war the best policy is to take a state intact; to ruin it is inferior to this. To capture the enemy’s entire army is better than to destroy it; to take intact a regiment, a company, or a squad is better than to destroy it. For to win one hundred victories in one hundred battles is not the epitome of skill. To subdue the enemy without fighting is the supreme excellence. Those skilled in war subdue the enemy’s army without battle.

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The art of using troops is this: When ten to the enemy’s one, surround him. When five times his strength, attack him. If double his strength, divide him. If equally matched, you may engage him with some good plan. If weaker, be capable of withdrawing. And if in all respects unequal, be capable of eluding him. Know your enemy and know yourself, and in a hundred battles you will never be defeated. When you are ignorant of the enemy but know yourself, your chances of winning or losing are equal. If ignorant both of your enemy and of yourself, you are sure to be defeated in every battle. He who occupies the field of battle first and awaits his enemy is at ease, and he who comes later to the scene and rushes into the fight is weary. And therefore, those skilled in war bring the enemy to the field of battle and are not brought there by him. Thus, when the enemy is at ease, be able to tire him; when well fed, be able to starve him; when at rest, be able to make him move.

Analyze the enemy’s plans so that you will know his shortcomings as well as his strong points. Agitate him to ascertain the pattern of his movement. Lure him out to reveal his dispositions and to ascertain his position. Launch a probing attack to learn where his strength is abundant and where deficient. It is according to the situation that plans are laid for victory, but the multitude does not comprehend this.

An army may be likened to water, for just as flowing water avoids the heights and hastens to the lowlands, so an army should avoid strength and strike weakness. And as water shapes its flow in accordance with the ground, so an army manages its victory in accordance with the situation of the enemy. And as water has no constant form, there are in warfare no constant conditions. Thus, one able to win the victory by modifying his tactics in accordance with the enemy situation may be said to be divine.

If you decide to go into battle, do not announce your intentions or plans. Project “business as usual.”

Unskilled leaders work out their conflicts in courtrooms and battlefields. Brilliant strategists rarely go to battle or to court; they generally achieve their objectives through tactical positioning well in advance of any confrontation.

When you do decide to challenge another company (or army), much calculating, estimating, analyzing, and positioning bring triumph. Little computation brings defeat.

Skillful leaders do not let a strategy inhibit creative counter-movement. Nor should commands from those at a distance interfere with spontaneous maneuvering in the immediate situation.

When a decisive advantage is gained over a rival, skillful leaders do not press on. They hold their position and give their rivals the opportunity to surrender or merge. They do not allow their forces to be damaged by those who have nothing to lose.

Brilliant strategists forge ahead with illusion, obscuring the area(s) of major confrontation, so thatopponents divide their forces in an attempt to defend many areas. Create the appearance of confusion, fear, or vulnerability so the opponent is helplessly drawn toward this illusion of advantage.

Note: Substitute the words strategy or strategic planning for war or warfare. Source: Sun Tzu’s The Art of War Writings, 1910, Lionel Giles.

implicatiOns fOr strategists Figure 1-3 reveals that to gain and sustain competitive advantages, a firm must create and nurture a clear vision and mission, and then systematically formulate, implement, and evaluate strategies. Consistent business success rarely happens by chance; it most often results from careful planning followed by diligent, intelligent, hard work. If the process were easy, every business would be successful. Consistent success requires that strategists gather and assimilate relevant data, make tough trade-off decisions among various options that would benefit the firm, energize and reward employees, and continually adapt to change. To survive and prosper, a business must gain and sustain at least several major competitive advantages over rival firms.

The strategic-management process represents a systematic means for creating, maintaining, and strengthening a firm’s competitive advantages. This text provides step-by-step guidance throughout the process to help strategists gain and sustain a firm’s competitive advantages. As the eleven chapters unfold, more than 100 key elements of the process, ranging from developing portfolio matrices to managing workplace romance, are examined to help strategists lead the firm in delivering prosperity to shareholders, customers, and employees. The eleven chapters provide a clear, planned, journey through the strategic-management process, with numerous highlights accented along the way, so strategists can perform essential analyses and anticipate and resolve potential problems in leading their firm to success.

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Establish A Clear Vision & Mission

Evaluate & Monitor Results: Take Corrective Actions; Adapt To Change

Gain & Sustain Competitive Advantages

Formulate Strategies: Collect, Analyze, & Prioritize Data Using Matrices; Establish A Clear Strategic Plan

Implement Strategies: Establish Structure; Allocate Resources; Motivate & Reward; Attract Customers; Manage Finances

Figure 1-3 How to Gain and Sustain Competitive Advantages

implicatiOns fOr stuDents In performing strategic-management case analysis, emphasize throughout your project, beginning with the first page or slide, where your firm has competitive advantages and disadvantages. More importantly, emphasize throughout how you recommend the firm sustain and grow its competitive advantages and how you recommend the firm overcome its competitive disadvantages. Pave the

way early and often in your presentation for what you ultimately recommend your firm should do over the next three years. The notion of competitive advantage should be integral to the discussion of every page or PowerPoint slide. Therefore, avoid being merely descriptive in your written or oral analysis; rather, be prescriptive, insightful, and forward-looking throughout your project.

Chapter Summary All firms have a strategy, even if it is informal, unstructured, and sporadic. All organizations are heading somewhere, but unfortunately some organizations do not know where they are going. The old saying “If you do not know where you are going, then any road will lead you there!” accents the need for organizations to use strategic-management concepts and techniques. The strategic-management process is becoming more widely used by small firms, large companies, nonprofit institutions, governmental organizations, and multinational conglomerates alike. The process of empowering managers and employees has almost limitless benefits.

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Organizations should take a proactive rather than a reactive approach in their industry, and they should strive to influence, anticipate, and initiate rather than just respond to events. The strategic-management process embodies this approach to decision making. It represents a logical, systematic, and objective approach for determining an enterprise’s future direction. The stakes are generally too high for strategists to use intuition alone in choosing among alternative courses of action. Successful strategists take the time to think about their businesses, where they are with their businesses, and what they want to be as organizations—and then they implement programs and policies to get from where they are to where they want to be in a reasonable period of time. It is a known and accepted fact that people and organizations that plan ahead are much more likely to become what they want to become than those that do not plan at all. A good strategist plans and controls his or her plans, whereas a bad strategist never plans and then tries to control people! This text is devoted to providing you with the tools necessary to be a good strategist.

MyManagementLab® To complete the problems with the

, go to EOC Discussion Questions in the MyLab.

Key Terms and Concepts annual objectives (p. 40) competitive advantage (p. 36) empowerment (p. 44) environmental scanning (p. 39) external opportunities (p. 38) external threats (p. 38) internal strengths (p. 39) internal weaknesses (p. 39) intuition (p. 34) long-range planning (p. 33) long-term objectives (p. 40) mission statements (p. 38) policies (p. 41)

retreats (p. 43) strategic management (p. 33) strategic-management model (p. 43) strategic-management process (p. 33) strategic planning (p. 33) strategies (p. 40) strategists (p. 36) strategy evaluation (p. 34) strategy formulation (p. 33) strategy implementation (p. 34) sustained competitive advantage (p. 36) vision statement (p. 38)

Issues for Review and Discussion 1-1. Discount airlines are competing more aggressively with Singapore Airline. How could Singapore Airline best compete with these rivals? 1-2. Does Singapore Airlines have its strategic plan posted on its website? Should the company do so? Why or why not? 1-3. Compare and contrast the activities involved in strategy formulation and those in strategy implementation. 1-4. Given the political and economic collapse of various Middle Eastern countries, identify a list of companies for which gaining and sustaining competitive advantage has permanently changed. 1-5. There is a dramatic shift in mass retailing to become smaller. Give four reasons for this phenomenon, with corporate examples of each. 1-6. Avoid being merely descriptive in your written or oral case analysis; rather, be prescriptive, insightful, and forward-looking throughout your project. Explain the statement and discuss its significance.

1-7. As cited in the chapter, Dale McConkey says, “plans are less important than planning.” In terms of strategic management and its benefits, what does McConkey mean? 1-8. In terms of developing a strategic plan, explain what Edward Deming means by “In God we trust. All others bring data.” 1-9. In an organization, at which three hierarchal levels would strategy formulation, implementation, and evaluation activities occur? 1-10. Explain Einstein’s rationale for saying “Imagination is more important than knowledge.” Would you agree with Einstein? Why or why not? 1-11. Explain Drucker’s statement “I believe in intuition only if you discipline it.” Do you agree with it? Give reasons for your answer. 1-12. Strategic management is all about gaining and maintaining competitive advantage. Explain whether you agree or disagree with the help of examples.

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1-13. Based on the chapter’s definition of strategists, identify the top three strategists you have personally spoken to, and interacted with. 1-14. Would the collapse of the euro be a major threat, or opportunity, for your college or university? Why or why not? In your opinion, what is the probability of such a collapse? 1-15. Strategic management is not a panacea for success and can be dysfunctional if conducted haphazardly. In this context, give five examples of potential “haphazard” aspects of the planning process. 1-16. Explain how and why firms use social networks these days to gain a competitive advantage. 1-17. Compare and contrast vision statements with mission statements. 1-18. Identify the top 10 external factors that you feel are affecting your university. Rank them with one being most important. 1-19. In order of importance, list six benefits of a firm engaging in strategic management. 1-20. Rank six reasons, in order of their importance, why firms don’t have strategic plans. 1-21. Identify six guidelines required while conducting strategic management activities. 1-22. Discuss how relevant you think Sun Tzu’s Art of War writings are, for firms today, in developing and carrying out a strategic plan. 1-23. Determine the ways and means by which strategic planning is conducted at your college or university. Report your findings to your class. 1-24. Go to the author website (www.strategyclub.com) and describe the strategic-planning products offered. 1-25. Compare and contrast the extent to which strategicplanning concepts are used by companies in your country versus companies in the United States. 1-26. Would strategy formulation or strategy implementation concepts differ more across countries? Why? 1-27. Compare strategic planning with long-range planning. 1-28. Which three activities comprise strategy evaluation? Why is strategy evaluation important, even for successful firms? 1-29. Explain how a firm can achieve sustained competitive advantage. 1-30. Identify and give an overview of three social networking sites that firms use to gain competitive advantage. 1-31. List four strategists whom you know personally. Rank them on their effectiveness as a leader in their organization.

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1-32. List six characteristics of objectives and give an example of each. 1-33. Conduct an Internet research to determine what percentage of your country’s population smoke. What implications does this have for firms in your country? 1-34. List four financial and four nonfinancial benefits of a firm engaging in strategic planning. 1-35. Discuss the comparisons between business strategy and military strategy. 1-36. Briefly explain whether strategic planning should be more of a people-oriented process than a paper process. 1-37. Do you agree with the fact that strategic planning should not be controlled by technicians? Briefly explain the reasons for your answer. 1-38. According to Sun Tzu, warfare is based on deception. Should strategic planning be based on deception? Explain. 1-39. Explain Sun Tzu’s statement “Generally, in war the best policy is to take a state intact; to ruin it is inferior to this.” Is this true in corporate strategic planning? Explain. 1-40. What is Singapore Airlines’ competitive advantage? How can this advantage be sustained? 1-41. Are there any compelling reasons why the external audit, and internal audit, should not be conducted simultaneously? 1-42. Which stage of strategic management do you feel is the most important? Give reasons for your answer. 1-43. Should strategic planning be more open or closed (i.e.,hidden or transparent)? Why? 1-44. Discuss the extent to which strategic-planning concepts would be applicable to individuals managing their own lives. 1-45. Strengths and weaknesses should be determined relative to competitors, or by elements of being, or relative to a firm’s own objectives. Explain. 1-46. What are the three stages in strategic management? Which stage is more analytical? Which relies most on empowerment to be successful? Which relies most on statistics? Justify your answers. 1-47. What two factors most often are associated with companies hiring a Chief Strategy Officer? 1-48. What is the most important activity in the strategicmanagement process? 1-49. Create a diagram illustrating how to gain and sustain competitive advantages.

MyManagementLab® Go to the Assignments section of your MyLab to complete these writing exercises. 1-50. Strengths and weaknesses should be determined relative to competitors, or by elements of being or relative to a firm’s own objectives. Explain.

1-51. What are the three stages in strategic management? Which stage is more analytical? Which relies most on empowerment to be successful? Which relies most on statistics? Justify your answers.

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mini-case On ryanair limiteD (ryaay)

IS RYANAIR’S WEBSITE ITS STRATEGIC MARKETING TOOL?

Source: © 123rf.com

Headquartered in Dublin, Ireland, Ryanair was set up by the Ryan family and began operating in 1985 with a share capital of £1 only, and a staff of 25 individuals. According to the International Air Transport Association (IATA) report in 2013, the low-cost airline, with its main bases at Dublin and London Stansted Airports, was considered the largest European airline in terms of domestic, international, and scheduled passenger figures and passenger-kilometers. The airline has 1,600 flights scheduled daily across 185 destinations, with 300 Boeing 737-800 jets in operation. The airline is growing rapidly, serving 35 countries in Africa (Morocco), and the Middle East (Cyprus and Israel), and Europe. In 2014, the airline saw an increase in traffic by 11 percent. The operations outgrew its previous office space at the Dublin Airport, and in April, 2014, Ryanair’s new €20m Dublin Head Office in Airside Business Park, which was around 100,000 square feet, was officially opened. In the same year, Ryanair launched its “Always Getting Better” program to address things that customers did not appreciate. It also agreed to purchase up to 200 Boeing 737 Max 8s (100 confirmed and 100 options) for over $22 billion. In December 2015, the airline opened an operating base at Milan Malpensa Airport. The key trends for Ryanair over recent years are shown below (year ending March, 2015): 2010

2011

2012

2013

2014

2015

2,988.1

3,629.5

4,390.2

4,884.0

5,036.7

5,654.0

Operating income (€m)

402.1

488.2

683.2

718.2

658.6

1,042.9

Profit before taxation (€m)

341.0

420.9

633.0

650.9

591.4

982.4

Profit after taxation (€m)

305.3

374.6

560.4

569.3

522.8

866.7

Total operating revenue (€m)

Source: Based on data from Ryanair FY 2015 Results, March 2015, © RyanAir, www.investor.ryanair.com.

In December 2014, Ryanair announced that it would inaugurate its 72nd base in 2015 in the Azores. In 2016, Ryanair will work towards developing a low-cost airline named VivaCan. The airline service has projected to have provided service to 160 million passengers in 2024. Questions

1. Visit Ryanair’s website. Compare its website with one of its competitor, like Spirit Air, and give recommendations on how Ryanair can utilize its website as a strategic marketing tool to enhance its competitiveness. How can it improve the website to function more effectively and enhance the company’s efficiency in serving its potential customers? 2. Can you identify any strengths and weaknesses of Ryanair based on information provided in the case and the data given in the table above?

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Current Readings Alber, Laura. “The CEO of Williams-Sonoma on Blending Instinct with Analysis.” Harvard Business Review 92.9 (2014): 41–44. Business Source Premier. Web. 5 Sept. 2014. Courtney, Hugh, Dan Lovallo, and Carmina Clarke. “Deciding How to Decide (Cover Story).” Harvard Business Review 91.11 (2013): 62–70. Business Source Premier. Web. 5 Sept. 2014. Hon, Alice H. Y., Matt Bloom, and J. Michael Crant. “Overcoming Resistance to Change and Enhancing Creative Performance.” Journal of Management 40.3 (2014): 919–941. Business Abstracts with Full Text (H. W. Wilson). Web, 5 Sept. 2014. Martin, Roger L. “The Big Lie of Strategic Planning.” Harvard Business Review 92.1/2 (2014): 78–84. Business Source Premier. Web. 5 Sept. 2014.

Priem, Richard L., John E. Butler, and Sali Li. “Toward Reimagining Strategy Research: Retrospection and Prospection on the 2011 AMR Decade Award Article.” Academy of Management Review 38.4 (2013): 471–489. Business Source Premier. Web. 5 Sept. 2014. Rosenzweig, Phil. “What Makes Strategic Decisions Different (Cover Story).” Harvard Business Review 91.11 (2013): 88–93. Business Source Premier. Web. 5 Sept. 2014. Weaver, Gary R., Scott J. Reynolds, and Michael E. Brown. “Moral Intuition: Connecting Current Knowledge to Future Organizational Research and Practice.” Journal of Management 40.1 (2014): 100–129. Business Abstracts with Full Text (H. W. Wilson). Web. 5 Sept. 2014.

Endnotes 1. Kathy Kiely, “Officials Say Auto CEOs Must Be Specific on Plans,” USA Today, November 24, 2008, 3B. 2. Peter Drucker, Management: Tasks, Responsibilities, and Practices (New York: Harper & Row, 1974), 611. 3. Alfred Sloan, Jr., Adventures of the White Collar Man (New York: Doubleday, 1941), 104. 4. Quoted in Eugene Raudsepp, “Can You Trust Your Hunches?” Management Review 49, no. 4 (April 1960): 7. 5. Stephen Harper, “Intuition: What Separates Executives from Managers,” Business Horizons 31, no. 5 (September– October 1988): 16. 6. Ron Nelson, “How to Be a Manager,” Success (July–August 1985): 69. 7. Bruce Henderson, Henderson on Corporate Strategy (Boston: Abt Books, 1979), 6. 8. Robert Waterman, Jr., The Renewal Factor: How the Best Get and Keep the Competitive Edge (New York: Bantam, 1987). See also BusinessWeek, September 14, 1987, 100; and Academy of Management Executive 3, no. 2 (May 1989): 115. 9. Jayne O’Donnell, “Shoppers Flock to Discount Stores,” USA Today, February 25, 2009, B1. 10. Richie Brand, “Nolan Richardson Scored a Championship Career,” Investor’s Business Daily (November 14, 2014): A3. 11. John Pearce, II, and Fred David, “The Bottom Line on Corporate Mission Statements,” Academy of Management Executive 1, no. 2 (May 1987): 109. 12. Jack Marshall, “Online Ads Lure Cash, But Losses Still Mount,” Wall Street Journal (August 18, 2014), B1.

13. Mike Esterl, Karishma Mehrotra, and Valerie Bauerlein, “America’s Smokers: Still 40 Million Strong,” Wall Street Journal (July 16, 2014), B1. 14. Fred R. David, “How Companies Define Their Mission,”Long Range Planning 22, no. 1 (February 1989): 91. 15. G. L. Schwenk and K. Schrader, “Effects of Formal Strategic Planning in Financial Performance in Small Firms: A Meta-Analysis,” Entrepreneurship and Practice 3, no. 17 (1993): 53–64. See also C. C. Miller and L. B. Cardinal, “Strategic Planning and Firm Performance: A Synthesis of More Than Two Decades of Research,” Academy of Management Journal 6, no. 27 (1994): 1649–1665; Michael Peel and John Bridge, “How Planning and Capital Budgeting Improve SME Performance,” Long Range Planning 31, no. 6 (October 1998): 848–856; Julia Smith, “Strategies for Start-Ups,” Long Range Planning 31, no. 6 (October 1998): 857–872. 16. Gordon Greenley, “Does Strategic Planning Improve Company Performance?” Long Range Planning 19, no. 2 (April 1986): 106. 17. Adapted from www.des.calstate.edu/limitations.html and www.entarga.com/stratplan/purposes.html 18. Victoria Neufeldt, ed. Webster’s New World Dictionary, 4th ed. (Hoboken, NJ: Pearson, 1998). Pearson purchased this dictionary from Simon & Schuster in 1998, but sold it to IDG Books in 1999. 19. Frederick Gluck, “Taking the Mystique Out of Planning,” Across the Board (July–August 1985), 59.

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the cOhesiOn case

Nestlé S.A. - 2016 by Forest r. DaviD anD MereDith e. DaviD www.nestlé.com (NSRGY) Source: © Danny Kosmayer.123rf

Headquartered in Vevey, Switzerland, Nestlé is one of the largest food producing companies in the world providing quality, healthy, and tasty treats and meals for all ages. Nestlé’s diversified portfolio includes notable product categories like baby foods, pet foods, dairy products, coffee, frozen goods, bottled water, and weight management products. Across this range of products, the top Nestlé brands include Milo, Häagen-Dazs, Carnation milk, Coffee Mate, Nescafe, Perrier, DiGiorno, Stouffers, Lean Cuisine, Nesquik, Purina pet foods, Butterfinger, Baby Ruth, and Nestlé Toll House among others. Nestlé also has many brands under a specific product category. For example, it has over 70 bottled water brands in its portfolio, and over 100 chocolate & confectionary brands. Nestlé reported that in 2014 of the group’s sales was 91.6 billion Swiss Francs (CHF) or approximately $98.8 billion USD based on 2014 average exchange rates. This indicated that the sales in 2014 were down a minimal 500 million CHF from 2013, approximately 0.6 percent. In the 2014 sales breakdown for the firm that competes globally, the United States accounts for 28 percent; Latin America and Caribbean, 15percent; Europe, 28 percent; and Asia, Oceania, and Africa, 29 percent. During the first half of 2015, Nestlé faced a food contamination scare in India and was forced to recall its range of instant noodles Maggi, from the shelves in the Indian market costing the company 66 million Swiss francs ($67 million); Nestlé also had to pay a $100 million USD fine. Overall, Nestlé’s sales declined slightly to 42.84 billion Swiss francs ($43.70 billion) from 42.98 billion francs a year earlier. The group’s net profit fell 2.5 percent to 4.52 billion francs. So while Nestlé, like many other food companies, saw a particular slump in frozen food sales, at constant rates, their sales had improved. The slump, especially in the United States of America, was due to a shift in consumer perception toward food products that they feel are fresh or natural. Even though frozen vegetables and freshly farmed products are often as wholesome as each other, people still view frozen meals and snacks as having more preservatives, sugar, and sodium. Despite this chill over the frozen food market, Nestlé’s research and development team has recently focused its effort on revamping frozen-food brands Lean Cuisine and Stouffer’s, with an eye on product-packaging and health attributes. Though the company is still struggling with the strong franc and its product recall in India that resulted in its first ever quarterly loss in India, in 2015 the revenue in the Americas increased 5.2 percent from the 3.7 percent growth in the first quarter. This growth was driven mainly by increased pricing. Nestlé’s CEO, Paul Bulcke, recently diversified the company into skin health, spending almost $5 billion in 2014 to acquire L’Oréal S.A.’s stake in a joint venture, and rights to sell certain medical products from Valeant Pharmaceuticals International Inc. In the third quarter of 2015, Nestlé inaugurated its third Nespresso plant, at Romont Switzerland. This move is a strategic, long-term plan for Nestlé with a focus on producing its new large-cup Vertuo Line, a coffee machine that will compete with Keurig Green Mountain’s K-cup. Nestlé’s North American Nespresso sales grew with its 2014 launch of the Vertuo Line, and it now has 36 new boutiques in the United States. The coffee capsule market in the United States is worth $5 billion and, thus, is a key growth market for Nespresso—flourishing in Europe, but nascent in the United States. The company spent around 300 million Swiss francs ($308.29 million) to construct the Romont plant. While the plant has a capacity to employ 300-400 workers, it has 125 employees. Copyright by Fred David Books LLC. www.strategyclub.com (Written by Forest R. David)

History The first thing most people instantly associate Nestlé with is chocolate products, but Nestlé’s roots are embedded in milk products, in particular baby formula. Nestlé’s roots can be traced back to 1866 when the Anglo-Swiss Condensed Milk Company first opened a milk factory in Cham, Switzerland. Nestlé was actually founded one year later in 1867 when a German pharmacist, Henri Nestlé, saved a neighbor’s child in Vevey, Switzerland, from starvation with a mixture comprising cow’s milk, wheat flour, and sugar. Fittingly enough, Nestlé’s first logo was that of a mother bird feeding her new hatchlings. Nestlé benefitted from World War I, which had created a shortage of food and governments were seeking contracts to help feed its militaries. By the end of the War, the firm had grown from a few

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factories to over 40 across various countries. Notable product launches after World War I included Nescafe in 1938 and Nestea a few years later. At the conclusion of World War II, Nestlé saw rapid growth, adding many new product lines and even diversifying by purchasing a stake in Paris based cosmetics maker L’Oréal. In the early 1990s, Nestlé benefited tremendously from the fall of communism in the former Soviet Union and Eastern Europe. Nestlé diversified into the pet food business in 2001 with the acquisition of Ralston Purina. Nestlé went on to purchase the American baby food giant Gerber in 2007 and Wyeth Nutrition from Pfizer Nutrition a few years later, strengthening its baby nutrition business. In 2014, Nestlé expanded its Nestlé Skin Health S.A. business to capitalize on the growing trends of global skin care. Part of Nestlé’s motivation for these acquisitions was to shift their business more towards nutrition and health from simply candy, food, canned goods, and other less nutritious products.

Internal Issues Organizational Structure

Nestlé operates from a strategic business unit (SBU) type organizational structure as illustrated on the company website’s About Us section; Exhibit 1 provides a list of Nestlé’s top executives along with their title. It should be noted that there is one woman (Patrice Bula) among 16 top executives; providing opportunities in upper management for women is an area Nestlé should work on improving in the future. Vision and Mission

Nestlé does not use the terms vision or mission, but on the company website’s About Us section, the firm clearly states that it is “committed to enhancing people’s lives by offering tastier and healthier food and beverage choices at all stages of life and at all times of the day.” Nestlé prides itself on being ethical and nonnegotiable on quality and safety.

exhibiT 1 Nestlé’s Top Executive Team

Peter Barbeck-Letmathe, Chairman of the Board

Paul Bulcke, CEO

Jose Lopez, Executive VP Operations

Luis Cantarell, Executive VP Zone Europe, Middle East, North Africa

Patrice Bula, Executive VP Strategic Business Units, Marketing and Sales

Laurent Freixe, Executive VP Zone Americas

Chris Johnson, Executive VP Nestlé Business Excellence

Wan Ling Martello, Executive VP Zone Asia, Oceania, and Africa

FrancoisXavier Roger, Executive VP, CFO

Marco Settembri, Executive VP Nestlé Waters

Stefan Catsicas, Executive VP Innovation, Technology, and R&D

Heiko Schipper, Deputy Executive VP Nestlé Nutrition

Peter Vogt, Deputy Executive VP Human Resources

Rudolf Ramsauer, Executive VP Corporate Communications

Martial Rolland, Deputy Executive VP Nestlé Professional

David P. Frick, Senior VP Corporate Governance Compliance & Corporate Services

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Strategy

Being a global organization, Nestlé’s strategy has always displayed a competitive focus. Their corporate roadmap is threefold. Nestlé has certain operational pillars that include innovation, consumer engagement, and operational efficiency. Nestlé also has certain growth drivers. One such growth driver for the group is in its image transformation from a packaged food company to one that focuses on nutrition, health, and wellness. While it has no plans to stop selling chocolate, coffee, ice cream, and other food products that it is world famous for, Nestlé is actively engaged in offering healthier food options to its customers. The firm has the largest research and development budget of any food company and it aims use this to produce healthier and tastier food options, from infant formula to products designed for senior citizens. Nestlé has recently reduced the amount of salt, sugar, and saturated fats in many of its products as a means of improving the nutrition quotient, and enhancing other flavors so as to not reduce the taste of these products. One key area that Nestlé will focus on improving in December 2015 is its Policy on Marketing Communication to Children. The company will be looking at phasing out their marketing communication in schools and increasing their focus on health and wellness education through various mediums including the television. Nestlé currently has a series running in both Mexico and the Philippines to better target children. The global ice cream market’s growth expectation was to go from $67 billion in 2014 to $71 billion in 2015, with Unilever and Nestlé having one third of that market share. However, consumers who are more aware of and concerned about healthy diets prefer smaller treats and niche brands with healthier ingredients to large blocks of ice cream. As part of their focus on premiumization, Nestlé is putting up some bulk ice cream businesses for sale, while entering new markets, acquiring start-ups, and introducing new products. Independent brands like the United Kingdom’s Jude’s, America’s Ciao Bella, China Mengniu Dairy, and R&R Ice Cream in Europe are gaining market share. Nestlé sells the banana-like Peelin’ Pops, as well as Häagen-Dazs and Movenpick, but some of its consumer ice cream operations have already been sold. More of its ice cream business, which provides the company about $4 billion of its $95 billion in annual revenue, is likely to be divested. In 2015, Nestlé sold its South African ice cream business to R&R Ice Cream. Nestlé’s wants its operations to focus on nutrition and health. According to an analyst at the Swiss private bank Vontobel, Nestlé may not want to increase its share in the unhealthy ice cream business. Nestlé also looks at its competitive advantages—having unmatched product portfolio, research and development capacities, and geographic presence—in its roadmap. Expanding on its health and wellness portfolio, Nestlé sold its stake in L’Oréal in 2014 and used part of the proceeds to gain 100 percent control of Galderma, the foundation of Nestlé’s subsidiary, Nestlé Skin Health. The vision behind this acquisition is for it to become the most recognized company in the skin health category in the world through science-based solutions. Social Responsibility

Nestlé is one of the most socially responsible companies in the world, and has even created an award for businesses that excel in rural development, nutrition, and clean water initiatives. In the 2014 social responsibility statement to shareholders, CEO Bulcke stated that at the heart of Nestlé’s corporate strategy is a desire to be the leading nutrition, health, and wellness-company in the world. Nestlé has shared 38 commitments that they aim to meet before or by 2020, including producing healthier food products, focusing on responsible marketing to children and women who opt to use baby formulas instead of breast feeding, water and other environmental conservation, and focus on human rights and workers’ rights for employees at Nestlé. Although Nestlé is doing an excellent job of reducing sodium and sugars in foods, providing direction to farmers and rural communities on how to maintain healthy water systems, and displaying ethical marketing of its products, the firm lacks in opportunities for women in upper management. As of 2014, 25 percent of senior leaders and 34 percent of management were women, but only 1 woman is listed out of the 16 people mentioned in the organizational chart of top management (see Exhibit 1 on page 55). Nestlé solicited the opinions and recommendations of the Bureau Veritas in 2014 to audit its social responsibility initiatives and provide directions for improvements. Bureau Veritas found Nestlé was in compliance with all social issues addressed, in particular Nestlé’s work in rural development. Moving forward, a key area for improvement for Nestlé would be in developing a clear methodology to quantify the benefits from the firm’s work in rural development. Currently, Nestlé is focusing on case studies of just a few areas where it is working on rural development activities. Bureau Veritas also suggested Nestlé provide increased disclosure to stakeholders on its R&D programs that are transforming Nestlé from a food and beverage business to a health, nutrition and wellness business.

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Nestlé has received numerous accolades for its commitment to being socially responsible. In 2013, Nestlé ranked 3rd among global food providers in the Access to Nutrition Index, which measures firms on a variety of factors such as governance, ethical marketing, accessibility, product labeling, and other parameters. In October 2014, Nestlé received a score of 96 out of 100 from the Climate Disclosure Index and received a maximum score of 20 from the Carbon Disclosure Project Water. Also in 2014, the Dow Jones Sustainability Index assigned a score of 88 to Nestlé, placing the firm second in its industry. Despite numerous accolades, in August 2015 Nestlé was sued in California for allegedly knowingly allowing a Thai supplier that employed slave labor to provide fish for its Fancy Feast cat food products. According to the class action lawsuit filed by the Hagens Berman law firm, Nestlé imports around 28 million pounds of seafood-based pet products to the United States through Thai Union Frozen Products PCL. The ingredients in those products have been said to be the result of slave labor. The lawsuit alleges that male individuals are often taken from certain areas in Thailand, Myanmar, and Cambodia, and sold to companies like Thai Union. These individuals work for around 20 hours a day with little pay, and if their work doesn’t meet standard requirements they are severely punished. Although protection of human rights is one of Nestlé’s corporate principles, Steve Berman, managing partner of the Hagens Berman law firm, had said that keeping these from the public has allowed Nestlé to mislead millions of consumers, who support and encourage slave labor in the production of its pet food without even knowing it. Research & Development

Nestlé has the largest R&D network and budget of any food company in the world, with total R&D expenses of 1.6 billion CHF in 2014 that amounted to 1.8 percent of total sales. Hershey and Mondelez (producers of Cadbury, Nabisco, and other products) by comparison had no R&D expenses listed on their respective income statement in 2014. Nestlé has 34 R&D facilities with over 5,000 employees around the world working to provide healthier food options for consumers. Switzerland is the base for almost two-thirds of Nestlé’s research and development. While these expenses are still relatively small in relation to total revenues, Nestlé is aiming to transform itself from merely a food company to a health and wellness company. With its strategy to produce healthier food and baby formulas, and to enter into the skin care market, research and development is likely to become of increased strategic importance for Nestlé moving forward. In fact, Nestlé plans to open R&D centers in the United States for frozen foods, and in Shanghai for skin care products focused on an aging population. Finance

Nestlé’s revenues dropped marginally in 2014 as revealed in Exhibit 2, but its net income increased 43 percent. Total assets, as shown in Exhibit 3, increased 10 percent in 2014 mostly due to a 10 percent increase in the company’s goodwill and intangibles. Segments

Nestlé is well diversified within the food industry with a range, for example, from pet food and skin care products. Exhibit 4 below reveals Nestlé’s 2014 and 2013 revenues over its 7 segments. Note that sales dropped in 5 product categories in 2014, only increasing in the Nutrition and Health Science segment and the Water segment. The year 2014 as a whole was slow for many in the food industry, so Nestlé’s sales are not out of line with industry norms. Nestlé’s increase in Nutrition and Health Science sales is in line with the firm’s overall strategy of becoming increasingly a health and wellness firm, rather than solely a packaged-food company.

exhibiT 2 Nestlé’s Income Statements (in millions CHF) report Date Revenues Cost of goods sold Other operating expenses net EBIT Interest expense EBT Tax Income from associates Net income

December 31, 2014

December 31, 2013

91,612 (47,553) (33,154) 10,905 (637) 10,268 (3,367) 8,003

92,158 (48,111) (30,979) 13,068 (631) 12,437 (3,256) 1,264

14,904

10,445

Source: Based on Nestlé’s 2014 Consolidated Financial Statements Report, pages 58–59.

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exhibiT 3 Nestlé’s Balance Sheets (in millions CHF) report Date

December 31, 2014

December 31, 2013

7,448 13,459 9,172 3,882 33,961 28,421 34,557 19,800 16,711 133,450

6,415 12,206 8,382 3,063 30,066 26,895 31,039 12,673 19,769 120,442

17,437 8,810 6,648 32,895 12,396 3,191 8,081 5,003 61,566

16,072 11,380 5,465 32,917 10,363 2,643 6,279 4,101 56,303

Treasury stock Translation reserve Retained earnings Other Total equity

(3,918) (17,255) 90,981 2,076 71,884

(2,196) (20,811) 85,260 1,885 64,139

Total liabilities & equity

133,450

120,442

Assets Cash and equivalents Accounts receivable Inventory Other current assets Total current assets Property, plant & equipment Goodwill Intangible assets Other assets Total assets Liabilities Accounts payable Short term debt Other current liabilities Total current liabilities Long term debt Deferred income taxes Employee benefits Other liabilities Total liabilities

Source: Based on Nestlé’s 2014 Consolidated Financial Statements Report, pages 60–61.

exhibiT 4 Nestlé’s Sales (in millions of CHF) 25,000 20,000 15,000 10,000 5,000

2013

Source: Based on Nestlé’s 2014 Annual Report, p. 43.

2014

W at er

tio ne ry

Ca re

Co nf ec

Pe t

Po wd er ed ilk an Pr d od Li uc qu ts id an ... d Ic e Cr Pr ep ea m ar N ed ut D rit i io sh n es an an d d. H .. ea lth Sc ien ce

M

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exhibiT 5 Nestlé’s 2014 Operating Profit Breakdown 4% 8%

Powdered and Liquid Beverages 29%

14%

Milk Products and Ice Cream Prepared Dishes and Cooking Aids Nutrition and Health Science Pet Care Confectionery Water

17% 17% 11%

Source: Based on Nestlé’s 2014 Annual Report, p. 43.

Exhibit 5 represents Nestlé’s operating profits for each division during 2014. Note that Nestlé Water profits only comprise 4 percent of the company total. Nevertheless, Nestlé’s sales and profits are quite diversified, with no one product category generating more than 30 percent of total 2014 operating profits. Much like Nestlé’s product categories, Nestlé’s geographical diversification is quite good, with roughly a quarter of 2014 revenues divided between Europe, North America, Asia, and the rest of the world as shown by Exhibit 6. It is quite remarkable that Nestlé is not overly dependent on any one region. If needed, Nestlé should divert its resources to more profitable regions. For example, in 2014 Nestlé’s sales in Brazil, Philippines, and Russia increased 10.6, 9.4, and 13.4 percent respectively, based on local currency (not taking into account exchanges rates with the Swiss Franc). These three nations are fairly sizable in volume as well, with Brazil producing the 4th largest revenues of any country served by Nestlé, and Philippines and Russia ranking 8th and 12th globally in Nestlé’s total sales. No other country in the top 12 experienced growth in local currency over 3 percent, with several reporting lower sales in 2014 than 2013. Nestlé did suffer from the depreciation of the Russian ruble, Mexican peso, and Australian dollar in 2014. The first half of 2015, however, continued to indicate a slowdown in emerging markets, especially China, while established markets remained stable.

Competitors Nestlé competes primarily in the food and beverage business with 70 percent of operating profits derived from these products and the remaining profits derived relatively evenly between skin care and pet food products. Within the food and beverage business, Nestlé finds itself competing with global chocolate giants, Hershey, Mars and others, along with firms such as French-based Danone, European focused Nomad Foods, U.S.-based Kraft, and many more. In the skin care business, Nestlé competes with a slew of consumer products firms such as giant Unilever. On pet foods, Nestlé competes with familiar competitors such as the world leader in pet food, which may be surprising to some, Mars. Del Monte, along with Procter & Gamble (P&G) are also in the pet food business.

exhibiT 6 Nestlé’s 2014 Sales Breakdown by Geographic Region 4%

2%

15%

28%

Europe US & Canada Asia Latin America & Caribbean Africa Oceania

23%

28%

Source: Based on Nestlé’s 2014 Annual Report, p. 47.

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Hershey

Headquartered in Hershey, Pennsylvania, The Hershey Company is the largest chocolate producer in North America and a confectionary leader worldwide, with over 80 brands, annual revenues of over $7 billion, with about 20,000 employees, and operations in about 80 countries. Hershey offers chocolates as well as other candies, mints, and chewing gum. Notable products include Hershey Kisses, Mr. Goodbar, Twizzlers, Jolly Ranchers, Ice Breakers, and, what may arguably be the best selling candy bar on the planet —Reese’s, a Hershey brand that became an official sponsor of ESPN college football game day, in 2015. Hershey is currently expanding globally with strategic emphasis on markets in China and Mexico, but the company still derives about 85 percent of its revenue from the USA. In 2015, Hershey introduced products like KitKat White Minis, Hershey’s caramels, Reese’s Spreads Snacksters, and Graham Dippers. In early 2015, Hershey acquired KRAVE Pure Foods, Inc. for about $300 million. KRAVE, founded in 2009, is a maker of beef jerky and other high-protein snacks. Hershey is focusing on getting a share of the ever-increasing meat snacks market, and building its capacity to make foods that consumers want to snack on. It expects the U.S. meat snacks category, valued at about $2.5 billion, to grow at a double-digit pace. Hershey plans to operate KRAVE, which saw $35 million in sales in 2014, as a single business unit in the North America division; KRAVE’s founder, Mr. Sebastiani, continues to head the business as the company’s president. Mars, Inc.

Mars is the second largest candy manufacturer in the United States and the third largest privately-held company in the United States according to Forbes. Headquartered in McLean, Virginia, and having annual sales of over $30 billion, Mars, like Nestlé, is well diversified with six business units consisting of chocolate, drinks, food, symbio-science, pet care, and Wrigley chewing gum. Mars blockbuster chocolate brands include: Snickers, Milky Way, M&Ms, Dove, Bounty, 3 Musketeers, Starburst, Skittles, among others. Mars’ annual revenue in 2014 was about $35 billion, more than 50 percent higher than in 2007, largely due to the firm’s 2008 acquisition of Wrigley. Since patenting recipes is difficult and producing chocolate is secretive, Mars does not allow visitors to its kitchens in its factories and facilities. Mars’ first blockbuster product back in 1923 was the Milky Way candy bar. Market researcher Euromonitor International recently reported that Mars’ market share in the USA rose to 28 percent from 24 percent. To further battle Hershey, Mars in 2014 opened a new 500,000 square foot chocolate factory in Topeka, Kansas at a cost of $270 million. Almost every day, the factory cranks out around 39 million peanut M&M’s and 8 million miniature Snickers candy bars. Like Nestlé, Mars advocates globally sustainability of the cocoa resource but has received criticism in recent years over purchasing cocoa from West African farms that use child labor. Mars is also one of the world’s biggest producers of dog food and pet-care products. Mars’ Wrigley division produces chewing gums, confectionery products, and a variety of other products ranging from Uncle Ben’s rice to Flavia coffee. Pedigree, Greenies, and Whiskas are some of the pet-food brands under Mars. Interestingly, chocolate is Mars’ second-largest business globally, behind pet care. Danone

Danoneis a global company based in Paris, France with 21 billion euros in revenue in 2014. The firm has four key operating segments—dairy products, water, baby nutrition, and medical nutrition, representing 52, 21, 20, and 7 percent of revenues respectively. Danone is also fairly diverse geographically with sales of approximately 40, 24 and 36 percent in Europe, North America, and Other respectively. With the close overlap on products and markets served, Danone is a significant competitor to Nestlé on many key areas. In early 2015, Danone warned sales for 2015 were expected to decline and the company planned on cutting costs and reorganizing production. However, the first half of 2015 was profitable for Danone as the Euro has depreciated much more than the Swiss Franc, making conversions back to Euros more beneficial for the firm. Chinese demand for baby formula was also strong in the first half of 2015 leading to an increase in worldwide Early Nutrition sales of 11 percent from the first half of 2015 compared to first half of 2014. Over the same time period, Dairy, Waters, and Medical Nutrition decreased/increased (0.4), 9.5 and 8.1 respectively at Danone. Nomad Foods

Nomad Foods is a large food company based in the British Virgin Islands. Nomad derives nearly 90percent of its revenues from the United Kingdom, Germany, Italy, and Austria. Nomad reported over 1.5 billion euros in revenues in 2014, but should see this number increase substantially with its 2015 purchase of Iglo, which included Birds Eye and Findus Group’s European operations for $2.8 billion USD expanding the firms reach across a much broader European footprint. Nomad is focused primarily on the frozen food market, and is now targeting possible U.S. acquisitions.

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External Issues Flavor Enhancers

There is a growing awareness of sugars harmful effects on people in particular high-fructose corn syrup and salt. Hershey is a high-profile example of the move away from high-fructose corn syrup that has may fuel weight gain and diabetes, using sugar in some of its products as a replacement for high-fructose corn syrup. However, the American Medical Association stated that restricting the use of syrup is not supported with enough evidence. The Corn Refiners Association, through research by firms like Mintel and Nielsen, analyzed perceptions of sweeteners and observed that 67 percent of consumers felt specific sweetener types were less important than moderation. In the food and beverage industry, soda constitutes a large portion of the high-fructose corn syrup market. Hunt’s ketchup is one product to have reverted to using corn syrup after having tried more sugar because there was no change in the sales. The U.S. Food and Drug Administration (FDA) had denied requests made by some companies to have their sweetening agent renamed “corn sugar” on nutrition labels. In addition to this, in July 2015 the FDA proposed forcing food producing companies to add the percent daily value of added sugar on all nutrition labels like the percent daily allowance of salt, fat, and other ingredients, which are listed on the product labels. Any added sugar, just as in the case of corn syrup, can have dramatic effects on the body. Added sugars are linked to diabetes, tooth decay, heart problems, weight gain, and many other health problems. In response to sugar being harmful, there is a growing global demand for artificial sweeteners as a means to reduce calories, stabilize blood sugar levels, and just an overall healthier choice rather than raw sugar. However, to date, research in this area is not conclusive as some studies reveal artificial sweeteners are similar to raw sugar once ingested. Europe has banned several artificial sweetener products such as Stevia and aspartame from lack on conclusive research, but other nations such as Japan and the United States have been using the same sweeteners for decades. Never the less, there is a growing public awareness toward both raw and artificial sugars. Another common flavor enhancer found in food is salt. Table salt has been linked to water retention, high blood pressure, stomach cancer, osteoporosis, and killing of beneficial bacterial in the body. Many medical researches recommend limiting salt consumption to 6 grams a day, however the World Health Organization suggests the average person consumes between 9 and 12 grams of salt daily. Many food companies are attempting to reduce the amount of sodium in their products as global awareness increases on the harmful effects of a high salt diet. Nestlé, for example is experimenting with reducing both salt and sugar from its foods and replacing them with natural flavorings. Cocoa Prices

Over 100 years ago, chocolate was generally considered a luxury for the rich and out of the grasp of lower income customers. However, today consumers in emerging markets worldwide are able to afford increasingly higher quality chocolates that require better and higher percentages of cocoa. Unlike other crops such as corn or soybeans, cocoa is more difficult to produce and cocoa prices are expected to rise substantially moving forward, according to the International Cocoa Organization (ICO). Typically cocoa trees take upwards of 10 years to mature and many trees now are old, not yielding the same number or quality of beans. Farmers are also switching to more profitable crops, even as the price per ton of cocoa approaches $3,000 per ton. Analysts estimate the cocoa price would need to be $3,500 per ton to maintain current production rates from farmers. In fact the ICO expects the demand to production ratio to be the highest ever by 2018, since it started keeping records in 1960. In 2013 alone, worldwide consumption of cocoa beans was up 32 percent from 2012 and Chinese demand is projected to rise 5 percent annually through 2018. To help combat the new demand, Mars and Nestlé have spent millions to educate farmers in West Africa on proper techniques and in developing new types of cocoa trees. The Ebola virus outbreak in West Africa threatened hundreds of cocoa farms. North American based Blommer Chocolate Company is a top cocoa processor and one of the main suppliers to rival Hershey and other chocolate producing companies. Blommer is expanding its processing capacity to meet strong chocolate demand in the United States. Nevertheless, chocolate companies are facing tough choices that include raising prices, reducing portion sizes, or even using less cocoa in its products. As early as 2006, Hershey started using substitutes for cocoa butter in the production of Krackel and Mr. Goodbar which resulted in the firm having to change the label “milk chocolate” to “made with chocolate” or “chocolate candy” to comply with the FDA protocols for labeling of chocolate food items. Hershey however is now switching both Krackel and Mr. Goodbar back to solid milk chocolate, meaning the bars will contain at least 10 percent cocoa per FDA regulations to be called milk chocolate.

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Potential Taxes and Health-Minded Public

There is a growing awareness worldwide to unhealthy eating, especially when it comes to sugars, processed foods, and animal fats. Many different governments (local, regional and national) have (or plan to) increased taxes or flat out banned unhealthy items. Taxes are viewed by governments much like tobacco taxes as a way not only to curb citizens’ consumption but also as an additional means of revenues. For example, Connecticut recently proposed a 2 percent additional tax on all soda, suggesting it would provide $144 million in annual revenues and reduce soda consumption in the state. New York City has banned most sugary drinks 16oz and larger from being served. The Navajos Nation, the largest American Indian Reservation in the United States with 300,000 members, is proposing a tax of up to 7 percent on fatty snacks and soda, up from the current level of 5 percent, while healthy food items are excluded from taxation. Former NBA star Yao Ming is campaigning in his home country of China to promote healthier eating and exercise habits. Mexico recently passed legislation to significantly tax both sugary drinks and high calorie items such as candy. Peru, Uruguay, and Costa Rica banned all junk food from public schools, including candy bars, back in 2012. Many other nations in Latin America require red or yellow circles around sugar content on items depending on their sugar content. All of these actions and trends are a threat to Nestlé. Increasing obesity is a major problem among the world’s population. Processed sugar negatively impacts the body by increasing your chances of tooth decay, obesity, and diabetes, and additionally can significantly increase ones chances of getting heart disease and even cancer. Scientific tests reveal that sugar is basically a food for cancer cells and people that drink 2 soft drinks a week are 87 percent more likely to develop pancreatic cancer. For comparison, a Nestlé Butterfinger and Baby Ruth contain 29 and 33 grams of sugar respectively, and a can of cola contains around 39g of sugar. Sugar is also believed to be damaging to your skin, looks and overall mood. Moving forward, Nestlé could consider increased marketing of dark chocolate, which contain good antioxidants, but is much higher in saturated fat than milk chocolate and contains high levels of sugar. Sugar free candy has also been linked to cancer and weight gain, partly because artificial sweeteners are not healthy. By 2017, almost 150 artificial ingredients, like artificial sweeteners, preservatives and artificial flavor enhancers, will be discarded from Panera Bread Company’s kitchens. Food companies are increasingly eliminating unnatural and unhealthy ingredients. For example, natural colorings made from turmeric and paprika will replace Kraft Heinz Company’s artificial colorings in its macaroni and cheese product, and PepsiCo’s Diet Pepsi will see a switch from artificial sweetener aspartame to sucralose. After an environmental advocacy group said it found nanoparticles, through laboratory tests, in the Dunkin Donut’s white powdered sugar, the company will do away with titanium dioxide (a whitening agent used in sunscreen) from its recipes. Nanoparticles, like titanium dioxide, may cause damage to cells and tissues. Hair Care, Skin Care, Cosmetics

The hair care, skin care and cosmetic industry in the USA accounts for over $55 billion in annual sales and enjoyed a growth rate of nearly 6 percent from 2010 through 2014. Much like many food products, consumers still purchased beauty products at relatively high rates even during the recession. Growth is projected to continue through 2020 at rate of nearly 4 percent. Hair care and skin care products are the two largest revenue producing contributions to the industry as a whole with revenues each of approximately $13 billion totaling just short of 50 percent of total revenues combined. Higher marketing and R&D expenses, along with a growing concern for reduced packaging, animal safety, and product safety all negatively hurt profits. Consumers also are quick to switch from brand to brand, and are showing less brand loyalty presenting both threats and opportunities for producers. There is also a growing influx of imported products from around the world on all price points. Generally perceived higher quality products are imported from Europe, where perceived lower quality and lower priced products are imported from Mexico and China. Skin care products continue to grow as a percent of total industry market share as more and more people are using these products, including men. In 2014, skin care products barely trailed hair care products in industry wide sales, but are expected to be the largest revenue producing product category moving forward. Firms promote antiaging treatments and wrinkle reducing creams. Even creams promoted to remove back circles from under the eyes are available. Sunscreen is also in this category. Estée Lauder’s CEO recently suggested that men’s skin care products may outpace company-wide growth at his firm moving forward. Activist Shareholders

Food and beverage companies have been popular targets for activist shareholders because of their bloated lackluster growth. In August 2015, Bill Ackman disclosed a stake in Mondelēz International, spurring speculation that he would seek cost cuts and potentially a sale. Similarly ConAgra Foods and

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Boulder Brands have recently faced calls for shakeups. So far however, activist investors have mainly targeted U.S. food companies, but Nestlé’s underperformance is attracting prying eyes. Nestlé is grappling with falling demand for its biscuits and peanut-milk beverages in China and the recall in India of its popular Maggi instant noodles. Its frozen-food business is not performing well. Given the activist shareholder environment, Nestlé may want to consider divesting its frozen-food division, along with the company’s 23.2 percent stake in cosmetics maker L’Oréal S.A. Nestlé could add 21 billion euros ($23 billion) of cash flow through 2018 by gradually reducing its stake in L’Oréal, said Jeff Stent, an analyst at Exane BNP Paribas. Nestlé could use that money to boost its share buyback or to make acquisitions. Additionally, an activist shareholder could require Nestlé to sell is its skin-health business. Nestlé acquired full control of the Galderma wrinkle treatment and acne medication business from joint-venture partner L’Oréal in 2014, but skincare does not fit well with food and beverages. To significantly impact Nestlé, an activist investor would need at least a 1 percent stake, said Urs Beck, a fund manager at EFG Asset Management. That would cost more than $2 billion. Jenny Craig and PowerBar are two examples of businesses that Nestlé acquired, held onto for too long and got depressed prices for in later divestitures. The political environment in Switzerland also gives activist investors another reason to “go for” Nestlé. Switzerland has instituted a “fat-cat” referendum that gives shareholders more say over salaries and the ability to eject an entire board. Even Nestlé’s Chairman Peter Brabeck-Letmathe has said new Swiss laws threaten the company’s long-term strategy. A new proposal that would allow investors to sue management and directors, even amid opposition by most shareholders, is also flawed, he has said.“Activist shareholders and plaintiffs’ lawyers would be granted free reign,” Brabeck-Lemathe says. Future

Nestlé has many internal and external issues to consider as the company struggles to help feed the world and reward shareholders, employees, and customers. The company is determined to become a renowned nutrition and corporate wellness company, but many of its products still are unhealthy for consumption.

Nestlé needs a clear strategic plan going forward. Develop a three-year strategic plan for Nestlé S.A. that will enable the company to meet its many obligations to the many shareholders who expect to see the company grow both revenues and profits annually.

assurance Of learning exercises exercise 1a

Assess Singapore Airlines’ Most Recent Quarterly Performance Data Purpose This exercise will enable you to analyze business strategies and practice examining the progress a firm is making in executing its strategic plan. Singapore Airlines utilizes excellent strategic management as showcased at the beginning of Chapter 1.

Instructions Step 1 Step 2 Step 3 Step 4

Go to Singapore Airlines’ website. Find the About Us section, which is usually on the bottom left hand corner of the home page, and then click on Investor Relations. Review Singapore Airlines’ most recent quarterly report or half-year report. Examine the change in performance variables and statistics for that most recent quarter or half-year report. Based on your observations, what are strategic changes you think were made during that time period? What additional changes in your view are still needed? Do the statistics and numbers reveal any key problem areas? How well do you think the company is faring using the strategic management processes they currently have in place?

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exercise 1b

Gather Strategy Information on Nestlé S.A. Purpose The purpose of this exercise is to get you familiar with strategy terms introduced and defined in this chapter. Let’s apply these terms to the Cohesion Case on Nestlé S.A. (traded as NSRGY).

Instructions Step 1

Step 2

Step 3 Step 4

Step 5

Step 6

Go to the Nestlé Global corporate website. Scroll to the bottom of the site and find Investors; click on Publications and download the most recent Annual Review report. The Annual Review contains excellent information for developing a list of internal strengths and weaknesses for Nestlé. From your college library website, download a copy of Standard & Poor’s Industry Surveys for the food industry. This document will contain excellent information for developing a list of external opportunities and threats facing Nestlé. You could also refer to Citi group’s credit cards page, IBIS World, ValueLine, and Mergent Online, if these sources are available in your college library. Using the Internet, find out and print information about Nestlé’s two major competitors: Danone (DANOY) and Mondelēz International (MDLZ). Using the Nestlé Cohesion Case and with the help of the information gathered above, identify what you consider to be Nestlé’s three major strengths, three major weaknesses, three major opportunities, and three major threats. Each factor listed for this exercise must include a percentage (%), number (#), dollar ($), or ratio (employees per share) to reveal some quantified fact or trend. These factors provide the underlying basis for a strategic plan because a firm strives to take advantage of strengths, improve weaknesses, avoid threats, and capitalize on opportunities. Estimate the numbers as needed. Through class discussion, compare your lists of external and internal factors to those developed by other students and add to your lists of factors. Keep this information for use in later exercises at the end of other chapters. Be mindful that whatever case company is assigned to you or your team this semester, you can start to update the information on your company by following the steps listed for any publicly held firm.

exercise 1c

Get Familiar with the Free Excel Student Template Purpose Every week companies, like Nestlé, update their websites with notes and articles on important strategic decisions and information. This exercise is designed to help strategic-management students become familiar with the free Excel student template for the case analysis offered by the authors.

Instructions Step 1 Step 2 Step 3

Go to the www.strategyclub.com website. Download the free Excel student template. Write a one-page summary summarizing the template and explaining why and how the template will benefit you the most in this course. Submit your report to your professor.

exercise 1D

Evaluate an Oral Student Presentation Purpose Quite often in a strategic-management course, a team of students is required to give a 15 to 20 minute case analysis oral presentation. This exercise gives you insight on some do’s and don’ts regarding oral presentations.

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Instructions Step 1 Step 2

Go to www.strategyclub.com website and watch the live student case analysis presentation given there on Barnes & Noble. Critique the presentation. What are four aspects that you liked most and four aspects that you liked least?

exercise 1e

Strategic Planning at Nestlé S.A. Purpose The purpose of this exercise is to give you practical knowledge and experience in investigating the strategic plan of large, publicly held firms such as Nestlé S.A. An important aspect of formulating a strategic plan is to assess the strategic plans of rival firms. For this exercise, you are in the top management team of M&M Mars, a large chocolate company that competes with Nestlé in the confectionery business worldwide.

Instructions Step 1 Step 2 Step 3

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Go to Nestlé’s website and review the company’s recent Annual Report. List as clearly as you can the five major strategies that Nestlé is pursuing worldwide. Go to Mars, Inc.’s website and determine as best you can what the privately-held firm is doing worldwide to compete with Nestlé. Write a one-page paper that summarizes your assessment of Nestlé’s strategic plan as compared to Mars’s strategic plan. Include whether you feel being privately held, as Mars is, enables a firm to conceal its strategic plan from rival firms. Do you feel it is advantageous to keep strategies secret from shareholders, employees, creditors, suppliers, and other stakeholders? What would be the advantages of being publicly held? Prepare to give your class an overview of your findings.

exercise 1f

Interview Local Strategists Purpose This exercise is designed to give you practical experience in learning how strategists in your city or town formulate and implement strategies. This information can be used to compare and contrast concepts presented in this textbook with practices of local strategists. Recall that strategists include owners of businesses, directors of nonprofit organizations, top managers of large firms, CEOs, presidents, and many others.

Instructions Step 1 Step 2

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Contact several business owners or top managers. Find three organizations that do strategic planning. Make an appointment to visit with three strategists of the businesses. Interview them, asking the following questions. • How do you decide which strategies to implement in this organization? • How often do you change strategies or take a fresh look at existing strategies? • How many persons assist you in formulating strategies? • Does your organization have written mission, vision, and objective statements? • Is the strategic-planning process in your company more secret or open in regards to process and procedure? Which approach do you feel is best? Why? Prepare answers and report back to your professor.

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Source: © BelliniFrancescoM81/Fotolia

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Outside-USA Strategic Planning LeArning oBjectives After studying this chapter, you should be able to do the following: 2-1. Discuss the nature of doing business globally, including language and labor union issues. 2-2. Explain the advantages and disadvantages of doing business globally. 2-3. Discuss the global challenge facing firms and why this is a strategic issue. 2-4. Discuss tax rates and tax inversions as strategic issues. 2-5. Compare and contrast American business culture versus foreign business cultures; explain why this is a strategic issue. 2-6. Discuss the business culture found in Mexico, Japan, China, and India; explain why this is a strategic issue. 2-7. Discuss the business climate in Africa, China, Indonesia, India, Japan, Mexico, and Vietnam; explain why this is a strategic issue.

AssurAnce of LeArning exercises The following exercises are found at the end of this chapter: exercise 2A exercise 2B exercise 2c

exercise 2D

Nestlé S.A. Wants to Enter Africa. Help Them. Assess Differences in Culture across Countries Honda Motor Company Wants to Do Business in Vietnam. Help Them. Does My University Recruit in Foreign Countries?

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lobal considerations impact virtually all strategic decisions, as illustrated in Figure 2-1 with white shading. The boundaries of countries no longer can define the limits of our imaginations. To see and appreciate the world from the perspective of others has become a matter of survival for businesses. The underpinnings of strategic management hinge on managers gaining an understanding of competitors, markets, prices, suppliers, distributors, governments, creditors, shareholders, and customers worldwide. The price and quality of a firm’s products and services must be competitive on a worldwide basis, not just on a local basis. Shareholders expect substantial revenue growth, so doing business globally is one of the best ways to achieve this end. As indicated in the exemplary company shown next, Honda Motor Company effectively and successfully does business globally.

The Nature of Doing Business Globally Exports of goods and services from the United States account for only 13.5 percent of U.S. gross domestic product, so the nation is still largely a domestic, continental economy. What happens inside the United States largely determines the strength of the economic recovery. In contrast, as a percent of gross domestic product (GDP), exports comprise 45.6 percent of the German economy, 22.6 percent of the Chinese economy, and 187 percent of the Singapore economy (http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS). Singapore’s number is so high because it imports oil and other products and then re-exports them globally. A point here is that the United States has substantial room for improvement in doing business globally based on the 11percent exports to the GDP number.

exempLAry compAny showcAseD

Honda Motor Company (HMC) Honda, headquartered in Minato, Tokyo, Japan, is the world’s largest manufacturer of motorcycles and of internal combustion engines. It annually produces and sells thousands of scooters, water pumps, lawn and garden equipment tools, tillers, outboard motors, robotics, jet engines, and solar cells. Honda, which has about 180,000 employees, is annually ranked as one of the most respected companies in the world by Fortune. Honda recently invested another $215 million in its Ohio operations, pushing the company’s total to $2.7 billion in North American operations in only the past three years. The majority of the money was spent on an expansion of manufacturing capabilities at the company’s Anna Engine Plant, Ohio, while the remainder was spent on a new building in Marysville, Ohio. Honda already has the strongest foothold of any Japanese automaker, and produces more cars with U.S.-sourced parts than any automaker other than General Motors. Nine of Honda’s 16 mass-market cars are made with over half American made parts, according to the survey—that’s more than Ford.

Honda recently built a new car factory in Ityrapina, Brazil, which is approximately 120 miles northwest of Sao Paulo, doubling its capacity in that country to 240,000 cars a year. The existing Honda factory in Brazil is in Sumare, a city of around 100,000, located halfway between Ityrapina and Sao Paulo. The cost of the new factory, including the purchase of the 1,433 acres, is about $435 million. The factory employs approximately 2,000 people, and produces the Honda Fit. Source: Based on company documents.

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Chapter 2: Outside–USA Strategic Planning

The Internal Audit Chapter 6

Vision and Mission Analysis Chapter 5

Types of Strategies Chapter 4

Strategy Generation and Selection Chapter 8

Strategy Implementation Chapter 9

Strategy Execution Chapter 10

Strategy Monitoring Chapter 11

The External Audit Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 2-1 A Comprehensive Strategic-Management Model Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.

A world market has emerged from what previously was a multitude of distinct national markets, and the climate for international business today is more favorable than in years past. Mass communication and high technology have created similar patterns of consumption in diverse cultures worldwide. This means that many companies may find it difficult to survive by relying solely on domestic markets. Globalization is a process of doing business worldwide, so strategic decisions are made based on global profitability of the firm rather than just domestic considerations. A global strategy seeks to meet the needs of customers worldwide, with the highest value at the lowest cost. This may mean locating production in countries with the lowest labor costs or abundant natural resources, locating research and complex engineering centers where skilled scientists and engineers can be found, and locating marketing activities close to the markets to be served. A global strategy includes designing, producing, and marketing products with global needs in mind, instead of considering individual countries alone. A global strategy integrates actions against competitors into a worldwide plan. Today, there are global buyers and sellers and the instant transmission of money and information across continents.

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Table 2-1 The Five Largest (by revenue) Companies in Nine Countries (2015) United Kingdom 1. BP 2. HSBC Holdings 3. Prudential 4. Vodafone 5. Rio Tinto Australia 1. BHP Billiton 2. Wesfarmers 3. Woolworths 4. Commonwealth Bank 5. Westpac Banking USA 1. Walmart Stores 2. ExxonMobil 3. Chevron 4. Berkshire Hathaway 5. Apple

India 1. Indian Oil 2. Reliance Industries 3. State Bank of India 4. Tata Motors 5. Oil and Natural Gas Brazil 1. Petrobras 2. Banco Bradesco 3. Banco do Brasil 4. Itau Unibanco Holding 5. Vale Canada 1. Suncor Energy 2. Royal Bank of Canada 3. TD Bank Group 4. Bank of Nova Scotia 5. Brookfield Asset Mgt.

Japan 1. Toyota Motor 2. Honda Motor 3. Nippon TeleG & TeleP 4. Nissan Motor 5. Japan Post Holdings China 1. Sinopec–China Petroleum 2. PetroChina 3. Ind. & Com. Bank of China 4. Agricultural Bank of China 5. China Construction Bank Germany 1. Volkswagen 2. E. ON 3. Daimier 4. Allianz 5. BMW Group

Source: Based on information at http://www.forbes.com/global2000/#page:4_sort:0_direction:asc_ search:_filter:All%20industries_filter:United%20States_filter:All%20states

It is no exaggeration that in any industry that is, or is rapidly becoming, global, the riskiest possible posture is to remain a domestic competitor. The domestic competitor will watch as more aggressive companies use this growth to capture economies of scale and learning. The domestic competitor will then be faced with an attack on domestic markets using different (and possibly superior) technology, product design, manufacturing, marketing approaches, and economies of scale.1 As a point of global reference, the five largest companies in nine different countries are listed in Table 2-1.

Multinational Firms Organizations that conduct business operations across national borders are called international firms or multinational corporations. The strategic-management process is conceptually the same for multinational firms as for purely domestic firms; however, the process is more complex for international firms as a result of more variables and relationships. The social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive opportunities and threats that face a multinational corporation are almost limitless, and the number and complexity of these factors increase dramatically with the number of products produced and the number of geographic areas served. Millions of small businesses do business everyday outside their home country by interacting with customers though websites, smartphones, and social media. All of Africa, and places such as Cuba and Iran, are becoming more desirable for business every day. More time and effort are required to identify and evaluate external trends and events in multinational corporations than in domestic corporations. Geographic distance, cultural and national differences, and variations in business practices often make communication between domestic headquarters and overseas operations difficult. Strategy implementation can be more difficult because different cultures have different norms, values, and work ethics. Multinational corporations (MNCs) face unique and diverse risks, such as expropriation of assets, currency losses through exchange rate fluctuations, unfavorable foreign court interpretations of contracts and agreements, social/political disturbances, import/export restrictions, tariffs, and trade barriers. Strategists in MNCs are often confronted with the need to be globally competitive and nationally

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responsive at the same time. With the rise in world commerce, government and regulatory bodies are more closely monitoring foreign business practices. The U.S. Foreign Corrupt Practices Act, for example, monitors business practices in many areas. Before entering international markets, firms should scan relevant journals and patent reports, seek the advice of academic and research organizations, participate in international trade fairs, form partnerships, and conduct extensive research to broaden their contacts and diminish the risk of doing business in new markets. Firms can also offset some risks of doing business internationally by obtaining insurance from the U.S. government’s Overseas Private Investment Corporation (OPIC). The decision to expand operations into foreign markets—that is, to globalize—is one of the most important strategic decisions made by companies. Thus, variables that influence how, when, where, and why to internationalize have attracted much attention in scholarly journals. Recent research reveals that countries are attractive not only because of their own institutions but also as a function of their serving as a platform for entry into other regions.2 Therefore, multinational firms make globalization decisions with special consideration in mind for how a particular region/country will facilitate the firm’s further globalization into other regions/countries.

Different Languages Globally A strategic issue facing many firms is whether to publish their website material in different languages, given that most of the world’s population does not speak English. Pioneering work to document the number of different languages spoken has been done by the Summer Institute of Linguistics (SIL) International. That organization today publishes 2,508 translations of the Christian Bible, and has compiled a catalogue of the world’s languages, called the Ethnologue, which lists 6,909 distinct languages being spoken. Of that total, only 230 are spoken in Europe and 2,197 in Asia. But in Papua, New Guinea, 830 different languages are spoken by 3.9 million people, and in France, the Ethnologue cites 10 languages being spoken, including Picard, Gascon, Provençal, Allemannisch, Alsace, Breton, and French. Academic Research Capsule 2-1 reveals that most languages will permanently disappear by the end of this century.

Labor Unions across Europe Prevalence of unions is a relevant factor in many strategic decisions, such as where to locate stores or factories. There is great variation across Europe in regards to levels of union membership, ranging from 74 percent of employees in Finland and 71 percent in Sweden to 9 percent in Lithuania and 8 percent in France. However, percentage of union membership is not the only indicator of strength. In France, for example, unions have repeatedly shown that despite low levels of membership, they are able to mobilize workers in mass strikes and demonstrations to great effect.

AcADemic reseArch cApsuLe 2-1

How Many Languages Are There Globally? When businesses consider offering their products or services globally, or manufacturing and securing resources outside their own country, language barriers arise. Interacting with people who speak a different language is one of many variables that complicate doing business globally—yet millions of businesses need to do more business globally. Thankfully, translations to and from most mainstream languages such as English, Spanish, French, German, and Chinese are easily done with online programs, and there are millions of multilingual people. The implication for businesses doing business globally is that the total number of languages spoken globally is decreasing quite dramatically. For example, in North America, many Native American languages are disappearing yearly, a common phenomenon all over the world. Whenever any language ceases to be learned by

young children, that language generally does not survive the death of current native speakers. In North America, about 75 languages are spoken by only a handful of older people, and those languages are expected to become extinct. About 25 percent of the world’s languages have fewer than a thousand remaining speakers. By the year 2099, analysts estimate that roughly one half of the 6,909 languages listed by Ethnologue will disappear. By 2115, researchers say there will be only 600 left on the planet. Source: Based on information from the website http://www.linguisticsociety .org/content/how-many-languages-are-there-world; and John McWhorter, “What the World Will Speak in 2115,” Wall Street Journal, January 4, 2015, C1–C2.

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The average level of union membership across the whole of the European Union (EU), weighted by the numbers employed in the different member states, is 23 percent, compared to about 11 percent in the United States. The European average is held down by relatively low levels of membership in some of the larger EU states: Germany with 18 percent, France with 8percent, Spain with 19 percent, and Poland with 12 percent. The three smallest states—Cyprus, Luxembourg, and Malta—have levels well above the average. The four Nordic countries of Denmark, Sweden, Finland, and Norway have 67, 70, 74, and 52 percent, respectively, of all employees as members of unions. In part this is because, as in Belgium, which also has above-average levels of union density, unemployment and other social benefits are normally paid out through the union. High union density in the Nordic countries also reflects an approach that sees union membership as a natural part of employment. Central and Eastern Europe nations generally have below-average levels of union membership. In Poland, for example, 12 percent of employees are estimated to be union members. Level of union membership is clearly trending downward all over Europe. The two exceptions appear to be Ireland and Italy, where union membership is slowly growing.

Advantages and Disadvantages of Doing Business Globally Firms have numerous reasons for formulating and implementing strategies that initiate, continue, or expand involvement in business operations across national borders. Perhaps the greatest advantage is that firms can gain new customers for their products and services, thus increasing revenues. Growth in revenues and profits is a common organizational objective and often an expectation of shareholders because it is a measure of organizational success. Potential advantages to initiating, continuing, or expanding international operations are as follows: 1. Firms can gain new customers for their products. 2. Foreign operations can absorb excess capacity, reduce unit costs, and spread economic risks over a wider number of markets. 3. Foreign operations can allow firms to establish low-cost production facilities in locations close to raw materials or cheap labor. 4. Competitors in foreign markets may not exist, or competition may be less intense than in domestic markets. 5. Foreign operations may result in reduced tariffs, lower taxes, and favorable political treatment. 6. Joint ventures can enable firms to learn the technology, culture, and business practices of other people and to make contacts with potential customers, suppliers, creditors, and distributors in foreign countries. 7. Economies of scale can be achieved from operation in global rather than solely domestic markets. Larger-scale production and better efficiencies allow higher sales volumes and lower-price offerings. 8. A firm’s power and prestige in domestic markets may be significantly enhanced if the firm competes globally. Enhanced prestige can translate into improved negotiating power among creditors, suppliers, distributors, and other important groups. The availability, depth, and reliability of economic and marketing information in different countries vary extensively, as do industrial structures, business practices, and the number and nature of regional organizations. There are also numerous potential disadvantages of initiating, continuing, or expanding business across national borders, such as the following: 1. Foreign operations could be seized by nationalistic factions. 2. Firms confront different and often little-understood social, cultural, demographic, environmental, political, governmental, legal, technological, economic, and competitive forces when doing business internationally. These forces can make communication difficult in the firm.

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3. Weaknesses of competitors in foreign lands are often overestimated, and strengths are often underestimated. Keeping informed about the number and nature of competitors is more difficult when doing business internationally. 4. Language, culture, and value systems differ among countries, which can create barriers to communication and problems managing people. 5. Gaining an understanding of regional organizations such as the European Economic Community, the Latin American Free Trade Area, the International Bank for Reconstruction and Development, and the International Finance Corporation is difficult but is often required in doing business internationally. 6. Dealing with two or more monetary systems can complicate international business operations.

The Global Challenge Few companies can afford to ignore the presence of international competition. Firms that seem insulated and comfortable today may be vulnerable tomorrow; for example, foreign banks do not yet compete or operate in most of the United States, but this too is changing. Thomson Reuters annually compiles a list of the world’s most innovative companies, using metrics that include patent activity, R&D investment, success rate, globalization, and influence. For the first time ever, Japan (39%) overtook the United States (36%) in 2014 as having the most innovative companies in the world. Top U.S. firms making the list included Apple, Lockheed Martin, Google, Microsoft, Intel, and IBM, whereas some top Asian companies on the top-100 list included Samsung, Fujitsu, Hitachi, Canon, and for the first time, a Chinese company, Huawei. The U.S. economy is becoming much less American. A world economy and monetary system are emerging. Corporations in every corner of the globe are taking advantage of the opportunity to obtain customers globally. Markets are shifting rapidly and, in many cases, converging in tastes, trends, and prices. Innovative transport systems are accelerating the transfer of technology. Shifts in the nature and location of production systems, especially to China and India, are reducing the response time to changing market conditions. China has more than 1.3 billion residents and a dramatically growing middle class anxious to buy goods and services. More and more countries around the world are welcoming foreign investment and capital. As a result, labor markets have steadily become more international. East Asian countries are market leaders in labor-intensive industries, Brazil offers abundant natural resources and rapidly developing markets, and Germany offers skilled labor and technology. The drive to improve the efficiency of global business operations is leading to greater functional specialization. This is not limited to a search for the familiar low-cost labor in Latin America or Asia. Other considerations include the cost of energy, availability of resources, inflation rates, tax rates, and the nature of trade regulations. Many countries are quite protectionist, and this position can impact companies’ strategic plans. Protectionism refers to countries imposing tariffs, taxes, and regulations on firms outside the country to favor their own companies and people. Most economists argue that protectionism harms the world economy because it inhibits trade among countries and invites retaliation. Advancements in telecommunications are drawing countries, cultures, and organizations worldwide closer together. Foreign revenue as a percentage of total company revenues already exceeds 50 percent in hundreds of U.S. firms, including ExxonMobil, Gillette, Dow Chemical, Citicorp, Colgate-Palmolive, and Texaco. A primary reason why most domestic firms do business globally is that growth in demand for goods and services outside the United States is considerably higher than inside. For example, the domestic food industry is growing just 3 percent per year, so Kraft Foods, the second-largest food company in the world behind Nestlé, is focusing on foreign acquisitions. Shareholders and investors expect sustained growth in revenues from firms; satisfactory growth for many firms can only be achieved by capitalizing on demand outside the United States. Joint ventures and partnerships between domestic and foreign firms are becoming the rule rather than the exception!

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Fully 95 percent of the world’s population lives outside the United States, and this group is growing 70 percent faster than the U.S. population. The lineup of competitors in virtually all industries is global. General Motors and Ford compete with Toyota and Hyundai. General Electric and Westinghouse battle Siemens and Mitsubishi. Caterpillar and John Deere compete with Komatsu. Goodyear battles Michelin, Bridgestone/Firestone, and Pirelli. Boeing competes with Airbus. Only a few U.S. industries—such as furniture, printing, retailing, consumer packaged goods, and retail banking—are not yet greatly challenged by foreign competitors. But many products and components in these industries too are now manufactured in foreign countries. International operations can be as simple as exporting a product to a single foreign country or as complex as operating manufacturing, distribution, and marketing facilities in many countries. New research examined in Academic Research Capsule 2-2 sheds some light on how firms decide where to expand. It is clear that different industries become global for different reasons. The need to amortize massive research and development (R&D) investments over many markets is a major reason why the aircraft manufacturing industry became global. Monitoring globalization in one’s industry is an important strategic-management activity. Knowing how to use that information for one’s competitive advantage is even more important. For example, firms may look around the world for the best technology and select one that has the most promise for the largest number of markets. When firms design a product, they design it to be marketable in as many countries as possible. When firms manufacture a product, they select the lowest-cost source, which may be Japan for semiconductors, Sri Lanka for textiles, Malaysia for simple electronics, and Europe for precision machinery.

Tax Rates and Tax Inversions Tax Rates Tax rates in countries are important in strategic decisions regarding where to build manufacturing facilities or retail stores or even where to acquire other firms. High corporate tax rates deter investment in new factories and also provide strong incentives for corporations to avoid and evade taxes. Corporate tax rates vary considerably across countries and companies. As indicated in Table 2-2, the top national statutory corporate tax rates in 2015 among sample countries ranged from 0 percent in Bermuda to 55 percent in the United Arab Emirates (UAE). Note that some countries have a flat tax, which often, on adoption, triggers a surge in foreign direct investment. Signet Jewelers Ltd., owner of Kay’s Jewelers, Zale Corporation, and Jared the Galleria of Jewelry, is headquartered in Bermuda for a reason: zero corporate taxes. The United States requires companies to pay the difference between lower foreign taxes and the U.S. corporate-tax rate of 35 percent when they bring their international earnings home. In contrast, the territorial system that many other countries use allows companies to pay little to no taxes on foreign profits above what they have already paid abroad. The United States is the only nation that imposes taxes on foreign earnings. Thus, to avoid paying U.S. taxes on income made in other countries, many U.S. companies are cash-rich outside the United States, but cash-poor inside

AcADemic reseArch cApsuLe 2-2

How Do Firms Decide Where to Expand? Considerable prior research has examined the relative attractiveness of various countries to expand operations, quite often from a “need to exploit resources in host countries” perspective. A recent article focused on the nature of institutions, such as schools, laws, and health care, rather than resources, such as oil, gas, minerals, and labor, in the decision to expand operations to other countries. Arregle and colleagues report that it does indeed matter which

region(s) are chosen for expansion. More specifically, Arregle and colleagues have found that companies seek to expand primarily to regions that have institutions similar to their own institutions, or at least similar to the institutions in other regions where the firm already has operations. The “institutions factor” may be more important than the “resources factor” in internationalization decisions. Source: Based on Jean-Luc Arregle, Tuyah Miller, Michael Hitt, and Paul Beamish, “Do Regions Matter?” An Integrated Institutional and SemiGlobalization Perspective on the Internationalization of MNEs,” Strategic Management Journal 34 (2013): 910–934.

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Table 2-2 Corporate Tax Rates across Countries in 2015 (from high to low) country United Arab Emirates (UAE) Chad USA Brazil France Germany India Mexico Italy Japan Israel Austria China Portugal Finland U.K. Ukraine Estonia Russia Greece Croatia Libya Netherlands Turkey Poland Czech Republic Hungary Singapore Canada Hong Kong Romania Latvia Lithuania Ireland Serbia Bulgaria Cyprus Bermuda

corporate tax rate (%) 55.00 40.00 35.00 34.00 33.33 33.00 30.00 30.00 27.50 25.50 25.00 25.00 25.00 25.00 24.50 23.00 21.00 21.00 20.00 20.00 20.00 20.00 20.00 20.00 19.00 19.00 19.00 17.00 15.00 16.50 16.00 15.00 15.00 12.50 10.00 10.00 10.00 0.00

Source: Based on information at http://www.worldwide-tax.com/#partthree, retrieved January 1, 2015.

the United States, and they bring cash back to the United States only as needed. For example, Microsoft has $15+ billion in cash reserves on its balance sheet, but only about 15 percent of that money is housed in the United States. General Electric and Apple have a similar policy to avoid paying U.S. corporate taxes. Emerson Electric has $2 billion in cash with almost all of it in Europe and Asia, so the firm borrows money in the United States rather than bringing its cash back and paying a 35 percent corporate U.S. tax on corporate profits minus whatever tax it has already paid overseas. Johnson & Johnson keeps virtually all of its $24+ billion in cash outside the United States, as does Illinois Tool Works Inc. Whirlpool has 85 percent of its cash offshore. Bruce Nolop, former CFO of Pitney Bowes, explains it this way: “You end up with the really peculiar

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result where you are borrowing money in the United States, while you show cash on the balance sheet that is trapped overseas. It is a totally inefficient capital structure.” The U.S. tax system, unfortunately for Americans, is structured so that companies can cut their tax bill by shifting income offshore to lower-tax countries. Since the 1980s, most countries have been steadily lowering their tax rates, but the United States has not cut its top statutory corporate tax rate since 1993. Canada recently achieved its goal of having the most business-friendly tax system of the Group of Seven (G-7) nations, which include Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. In January 2014, Canada’s federal corporate tax rate automatically fell to 15 percent from 16.5 percent as the last installment of a series of corporate rate cuts launched in 2006 by the administration of Prime Minister Stephen Harper, who had campaigned on the promise to lower Canada’s overall federal corporate tax rate by one third. More recently, the United Kingdom lowered its federal tax rate to 23 percent. Other factors besides the corporate tax rate obviously affect companies’ decisions of where to locate plants and facilities and whether to acquire other firms. For example, the large, affluent market and efficient infrastructure in both Germany and Britain attract companies, but the high labor costs and strict labor laws there keep other companies away. The rapidly growing GDP in Brazil and India attracts companies, but violence and political unrest in Middle East countries deter investment. Perhaps the United States should lower its rate to reward companies that invest in jobs domestically. Lowering the U.S. corporate tax rate should also reduce unemployment and spur growth domestically.

Tax Inversions An increasing number of U.S. companies are reincorporating in foreign countries to reduce their tax burden, and doing this typically by acquiring a foreign firm. For example, Illinoisbased AbbVie recently acquired Dublin-based Shire PLC for $54 billion and Pennsylvania-based Mylan acquired Abbott Laboratories’ overseas generic drugs segment for $5.3 billion. Whenever a U.S. firm acquires a foreign firm and adopts that firm’s lower tax rate or establishes a holding company in a foreign country and adopts that firm’s lower tax rate, the transaction is called an inversion. Inversions are becoming common out of fear that politicians will soon eliminate that cross-border tax strategy. The U.S. Treasury Department installed some new rules in September 2014 to curtail inversions, but those rules had little effect. Under consideration currently are U.S.-based Pfizer and Medtronic bidding for Actavis (based in Ireland) and Covidien (based in Ireland), respectively, and Chiquita (based in Charlotte, NC) recently acquiring Fyffes (based in Ireland). Ireland in particular is taking steps to close the best-known corporate tax loophole. Tax inversions have led to a higher dollar value of mergers and acquisitions in the United States in 2014–2015 than in the past 10 years. Inversions are common because the old alternative strategy of simply reincorporating in, say Bermuda or the Cayman Islands, has been virtually eliminated by politicians. Mylan, like many firms, used its foreign acquisition to reincorporate in the Netherlands, and then transfer pretax income from their domestic operations to their foreign parent through intercompany debt. Similarly, Salix Pharmaceuticals in North Carolina recently acquired an Italian drug company and reincorporated in Ireland in the process. Congress’s Joint Committee on Taxation says eliminating inversions would yield $19.46 billion more in tax revenue for the United States over 10 years, but this will likely not get done for several years.

American Versus Foreign Business Culture To be successful in world markets, U.S. managers must obtain a better knowledge of historical, cultural, and religious forces that motivate and drive people in other countries. For multinational firms, knowledge of business culture variation across countries can be essential for gaining and sustaining competitive advantage. An excellent website to visit on this topic is www.worldbusinessculture. com, where you may select any country in the world and check out how business culture varies in that country versus other lands. In Japan, for example, business relations operate within the context of Wa, which stresses group harmony and social cohesion. In China, business behavior revolves around guanxi, or personal relations. In South Korea, activities involve concern for inhwa, or harmony based on respect of hierarchical relationships, including obedience to authority.3

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In Europe, it is generally true that the farther north on the continent, the more participatory the management style. Most European workers are unionized and enjoy more frequent vacations and holidays than U.S. workers. A 90-minute lunch break plus 20-minute morning and afternoon breaks are common in European firms. Many Europeans resent pay-for-performance, commission salaries, and objective measurement and reward systems. This is true especially of workers in southern Europe. Many Europeans also find the notion of team spirit difficult to grasp because the unionized environment has dichotomized worker–management relations throughout Europe. A weakness of some U.S. firms in competing with Pacific Rim firms is a lack of understanding of Asian cultures, including how Asians think and behave. Spoken Chinese, for example, has more in common with spoken English than with spoken Japanese or Korean. Managers in the United States consistently put more weight on being friendly and liked, whereas Asian and European managers often exercise authority without this concern. Americans tend to use first names instantly in business dealings with foreigners, but foreigners find this presumptuous. In Japan, for example, first names are used only among family members and intimate friends; even longtime business associates and coworkers shy away from the use of first names. Table 2-3 lists other cultural differences or pitfalls that would benefit U.S. managers. Managers from the United States place greater emphasis on short-term results than do foreign managers. In marketing, for example, Japanese managers strive to achieve “everlasting customers,” whereas many Americans strive to make a one-time sale. Marketing managers in Japan see making a sale as the beginning, not the end, of the selling process. This is an important distinction. Japanese managers often criticize U.S. managers for worrying more about shareholders, whom they do not know, than employees, whom they do know. Americans refer to “hourly employees,” whereas many Japanese companies still refer to “lifetime employees.” Rose Knotts summarized some important cultural differences between U.S. and foreign managers.4 Awareness and consideration of these differences can enable a manager to be more effective, regardless of his or her own nationality. 1. Americans place an exceptionally high priority on time, viewing time as an asset. Many foreigners place more worth on relationships. This difference results in foreign managers often viewing U.S. managers as “more interested in business than people.” 2. Personal touching and distance norms differ around the world. Americans generally stand about three feet from each other when carrying on business conversations, but Arabs and

Table 2-3 Cultural Pitfalls That May Help You Be a Better Manager • • • •

• • • • •

• • •

• •

Waving is a serious insult in Greece and Nigeria, particularly if the hand is near someone’s face. Making a “good-bye” wave in Europe can mean “No,” but it means “Come here” in Peru. In China, last names are written first. A man named Carlos Lopez-Garcia should be addressed as Mr. Lopez in Latin America but as Mr.Garcia in Brazil. Breakfast meetings are considered uncivilized in most foreign countries. Latin Americans are, on average, 20 minutes late to business appointments. Direct eye contact is impolite in Japan. Do not cross your legs in any Arab or many Asian countries—it is rude to show the sole of your shoe. In Brazil, touching your thumb and first finger—an American “Okay” sign—is the equivalent of raising your middle finger. Nodding or tossing your head back in southern Italy, Malta, Greece, and Tunisia means “No.” In India, this body motion means “Yes.” Snapping your fingers is vulgar in France and Belgium. Folding your arms across your chest is a sign of annoyance in Finland. In China, leave some food on your plate to show that your host was so generous that you could not finish. Do not eat with your left hand when dining with clients from Malaysia or India. One form of communication works the same worldwide. It is the smile—so take that along wherever you go.

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3. 4. 5. 6. 7. 8. 9.

10.

Africans stand about one foot apart. Touching another person with the left hand in business dealings is taboo in some countries. Family roles and relationships vary in different countries. For example, males are valued more than females in some cultures, and peer pressure, work situations, and business interactions reinforce this phenomenon. Business and daily life in some societies are governed by religious factors. Prayer times, holidays, daily events, and dietary restrictions, for example, need to be respected by managers not familiar with these practices in some countries. Time spent with the family and the quality of relationships are more important in some cultures than the personal achievement and accomplishments espoused by the traditional U.S. manager. Many cultures around the world value modesty, team spirit, collectivity, and patience much more than competitiveness and individualism, which are so important in the United States. Punctuality is a valued personal trait when conducting business in the United States, but it is not revered in many of the world’s societies. Eating habits also differ dramatically across cultures. For example, belching is acceptable in some countries as evidence of satisfaction with the food that has been prepared. Chinese culture considers it good manners to sample a portion of each food served. To prevent social blunders when meeting with managers from other lands, one must learn and respect the rules of etiquette of others. Sitting on a toilet seat is viewed as unsanitary in most countries, but not in the United States. Leaving food or drink after dining is considered impolite in some countries, but not in China. Bowing instead of shaking hands is customary in many countries. Some cultures view Americans as unsanitary for locating toilet and bathing facilities in the same area, whereas Americans view people of some cultures as unsanitary for not taking a bath or shower every day. Americans often do business with individuals they do not know, unlike businesspersons in many other cultures. In Mexico and Japan, for example, an amicable relationship is often mandatory before conducting business.

In many countries, effective managers are those who are best at negotiating with government bureaucrats, rather than those who inspire workers. Many U.S. managers are uncomfortable with nepotism, which is practiced in some countries. The United States defends women from sexual harassment, defends minorities from discrimination, and allows gay marriage, but not all countries embrace the same values. American managers in China have to be careful about how they arrange office furniture because Chinese workers believe in feng shui, the practice of harnessing natural forces. Also, U.S. managers in Japan have to be careful about nemaswashio, whereby Japanese workers expect supervisors to alert them privately of changes rather than informing them in a meeting. Japanese managers have little appreciation for versatility, expecting all managers to be the same. In Japan, “If a nail sticks out, you hit it into the wall,” says Brad Lashbrook, an international consultant for Wilson Learning. Probably the biggest obstacle to the effectiveness of U.S. managers—or managers from any country working in another—is the fact that it is almost impossible to change the attitude of a foreign workforce. “The system drives you; you cannot fight the system or culture,” says Bill Parker, president of Phillips Petroleum in Norway. For example, in the Middle East, gifts should not be made of pigskin, and should not be any type of alcohol, because Muslins do not eat pork or drink alcohol. In India, cows are revered, so no leather gifts.

Communication Differences across Countries Communication may be the most important word in strategic management. Americans increasingly interact with managers in other countries, so it is important to understand communication differences across countries. Americans sometimes come across as intrusive, manipulative, and garrulous; this impression may reduce their effectiveness in communication. Asian managers view extended periods of silence as important for organizing and evaluating one’s thoughts, whereas U.S. managers have a low tolerance for silence. Sitting through a conference without talking is unproductive in the United States, but it is viewed as positive in Japan if one’s silence helps preserve unity. Managers from the United States are much more action-oriented than their counterparts around the world; they rush to appointments, conferences, and meetings—and then

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feel the day has been productive. But for many foreign managers, resting, listening, meditating, and thinking is considered productive. Most Japanese managers are reserved, quiet, distant, introspective, and other oriented, whereas most U.S. managers are talkative, insensitive, impulsive, direct, and individual-oriented. Americans often perceive Japanese managers as wasting time and carrying on pointless conversations, whereas U.S. managers often use blunt criticism, ask prying questions, and make quick decisions. These kinds of communication differences have disrupted many potentially productive Japanese–American business endeavors. Viewing the Japanese communication style as a prototype for all Asian cultures is a stereotype that must be avoided. Like many Asian and African cultures, the Japanese are nonconfrontational. They have a difficult time saying “no,” so you must be vigilant at observing their nonverbal communication. Rarely refuse a request, no matter how difficult or nonprofitable it may appear at the time. In communicating with Japanese, phrase questions so that they can answer yes—for example, “Do you disagree with this?” Group decision making and consensus are vitally important. The Japanese often remain silent in meetings for long periods of time and may even close their eyes when they want to listen intently.

Business Culture across Countries5 Managers, marketers, salespersons, and virtually all businesspersons can be more effective in doing business with persons and companies in other countries if they have an understanding and appreciation of business culture variation across countries. Thus, let’s focus here on a few countries to compare and contrast their business cultures with the U.S. business culture.

Mexico’s Business Culture Mexico is an authoritarian society in terms of schools, churches, businesses, and families. Employers seek workers who are agreeable, respectful, and obedient, rather than innovative, creative, and independent. Mexican workers tend to be activity-oriented rather than problem solvers. When visitors walk into a Mexican business, they are impressed by the cordial, friendly atmosphere. This is almost always true because Mexicans desire harmony rather than conflict; desire for harmony is part of the social fabric in worker–manager relations. There is a much lower tolerance for adversarial relations or friction at work in Mexico as compared to that in the United States. Mexican employers are paternalistic, providing workers with more than a paycheck, but in return they expect allegiance. Weekly food baskets, free meals, free bus service, and free day care are often part of compensation. The ideal working condition for a Mexican worker is the family model, with people all working together, doing their share, according to their designated roles. Mexican workers do not expect or desire a work environment in which self-expression and initiative are encouraged. American business embodies individualism, achievement, competition, curiosity, pragmatism, informality, spontaneity, and doing more than expected on the job, whereas Mexican businesses stress collectivism, continuity, cooperation, belongingness, formality, and doing exactly what is told. In Mexico, business associates rarely entertain each other at their homes, which are places reserved exclusively for close friends and family. Business meetings and entertaining are nearly always done at a restaurant. Preserving one’s honor, saving face, and looking important are also exceptionally important in Mexico. This is why Mexicans do not accept criticism and change easily; many find it humiliating to acknowledge having made a mistake. A meeting among employees and managers in a business located in Mexico is a forum for giving orders and directions rather than for discussing problems or participating in decision making. Mexican workers want to be closely supervised, cared for, and corrected in a civil manner. Opinions expressed by employees are often regarded as back talk in Mexico. Mexican supervisors are viewed as weak if they explain the rationale for their orders to workers. In general, Mexicans do not feel compelled to follow rules that are not associated with a particular person in authority they work for or know well. Thus, signs to wear earplugs or safety glasses, or attendance or seniority policies, and even one-way street signs are often ignored. Whereas Americans follow the rules, Mexicans often do not. Life is simply slower in Mexico than in the United States. The first priority is often assigned to the last request, rather than to the

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first. Telephone systems break down. Banks may suddenly not have pesos. Phone repair can take a month. Electricity for an entire plant or town can be down for hours or even days. Business and government offices may open and close at odd hours. Buses and taxis may be hours off schedule. Meeting times for appointments are not rigid. Tardiness is common everywhere. Effectively doing business in Mexico requires knowledge of the Mexican way of life, culture, beliefs, and customs. When greeting others, Mexican women normally pat each other on the right forearm or shoulder rather than shake hands. Men normally shake hands or, if close friends, use the traditional hug and back slapping upon greeting. If visiting a person’s home in Mexico, bring a gift such as flowers or sweets, but avoid both marigolds and red flowers because they symbolize negativity. White flowers are an excellent choice. Arrive up to 30 minutes late, but definitely not early. If you receive a gift, open it immediately and react enthusiastically. At dinner, do not sit until you are invited to, and wait to be told where to sit. This is true in most foreign countries as well as in the United States. Do not begin eating until the hostess starts. Only men give toasts in Mexico. It is also polite to leave some food on your plate after a meal. For business appointments, as opposed to home visits, it is best to arrive on time, although your Mexican counterparts may be up to 30 minutes late. Do not get irritated at their lack of punctuality. Mexicans often judge or stereotype a person by who introduces them, and changing that first impression is difficult in business. Expect to answer questions about personal background, family, and life interests—because Mexicans consider trustworthiness and character to be of upmost importance. Mexicans are status conscious, so business titles and rank are important. Faceto-face meetings are preferred over telephone calls, letters, or e-mail. Negotiations in Mexico include a fair amount of haggling, so do not give a best offer first.

Japan’s Business Culture Due to its dwindling workforce and aging population, Japan is increasingly promoting women into managerial positions. Recent statistics show that only 10 only percent of managers in Japan are currently women, compared with 31 percent in Singapore, 38 percent in Germany, and 43percent in the United States.6 Therefore, Prime Minister Shinzo Abe of Japan has proclaimed a goal to fill 30 percent of leadership positions in Japan with women by 2020. Abe recently filled five open positions in his own cabinet with women. A key reason that Japanese women have historically not advanced to managerial positions is the business culture of notorious long work hours. Although Japan’s powerful business lobby, Keidanren, currently has no women on its 24-member board of directions, the body has mandated its member companies to publicize their gender equity strategies and progress—and Keidanren itself plans to appoint women into board positions. Suppression, exploitation, and even persecution of women are severe problems in many countries, especially in the Middle East and to a lesser extent in the Far East. However, Japan is taking a leadership role by aggressively reversing its historical underutilization of women in business. The Japanese people place great importance on group loyalty and consensus—a concept called Wa. Nearly all corporate activities in Japan encourage Wa among managers and employees. Wa requires that all members of a group agree and cooperate; this results in constant discussion and compromise. Japanese managers evaluate the potential attractiveness of alternative business decisions in terms of the long-term effect on the group’s Wa. This is why silence, used for pondering alternatives, can be a plus in a formal Japanese meeting. Discussions potentially disruptive to Wa are generally conducted in informal settings, such as at a bar, so as to minimize harm to the group’s Wa. Entertaining is an important business activity in Japan because it strengthens Wa. Formal meetings are often conducted in informal settings. When confronted with disturbing questions or opinions, Japanese managers tend to remain silent, whereas Americans tend to respond directly, defending themselves through explanation and argument. Americans have more freedom to control their own fates than do the Japanese. The United States offers more upward mobility to its people, as indicated below: America is not like Japan and can never be. America’s strength is the opposite: It opens its doors and brings the world’s disorder in. It tolerates social change that would tear most other societies apart. This openness encourages Americans to adapt as individuals rather than as a group. Americans go west to California to get a new start; they move east to Manhattan to try to make the big time; they move to Vermont or to a farm to get close to the soil. They break away from their parents’ religions or values or class; they rediscover their ethnicity. They go to night school; they change their names.7

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In Japan, a person’s age and status are of paramount importance, whether in the family unit, the extended family, or a social or business situation. Schoolchildren learn early that the oldest person in the group is to be honored. Older folks are served first and their drinks are poured for them. Greetings in Japan are formal and ritualized, so wait to be introduced, because it may be viewed as impolite to introduce yourself, even in a large gathering. Foreigners may shake hands, but the traditional form of greeting in Japan is to bow. The deeper you bow, the more respect you show, but at least bow the head slightly in greetings. Chocolates or small cakes are excellent gifts in Japan, but do not give lilies, camellias, lotus blossoms, or white flowers, because they all are associated with funerals. Do not give potted plants because they encourage sickness, although a bonsai tree is always acceptable. Give items in odd numbers, but avoid the number 9. Gifts are not opened when received. If going to a Japanese home, remove your shoes before entering and put on the slippers left at the doorway. Leave shoes pointing away from the doorway you are about to walk through. If going to the toilet in a Japanese home, put on the toilet slippers and remove them when you exit. Learn how to use chopsticks before visiting Japan and do not pierce food with chopsticks. Never point the chopsticks. Japanese oftentimes slurp their noodles and soup, but mixing other food with rice is inappropriate. Instead of mixing, eat a bit of rice and then a bit of food. To signify that you do not want more rice or drink, leave some in the bowl or glass. Conversation over dinner is generally subdued because the Japanese prefer to savor their food. Unlike Americans, Japanese prefer to do business on the basis of personal relationships rather than impersonally speaking over the phone or by written correspondence. Therefore, build and maintain relationships by sending greeting, thank-you, birthday, and seasonal cards. You need to be a good “correspondent” to effectively do business with the Japanese. Punctuality is important, so arrive on time for meetings and be mindful that it may take several meetings to establish a good relationship. The Japanese are looking for a long-term relationship. Always give a small gift as a token of your appreciation, and present it to the most senior person at the end of any meeting. Business cards are exchanged in Japan constantly and with excitement. Invest in quality business cards and keep them in pristine condition. Do not write on them. Have one side of your card translated in Japanese and give it to the person with the Japanese side facing the recipient. Business cards are generally given and received with two hands and a slight bow. Examine any business card you receive carefully.

China’s Business Culture In China, greetings are formal and the oldest person is always greeted first. Like in the United States, handshakes are the most common form of greeting. Many Chinese will look toward the ground when greeting someone. The Chinese have an excellent sense of humor, oftentimes laughing at themselves if they have a comfortable relationship with the other person. In terms of gifts, a food basket makes an excellent gift, but do not give scissors, knives, or other cutting utensils, because these objects indicate severing of the relationship. Never give clocks, handkerchiefs, flowers, or straw sandals, because they are associated with funerals. Do not wrap gifts in white, blue, or black paper. In China, the number 4 is unlucky, so do not give four of anything. Eight is the luckiest number, so giving eight of something is a great idea. If invited to a Chinese person’s home, consider this a great honor and arrive on time. Remove your shoes before entering the house and bring a small gift to the hostess. Wait to be told where to sit, and eat heartily to demonstrate that you are enjoying the food. You should use chopsticks and try everything that is offered; never eat the last piece from the serving tray. Hold the rice bowl close to your mouth while eating. Do not be offended if a Chinese person makes slurping or belching sounds; it merely indicates that they are enjoying their food. The Chinese rarely do business with companies or people they do not know. Your position on an organizational chart is extremely important in business relationships. Gender bias is generally not an issue. Meals and social events are not the place for business discussions. There is ademarcation between business and socializing in China, so try to be careful not to intertwine the two. Like in the United States and Germany, punctuality is important in China. Arriving late to a meeting is an insult and could negatively affect your relationship. Meetings require patience because mobile phones ring frequently and conversations tend to be boisterous. Never ask the Chinese to turn off their mobile phones because this causes you both to lose face. The Chinese

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are nonconfrontational and virtually never overtly say no. Rather, “they will think about it.” The Chinese are shrewd negotiators, so an initial offer or price should leave room for negotiation.

India’s Business Culture According to statistics from the United Nations, India’s rate of female participation in the labor force is 34.2 percent, which is quite low, especially because women make up 42 percent of college graduates in India. But even Indian women with a college degree are expected to let their careers take a back seat to caring for their husband, children, and elderly parents. “The measures of daughterly guilt are much higher in Indian women than in other countries,” says Sylvia Ann Hewlett, president of the Center for Work-Life Policy, a Manhattan think tank, who headed a recent study on the challenges Indian women face in the workplace.8 Hewlett adds, “Since taking care of elderly parents usually becomes a reality later in a woman’s career, it takes them out of the workplace just when they should be entering top management roles.” That is why gender disparities at Indian companies unfortunately grow more pronounced at higher levels of management. Like in many Asian cultures, people in India do not like to say no, verbally or nonverbally. Rather than disappoint you, they often will say something is not available, will offer you the response that they think you want to hear, or will be vague with you. This behavior should not be considered dishonest. Shaking hands is common in India, especially in the large cities among the more educated who are accustomed to dealing with westerners. Men may shake hands with other men and women may shake hands with other women; however, there are seldom handshakes between men and women because of religious beliefs. Indians believe that giving gifts eases the transition into the next life. Gifts of cash are common, but do not give frangipani or white flowers, because they represent mourning. Yellow, green, and red are lucky colors, so remember that when you wrap gifts. Because Hindus consider cows to be sacred, do not give gifts made of leather. Before entering an Indian’s house, take off your shoes, just as you would in China or Japan. Politely turn down the host’s first offer of tea, coffee, or snacks. You will be asked again and again. Saying no to the first invitation is part of the protocol. Be mindful that neither Hindus nor Sikhs eat beef, and many are vegetarians. Muslims do not eat pork or drink alcohol. Lamb, chicken, and fish are the most commonly served main courses. Table manners are somewhat formal, but much Indian food is eaten with the fingers. Like most places in the world, wait to be told where and when to sit at dinner. Women in India typically serve the men and eat later. You may be asked to wash your hands before and after sitting down to a meal. Always use your right hand to eat, whether using utensils or your fingers. Leave a small amount of food on your plate to indicate that you are satisfied. Finishing all your food means that you are still hungry, which is true in Egypt, China, Mexico, and many countries. Indians prefer to do business with those with whom they have established a relationship built on mutual trust and respect. Punctuality is important. Indians generally do not trust the legal system, and someone’s word is often sufficient to reach an agreement. Do not disagree publicly with anyone in India. Titles such as professor, doctor, or engineer are important in India, as is a person’s age, university degree, caste, and profession. Use the right hand to give and receive business cards. Business cards need not be translated into Hindi but always present your business card so the recipient may read the card as it is handed to him or her. This is a nice, expected gesture in most countries around the world.

Business Climate across Countries The World Bank and the International Finance Corporation annually rank 189 countries in terms of their respective ease of doing business (http://www.doingbusiness.org/rankings). The index ranks nations from 1 (best) to 189 (worst). For each nation, the ranking is calculated as the simple average of the percentile rankings on how easy is it to (1) start a business, (2) deal with construction permits, (3) register property, (4) get credit, (5) protect investors, (6) pay taxes, (7)trade across borders, (8) enforce contracts, (9) resolve insolvency, and (10) get electricity. Table 2-4 reveals the 2014 “Ease of Doing Business” rankings for the top 10 nations in six regions of the world. Note, for example, that Norway is rated the sixth best country on the planet for doing business, the United States is ranked seventh, and Colombia is the best country in South America. This information can be helpful for strategists (and students) deciding where to locate new operations, and where to focus new efforts.

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Table 2-4 The Top 10 Nations That Are Easiest To Do Business With Across Continents OverallBest

east europe east asia Pacific central asia

latinAmerica caribbean

Mid-East& north africa

sub-saharan africa

South asia

1. Singapore 2. New Zealand 3. Hong Kong 4. Denmark 5. South Korea 6. Norway 7. USA 8. UK 9. Finland 10. Australia

Singapore Hong Kong Malaysia Taiwan Thailand Samoa Tonga Mongolia Vanuatu Vietnam

Colombia Peru Mexico Puerto Rico Jamaica Guatemala Trinidad/Tobago Uruguay Costa Rico Dom. Republic

UAE S. Arabia Qatar Bahrain Tunisia Oman Morocco Kuwait Malta Lebanon

Mauritius S. Africa Rwanda Botswana Seychelles Nambia Swaziland Zambia Cabo Verde Mozambique

Sri Lanka Nepal Maldives Bhutan Pakistan India Bangladesh Afghanistan NA NA

Georgia Latvia Lithuania Macedonia Montenegro Bulgaria Armenia Romania Hungary Turkey

(Video) Extra Jabardasth | 1st July 2022 | Full Episode |Laila, Indraja, Rashmi, Auto Ram Prasad |ETV Telugu

Source: Based on information at http://www.doingbusiness.org/rankings, retrieved on January 1, 2005.

Africa’s Business Climate Recently, 25 African countries held democratic elections, whereas two decades ago only 3 African countries were considered democracies. Currencies in Africa are stabilizing and many countries are fund-raising to build modern highways, ports, and power grids. Many African and non-African companies are launching operations in Africa due to the rapidly growing middle class and an average GDP growth of 5 percent for the continent through 2017. Also, the World Bank says food demand across Africa will double between 2012 and 2020. Morocco has the highest Internet penetration among all countries in Africa, with 51 percent, followed by Egypt (36%), Kenya (tied with Nigeria at 28%), Senegal (18%), South Africa (17%), Angola (15%), Algeria (14%), Ghana (14%), and Tanzania (12%).9 All other African countries have less than 6 percent Internet penetration among their residents. The article was based on research published by the consulting firm McKinsey, which estimates that only 16percent of Africans have access to the Internet. McKinsey predicts that by 2025, 50 percent of Africans will be online. Nigeria (GDP = $510B) recently surpassed South Africa (GDP = $320B) as having the continent’s largest gross domestic product.10 In 2014, Nissan Motor assembled thousands of cars in Nigeria, General Electric began building $10 billion worth of new turbines for power plants, and Procter & Gamble (P&G) opened a second diaper factory. Nigeria’s population will be seven times larger than South Africa by 2050, even though the country still has problems with infrastructure, unemployment, crime, and poverty. A recent article in the Wall Street Journal (7-13-15, p. B1) reported that Ethiopia is the newest country where garment companies are shifting manufacturing work; Kenya also is receiving numerous new “clothing” factories. VF Corporation that makes such brands as Lee, Wrangler, and Timberland, as well as Calvin Klein and PVH Corporation that makes Tommy Hilfiger, are all mentioned in the article as increasingly shifting their production operations to Africa. Such companies are shifting work to Africa from China, Bangladesh, Vietnam, Cambodia, India, Sri Lanka, and Turkey, primarily due to exceptionally low wages. For example, the article reports that Chinese garment workers earn between $155 to $297 a month, compared to workers in Bangladesh and Ethiopia that earn about $67 and $21 a month respectively. Many African countries also grow cotton and that is a plus for textile companies, but the lowest wages on the planet, coupled with improving infrastructure and stability, is the real draw. Table 2-5 provides a summary of the economic situation in 12 African countries. Note that Angola is rated lowest in terms of doing business, whereas South Africa is rated highest. Recent regime changes in Egypt, Tunisia, Libya, and Algeria may spur further investment in Africa as democracy and capitalism strengthens. Many multinational companies are now gaining first mover advantages by engaging Africa at all levels. Today, 40 percent of Africans live in the cities—a proportion close to China and India. The general stereotype of Africa is rapidly changing from subsistence farmers avoiding lions to millions of smartphone-carrying consumers in cities purchasing products. Africa has the world’s largest deposits of platinum, chrome, and diamonds—and many Chinese companies in particular are investing there. Africa’s largest food retailer, Shoprite Holdings, has more than 1,000 stores in 17 countries. Shoprite is a potential acquisition target being considered by European retailers Carrefour and Tesco. Diageo PLC sells Guinness beer,

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Table 2-5 Sampling of African Countries: Ease-of-Doing-Business Rankings

South Africa Tunisia Ghana Morocco Kenya Egypt Ethiopia Uganda Nigeria Sudan Mozambique Angola

Population in Millions

EaseofdoingBusiness amongAllCountries

capital city

49 11 24 32 39 79 86 33 150 41 22 13

43 out of 183 60 out of 183 70 out of 183 71 out of 183 136 out of 183 112 out of 183 132 out of 183 150 out of 183 170 out of 183 160 out of 183 127 out of 183 181 out of 183

Pretoria Tunis Accra Rabat Nairobi Cairo Addis Ababa Kampala Abuja Khartoum Maputo Luanda

Source: Based on information at http://www.doingbusiness.org/rankings, retrieved on January 1, 2015.

Smirnoff vodka, Baileys liqueur, and Johnnie Walker whiskey in more than 40 countries across Africa. Nestlé S.A. now has more than 25 factories in Africa. All of Africa is coming online, representing huge opportunities for countless companies. McKinsey & Co. estimates that within 5 years another 220 million Africans that today can meet only basic needs will join the middle class as consumers.11 There are more than 950 million people who live in Africa.

China’s Business Climate The International Monetary Fund (IMF) recently reported that China, the world’s most populous country, has overtaken the United States as the world’s number-one economic powerhouse. China’s economic output in 2014 reached $17.6 trillion, compared to the U.S.’s $17.4 trillion. China now accounts for 16.5 percent of the world economy, compared to the 6.3 percent recorded by the United States. Experts have predicted this monumental shift in economic power for years, but it has come much faster than expected. Hundreds of companies are scurrying to set up business in China. China’s economic growth has slowed to 6.8 percent, led especially by a domestic-property slump that has dented construction activity and demand for materials such as steel and cement. Ruling Communist Party leaders are calling the situation the “new normal” of slower growth as the government tries to reduce widespread pollution and conserve energy. Fixed-asset investment in China is poised to fall to 12.8 percent in 2015, down from 15.5 percent the prior year. Cantonese-speaking demonstrators in Hong Kong, supported by millions of Mandarin-speaking main land Chinese, still hold out for democracy. More than 40 million Chinese visit Hong Kong (population 7 million) annually.”12 For many decades, low wage rates in China helped keep world prices low on hundreds of products—but that is changing, because all 31 Chinese provinces and regions recently boosted their minimum wage for the third consecutive year. Demand for workers in China now outstrips supply, and this is contributing to rapidly rising wage rates and worldwide inflation. Commercial and industrial development in China’s west has turned interior cities such as Chongqing into production centers that compete for labor with coastal factories. In fact, Chinese labor laws limiting student interns to 8 work hours a day and no night shifts are widely disregarded by factories.13 Many of China’s vocational schools “dump students for long internships (up to one year) at factories.” Intern students are generally paid about the same as regular workers, about $212 a month before overtime, but students often have to pay most of their base wages to their school. As indicated in Table 2-6, China ranks 90 out of 189 countries in terms of doing business. That ranking is relatively low for a variety of reasons, ranging from human rights issues to substantial disregard for copyright, patent, and trademark rules of law. Best Buy and Home Depot are examples of companies that are closing stores in China. In contrast, luxury handbag maker Coach Inc. has made China the cornerstone of its international strategy, adding more products for men and opening men’s stores in China. However, Coach is struggling to compete with Hong Kong–based Michael Kors. Note also in Table 2-6 that Singapore is rated the best country on the planet for doing business.

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Brazil’s Business Climate Brazil’s biggest trading partner is China, but as China’s economy has slowed, Brazil’s economy has deteriorated. In August 2015, consumer confidence in Brazil is at a record low, unemployment has increased to 8.3 percent, inflation is nearing 10 percent, and corruption scandals have left President Dilma Rouseseff with approval ratings below 10 percent. Demand for Brazil’s commodities, especially soybeans and iron ore, has declined sharply, so Brazilian businesses are laying off workers and cutting spending. Lower commodity prices cost Brazil $12 billion in foreign sales through the first half of 2015 alone. Brazil’s currency, the real, declined 30 percent versus the US dollar in the last twelve months; Brazil’s stock market is down 22 percent in the last twelve months; Brazil’s economy is shrinking at about 1.7 percent annually. Economists now predict prolonged stagnation for Brazil. Marcos Troyjo, a former Brazilian diplomat who now is at Columbia University, says: “We went from Brazil mania to Brazil nausea; we are now looking at a lost decade.” Instead of negative growth, Brazil reported 7+ percent annual GDP growth in 2010–2012 making it a BRIC (Brazil, Russia, India, China) high performer. But that was then. Also hurting Brazil now has been the fall in oil prices since that country is (or was) a big exporter of oil.

Indonesia’s Business Climate A Pacific archipelago comprised of thousands of islands, Indonesia’s stock market was the top performer in 2014 among all Asian countries, and was also the top performer in five out of the last seven years in Asia. Indonesia’s currency is the rupiah and its economy is one of the fastest growing in Asia, behind China and the Philippines. Indonesia’s GDP is expected to grow 5.7percent in 2015. As Southeast Asia’s largest economy, Indonesia elected a new legislature and president in 2014. Despite its large population and densely populated regions, Indonesia has the world’s second-highest level of biodiversity, with vast areas of wilderness and abundant natural resources.

India’s Business Climate The GDP of India in 2015 is expected to reach 8.3 percent, making it the world’s fastest-growing large economy, and the first time that India’s growth rate has exceeded that of China since the 1990s. China’s GDP for 2015 is expected to slow to 6.8 percent. By a landslide, India elected a new prime minister in May 2014, Narendra Modi. Modi has introduced excellent policies to jump-start India’s economy, boosting profits at companies ranging from banks to cement makers. In support of Modi and India’s future, money managers worldwide poured more than $17 billion into Indian stocks in 2014—the most of any developing country tracked by the Institute of International Finance. India’s S&P Index grew nearly 40 percent in 2014. The country is the world’s tenth-largest economy, but its economy pre-Modi was stagnant due to cumbersome bureaucracy and poor infrastructure. India grew faster (5.6%) in 2014 than any BRIC (Brazil, Russia, India, and China) country. India’s economy is expected to grow 6.4 Table 2-6 Sampling of Asian Countries: Ease-of-Doing-Business Rankings

Singapore South Korea Malaysia Thailand Japan Taiwan China Pakistan Russia Indonesia India Philippines

Population in Millions

EaseofdoingBusiness amongAllCountries

capital city

5 49 26 66 127 23 1,500 175 140 241 1,160 98

1 out of 189 5 out of 189 18 out of 189 26 out of 189 29 out of 189 19 out of 189 90 out of 189 128 out of 189 62 out of 189 114 out of 189 142 out of 189 95 out of 189

Singapore Seoul Kuala Lumpur Bangkok Tokyo Taipei Beijing Islamabad Moscow Jakarta New Delhi Manila

Source: Based on information at http://www.doingbusiness.org/rankings, retrieved on January 1, 2015.

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percent in 2015. Modi’s political party has the ruling majority in the India legislature for the first time in 30 years. India is benefiting greatly from low prices for oil and gas, India’s biggest import. India’s state Parliament of Rajasthan recently overhauled its local labor laws by making it easier for companies with as many as 300 employees to fire workers and avoid other contentious provisions of strict labor-protection laws. Modi is using various Indian states where his Bharatiya Janata Party has control to test his greater economic openness policies. He believes, for example, that manufacturers will now relocate to Rajasthan, and the neighboring state of Haryana has suggested it may follow Rajasthan. Modi is trying to revitalize India’s manufacturing sector by taking the following steps immediately: reducing the powers of labor inspectors, replacing onerous paperwork with digital submissions, removing restrictions on women working at night, improving factory conditions for workers, easing regulations on hiring apprentices, and facilitating overtime. Foreign firms may now own 100 percent of some Indian retail ventures, up from a previous 51 percent a few years ago. One company taking advantage of this change in the law is IKEA, which recently opened 25 new stores in India. India has also greatly reduced the expensive government subsidies on diesel fuel. Indian banks are lowering interest rates to spur growth. The country is implementing a 5-year road map to improve its finances, aiming to narrow its budget deficit of 5.3 percent of GDP to 3 percent by 2017. Complicating matters in India are high interest rates and budget deficits. The Indian Parliament recently approved higher overseas ownership in their insurance and pension investments sectors of the economy. The Indian government is slowly improving the country’s education system, but an enormous amount of work remains. Only 74 percent of Indian men and 48 percent of Indian women are literate, compared to 96 percent of men and 88 percent of women in China. India’s “knowledge economy” employs only about 2.23 million people out of 750 million available. At present, only 15 percent of India’s citizens enter higher education, and the government hopes to increase this to 21 percent by 2017. The Indian Institutes of Technology—a group of universities focused on engineering and technology—are world renowned, but offer only a miniscule 7,000 places to students each year. There is elaborate red tape required to establish and operate any business in India. Also, the country’s tax code is archaic and many new sectors are not even open to foreign direct investment. However, India will surpass China as the most populated country in 2030. Its highest density growth and population is in the northwest and east-central areas of the country. India has a literacy rate now of 74 percent, up from 65 percent a decade ago.

Japan’s Business Climate Japan’s new Prime Minister Shinzo Abe was reelected on a mandate to revive the economy. Hopes for Abe’s “Three Arrows” of hyper-easy monetary policy, government spending, and reforms such as deregulation were tarnished after Japan’s economy slipped into a recession in Q3 2014, following a national sales tax increase from 5 to 8 percent aimed primarily at reducing Japan’s huge public debt, the worst among advanced nations. But the sales tax increase hurt ordinary Japanese citizens. However, the falling yen has hurt small businesses and consumers by raising the cost of imported goods. Abe is pushing hard now for Japanese companies to raise wages of their employees, because company stock prices and profits are up and ordinary citizens are suffering. Abe says if wages do not rise as quickly as prices, households will cut back on spending, endangering a desired economic recovery in Japan. Prime Minister Abe wants to restart nuclear reactors that were taken offline after the 2011 Fukushima disaster. As of 2015, all 48 of Japan’s reactors are offline. Abe likely will stay in power in Japan through 2018, becoming one of Japan’s rare long-term leaders. His historically pro-business Liberal Democratic Party (LBD), together with its junior coalition partner, the Komeito party, now controls more than two thirds of the lower house. Abe also wants to revitalize Japan’s military to help confront growing aggression from China and North Korea, and to be able to respond to incidents such as the recent ISIS beheading of two Japanese journalists.

Mexico’s Business Climate South Korea’s Kia Motors is building a $1 billion assembly near Monterrey, Mexico, joining Mazda Motors, Honda Motors, Audi AG, BMW AG, Renault S.A., Nissan Motors, and Daimler AG, all of which are shifting automobile assembly operations to Mexico. The country of Mexico

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is now (2015) the fourth-largest auto exporter in the world, behind Japan, Germany, and South Korea. Mexico’s auto industry now employs one of every six Mexican factor workers and comprises one third of all exports from Mexico. No country was hurt more in the last decade by the rise of China than Mexico, but Chinese policy today is to boost wages and therefore boost consumer spending. The Boston Consulting Group estimates that “China’s average manufacturing wage exceeded Mexico’s in 2012 for the first time, when accounting for differences in productivity; Mexican workers typically produce more per hour than Chinese workers.”14 The average wage plus benefits across Mexico is $3.50 an hour. This fact, coupled with China’s rising wages and slowing growth and Mexico’s close proximity to the United States, represents a great opportunity for Mexico to recoup much of the manufacturing prowess it lost in the last decade to China. Foreign direct investment (FDI) in Mexico has surged to exceed $30 billion annually, led by automobile manufacturers such as Volkswagen AG building new factories, and auto-parts suppliers such as Delphi Automotive PLC following. Home Depot will soon have 150 stores in Mexico. The FDI surge is expected to last at least through 2018, spurred by low wages, government policies that allow foreign companies to import raw materials without paying duties or tariffs, a 30 percent corporate tax rate, and rising wages in China. Note in Table 2-7 that Mexico rose to 39th place (from 53rd place) in the last two years among all nations in terms of ease of doing business. Mexico is especially attractive for manufacturing products that are bulky or costly to transport, such as automobiles. However, a key variable hurting Mexico is drug-related violence. Mexico’s homicide rate exceeds 15 people per 100,000, compared with a per capita rate of about 5.0 in the United States and 1.1 in China. If Mexico can improve its security situation as it intends, then hundreds of additional firms may consider returning to Mexico from China (and India).

Vietnam’s Business Climate Internet penetration has grown to 44 percent among Vietnam’s 90 million people, up from 12percent a decade ago.15 Unlike another communist country, North Korea, Vietnam is booming for business. The market for e-commerce in Vietnam generates $4 billion in revenue annually and is growing dramatically. Telecommunications companies in Vietnam, such as Viettel Mobile and Vietnam Mobile Telecom Services, provide the lowest data prices in the world at just over $3 per gigabyte. The Vietnamese are among the most prevalent watchers of videos on smartphones in the world. The number of active mobile social-media accounts in Vietnam rose 41 percent from January 2014 to January 2015—a higher growth rate than China, India, or Brazil. Facebook has over 30 million active users in Vietnam, up from 8.5 million in 2012. Even the smallest businesses in the United States (and elsewhere) can easily reach and sell to consumers in Vietnam, who yearn for new products and services. (Interestingly, the most recent foreign translation of this textbook, Strategic Management, has been translated into Vietnamese.) Table 2-7 Sampling of North and South American Countries: Ease-of-Doing-Business Rankings

USA Canada Chile Peru Mexico Argentina Brazil Ecuador Bolivia Venezuela

Population in Millions

EaseofdoingBusiness amongAllCountries

308 34 17 30 112 41 199 15 10 27

7 out of 183 16 out of 183 41 out of 183 35 out of 183 39 out of 183 124 out of 183 120 out of 183 115 out of 183 157 out of 183 182 out of 183

capital city Washington, DC Ottawa Santiago Lima Mexico City Buenos Aires Brasilia Quito La Paz Caracas

Source: Based on information at http://www.doingbusiness.org/rankings, retrieved on January 1, 2015.

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impLicAtions for strAtegists Figure 2-2 reveals that doing business globally is increasingly a prerequisite for success even for the smallest of firms. An estimated 95 percent of consumers globally live outside the United States; firms can grow and gain economies of scale by serving these consumers. Staying domestic oftentimes gives rival firms major competitive advantages. There are about 190 countries on seven continents.

Whatever product/service your company has to offer, it would likely be well received in many nations, and it may be strategically best for your firm to outsource operations, procure resources, and use a labor force away from home, to gain and sustain competitive advantages at home.

Establish A Clear Vision & Mission

Evaluate & Monitor Results: Take Corrective Actions; Adapt To Change

Gain & Sustain Competitive Advantages

Formulate Strategies: Collect, Analyze, & Prioritize Data Using Matrices; Establish A Clear Strategic Plan

Implement Strategies: Establish Structure; Allocate Resources; Motivate & Reward; Attract Customers; Manage Finances

Figure 2-2 How to Gain and Sustain Competitive Advantages

impLicAtions for stuDents Even the smallest businesses today regularly serve customers globally and gain competitive advantages and economies of scale by doing so. Many iconic U.S. businesses, such as Tupperware, obtain more than 80 percent of their revenue from outside the United States. Therefore, in performing a strategic-management case analysis, you must evaluate the scope, magnitude, and nature of what your company is doing globally compared to rival firms. Then, determine what your company should be doing to garner global

business. Continuously throughout your presentation or written report, compare your firm to rivals in terms of global business and make recommendations based on careful analysis. Be “prescriptive and insightful” rather than “descriptive and mundane” with every slide presented to pave the way for your specific recommendations with costs regarding global reach of your firm. Continually compare and contrast what you are recommending versus what the company is actually doing or planning to do.

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Chapter Summary The population of the world has surpassed 7 billion. Just as they did for centuries before Columbus reached America, businesses search for new opportunities beyond their national boundaries for centuries to come. There has never been a more internationalized and economically competitive society than today’s model. Some U.S. industries, such as textiles, steel, and consumer electronics, are in disarray as a result of the international challenge. Success in business increasingly depends on offering products and services that are competitive on a world basis, not just on a local basis. If the price and quality of a firm’s products and services are not competitive with those available elsewhere in the world, the firm may soon face extinction. Global markets have become a reality in all but the most remote areas of the world. Certainly throughout the United States, even in small towns, firms feel the pressure of world competitors. This chapter has provided some basic global information that can be essential to consider in developing a strategic plan for any organization. The advantages of engaging in international business may well offset the drawbacks for most firms. It is important in strategic planning to be effective, and the nature of global operations may be the key component in a plan’s overall effectiveness.

MyManagementLab® To complete the problems with the

, go to EOC Discussion Questions in the MyLab.

Key Terms and Concepts feng shui (p. 78) global strategy (p. 69) globalization (p. 69) guanxi (p. 76) international firms (p. 70) inhwa (p. 76)

inversion (p. 76) multinational corporations (p. 70) nemaswashio (p. 78) protectionism (p. 73) Wa (p. 76)

Issues for Review and Discussion 2-1. Honda Motor Company has been very successful in recent years. What percentage of Honda’s revenues comes from the United States versus Europe? How does this percentage compare with rival firms? 2-2. Why are consumption patterns becoming similar worldwide? What are the strategic implications of this trend? 2-3. What are the major differences between the United States operations and multinational operations that affect strategic management?

2-4. Why is globalization of industries a common factor today? 2-5. Compare and contrast the United States with foreign cultures in terms of doing business. 2-6. List six reasons why strategic management is more complex in a multinational firm. 2-7. Do you feel that protectionism is good or bad for the world economy? Why? 2-8. How many different languages are the in the world? 2-9. Why are some industries more “global” than others? Discuss.

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2-10. Wa, guanxi and inhwa are important management terms in Japan, China, and Korea respectively. What would be analogous terms to describe American management practices? 2-11. Why do many Europeans also find the notion of “team spirit” in a work environment difficult to grasp? 2-12. In China feng shui is important in business, while in Japan nemaswashio is deemed important. What are the analogous American terms and practices? 2-13. Describe the business culture in Mexico. 2-14. Describe the business culture in Japan. 2-15. Compare tax rates in the United States versus other countries. What impact could these differences have on “keeping jobs at home?” 2-16. Discuss the requirements for doing business in India. 2-17. Select any four countries in which Honda Motor Company operates. Evaluate their operations in those countries. 2-18. Based on the points of comparisons discussed in this chapter compare and contrast business practices and cultures in Europe with the U.S. business culture. 2-19. In 2016, China devalued its currency substantially. What impact does that have within and outside China? 2-20. What five countries in Asia have the highest GDP? What are its implications for Nestlé? 2-21. Africa is rapidly joining the world economic community. Give 10 examples to justify this.

2-22. Which six African countries do you feel are most suitable for foreign investment? 2-23. Compare business practice and culture in your own country versus the United States. 2-24. What is required to be done in a strategic-management case analysis? 2-25. Select three countries in South America. Prepare a one-page summary for each to reveal their attractiveness for foreign direct investment. For each of the three countries, prepare a one-page summary analyzing their suitability for foreign direct investment. 2-26. Compare sexual harassment policies and practices in your country with those in the United States. 2-27. Discuss the business culture in Australia. 2-28. In terms of presenting flowers as business gifts, compare and contrast the practices and customs across three countries. 2-29. Discuss how business etiquette at dinner varies across countries. 2-30. Make a good argument for keeping the statutory corporate tax rate in the United States the highest in the world. Make a counterargument. 2-31. Is the number languages increasing or decreasing globally? What are the strategic implications? 2-32. Which country recently achieved its goal of having the most business-friendly tax system of the Group of Seven (G-7) nations—Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States?

MyManagementLab® Go to the Assignments section of your MyLab to complete these writing exercises. 2-33. Make a good argument for keeping the statutory corpo2-34. What are the advantages and disadvantages of beginning rate tax rate in the United States the highest in the world. export operations in a foreign country? Make the counterargument.

AssurAnce of LeArning exercises exercise 2A

Nestlé S.A. Wants to Enter Africa. Help Them. Purpose More and more companies every day begin doing business in Africa and websites provide a lot of information to help compare and contrast business cultures across countries. Research is necessary to determine the best strategy for being the first mover in many African countries (that is, being the first competitor doing business in various countries).

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Instructions Step 1 Step 2 Step 3 Step 4 Step 5

Search the Internet and print a map of Africa. Look for demographic data on any 10 African countries and print the details. Gather competitive information regarding the presence of Nestlé companies doing business in Africa. List, in prioritized order, eight countries that you would recommend for Nestlé to enter. Remember that Country 1 would be the one you consider best and Country 2 is the next best. List, in a prioritized order, three cities in each of the eight African countries where you believe Nestlé should build distribution centres. Justify your choices.

exercise 2B

Assess Differences in Culture across Countries Purpose Persons in your country are more effective in dealing with business people from other countries if they have some awareness and understanding of differences in culture across countries. This exercise will help increase your knowledge and understanding of various countries’ business culture, making you a more effective manager and communicator with people and organizations globally. This is a fun exercise that provides information for your class regarding some of these key differences.

Instructions Step 1

Step 2

Step 3

Step 4

Identify four individuals who either grew up in a foreign country or have lived in a foreign country for more than a year. Interview those four persons. Try to have four different countries represented. During each interview, develop a list of eight key differences between your country’s business style and customs and that particular country’s style and custom in terms of various aspects of speech, meetings, meals, relationships, friendships, and communication, which could impact business dealings. Develop a 15-minute PowerPoint presentation for your class and discuss, summarizing your findings. In your speech to the class, identify the persons you interviewed and the length of time those persons lived in their respective countries. Frame your presentation as if you are giving advice to top managers regarding expansion into those countries. Submit a hard copy of your presentation to your professor.

exercise 2c

Honda Motor Company Wants to Do Business in Vietnam. Help Them. Purpose More and more companies every day decide to begin doing business in Vietnam. Research is necessary to determine the best strategy for being competitive in Vietnam. Review the opening chapter boxed insert and Honda Motor Company’s website, as well as the information about Vietnam in the chapter.

Instructions Step 1 Step 2 Step 3 Step 4

Print a map of Vietnam. Print the demographic data on 10 cities in Vietnam. Gather competitive information regarding the presence of automobile companies doing business in Vietnam. Develop a prioritized list of five cities in which you would recommend Honda build and expand their business operations.

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exercise 2D

Does My University Recruit in Foreign Countries? Purpose A competitive climate is emerging among colleges and universities around the world. Colleges and universities in Europe and Japan are increasingly recruiting U.S. students to offset declining enrolments. Foreign students already make up more than one-third of the student body at many American universities. The purpose of this exercise is to identify particular colleges and universities in foreign countries that represent a competitive threat to your college.

Instructions Step 1

Step 2

Select a foreign country. Conduct research to determine the number and nature of colleges and universities in that country. What are the major educational institutions in that country? What programs are those institutions recognized for offering? What percentage of undergraduate and graduate students attending those institutions are citizens of your country? Do these institutions actively recruit students from your country? Are any of the Schools of Business at the various universities AACSB International accredited? Prepare a report for the class that summarizes your research findings. Present your report to the class.

mini-cAse on AirBus group se (Air.pA)

HOW WELL IS AIRBUS PERFORMING GLOBALLY? Headquartered in Toulouse, France, Airbus Group SE is a European multinational aerospace and defense company that consists of the three business divisions: Airbus, Airbus Defense and Space, and Airbus Helicopters. Airbus competes heavily with Boeing for making commercial airliners and military aircraft. For the first half of Airbus Group SE’s’ fiscal 2015 year, revenues were $31.8 billion, up source:©Bocman1973.shutterstock 6 percent from the prior year. The company’s operating income of $2.1 billion was also up 6 percent, and earnings per share were up 34 percent at $2.13 for the first half of 2015. Airbus added 348 new planes to its order book in the first half of 2015, nearly double the prior year period, rising 94.5 percent to $59.3 billion. The company’s backlog of work to be done is now valued at $1.02 trillion. Simply put, Airbus has all engines running at full steam. The company recently finalized its biggest order, $26.5 billion deal with India’s budget airline, IndiGo, which ordered 250 A320neo family aircraft for $27 billion. The aircraft is a more fuel efficient Airbus, delivering on low-cost fares and enabling the company to grow further. Airbus is also scheduled to deliver seven A330s in 2017 and a further eight to China Eastern Airlines Corporation in 2018. It will also help China Eastern Airlines to meet rising passenger demand for mid and long routes. According to the International Air Transport Association, China will be the world’s largest air passenger market by 2034. Question

1. At the Airbus website (www.airbus.com), determine the percentage breakdown of Airbus revenues across continents. What is the company’s strategy with regards to global expansion? Is that strategy working well for the company?

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Current Readings of Management of Perspectives 28 (November 2014): Alessandri, Todd M., and Anju Seth. “The Effects of Managerial 409–429. Ownership on International and Business Diversification: Mazrouei, Hanan A., and Richard J. Pech. “The Expatriate Balancing Incentives and Risks.” Strategic Management as Company Leader in the UAE: Cultural Adaptation.” Journal, 35, issue 13 (December 2014): 2064–2075. Journal of Business Strategy, no. 1 (2015): 33–40. Berman, Jonathan, Brad Smith, and Eniola Ladapo. “Seven Reasons Why Africa’s Time Is Now: Interaction.” Harvard Schneckenberg, Dirk. “Open Innovation and Knowledge Networking in a Multinational Corporation.” Journal of Business Review 91, no. 12 (2013): 22. Business Strategy 36, no. 1 (2015): 14–24. Bremmer, Ian. “The New Rules of Globalization.” Harvard Tate, Wendy L., et al. “Global Competitive Conditions Driving Business Review 92, no. 1/2 (2014): 103–107. the Manufacturing Location Decision.” Business Horizons Chand, Masud, and Rosalie L. Tung. “The Aging of the World’s 57, no. 3 (2014): 381–390. Population and Its Effects on Global Business.” Academy

Endnotes 1. Frederick Gluck, “Global Competition in the 1990s,” Journal of Business Strategy (Spring 1983): 22–24. 2. Arregle, Jean-Luc, Toyah Miller, Michael Hitt, and Paul Beamish, “Do Regions Matter? An Integrated Institutional and Semiglobalization Perspective on the Internationalization of MNEs,” Strategic Management Journal, 34 (2013): 910–934. 3. Jon Alston, “Wa, Guanxi, and Inhwa: Managerial Principles in Japan, China and Korea,” Business Horizons 32, no. 2 (March–April 1989): 26. 4. Rose Knotts, “Cross-Cultural Management: Transformations and Adaptations,” Business Horizons (January–February 1989): 29–33. 5. Some of the narrative in this section is based on information at http://kwintessential.co.uk/resources/countryprofiles.html and http://www.kwintessential.co.uk/ resources/global-etiquette/ 6. Toko Sekiguchi, “Japan Seeks New Salarywomen,” Wall Street Journal, September 12, 2014, A9.

7. Stratford Sherman, “How to Beat the Japanese?” Fortune (April 10, 1989): 45. 8. Mehul Srivastava, “Keeping Women on the Job in India,” Bloomberg Businessweek, March 7–13, 2011, 11–12. 9. Sarah Childress, “Telecom Giants Battle for Kenya,” Wall Street Journal, January 14, 2011, B1. 10. Drew Hinshaw, “Nigeria Economy Takes Lead in Continent,” Wall Street Journal, April 7, 2014, A13. 11. Emmanuel Tumanjong, “Prying Open Africa’s Web Reach,” Wall Street Journal, January 10, 2014, B6. 12. Gordon Corvitz, “China ‘Voids’ Hong Kong Rights,” Wall Street Journal, December 10, 2014, A11. 13. Eva Dou, “China Fills Tech Factories with Student Labor,” Wall Street Journal, September 25, 2014, B1. 14. David Luhnow and Bob Davis, “For Mexico, an Edge on China,” Wall Street Journal, September 17, 2012, A12. 15. James Hookway, “Vietnam’s Mobile Revolution,” Wall Street Journal, June 15, 2015, B4.

Source: © nobeatsofierce.Shutterstock

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Ethics, Social Responsibility, and Sustainability LeArning oBjectives After studying this chapter, you should be able to do the following: 3-1. Explain why good ethics is good business in strategic management. 3-2. Explain why whistle-blowing, bribery, and workplace romance are strategic issues. 3-3. Discuss why social responsibility and policy are key issues in strategic planning. 3-4. Discuss the nature of environmental sustainability and why it is a key issue in strategic planning. 3-5. Explain why animal welfare is a strategic issue for firms.

AssurAnce of LeArning exercises The following exercises are found at the end of this chapter: exercise 3A exercise 3B

exercise 3c exercise 3D exercise 3e

Sustainability and Nestlé How Does My Municipality Compare to Others on Being Pollution-Safe? Compare Nestlé versus Mars, Inc. on Social Responsibility How Do You Rate Nestlé’s Sustainability Efforts? The Ethics of Spying on Competitors

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lthough the three sections of this chapter [(1) business ethics, (2) social responsibility, and (3) environmental sustainability] are distinct, the topics are quite related. For example, many people consider it unethical for a firm to be socially irresponsible or to treat animals inhumanely. Business ethics can be defined as principles of conduct within organizations that guide decision making and behavior. Good business ethics is a prerequisite for good strategic management; good ethics is just good business! Social responsibility refers to actions an organization takes beyond what is legally required to protect or enhance the well-being of living things. Sustainability refers to the extent that an organization’s operations and actions protect, mend, and preserve rather than harm or destroy the natural environment. Polluting the environment, for example, is unethical, irresponsible, and in many cases illegal, as is treating pigs, cows, chickens, and turkeys inhumanely. Business ethics, social responsibility, and environmental sustainability issues therefore are interrelated and impact all areas of the strategicmanagement process, as illustrated in Figure 3-1 with white shading. An example of a high-performing, highly ethical, privately held company is Bank Audi S.A.L., the largest Lebanese bank integrating CSR and sustainability into core business activities. Another high-performing, highly ethical, publicly held company is Chipotle Mexican Grill, which recently stopped selling a pork product at one third of its U.S. restaurants because one of its suppliers failed an animal welfare audit. That particular supplier could not ensure that pigs have outdoor access or “deeply bedded barns” instead of being raised in tight cages. In response, Chipotle stopped offering carnitas, or pork meat, in its burritos or bowls. An increasing number of firms like Chipotle are raising their standards for animal welfare in terms of its beef, pork, and poultry suppliers raising animals with respect and also avoid using various antibiotics and growth hormones. A Chipotle spokesman remarked, “This is fundamentally an animal welfare decision and is rooted in our unwillingness to compromise our standards where animal welfare is concerned; we hope the vendor will solve its problems and return as a regular supplier for Chipotle.”

Why “Good Ethics is Good Business” The Institute of Business Ethics (IBE) recently did a study titled “Does Business Ethics Pay?” and concluded that companies displaying a “clear commitment to ethical conduct” consistently outperform companies that do not display ethical conduct. Philippa Foster Black of the IBE

exempLAry compAny showcAseD

Bank Audi S.A.L As of 2015, Bank Audi S.A.L, headquartered in Beirut, Lebanon, is the largest Lebanese bank, employing 6,720 individuals, including 3,087 employees in Lebanon. Its total assets amounted to 63,783 billion Lebanese pounds (around $42 billion); customer deposits were 54,430 billion Lebanese pounds ($36 billion); and it had a net profit of 305 billion Lebanese pounds ($200 million) in the first half of 2015. Over the last decade, Bank Audi’s strategy included regional expansion. Apart from Lebanon, it operates across Egypt, Qatar, Saudi Arabia, Syria, Jordan, and Sudan; it also operates in France, Switzerland and Monaco. It is exploring opportunities in Sub-Saharan Africa, which may prove to be advantageous for the company as Africa becomes more interesting for the Turkish market. With its Latin American clients leading to a turnover of $2.1 billion in 2014, Bank Audi plans to begin operations in Latin America and make the most of its Latin American employees in Lebanon and Switzerland. In 2014, Bank Audi began integrating CSR and sustainability into core business activities. It continued implementing its

Environmental and Social Management System that guided its approach in evaluating the environmental and social risks associated with its corporate and commercial activities. In an attempt to reduce its carbon footprint and increase environmental awareness within the company, and among the youth, Bank Audi initiated an employee-volunteering program called “Be a Hero for a Day,” with employees representing a culture of ethics and responsibility. Source: Based on information from Bank Audi Group’s website, http://www .bankaudi.com.lb; and http://www.bankaudi.com.lb/GroupWebsite/openAud iFile.aspx?id=2783.

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Chapter 2: Outside-USA Strategic Planning

The Internal Audit Chapter 6

Types of Strategies Chapter 4

Vision and Mission Analysis Chapter 5

Strategy Generation and Selection Chapter 8

Strategy Implementation Chapter 9

Strategy Execution Chapter 10

Strategy Monitoring Chapter 11

The External Audit Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 3-1 A Comprehensive Strategic-Management Model Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.v

stated, “Not only is ethical behavior in business life the right thing to do in principle, it pays off in financial returns.” Alan Simpson remarked, “If you have integrity, nothing else matters. If you don’t have integrity, nothing else matters.” Good ethics is good business. Bad ethics can derail even the best strategic plans. This chapter provides an overview of the importance of business ethics in strategic management. Table 3-1 provides some results of the IBE study.

Does It Pay to Be Ethical? A rising tide of consciousness about the importance of business ethics is sweeping the United States and the rest of the world. Strategists such as CEOs and business owners are the individuals primarily responsible for ensuring that high ethical principles are espoused and practiced in an organization. All strategy formulation, implementation, and evaluation decisions have ethical ramifications. As indicated in Academic Research Capsule 3-1, it does pay to be ethical; high-performing companies generally exhibit high business ethics. Investor’s Business Daily reported on 7-20-15

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Table 3-1 Seven Principles of Admirable Business Ethics 1. Be trustworthy; no individual or business wants to do business with an entity it does not trust. 2. Be open-minded, continually asking for “ethics-related feedback” from all internal and external stakeholders. 3. Honor all commitments and obligations. 4. Do not misrepresent, exaggerate, or mislead with any print materials. 5. Be visibly a responsible community citizen. 6. Utilize your accounting practices to identify and eliminate questionable activities. 7. Follow the motto: Do unto others as you would have them do unto you. Source: Based on http://sbinformation.about.com/od/bestpractices/a/businessethics.htm

(p. A4) that character-driven leaders deliver five times greater profitability results and 26 percent higher workforce engagement than self-focused leaders. Those were the results of a seven-year study by Fred Kiel, author of “Return on Character,” who followed 8,000 employees and 84 top executives of Fortune 500 companies. Daily, newspapers and business magazines report legal and moral breaches of ethical conduct by both public and private organizations. Being unethical can be expensive. For example, Cisco Systems in 2015 sued Arista Networks for copying verbatim sections of its user manuals. In addition to plagiarism, literally hundreds of business actions are unethical, including: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Misleading advertising or labeling Causing environmental harm Poor product or service safety Padding expense accounts Insider trading Dumping banned or flawed products in foreign markets Not providing equal opportunities for women and minorities Overpricing Sexual harassment Using company funds or resources for personal gain

Increasingly, executives’ and managers’ personal and professional decisions are placing them in the crosshairs of angry shareholders, disgruntled employees, and even their own boards

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What Can We Learn from High-Performance Companies? Research at DePaul University in Chicago by Frigo and Litman found a pattern of strategic activities of high-performance companies. Their research involved screening the financial performance of more than 15,000 public companies using 30 years of financial data and identifying about 100 high-performance companies. Here are three lessons from high-performance companies studied: 1) Commitment to Return on Investment and Ethical Business Conduct: High-performance companies demonstrate a strong commitment to creating shareholder value by focusing on sustainable return on investment (ROI). These companies achieve superior ROI and growth while adhering to ethical business conduct, such as Johnson & Johnson, which is famous for its credo as a foundation for ethical business conduct at the company.

2) Focus on Unmet Customer Needs in Growing Market Segments: To avoid commoditization, high-performance companies concentrate on fulfilling unmet customer needs and target growing market segments. Harley-Davidson targets customer needs (lifestyle, freedom, community) with their unique Harley experience while pursuing a growing customer group (the Baby Boom generation). 3) Innovate Offerings: High-performance companies constantly reexamine their products and services (their offerings), modifying existing ones and developing new ones that will better fulfill customers’ unmet needs. For example, Apple demonstrate this characteristic through its innovation strategy. Source: Based on Mark L. Frigo and Joel Litman, DRIVEN: Business Strategy, Human Actions and the Creation of Wealth, Strategy and Execution (Chicago: Strategy & Execution LLC, 2008).

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of directors—making the imperious CEO far more vulnerable to personal, public, and corporate missteps than ever before. “Certainly, anybody who is doing something that can be construed as unethical, immoral or greedy is being taken to task,” says Paul Dorf of Compensation Resources, a consultant to boards of directors.1 Social media and business-centric websites such as glassdoor.com and vault.com as well as disclosure mandates required under Sarbanes-Oxley are just several among hundreds of outlets that today quickly spread fact and rumor about the inside dealings of corporations and organizations, revealing ethical breaches and internal business practices that may never have surfaced years ago. Wendy Patrick, who teaches business ethics at San Diego State University, states, “God forbid anyone who isn’t squeaky-clean these days or misrepresents their credentials. Anything embarrassing and you begin to question everything. If you aren’t making good decisions in your personal life, it can bleed over to your career (professional life).”

How to Establish an Ethics Culture A new wave of ethics issues has recently surfaced related to product safety, employee health, sexual harassment, AIDS in the workplace, smoking, acid rain, affirmative action, waste disposal, foreign business practices, cover-ups, takeover tactics, conflicts of interest, employee privacy, inappropriate gifts, and security of company records. A key ingredient for establishing an ethics culture is to develop a clear code of business ethics. Internet fraud, hacking into company computers, spreading viruses, and identity theft are other unethical activities that plague every sector of online commerce. As indicated in Academic Research Capsule 3-2, anyone is prone to be unethical in a business, so Donald Palmer provides six procedures to establish an ethics culture. Merely having a code of ethics, however, is not sufficient to ensure ethical business behavior. A code of ethics can be viewed as a public relations gimmick, a set of platitudes, or window dressing. To ensure that the code is read, understood, believed, and remembered, periodic ethics workshops are needed to sensitize people to workplace circumstances in which ethics issues may arise.2 If employees see examples of punishment for violating the code as well as rewards for upholding the code, this reinforces the importance of a firm’s code of ethics. The website www.ethicsweb.ca/codes provides guidelines on how to write an effective code of ethics. Reverend Billy Graham once said, “When wealth is lost, nothing is lost; when health is lost, something is lost; when character is lost, all is lost.” An ethics “culture” needs to permeate organizations! To help create an ethics culture, Citicorp developed a business ethics board game that is played by thousands of employees worldwide. Called “The Word Ethic,” this game asks players business ethics questions, such as “How do you deal with a customer who offers you football tickets in exchange for a new, backdated IRA?” Diana Robertson at the Wharton School

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Who Is Prone to Be Unethical in a Business? Prior research suggests that being unethical is abnormal, rare, and most often perpetrated by people who are abhorrent. However, Donald Palmer recently reported that misconduct is a normal phenomenon and that wrongdoing is as prevalent as “rightdoing,” and that misconduct is most often done by people who are primarily good, ethical, and socially responsible. Palmer reports that individuals engage in unethical activities due to a plethora of structure, processes, and mechanisms inherent in the functioning of organizations—and, importantly, all of us are candidates to be unethical under the right circumstances in any organization. Implications of this new research abound for managers. In light of his findings, Palmer concludes that organizations should implement the following six procedures as soon as possible:

1) 2) 3) 4)

Punish wrongdoing swiftly and severely when it is detected. Be careful to hire employees who possess high ethical standards. Develop socialization programs to reinforce desired cultural values. Alter chains of command so subordinates report to more than one superior. 5) Develop a culture whereby subordinates may challenge their superior’s orders when they seem questionable. 6) Develop a better understanding of internal policies, procedures, systems, and mechanisms that could lead to misconduct. Source: Based on Donald Palmer, “The New Perspective on Organizational Wrongdoing,” California Management Review, 56, no. 1 (2013): 5–23.

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of Business believes the game is effective because it is interactive. Many organizations have developed a code-of-conduct manual outlining ethical expectations and giving examples of situations that commonly arise in their businesses. One reason strategists’ salaries are high is that they must take the moral risks of the firm. Strategists are responsible for developing, communicating, and enforcing the code of business ethics for their organizations. Although primary responsibility for ensuring ethical behavior rests with a firm’s strategists, an integral part of the responsibility of all managers is to provide ethics leadership by constant example and demonstration. Managers hold positions that enable them to influence and educate many people. This makes managers responsible for developing and implementing ethical decision making. Gellerman and Drucker, respectively, offer some good advice for managers: All managers risk giving too much because of what their companies demand from them. But the same superiors who keep pressing you to do more, or to do it better, or faster, or less expensively, will turn on you should you cross that fuzzy line between right and wrong. They will blame you for exceeding instructions or for ignoring their warnings. The smartest managers already know that the best answer to the question “How far is too far?” is don’t try to find out.3 A man (or woman) might know too little, perform poorly, lack judgment and ability, and yet not do too much damage as a manager. But if that person lacks character and integrity—no matter how knowledgeable, how brilliant, how successful—he destroys. He destroys people, the most valuable resource of the enterprise. He destroys spirit. And he destroys performance. This is particularly true of the people at the head of an enterprise because the spirit of an organization is created from the top. If an organization is great in spirit, it is because the spirit of its top people is great. If it decays, it does so because the top rots. As the proverb has it, “Trees die from the top.” No one should ever become a strategist unless he or she is willing to have his or her character serve as the model for subordinates.4 No society anywhere in the world can compete long or successfully with people stealing from one another or not trusting one another, with every bit of information requiring notarized confirmation, with every disagreement ending up in litigation, or with government having to regulate businesses to keep them honest. Being unethical is a recipe for headaches, inefficiency, and waste. History has proven that the greater the trust and confidence of people in the ethics of an institution or society, the greater its economic strength. Business relationships are built mostly on mutual trust and reputation. Short-term decisions based on greed and questionable ethics will preclude the necessary self-respect to gain the trust of others. More and more firms believe that ethics training and an ethics culture create strategic advantage. According to Max Killan, “If business is not based on ethical grounds, it is of no benefit to society, and will, like all other unethical combinations, pass into oblivion.”

Whistle-Blowing, Bribery, and Workplace Romance As social media and technology have become commonplace globally, three business ethics topics—whistle-blowing, bribery, and workplace romance—have become important strategic issues facing companies. Missteps in any of these three areas can severely harm an organization.

Whistle-Blowing Whistle-blowing refers to employees reporting any unethical violations they discover or see in the firm. Employees should practice whistle-blowing, and organizations should have policies that encourage whistle-blowing. Three individuals recently received $170 million for helping investigators obtain a record $16.65 billion penalty against Bank of America for inflating the value of mortgage properties and selling defective loans to investors. The whistle-blower payouts are among the highest ever in financial institution cases. Thousands of firms warn managers and employees that failing to report an ethical violation by others could bring discharge. The Securities and Exchange Commission (SEC) recently strengthened its whistle-blowing policies, virtually mandating that anyone seeing unethical activity report such behavior.

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Whistle-blowers in the corporate world receive up to 25 percent of the proceeds of legal proceedings against firms for wrongdoing. Such payouts are becoming more and more common. J.P. Morgan Chase employee Keith Edwards recently received a $63.9 million payout for his whistle-blowing tips that led J.P. Morgan to pay $614 million to the U.S. government for illegally approving thousands of FHA loans and hundreds of VA loans that did not meet underwriting requirements. The SEC recently paid $30 million to a non-U.S. citizen whistle-blower who reported an ongoing fraud matter. Sean McKessy, the SEC’s whistle-blower top executive, commented about the case, “Whistleblowers from all over the world should feel similarly incentivized to come forward with credible information about potential violations of the U.S. securities laws.” An accountant who recently tipped off the IRS that his employer was skimping on taxes received $4.5 million in the first IRS whistle-blower award. The accountant’s tip netted the IRS $20 million in taxes and interest from the errant financial-services firm. The award represented a 22 percent cut of the taxes recovered. The IRS program, designed to encourage tips in large-scale cases, mandates awards of 15 to 30 percent of the amount recouped. “It’s a win-win for both the government and taxpayers. These are dollars that are being returned to the U.S. Treasury that otherwise wouldn’t be,” said lawyer Eric Young. Ethics training programs should include messages from the CEO or owner of the business, emphasizing ethical business practices, the development and discussion of codes of ethics, and procedures for discussing and reporting unethical behavior. Firms can align ethical and strategic decision making by incorporating ethical considerations into strategic planning, by integrating ethical decision making into the performance appraisal process, by encouraging whistle-blowing, and by monitoring departmental and corporate performance regarding ethical issues.

Avoid Bribery Managers, employees, and firms must avoid bribery. Bribery is defined by Black’s Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or other person in discharge of a public or legal duty. A bribe is a gift bestowed to influence a recipient’s conduct. The gift may be any money, goods, actions, property, preferment, privilege, emolument, object of value, advantage, or merely a promise or undertaking to induce or influence the action, vote, or influence of a person in an official or public capacity. Bribery is a crime in most countries of the world, including the United States.5 For example, Avon Products has been plagued by bribery charges over the last 8 years. French engineering firm Alstom S.A. recently pleaded guilty to criminal charges that the company paid tens of millions of dollars in a “widespread” bribery scheme to win energy contracts globally. Alstom paid a fine of $772million for falsifying financial records and paying bribes to win contracts around the world. The U.S. Foreign Corrupt Practices Act (FCPA) governs bribery in the United States and has stepped up enforcement. This act, and a new provision in the Dodd-Frank financial-regulation law, allows company employees or others who bring cases of financial fraud, such as bribery, to the government’s attention to receive up to 30 percent of any sum recovered. Bribery suits against a company also expose the firm to shareholder lawsuits. Hewlett-Packard (HP) recently paid $108 million to resolve bribery investigations in Russia, Poland, and Mexico. The HP bribery activities included the use of slush funds and shell companies to funnel monies to politicians, as well as free trips to Las Vegas with free cash to gamble. A recent Wall Street Journal article titled “Bribery Law Dos and Don’ts” provides a synopsis of the recent 130-page document released by the U.S. Justice Department and the SEC to respond to complaints from companies that ambiguity in the FCPA has forced them to abandon business in high-risk countries and spend millions of dollars investigating themselves.6 Numerous examples of bribery are given, such as “providing a $12,000 birthday trip for a government official from Mexico that includes visits to wineries and museums” and “$10,000 spent on a government official for drinks, dinners, and entertainment.” The U.S. Justice Department and the SEC each file about 100 bribery cases annually. The United Kingdom Bribery Law forbids any company doing any business in the United Kingdom from bribing foreign or domestic officials to gain competitive advantage. The British law is more stringent even than the similar U.S. FCPA. The British Bribery Law carries a maximum 10-year prison sentence for those convicted of bribery. The law stipulates that “failure to prevent bribery” is an offense and stipulates that facilitation payments, or payments to gain access, are not a valid defense to

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prevent bribery. The United Kingdom law applies even to bribes between private businesspersons, and if the individual who makes the payment does not realize the transaction was a bribe, he or she is still liable. The new bribery law is being enforced by Britain’s Serious Fraud Office (SFO) and boosts the maximum penalty for bribery from 7 years to 10 years in prison, and sets no limits on fines. More and more nations are taking a tougher stance against corruption, and companies worldwide are installing elaborate programs to avoid running afoul of the FCPA or the SFO. In some foreign countries, paying bribes and kickbacks has historically been acceptable. But now, antibribery and extortion initiatives are advocated by many organizations, including the World Bank, the International Monetary Fund, the European Union (EU), the Council of Europe, the Organization of American States, the Pacific Basin Economic Council, the Global Coalition for Africa, and the United Nations. Tipping is even now considered bribery in some countries. Taking business associates to lavish dinners and giving them expensive holiday gifts and even outright cash may have been expected in some countries, such as South Korea and China, but there is now stepped-up enforcement of bribery laws virtually everywhere. The world’s thirdlargest commercial aircraft manufacturer, Embraer S.A., headquartered in Brazil, is currently being investigated for allegedly paying a $3.5 million bribe to a Dominican Republic Air Force colonel, who then pressured Dominican legislators to approve a $92 million contract for Embraer to provide attack planes to that country. Several pharmaceutical companies, including Merck, AstraZeneca PLC, Bristol-Myers Squibb, and GlaxoSmithKline PLC, are currently being investigated for allegedly paying bribes in certain foreign countries to boost sales and speed approvals. Four types of violations are being reviewed: bribing government-employed doctors to purchase drugs, paying company sales agents commissions that are passed along to government doctors, paying hospital committees to approve drug purchases, and paying regulators to win drug approvals. Johnson & Johnson recently paid $70 million to settle allegations that it paid bribes to doctors in Greece, Poland, and Romania to use their surgical implants and to prescribe its drugs. Pfizer paid $60 million to resolve similar probes to win business overseas.

Workplace Romance Workplace romance is an intimate relationship between two consenting employees, as opposed to sexual harassment, which the Equal Employment Opportunity Commission (EEOC) defines broadly as unwelcome sexual advances, requests for sexual favors, and other verbal or physical conduct of a sexual nature. Sexual harassment (and discrimination) is illegal, unethical, and detrimental to any organization and can result in expensive lawsuits, lower morale, and reduced productivity. Workplace romance between two consenting employees simply happens, so the question is generally not whether to allow the practice, or even how to prevent it, but rather how best to manage the phenomena. An organization probably should not strictly forbid workplace romance because such a policy could be construed as an invasion of privacy, overbearing, or unnecessary. Some romances actually improve work performance, adding a dynamism and energy that translates into enhanced morale, communication, creativity, and productivity.7 However, it is important to note that workplace romance can be detrimental to workplace morale and productivity, for a number of reasons that include: 1. 2. 3. 4. 5. 6.

Favoritism complaints can arise. Confidentiality of records can be breached. Reduced quality and quantity of work can become a problem. Personal arguments can lead to work arguments. Whispering secrets can lead to tensions and hostilities among coworkers. Sexual harassment (or discrimination) charges may ensue, either by the involved female or a third party. 7. Conflicts of interest can arise, especially when well-being of the partner trumps well-being of the company. In some states, such as California, managers can be held personally liable for damages that arise from workplace romance. Organizations should establish guidelines or policies that address workplace romance, for at least six reasons: 1. Guidelines can enable the firm to better defend against and avoid sexual harassment or discrimination charges.

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2. Guidelines can specify reasons (such as the seven listed previously) why workplace romance may not be a good idea. 3. Guidelines can specify resultant penalties for romancing partners if problems arise. 4. Guidelines can promote a professional and fair work atmosphere. 5. Guidelines can help assure compliance with federal, state, and local laws and recent court cases. 6. Lack of any guidelines sends a lackadaisical message throughout the firm. Workplace romance guidelines should apply to all employees at all levels of the firm and should specify certain situations in which affairs are especially discouraged, such as supervisor and subordinate. Company guidelines or policies in general should discourage workplace romance because “the downside risks generally exceed the upside benefits” for the firm. Best Buy CEO Brian Dunn recently resigned when directors learned of his inappropriate relationship with a young subordinate, which was a violation of that company’s code of ethics. Based in Fremont, California, IGate Corp. fired its CEO, Phaneesh Murthy, recently for allegedly failing to report a workplace romance relationship that turned into a sexual harassment issue with a subordinate. Flirting is a step down from workplace romance, but a full-page Wall Street Journal article titled “The New Rules of Flirting” reveal the dos and don’ts of flirting.8 Flirting is defined by researchers as “romantic behavior that is ambiguous and goal oriented,” or said differently, “ambiguous behavior with potential sexual or romantic overtones that is goal-oriented.” A few flirting rules given in the article are: 1. Do not flirt with someone you know is looking for a relationship if you are not interested in a new relationship. 2. Do flirt within a relationship that you want to strengthen. 3. Do not flirt to make your partner jealous because this is manipulative behavior. 4. Flirting between power differences, such as boss and employee or professor and student, usually leads to trouble, as many defendants in sexual harassment complaints know. 5. Do not make physical contact with the person you are flirting with, unless it is within a desired relationship. Among colleges and universities, the federal Office of Civil Rights (OCR) has stepped up its investigation of sexual harassment cases brought forward by female students against professors. Numerous institutions are currently being investigated. At no charge to the student, the OCR will investigate a female student’s claim if evidence is compelling. A Wall Street Journal article recapped U.S. standards regarding boss and subordinate love affairs at work.9 Only 5 percent of all firms sampled had no restrictions on such relationships; 80percent of firms have policies that prohibit relationships between a supervisor and a subordinate. Only 4 percent of firms strictly prohibited such relationships, but 39 percent of firms had policies that required individuals to inform their supervisors whenever a romantic relationship begins with a coworker. Only 24 percent of firms required the two persons to be in different departments. In Europe, romantic relationships at work are largely viewed as private matters and most firms have no policies on the practice. However, European firms are increasingly adopting explicit, U.S.-style sexual harassment laws. The U.S. military strictly bans officers from dating or having sexual relationships with enlistees. At the World Bank, sexual relations between a supervisor and an employee are considered “a de facto conflict of interest which must be resolved to avoid favoritism.” World Bank president Paul Wolfowitz recently was forced to resign as a result of a relationship he had with a bank staff person. A recent Bloomberg Businessweek article reports that employees are filing sexual harassment complaints as a way to further their own job security. Many of these filings are increasingly third-party individuals not even directly involved in the relationship but alleging their own job was impacted. Largely the result of the rise of third-party discrimination claims, the EEOC recovers about $500 million on behalf of office romance victims.10

Social Responsibility and Policy Some strategists agree with Ralph Nader, who proclaims that organizations have tremendous social obligations. Nader points out, for example, that ExxonMobil has more assets than most countries, and because of this, such firms have an obligation to help society cure its many ills.

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Does It Pay to Be Socially Responsible? Economists generally say no, and philanthropists say yes to this question. Recent research by Barnett and Salomon examined the relationship between corporate social performance (CSP) and corporate financial performance (CFP). They hypothesized, and then confirmed, that the CSP–CFP relationship is U-shaped. Specifically, Barnett and Salomon reported that firms with low CSP have higher CFP than firms with moderate CSP, but firms with high CSP have the highest CFP. They also found that firms with the highest CSP

generally have the highest CFP. In addition, the researchers reported that the accrual of social responsibility deeds causes the benefits of CSP to increase at a higher rate than the costs, producing an eventual upturn in the CSP–CFP relationship. Source: Based on Michael Barnett and Robert Salomon, “Does It Pay to Be Really Good? Addressing the Shape of the Relationship Between Social and Financial Performance,” Strategic Management Journal, 33 (2012): 1304–1320.

Other people, however, agree with the economist Milton Friedman, who asserts that organizations have no obligation to do any more for society than is legally required. Friedman may contend that it is irresponsible for a firm to give monies to charity. Do you agree more with Nader or Friedman? Surely we can all agree that the first social responsibility of any business must be to make enough profit to cover the costs of the future, because if this is not achieved, no other social responsibility can be met. Indeed, no social need can be met if the firm fails. Strategists should examine social problems in terms of potential costs and benefits to the firm and focus on social issues that could benefit the firm most. For example, if a firm avoids cutting jobs to protect employees’ livelihood, and that decision forces the firm to liquidate, then all the employees lose their jobs. As indicated in Academic Research Capsule 3-3, most economists suggest that firms should not engage much, if any, in philanthropy, because simply making a profit is difficult, and shareholders expect a high return on their investment.

Design and Articulate a Social Policy The term social policy embraces managerial philosophy and thinking at the highest level of the firm, which is why the topic is covered in this text. Social policy concerns what responsibilities the firm has to employees, consumers, environmentalists, minorities, communities, shareholders, and other groups. After decades of debate, many firms still struggle to determine appropriate social policies. The impact of society on business and vice versa is becoming more pronounced each year. Corporate social policy should be designed and articulated during strategy formulation, set and administered during strategy implementation, and reaffirmed or changed during strategy evaluation.11 Firms should strive to engage in social activities that have economic benefits. Merck & Co. once developed the drug ivermectin for treating river blindness, a disease caused by a fly-borne parasitic worm endemic in poor tropical areas of Africa, the Middle East, and Latin America. In an unprecedented gesture that reflected its corporate commitment to social responsibility, Merck then made ivermectin available at no cost to medical personnel throughout the world. Merck’s action highlights the dilemma of orphan drugs, which offer pharmaceutical companies no economic incentive for profitable development and distribution. Merck did, however, garner substantial goodwill among its stakeholders for its actions.

Social Policies on Retirement Some countries around the world are facing severe workforce shortages associated with their aging populations. The percentage of persons age 65 or older exceeds 20 percent in Japan, Italy, and Germany—and will reach 20 percent in 2018 in France. In 2036, the percentage of persons age 65 or older will reach 20 percent in the United States and China. Unlike the United States, Japan is reluctant to rely on large-scale immigration to bolster its workforce. Instead, Japan provides incentives for its elderly to work until ages 65 to 75. Western European countries are doing the opposite, providing incentives for its elderly to retire at ages 55 to 60. The International Labor Organization says 71 percent of Japanese men ages 60 to 64 work, compared to 57 percent of American men and just 17 percent of French men in the same age group.

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Table 3-2 The Ten Best Socially Responsible Companies in the World 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Microsoft Google Walt Disney Company BMW Apple Daimler (Mercedes-Benz) Volkswagen Sony Colgate-Palmolive LEGO Group

Source: Based on information at http://www.forbes.com/pictures/efkk45mmlm/no-1-microsoft/

Sachiko Ichioka, a typical 67-year-old man in Japan, says, “I want to work as long as I’m healthy. The extra money means I can go on trips, and I’m not a burden on my children.” Better diet and health care have raised Japan’s life expectancy now to 82, the highest in the world. Japanese women are having, on average, only 1.28 children compared to 2.04 in the United States. Keeping the elderly at work, coupled with reversing the old-fashioned trend of keeping women at home, are Japan’s two key remedies for sustaining its workforce in factories and businesses. This prescription for dealing with problems associated with an aging society should be considered by many countries around the world. The Japanese government is phasing in a shift from age 60 to age 65 as the date when a person may begin receiving a pension, and premiums paid by Japanese employees are rising while payouts are falling. Unlike the United States, Japan has no law against discrimination based on age. Worker productivity increases in Japan are not able to offset declines in number of workers, thus resulting in a decline in overall economic production. Like many countries, Japan does not view immigration as a good way to solve this problem. Japan’s shrinking workforce has become such a concern that the government just recently allowed an unspecified number of Indonesian and Filipino nurses and caregivers to work in Japan for two years. The number of working-age Japanese—those between ages 15 and 64—is projected to shrink to 70 million by 2030. Using foreign workers is known as gaikokujin roudousha in Japanese. Many Filipinos have recently been hired now to work in agriculture and factories throughout Japan. Forbes best companies globally in regard to being socially responsible are listed in Table 3-2. Bill Gates, former CEO of the number-one ranked firm Microsoft, established the well-known Bill and Melinda Gates Foundation, which sets a high standard for any person or company.

Environmental Sustainability The ecological challenge facing all organizations requires managers to formulate strategies that preserve and conserve natural resources and control pollution. Special natural environment issues include ozone depletion, global warming, depletion of rain forests, destruction of animal habitats, protecting endangered species, developing biodegradable products and packages, waste management, clean air, clean water, erosion, destruction of natural resources, and pollution control. Firms increasingly are developing green product lines that are biodegradable or are made from recycled products. Green products sell well. Managing the health of the planet requires an understanding of how international trade, competitiveness, and global resources are connected. Managing environmental affairs, for example, can no longer be simply a technical function performed by specialists in a firm; more emphasis must be placed on developing an environmental perspective among all employees and managers of the firm. Businesses must not exploit and decimate the natural environment. Mark Starik at George Washington University believes, “Halting and reversing worldwide ecological destruction and deterioration is a strategic issue that needs immediate and substantive attention by all businesses and managers.” According to the International Standards Organization, the word environment

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is defined as “surroundings in which an organization operates, including air, water, land, natural resources, flora, fauna, humans, and their interrelation.” This chapter illustrates how many firms are gaining competitive advantage by being good stewards of the natural environment. Employees, consumers, governments, and societies are especially resentful of firms that harm rather than protect the natural environment. Conversely, people today are especially appreciative of firms that conduct operations in a way that mends, conserves, and preserves the natural environment. Consumer interest in businesses preserving nature’s ecological balance and fostering a clean, healthy environment is high.

What Firms Are the Best Stewards? Lennar Corporation, the nation’s second-largest homebuilder, now offers solar panels as standard equipment on thousands of its new homes, especially in the southwestern United States. Homeowners can either lease the solar panels from Lennar or purchase the panels outright. Even with oil and gas prices at decade lows, solar panels have become quite cost effective, and “exhumes good ethics rather than bad fumes.” Walmart is installing solar panels on its stores in California and Hawaii, providing as much as 30 percent of the power in some stores. It may go national with solar power if this test works well. Also moving to solar energy is department-store chain Kohl’s Corp., which is converting 64 of its 80 California stores to use solar power. There are big subsidies for solar installations in some states. In October of every year, three world-renowned corporate sustainability rankings are published: (1) the Dow Jones Sustainability Index (DJSI), (2) the Carbon Disclosure Project, and (3) Newsweek’s “Green” rankings. The DJSI annually reveals the best corporations in the world in various industries in terms of sustainability. Note in Table 3-3 that Sodexo, for example, leads all Table 3-3 The Best “Environmental Sustainability” Company in Various Industries (2014–2015) company

industry

BMW AG AG Westpac Banking Siemens AG SGS SA LG Electronics Inc Sodexo ING Group NV Thai Oil PCL Woolworths Ltd Unilever NV Abbott Laboratories Kao Corp Swiss Re AG Akzo Nobel NV Telenet Group Holding NV Roche Holding AG GPT Group Lotte Shopping Co Ltd Taiwan Semiconductor Manufacturing Wipro Ltd Alcatel Lucent Telecom Italia SpA Air France-KLM EDP Energias de Portugal SA

Automobiles & Components Banks Capital Goods Commercial & Professional Services Consumer Durables & Apparel Consumer Services Diversified Financials Energy Food & Staples Retailing Food, Beverage & Tobacco Health Care Equipment & Services Household & Personal Products Insurance Materials Media Pharmaceuticals & Biotechnology Real Estate Retailing Semiconductors Software & Services Technology Hardware & Equipment Telecommunication Services Transportation Utilities

Source: Based on information at http://www.sustainability-indices.com/review/annual-review-2014.jsp

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“consumer services” companies in “environmental sustainability;” consumer services includes providing food services in the cafeteria at many colleges and universities. The strategies of both companies and countries are increasingly scrutinized and evaluated from a natural environment perspective. Companies (e.g., Walmart) now monitor not only the price their vendors offer for products but also how those products are made in terms of environmental practices, as well as safety and infrastructure soundness—particularly of Southeast Asia factories. A growing number of business schools offer separate courses and even a concentration in environmental management. In terms of megawatts of wind power generated by various states in the nation, Texas’s 8,000 megawatts dwarfs all other states. Minnesota also is making substantial progress in wind power generation. New Jersey recently outfitted 200,000 utility poles with solar panels. A Wall Street Journal (6-29-15, p. B1) article says Hawaii leads all states in the most electricity per capita (21%) generated from solar or wind. A new Hawaii mandates that 100 percent of the state’s electricity be supplied by wind turbines and solar panels by 2045. States that get the most electricity per capita from residential solar panels are Hawaii 168 watts per capita, followed by California at 47, Arizona at 44, and New Jersey at 25.

Sustainability Reports A sustainability report reveals how a firm’s operations impact the natural environment. This document discloses to shareholders information about the firm’s labor practices, product sourcing, energy efficiency, environmental impact, and business ethics practices. No business wants a reputation as being a polluter. A bad sustainability record will hurt the firm in the market, jeopardize its standing in the community, and invite scrutiny by regulators, investors, and environmentalists. Governments increasingly require businesses to behave responsibly and require, for example, that businesses publicly report the pollutants and wastes their facilities produce. It is simply good business for any business to provide a sustainability report annually to the public. With 60,000 suppliers and more than $350 billion in annual sales, Walmart works with its suppliers to make sure they provide such reports. Many firms use the Walmart sustainability report as a benchmark guideline, and model to follow in preparing their own report. Walmart encourages and expects its 1.35 million U.S. employees to adopt what it calls Personal Sustainability Projects, which include such measures as organizing weight-loss or smoking-cessation support groups, biking to work, or starting recycling programs. Employee wellness can be a part of sustainability. Home Depot, the world’s second-largest retailer behind Walmart, recently more than doubled its offering of environmentally friendly products such as all-natural insect repellent. Home Depot has made it much easier for consumers to find its organic products by using special labels similar to Timberland’s (the outdoor company) Green Index tags. The Global Reporting Initiative recently issued a set of detailed reporting guidelines specifying what information should go into sustainability reports. The proxy advisory firm Institutional Shareholder Services reports that an increasing number of shareholder groups are pushing firms to provide sustainability information annually. Two companies that released sustainability reports for the first time were Hyatt Hotels & Resorts and Las Vegas Sands Corporation. Rival firm Hilton Worldwide does not have a stand-alone sustainability report, but Marriott and Wyndham Worldwide do release annual sustainability reports and report excellent reductions in energy, water, waste, and carbon dioxide emissions. Managers and employees of firms must be careful not to become scapegoats blamed for company environmental wrongdoings. Harming the natural environment can be unethical, illegal, and costly. When organizations today face criminal charges for polluting the environment, they increasingly turn on their managers and employees to win leniency. Employee firings and demotions are becoming common in pollution-related legal suits. Managers were fired at Darling International, Inc., and Niagara Mohawk Power Corporation for being indirectly responsible for their firms polluting water. Managers and employees today must be careful not to ignore, conceal, or disregard a pollution problem, or they may find themselves personally liable. A few years ago, firms could get away with placing “green” terminology on their products and labels, using such terms as organic, green, safe, earth-friendly, nontoxic, or natural because there

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were no legal or generally accepted definitions. Today, however, these terms carry much more specific connotations and expectations. Uniform standards defining environmentally responsible company actions are rapidly being incorporated into the legal landscape. It has become more and more difficult for firms to make “green” claims when their actions are not substantive, comprehensive, or even true. Lack of standards once made consumers cynical about corporate environmental claims, but those claims today are increasingly being challenged in courts. According to Joel Makower, “One of the main reasons to truly become a green firm is for your employees. They’re the first group that needs assurance than any claims you make hold water.”12 Around the world, political and corporate leaders now realize that the “business green” topic is not going away and in fact is gaining ground rapidly. Strategically, companies more than ever must demonstrate to their customers and stakeholders that their green efforts are substantive and set the firm apart from competitors. A firm’s social performance (facts and figures) must back up their rhetoric and be consistent with sustainability standards.

The Office of Environmental Affairs Many companies are moving environmental affairs from the staff side of the organization to the line side, thus making the corporate environmental group report directly to the chief operating officer. Firms that manage environmental affairs will enhance relations with consumers, regulators, vendors, and other industry players, substantially improving their prospects of success. Environmental strategies could include developing or acquiring green businesses, divesting or altering environment-damaging businesses, striving to become a low-cost producer through waste minimization and energy conservation, and pursuing a differentiation strategy through greenproduct features. In addition, firms could include an environmental representative on their board of directors, conduct regular environmental audits, implement bonuses for favorable environmental results, become involved in environmental issues and programs, incorporate environmental values in mission statements, establish environmentally oriented objectives, acquire environmental skills, and provide environmental training programs for company employees and managers. Preserving the environment should be a permanent part of doing business, for the following reasons: 1. Consumer demand for environmentally safe products and packages is high. 2. Public opinion demanding that firms conduct business in ways that preserve the natural environment is strong. 3. Environmental advocacy groups now have more than 20 million Americans as members. 4. Federal and state environmental regulations are changing rapidly and becoming more complex. 5. More lenders are examining the environmental liabilities of businesses seeking loans. 6. Many consumers, suppliers, distributors, and investors shun doing business with environmentally weak firms. 7. Liability suits and fines against firms having environmental problems are on the rise. More firms are becoming environmentally proactive—doing more than the bare minimum to develop and implement strategies that preserve the environment. The old undesirable alternative of being environmentally reactive—changing practices only when forced to do so by law or consumer pressure—more often today leads to high clean-up costs, liability suits, reduced market share, reduced customer loyalty, and higher medical costs. In contrast, a proactive policy views environmental pressures as opportunities and includes such actions as developing green products and packages, conserving energy, reducing waste, recycling, and creating a corporate culture that is environmentally sensitive.

ISO 14000/14001 Certification Based in Geneva, Switzerland, the International Organization for Standardization (ISO) is a network of the national standards institutes of 147 countries, with one member per country. The ISO is the world’s largest developer of sustainability standards. Widely accepted all over the world, ISO standards are voluntary because it has no legal authority to enforce their implementation; the organization itself does not regulate or legislate. Governmental agencies in various countries, such

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as the Environmental Protection Agency (EPA) in the United States, have adopted ISO standards as part of their regulatory framework, and the standards are the basis of much legislation. Adoptions are sovereign decisions by the regulatory authorities, governments, or companies concerned. Businesses and municipalities should consider becoming ISO certified to help attract business. ISO 14000 refers to a series of voluntary standards in the environmental field. The ISO 14000 family of standards concerns the extent to which a firm minimizes harmful effects on the environment caused by its activities and continually monitors and improves its own environmental performance. These standards have been adopted by thousands of firms and municipalities worldwide to certify to their constituencies that they are conducting business in an environmentally friendly manner; these standards offer a universal technical benchmark for environmental compliance that more and more firms are requiring not only of themselves but also of their suppliers and distributors. Included in the ISO 14000 series are the ISO 14001 standards in fields such as environmental auditing, environmental performance evaluation, environmental labeling, and life-cycle assessment. ISO 14001 is a set of standards adopted by thousands of firms worldwide to certify to their constituencies that they are conducting business in an environmentally friendly manner. The ISO 14001 standard offers a universal technical standard for environmental compliance that more and more firms are requiring not only of themselves but also of their suppliers and distributors. According to the ISO 14001 standard, a community or organization is required to put in place and implement a series of practices and procedures that, when taken together, result in an environmental management system (EMS). The ISO 14001 is not a technical standard and as such does not in any way replace technical requirements embodied in statutes or regulations. It also does not set prescribed standards of performance for organizations. Not being certified with ISO 14001 can be a strategic disadvantage for towns, counties, and companies because people today expect organizations to minimize or, even better, to eliminate environmental harm they cause.13 There are six major requirements of an EMS under ISO 14001: 1. Show commitments to prevention of pollution, continual improvement in overall environmental performance, and compliance with all applicable statutory and regulatory requirements. 2. Identify all aspects of the organization’s activities, products, and services that could have a significant impact on the environment, including those that are not regulated. 3. Set performance objectives and targets for the management system that link back to three policies: (a) prevention of pollution, (b) continual improvement, and (c) compliance. 4. Meet environmental objectives that include training employees, establishing work instructions and practices, and establishing the actual metrics by which the objectives and targets will be measured. 5. Conduct an audit operation of the EMS. 6. Take corrective actions when deviations from the EMS occur.

Wildlife Welfare Consumers globally are becoming increasingly intolerant of any business or nation that directly or indirectly destroys wildlife, especially endangered wildlife, such as tigers, elephants, whales, songbirds, and coral reefs. Affected businesses range from retailers that sell ivory chess pieces to restaurants that sell whale meat. The United States recently crushed over 6 tons of elephant ivory as part of a global effort to combat elephant poaching; one elephant is killed every 16 minutes.14 The Chinese government recently destroyed more than 6.1 tons of elephant ivory to help stop illegal ivory smuggling that is fueling poaching and decimating elephant populations in Africa. There are today less than 100,000 elephants in Africa, down from more than 300,000 in 2002, primarily because the demand for ivory remains robust in Asia, particularly China. African giraffes are in danger of becoming extinct due to hunting and poaching in Africa that has decimated the giraffe population. There are only about 80,000 giraffes left in the wild, down from 140,000 giraffes 15 years ago. Fewer than 300 West African giraffes remain in Niger, and only 700 Rothschild’s giraffes remain in Uganda and Kenya. Poaching is especially detrimental in eastern and central Africa, partly because some people (in Tanzania) erroneously believe the giraffe’s meat and/or bone marrow is an HIV cure.

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Many New Zealanders, supported by Australians, are outraged about Japan’s large-scale whaling operations in the Antarctic. Japan recently issued permits allowing its whalers to kill up to 935 Antarctica minkes, 50 fin whales, and 50 humpbacks as part of “research into sustainable hunting.” Whale meat is regarded as a delicacy in Japan and can fetch up to US$38 for 100 grams. Japan ironically is a member of the International Whaling Commission that has banned commercial whaling in a 31 million square-mile area around Antarctica known as the Southern Ocean Whale Sanctuary. Unfortunately, South Korea recently resumed whaling, despite a 1986 moratorium on commercial whaling. Many countries are upset with whaling, including Australia, where the Prime Minister Julia Gillard asserted, “We are completely opposed to whaling; there’s no excuse for scientific whaling.” Only a few countries—such as Norway, Japan, and Russia—favor and engage in commercial whaling. Norway was soundly criticized globally in mid-2015 for launching whalehunting expeditions, to follow up on their killing 729 whales the prior year, the most annual whale killings by Norway in two decades. Countries, municipalities, and companies increasingly run the risk of being boycotted and exposed for direct or indirect wildlife endangering practices. About 50 million sharks are killed every year solely to cut off (and sell) their fins.15 Although “shark-finning” was outlawed in U.S. waters in 2000, the law does not ban fin imports or serving the fins in food, so about 57 metric tons of fins are imported in the United States annually. Only eight U.S. states have laws banning the sale of shark fins in food: Hawaii, Oregon, Washington, Illinois, California, Maryland, New York, and Delaware. The problem is much worse in some countries, especially China. More than 25 percent of the world’s shark species now face extinction, according to the International Union for Conservation of Nature. Table 3-4 reveals the impact that bad environmental policies have on songbirds and coral reefs, two of nature’s many ecosystems. Table 3-4 Songbirds and Coral Reefs Need Help Songbirds Please be a good steward of the natural environment to save our songbirds. Bluebirds are one of 76 songbird species in the United States that have dramatically declined in numbers in the last two decades. Not all birds are considered songbirds, and why birds sing is not clear. Some scientists say they sing when calling for mates or warning of danger, but many scientists now contend that birds sing for sheer pleasure. Songbirds include chickadees, orioles, swallows, mockingbirds, warblers, sparrows, vireos, and the wood thrush. “These birds are telling us there’s a problem, something’s out of balance in our environment,” says Jeff Wells, bird conservation director for the National Audubon Society. Songbirds may be telling us that their air or water is too dirty or that we are destroying too much of their habitat. People collect Picasso paintings and save historic buildings. “Songbirds are part of our natural heritage. Why should we be willing to watch songbirds destroyed any more than allowing a great work of art to be destroyed?” asks Wells. Whatever message songbirds are singing to us today about their natural environment, the message is becoming less and less heard nationwide. Listen when you go outside today. Each of us as individuals, companies, states, and countries should do what we reasonably can to help improve the natural environment for songbirds.16 A recent study concludes that 67 of the 800 bird species in the United States are endangered, and another 184 species are designated of “conservation concern.” The birds of Hawaii are in the greatest peril. coral reefs Please be a good steward of the natural environment to save our coral reefs. The ocean covers more than 71percent of the earth. The destructive effect of commercial fishing on ocean habitats coupled with increasing pollution runoff into the ocean and global warming of the ocean have decimated fisheries, marine life, and coral reefs around the world. The unfortunate consequence of fishing over the last century has been overfishing, with the principal reasons being politics and greed. Trawl fishing with nets destroys coral reefs and has been compared to catching squirrels by cutting down forests because bottom nets scour and destroy vast areas of the ocean. The great proportion of marine life caught in a trawl is “by-catch” juvenile fish and other life that are killed and discarded. Warming of the ocean as a result of carbon dioxide emissions also kills thousands of acres of coral reefs annually. The total area of fully protected marine habitats in the United States is only about 50 square miles, compared to some 93 million acres of national wildlife refuges and national parks on the nation’s land. A healthy ocean is vital to the economic and social future of the nation— and, indeed, all countries of the world. Everything we do on land ends up in the ocean, so we all must become better stewards of this last frontier on earth to sustain human survival and the quality of life.17

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Food Suppliers and Animal Welfare Humane treatment of animals matters! Walmart, other retailers, and restaurants are demanding that food suppliers treat animals better, and consumers are flocking to organic foods. Thus, numerous food companies, such as Tyson Foods, the largest U.S. meatpacker, are phasing out use of human antibiotics and are “housing” animals more humanely. Walmart says its suppliers must begin to “raise animals with sufficient space for them to express normal behaviors and freedom from discomfort.” Walmart wants the use of battery cages for chickens, gestation crates for hogs, and veal crates for cows to be eliminated, although such small confined areas are currently used to raise many chickens, pigs, and cows in the United States. Wayne Pacelle, CEO of the Humane Society of the United States, wants Walmart to set a timeline for compliance. Parents want their children to eat food raised without use of growth hormones and antibiotics. Sales of organic milk, eggs, and other food products are booming, even at the higher prices. Walmart is by far the largest grocer in the United States, with grocery accounting for 56 percent of the company’s $288 billion in sales in 2014.18

impLicAtions for strAtegists Figure 3-2 reveals that the whole strategic-management process is designed to gain and sustain competitive advantages, but all can be lost with ethical violations, ranging from bribery to sexual harassment to selling whale meat. Trees die from the top; strategists are at the top of the firm. Consequently, strategists must set an exemplary

example personally and professionally to establish and continually reinforce an organizational culture for “doing the right thing.” Social responsibility and environmental sustainability policies, practices, and procedures must reinforce that good ethics is good business,” and that good ethics is the foundation for everything we do and say.”

Establish A Clear Vision & Mission

Evaluate & Monitor Results: Take Corrective Actions; Adapt To Change

Gain & Sustain Competitive Advantages

Implement Strategies: Establish Structure; Allocate Resources; Motivate & Reward; Attract Customers; Manage Finances

Figure 3-2 How to Gain and Sustain Competitive Advantages

Formulate Strategies: Collect, Analyze, & Prioritize Data Using Matrices; Establish A Clear Strategic Plan

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impLicAtions for stuDents No company or individual wants to do business with someone who is unethical or is insensitive to natural environment concerns. It is no longer admirable simply to be environmentally proactive; today, it is expected, and in many respects is the law. Firms are being compared to rival firms every day on sustainability and ethics behavior, actually every minute on Facebook, Twitter, LinkedIn, and YouTube. Issues presented in this chapter therefore comprise a competitive advantage or disadvantage for all organizations. Thus, you should include

in your case analysis recommendations for your firm to exceed stakeholder expectations on ethics, sustainability, and social responsibility. Make comparisons to rival firms to show how your firm can gain or sustain competitive advantage on these issues. Reveal suggestions for the firm to be a good corporate citizen and promote that for competitive advantage. Be mindful that the first responsibility of any business is to stay in business, so use cost/benefit analysis as needed to present your recommendations effectively.

Chapter Summary In a final analysis, ethical standards come out of history and heritage. Our predecessors have left us with an ethical foundation on which to build. Even the legendary football coach Vince Lombardi knew that some things were worth more than winning, and he required his players to have three kinds of loyalty: to God, to their families, and to the Green Bay Packers, “in that order.” Employees, customers, and shareholders have become less and less tolerant of business ethics violations in firms, and more and more appreciative of model ethical firms. Informationsharing across the Internet increasingly reveals such model firms versus irresponsible firms. Consumers across the country and around the world appreciate firms that do more than is legally required to be socially responsible. But staying in business, while adhering to all laws and regulations, must be a primary objective of any business. One of the best ways to be socially responsible is for the firm to proactively conserve and preserve the natural environment. For example, to develop a corporate sustainability report annually is not legally required, but such a report, based on concrete actions, goes a long way toward assuring stakeholders that the firm is worthy of their support. Business ethics, social responsibility, and environmental sustainability are interrelated and key strategic issues facing all organizations.

MyManagementLab® To complete the problems with the

, go to EOC Discussion Questions in the MyLab.

Key Terms and Concepts bribe (p. 101) bribery (p. 101) business ethics (p. 96) code of business ethics (p. 99) environment (p. 105) environmental management system (EMS) (p. 109) ISO 14000 (p. 109) ISO 14001 (p. 109)

sexual harassment (p. 102) social policy (p. 104) social responsibility (p. 96) sustainability (p. 96) sustainability report (p. 107) whistle-blowing (p. 100) workplace romance (p. 102)

Issues for Review and Discussion 3-1. Bank Audi Group has done really well in 2015. Visit their corporate website and determine if business ethics and sustainability issues may be key reasons for their success.

3-2. If you owned a small business, would you develop a code of business conduct? If yes, what variables would you include? If no, how would you ensure that ethical business standards were being followed by your employees?

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3-3. What is the relationship between personal ethics and business ethics? Are they, or should they be the same? 3-4. How can firms best ensure that their code of business ethics is read, understood, believed, remembered, and acted upon? 3-5. Why is it important not to view the concept of “whistle blowing” as “tattle-telling” or “ratting” on another employee? 3-6. List six desired results of “ethics training programs,” in terms of recommended business ethics policies or procedures in the firm. 3-7. Discuss bribes. Would actions like politicians adding earmarks in legislation or pharmaceutical salespersons giving away drugs to physicians constitute bribery? Identify three business activities that would constitute bribery and three actions that would not.

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3-8. How could a strategist’s attitude toward social responsibility affect a firm’s strategy? On a 1-to-10 scale, ranging from Nader’s view to Friedman’s view, what is your attitude toward social responsibility? 3-9. How do social policies on retirement differ in various countries around the world? 3-10. Who is prone to be unethical in a business according to Donald Palmer’s research? 3-11. Given Donald Palmer’s research, what should organizations do to help assure an ethical work environment? 3-12. According to Barnett and Salomon, does it pay to be socially responsible? Discuss with specifics from the chapter.

MyManagementLab® Go to the Assignments section of your MyLab to complete these writing exercises. 3-13. Firms should formulate and implement strategies from 3-14. Discuss the major requirements of an EMS under ISO an environmental perspective. List eight ways firms 14001. can do this.

AssurAnce of LeArning exercises exercise 3A

Sustainability and Nestlé Purpose Headquartered in Vevey, Switzerland, Nestlé is the largest food company in the world measured by revenues. Nestlé has hundreds of products that include cereals, coffee, dairy products, pet foods, snacks, baby food, and bottled water. Thirty of Nestlé’s brands have annual sales of over 1 billion Swiss francs (about $1.1 billion), including Nespresso, Nescafé, Kit Kat, Smarties, Nesquick, Stouffers, Vittel, and Maggi. Nestlé has around 450 factories, operates in 86 countries, and employs around 328,000 people. Sustainability reports are increasingly becoming expected or even required by business organizations. This exercise can give you practice in evaluating a company’s sustainability efforts. At the company’s website, read about the three key sustainability areas that the firm engages in: Nutrition, CSV-Water, and Rural Development.

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Instructions Step 1 Step 2 Step 3

Conduct research to evaluate and determine the six best aspects of Nestlé’s sustainability efforts. Evaluate and analyze the sustainability efforts of competitors Danone (stock symbol DANOY) and Mondelēz International, Inc. (stock symbol = MDLZ). Prepare a report for the class giving your assessment of Nestlé’s sustainability work versus rival firms Danone and Mondelēz International, Inc.

exercise 3B

How Does My Municipality Compare to Others on Being Pollution-Safe? Purpose Sometimes it is difficult to know how safe a particular municipality or county is regarding industrial and agricultural pollutants. A website that provides consumers and businesses excellent information in this regard is http://scorecard.goodguide.com. This type information is often used in assessing where to locate new business operations.

Instructions Step 1 Step 2

Go to http://scorecard.goodguide.com/. Put in your zip code. Print off the information available for your city/county regarding pollutants. Prepare a comparative analysis of your municipality versus state and national norms on pollution issues. Does your locale receive an A, B, C, D, or F?

exercise 3c

Compare Nestlé versus Mars, Inc. on Social Responsibility Purpose This exercise aims to familiarize you with corporate social responsibility programs.

Instructions Step 1 Step 2 Step 3

Go to Nestlé’s Code of Business Conduct which is provided at the corporate website by clicking on About Us and then click on Business Principles. Go to Mars’ corporate website at, visit the “about mars” page, and read about the Five Principles of Mars. Compare Nestlé’s business ethics and social responsibility efforts with those of Mars, Inc. Summarize your findings in a three-page report for your professor.

exercise 3D

How Do You Rate Nestlé’s Sustainability Efforts? Purpose This exercise aims to familiarize you with corporate sustainability programs.

Instructions Step 1 Step 2 Step 3

Go to www.nestle.com and click on Environmental Sustainability down the left column. Review the sustainability information in this section of the website. On a separate sheet of paper, list five aspects that you like most and five aspects that you like least about Nestlé’s environmental sustainability efforts. Provide a two-page executive summary of your assessment of Nestlé’s sustainability efforts.

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exercise 3e

The Ethics of Spying on Competitors Purpose This exercise gives you an opportunity to discuss in class ethical and legal issues related to methods being used by many companies to spy on competing firms. Gathering and using information about competitors is an area of strategic management that Japanese firms do more proficiently than American firms.

Instructions On a separate sheet of paper, write down numbers 1 to 18. For the 18 spying activities that follow, indicate whether or not you believe the activity is ethical or unethical and legal or illegal. Place either an E for ethical or U for unethical, and either an L for legal or an l for illegal for each activity. Compare your answers to those of your classmates and discuss any differences. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

Buying competitors’ garbage Dissecting competitors’ products Taking competitors’ plant tours anonymously Counting tractor-trailer trucks leaving competitors’ loading bays Studying aerial photographs of competitors’ facilities Analyzing competitors’ labor contracts Analyzing competitors’ help-wanted ads Quizzing customers and buyers about the sales of competitors’ products Infiltrating customers’ and competitors’ business operations Quizzing suppliers about competitors’ level of manufacturing Using customers to buy out phony bids Encouraging key customers to reveal competitive information Quizzing competitors’ former employees Interviewing consultants who may have worked with competitors Hiring key managers away from competitors Conducting phony job interviews to get competitors’ employees to reveal information Sending engineers to trade meetings to quiz competitors’ technical employees Quizzing potential employees who worked for or with competitors

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mini-cAse on etihAD AirwAys

HOW ETHICAL AND SUSTAINABLE IS ETIHAD AIRWAYS?

source:©luckybusiness. Shutterstock

Headquartered in Khalifa City, Abu Dhabi, Etihad Airways is the second-largest airline of the United Arab Emirates (UAE). Operating more than 1,000 flights every week to destinations in the Middle East, Africa, Europe, Asia, Australia, and the Americas, Etihad has a fleet of 119 aircrafts since August, 2015. Apart from transporting passengers, Etihad also operates Etihad Holidays and Etihad Cargo and recently established its own airline alliance, Etihad Airways Partners, which includes Alitalia, Jet Airways, Airberin, Niki, Air Serbia, Air Seychelles, and Etihad Regional. Booking for these airlines is consolidated under one network. In August 2015, Etihad Airways received two awards for “Best Sustainability Communication Program” and “Sustainability Manager of the Year” at the Abu Dhabi Sustainability Group’s (ADSG) award ceremony. ADSG is focused on promoting sustainability management in Abu Dhabi through learning and knowledge-sharing opportunities provided to the government, private companies, and not-for-profit organizations. Having strategically worked towards sustainability, Etihad Airways received an award for its “BIOjet: Flight Path to Sustainability” program and its Head of Sustainability, Linden Coppell, won the award for Sustainability Manager of the Year. Questions

1. At the Etihad website, click on About Us section, go through its Corporate Responsibility section, and evaluate Etihad’s record on sustainability and business ethics. 2. Visit Etihad’s corporate profile on the website, scroll down to the Executive Team and click on it. You will be able to view the pictures of Etihad’s nine top executives. There are no women. Explain whether you think this represents an ethical issue or not. Source: Based on company documents.

Current Readings Barnett, Michael L. “Why Stakeholders Ignore Firm Misconduct: A Cognitive View.” Journal of Management 40, no. 3 (2014): 676–702. Hanson, William R., and Jeffrey R. Moore, “Business Student Moral Influencers: Unseen Opportunities for Development?” Academy of Management Journal Learning and Education 13 (December 2014): 525–546. Hess, Megan F., and Earnest Broughton. “Fostering an Ethical Organization from the Bottom Up and the Outside In.” Business Horizons (July 2014): 541–561. Jones, David A., Chelsea R. Willness, and Sarah Madey. “Why Are Job Seekers Attracted by Corporate Social Performance? Experimental and Field Tests of Three Signal-Based Mechanisms.” Academy of Management Journal 57, no. 2 (2014): 383–404. Lubin, David A., and Daniel C. Esty. “Bridging the Sustainability Gap.” MIT Sloan Management Review 55, no. 4 (2014): 18–21. Paine, Lynn S. “Sustainability in the Boardroom.” Harvard Business Review 92, no. 7/8 (2014): 86–94. Perrott, Bruce E. “Building the Sustainable Organization: An Integrated Approach.” Journal of Business Strategy 36, no. 1 (2015): 41–51.

Rangan, Kasturi, Lisa Chase, and Sohel Karim. “The Truth about CSR.” Harvard Business Review (January–February 2015). Reilly, Anne H., and Katherine A. Hynan. “Corporate Communication, Sustainability, and Social Media: It’s Not Easy (Really) Being Green,” Business Horizons 57, no. 6 (January–February 2015): 747–758. Scott, Brent A., Adela S. Garza, Donald E. Conlon, and You Jin Kim. “Why Do Managers Act Fairly in the First Place? A Daily Investigation of “Hot” and “Cold” Motives and Discretion,” Academy of Management Journal, December 1, 2014, vol. 47, no. 6, pp. 1571–1591. Sonenshein, Scott, Katherine A., Decelles, and Jane E. Dutton. “It’s Not Easy Being Green: The Role of Self-Evaluations in Explaining Support of Environmental Issues.” Academy of Management Journal 57, no. 1 (2014): 7–37. Unruh, Gregory. “The Sweet Spot of Sustainability Strategy.” MIT Sloan Management Review 55, no. 1 (2013): 16–19. Washburn, Nathan T., and Donald Lange. “Does Your Company Seem Socially Irresponsible?” MIT Sloan Management Review 55, no. 1 (2013): 10–11.

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Endnotes 1. http://www.usatoday.com/money/companies/management/ story/2012-05-14/ceo-firings/54964476/1 2. Joann Greco, “Privacy—Whose Right Is It Anyhow?” Journal of Business Strategy (January–February 2001): 32. 3. Ashby Jones and JoAnn Lublin, “New Law Prompts Blowing Whistle,” Wall Street Journal, November 1, 2010, B1. 4. Saul Gellerman, “Why ‘Good’ Managers Make Bad Ethical Choices,” Harvard Business Review 64, no. 4 (July–August 1986): 88. 5. www.wikipedia.org 6. Joe Palazzolo and Christopher Matthews, “Bribery Law Do’s and Don’ts,” Wall Street Journal (November 15, 2012): B1. 7. http://www.businessknowhow.com/manage/romance.htm 8. Elizabeth Bernstein “The New Rules of Flirting,” Wall Street Journal, November 13, 2012, D1. 9. Phred Dvorak, Bob Davis, and Louise Radnofsky, “Firms Confront Boss-Subordinate Love Affairs,” Wall Street Journal, October 27, 2008, B5. 10. Spencer Morgan, “The End of the Office Affair,” Bloomberg Businessweek, September 20–26, 2010, 74.

11. Archie Carroll and Frank Hoy, “Integrating Corporate Social Policy into Strategic Management,” Journal of Business Strategy 4, no. 3 (Winter 1984): 57. 12. Kerry Hannon, “Businesses’ Green Opportunities Are Wide, But Complex,” USA Today, January 2, 2009, 5B. 13. Adapted from the www.iso14000.com website and the www.epa.gov website. 14. Ana Campoy, “Crushing Illegal Ivory Trade,” Wall Street Journal, November 15, 2013, p. A3. See also, Dinny McMahon, “Chinese Officials Destroy Tons of Illegal Ivory,” Wall Street Journal, January 7, 2014, p. A10. 15. Zusha Elinson, “Shark-Fin Bans Hard to Police,” Wall Street Journal, February 25, 2014, A3. 16. Tom Brook, “Declining Numbers Mute Many Birds’ Songs,” USA Today, September 11, 2001, 4A. 17. John Ogden, “Maintaining Diversity in the Oceans,” Environment, April 2001, 29–36. 18. Based on Sarah Nassauer, “Wal-Mart: Food Suppliers Must Treat Animals Better,” Wall Street Journal, May 23–24, 2015, p. B3.

Source: © Bruder Jakob/Fotolia

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Types of Strategies LeArning oBJectives After studying this chapter, you should be able to do the following: 4-1. Identify and discuss eight characteristics of objectives and ten benefits of having clear objectives. 4-2. Define and give an example of eleven types of strategies. 4-3. Identify and discuss the three types of “Integration Strategies.” 4-4. Give specific guidelines when market penetration, market development, and product development are especially effective strategies. 4-5. Explain when diversification is an effective business strategy. 4-6. List guidelines for when retrenchment, divestiture, and liquidation are especially effective strategies. 4-7. Identify and discuss Porter’s five generic strategies. 4-8. Compare (a) cooperation among competitors, (b) joint venture and partnering, and (c) merger/acquisition as key means for achieving strategies. 4-9. Discuss tactics to facilitate strategies, such as (a) being a first mover, (b) outsourcing, and (c) reshoring. 4-10. Explain how strategic planning differs in for-profit, not-for-profit, and small firms.

AssurAnce of LeArning exercises The following exercises are found at the end of this chapter: exercise 4A exercise 4B exercise 4c exercise 4D exercise 4e exercise 4f exercise 4g exercise 4H exercise 4i exercise 4J

Market Development for Petronas Alternative Strategies for Petronas Private-Equity Acquisitions The Strategies of Nestlé S.A.: 2015–2017 Lessons in Doing Business Globally What Are Petronas’ Strategies in 2015–2017? What Strategies Are Most Risky? Explore Bankruptcy Examine Strategy Articles Classify Some Strategies

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H

undreds of companies today have embraced strategic planning in their quest for higher revenues and profits. Kent Nelson, former chair of UPS, explains why his company created a new strategic-planning department: “Because we’re making bigger bets on investments in technology, we can’t afford to spend a whole lot of money in one direction and then find out five years later it was the wrong direction.”1 This chapter brings strategic management to life with many contemporary examples. Sixteen types of strategies are defined and exemplified, including Michael Porter’s generic strategies: cost leadership, differentiation, and focus. Guidelines are presented for determining when each strategy is most appropriate to pursue. An overview of strategic management in nonprofit organizations, governmental agencies, and small firms is provided. As showcased next, Petronas is an example company that for many years has exemplified excellent strategic management, especially through its Upstream and Downstream business focus.

Long-Term Objectives Long-term objectives represent the results expected from pursuing certain strategies. Strategies represent the actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies should be consistent, usually from 2 to 5 years. Without long-term objectives, an organization would drift aimlessly toward some unknown end. It is hard to imagine an organization or an individual being successful without clear objectives. You probably have worked hard the last few years striving to achieve an objective to graduate with a business degree. Success only rarely occurs by accident; rather, it is the result of hard work directed toward achieving certain objectives. Long-term objectives are needed at the corporate, divisional, and functional levels of an organization. They are an important measure of managerial performance. Many practitioners and academicians attribute a significant part of U.S. industry’s competitive decline to the short-term, rather than long-term, strategy orientation of managers in the United States. Arthur D. Little argues that bonuses or merit pay for managers today must be based to a greater extent on longterm objectives and strategies. An example framework for relating objectives to performance

exempLAry compAny sHowcAseD

PETRONAS (PGAS.KL) Established in 1974, Petroliam Nasional Berhad (PETRONAS), headquartered in Kuala Lumpur, Malaysia, is an integrated oil and gas multinational company. Responsible for the national oil and gas resources, PETRONAS explores, develops, and produces these resources and delivers energy to meet the country’s growing demands. The only Malaysian company to feature in the Fortune Global 500 list, it operates in over 35 countries and is engaged in a wide spectrum of petroleum activities. Its Upstream business explores, produces, and monetizes oil and gas resources, and its Downstream business focuses on marketing and distribution strategies to enhance the value of resources. Its successful management of legal and maintenance activities in 2014 enabled PETRONAS to shift its focus to raising utilization rate by 5 percent in 2015. In 2014, while profit decreased by 27 percent, the group saw a 4 percent growth in revenue, which was driven by higher production, higher liquefied natural gas (LNG) sales volume, and favorable U.S. Dollar exchange rate movement. Revenue derived from PETRONAS provides roughly 45 percent of the Malaysian government’s annual budget.

Ta k i n g advantage of being an integrated chain and its strategic location in South East Asia, a region with fast growing chemical consumers, it is focusing on three long-term objectives— operational excellence, marketing and sales excellence, and innovation excellence. As part of its strategies, PETRONAS is pursuing backward integration by purchasing its ships to transport its oil and gas, especially its LNG. This will provide low cost, direct access to LNG shipping capacity. PETRONAS, operating the world’s first floating LNG facility, is also in the process of constructing one of the largest LNG facilities in British Columbia. Source: Based on company documents.

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Table 4-1 Varying Performance Measures by Organizational Level organizationalLevel

BasisforAnnualBonusorMeritPay

Corporate

75% based on long-term objectives 25% based on annual objectives 50% based on long-term objectives 50% based on annual objectives 25% based on long-term objectives 75% based on annual objectives

Division Function

evaluation is provided in Table 4-1. A particular organization could tailor these guidelines to meet its own needs, but incentives should be attached to both long-term and annual objectives.

Characteristics and Benefits of Objectives Objectives should be quantitative, measurable, realistic, understandable, challenging, hierarchical, obtainable, and congruent among organizational units. Each objective should also be associated with a timeline. Objectives are commonly stated in terms such as growth in assets, growth in sales, profitability, market share, degree and nature of diversification, degree and nature of vertical integration, earnings per share, and social responsibility. Clearly established objectives offer many benefits. They provide direction, allow synergy, assist in evaluation, establish priorities, reduce uncertainty, minimize conflicts, stimulate exertion, and aid in both the allocation of resources and the design of jobs. Objectives provide a basis for consistent decision making by managers whose values and attitudes differ. Objectives serve as standards by which individuals, groups, departments, divisions, and entire organizations can be evaluated. Table 4-2 reveals the desired characteristics of objectives, and Table 4-3 summarizes the benefits of having clear objectives.

Financial versus Strategic Objectives Two types of objectives are especially common in organizations: financial and strategic objectives. Financial objectives include those associated with growth in revenues, growth in earnings, higher dividends, larger profit margins, greater return on investment, higher earnings per share, a rising stock price, improved cash flow, and so on; whereas strategic objectives include things such as a larger market share, quicker on-time delivery than rivals, shorter design-to-market times than rivals, lower costs than rivals, higher product quality than rivals, wider geographic coverage than rivals, achieving technological leadership, consistently getting new or improved products to market ahead of rivals, and so on. Although financial objectives are especially important in firms, oftentimes there is a tradeoff between financial and strategic objectives such that crucial decisions have to be made. For example, a firm can do certain things to maximize short-term financial objectives that would harm long-term strategic objectives. To improve financial position in the short run through higher

Table 4-2 Eight Desired Characteristics of Objectives 1. 2. 3. 4. 5. 6. 7. 8.

Quantitative Measurable Realistic Understandable Challenging Hierarchical Obtainable Congruent across departments

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Table 4-3 Ten Benefits of Having Clear Objectives 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Provide direction by revealing expectations Allow synergy Assist in evaluation by serving as standards Establish priorities Reduce uncertainty Minimize conflicts Stimulate exertion Aid in allocation of resources Aid in design of jobs Provide basis for consistent decision making

prices may, for example, jeopardize long-term market share. The dangers associated with trading off long-term strategic objectives with near-term bottom-line performance are especially severe if competitors relentlessly pursue increased market share at the expense of short-term profitability. Amazon, for example, went many years operating without profits but gaining market share. And there are other trade-offs between financial and strategic objectives, related to riskiness of actions, concern for business ethics, the need to preserve the natural environment, and social responsibility issues. Both financial and strategic objectives should include both annual and long-term performance targets. Ultimately, the best way to sustain competitive advantage over the long run is to relentlessly pursue strategic objectives that strengthen a firm’s business position over rivals. Financial objectives can best be met by focusing first and foremost on achieving strategic objectives that improve a firm’s competitiveness and market strength.

Avoid Not Managing by Objectives Mr. Derek Bok, former President of Harvard University, once said, “If you think education is expensive, try ignorance.” The idea behind this saying also applies to establishing objectives, because strategists should avoid the following ways of “not managing by objectives.” •

Managing by Extrapolation —Adheres to the principle “If it ain’t broke, don’t fix it.” The idea is to keep on doing the same things in the same ways because things are going well. Managing by Crisis —Based on the belief that the true measure of a really good strategist is the ability to solve problems. Because there are plenty of crises and problems to go around for every person and organization, strategists ought to bring their time and creative energy to bear on solving the most pressing problems of the day. Managing by crisis is actually a form of reacting, letting events dictate the what and when of management decisions. Managing by Subjectives —Built on the idea that there is no general plan for which way to go and what to do; just do the best you can to accomplish what you think should be done. In short, “Do your own thing, the best way you know how” (sometimes referred to as the mystery approach to decision making because subordinates are left to figure out what is happening and why). Managing by Hope —Based on the fact that the future is laden with great uncertainty and that if we try and do not succeed, then we hope our second (or third) attempt will succeed. Decisions are predicated on the hope that they will work and that good times are just around the corner, especially if luck and good fortune are on our side!2

Types of Strategies The model illustrated in Figure 4-1 provides a conceptual basis for applying strategic management. Defined and exemplified in Table 4-4, alternative strategies that an enterprise could pursue can be categorized into 11 actions: forward integration, backward integration, horizontal integration, market penetration, market development, product development, related diversification,

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Chapter 2: Outside-USA Strategic Planning

The Internal Audit Chapter 6

Vision and Mission Analysis Chapter 5

Types of Strategies Chapter 4

Strategy Generation and Selection Chapter 8

Strategy Implementation Chapter 9

Strategy Execution Chapter 10

5VTCVGI[ /QPKVQTKPI %JCRVGT

The External Audit Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 4-1 A Comprehensive Strategic-Management Model Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.

unrelated diversification, retrenchment, divestiture, and liquidation. Each alternative strategy has countless variations. For example, market penetration can include adding salespersons, increasing advertising expenditures, couponing, and using similar actions to increase market share in a given geographic area. Most organizations simultaneously pursue a combination of two or more strategies, but a combination strategy can be exceptionally risky if carried too far. No organization can afford to pursue all the strategies that might benefit the firm. Difficult decisions must be made. Priorities must be established. Organizations, like individuals, have limited resources. Both organizations and individuals must choose among alternative strategies and avoid excessive indebtedness. Hansen and Smith explain that strategic planning involves “choices that risk resources and trade-offs that sacrifice opportunity.” In other words, if you have a strategy to go north, then you must buy snowshoes and warm jackets (spend resources) and forgo the opportunity of “faster population growth in southern states.” You cannot have a strategy to go north and then take a step east, south, or west “just to be on the safe side.” Firms spend resources and focus on a finite number of opportunities in pursuing strategies to achieve an uncertain outcome in the future. Strategic planning is much more than a roll of the dice; it is an educated wager based

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Table 4-4 Alternative Strategies Defined and Recent Examples Given strategy

Definition

example

Forward Integration

Amazon began rapid delivery services in some U.S. cities. Starbucks purchased a coffee farm.

Related Diversification

Gaining ownership or increased control over distributors or retailers Seeking ownership or increased control of a firm’s suppliers Seeking ownership or increased control over competitors Seeking increased market share for present products or services in present markets through greater marketing efforts Introducing present products or services into new geographic area Seeking increased sales by improving present products or services or developing new ones Adding new but related products or services

Unrelated Diversification

Adding new, unrelated products or services

Retrenchment

Regrouping through cost and asset reduction to reverse declining sales and profit Selling a division or part of an organization

Backward Integration Horizontal Integration Market Penetration

Market Development Product Development

Divestiture Liquidation

Selling all of a company’s assets, in parts, for their tangible worth

BB&T acquired Susquehanna Bancshares. Under Armour signed tennis champion Andy Murray to a 4-year, $23 million marketing deal. Gap opened its first five stores in China. Amazon just began offering its own line of baby diapers and wipes. Facebook acquired the text-messaging firm WhatsApp for $19 billion. Kroger and Whole Foods Market are cooking meals, becoming restaurants. Staples closed 250 stores and reduced by 50% the size of other stores. Sears Holdings divested its Land’s End division to Sears’ shareholders. The Trump Taj Mahal in Atlantic City, New Jersey, faces liquidation.

on predictions and hypotheses that are continually tested and refined by knowledge, research, experience, and learning. Survival of the firm oftentimes hinges on an excellent strategic plan.3 Organizations cannot excel in too many things because resources and talents get spread thin and competitors gain advantage. In large, diversified companies, a combination strategy is commonly employed when different divisions pursue different strategies. Also, organizations struggling to survive may simultaneously employ a combination of several defensive strategies, such as divestiture, liquidation, and retrenchment.

Levels of Strategies Strategy making is not just a task for top executives. Middle- and lower-level managers also must be involved in the strategic-planning process to the extent possible. In large firms, there are actually four levels of strategies: corporate, divisional, functional, and operational—as illustrated in Figure 4-2. However, in small firms, there are three levels of strategies: company, functional, and operational. The persons primarily responsible for having effective strategies at the various levels include the CEO or business owner at the corporate level; the president or executive vice president at the divisional level; the chief finance officer (CFO), chief information officer (CIO), human resource manager (HRM), chief marketing officer (CMO), and so on at the functional level; and the plant manager, regional sales manager, and so on at the operational level. It is important that all managers at all levels participate and understand the firm’s strategic plan to help ensure coordination, facilitation, and commitment, while avoiding inconsistency, inefficiency, and miscommunication.

Integration Strategies Forward integration and backward integration are sometimes collectively referred to as vertical integration. Vertical integration strategies allow a firm to gain control over distributors and suppliers, whereas horizontal integration refers to gaining ownership and/or control over competitors. Vertical and horizontal actions by firms are broadly referred to as integration strategies.

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Corporate Level—chief executive officer Division Level—division president or executive vice president

Company Level—owner or president

Functional Level—finance, marketing, R&D, manufacturing, information systems, and human resource managers

Functional Level— finance, marketing, R&D, manufacturing, information systems, and human resource managers

Operational Level—plant managers, sales managers, production and department managers

Operational Level—plant managers, sales managers, production and department managers

Large Company

Small Company

Figure 4-2 Levels of Strategies with Persons Most Responsible

Forward Integration Forward integration involves gaining ownership or increased control over distributors or retailers. Increasing numbers of manufacturers (suppliers) are pursuing a forward integration strategy by establishing websites to sell their products directly to consumers. In a forward integration move, Coca-Cola recently signed a 10-year partnership with Green Mountain Coffee Roasters, maker of the Keurig single-serve coffeemaker, to offer for the first time a Coca-Cola drink through a K-Cup. Coca-Cola thus plans to sell Coke through the at-home beverage system Keurig K-Cup. With the partnership, Coca-Cola also acquired 10 percent of the Green Mountain company for about $1.25 billion. Green Mountain now has a similar partnership with Campbell Soup to brew a cup of chicken broth in a K-Cup. Based in Cincinnati and having more than 2,600 grocery stores, Kroger recently acquired Viatcost.com to expand its push into online groceries, partly so as not to concede the same-day food delivery market to Amazon.com. FedEx and UPS are both using forward integration, paying the United States Post Office (USPS) to ship their packages. Today, USPS delivers about 2.5 million packages daily for FedEx, or about one third of FedEx’s express-mail U.S.-bound mailings. Amazon is forward integrating into the “installation business.” When you buy, for example, a ceiling fan or car stereo from Amazon, the company now wants to install it for you for a fee—at least in three cities (Los Angeles, New York, and Seattle). Amazon’s new program is called Amazon Local Services and is another step by the company to erode brick-and-mortar’s 90 percent market share of retail sales in the United States. In addition, Amazon is developing a new mobile application that recruits and pays ordinary people to be carriers of packages as they travel, doing away with the need for FedEx, UPS, and even the United States Postal Service. This new Amazon forward integration strategy is known as “On My Way” and is still being tested to resolve potential issues such as what happens if the package is damaged, or even stolen, by the transporter. Taco Bell also wants to ring your doorbell and deliver you the goods. Fast food delivery is already a strategy at some rival firms, such as Jimmy John’s sandwich shop; Burger King has been offering delivery in select markets for a couple of years now; Starbucks is testing delivery. An effective means of implementing forward integration is franchising. Approximately 2,000 companies in about 50 different industries in the United States use franchising to distribute their products or services. Businesses can expand rapidly by franchising because costs and opportunities are spread among many individuals. Total sales by franchises in the United States are annually about $1 trillion. There are about 800,000 franchise businesses in the United States. However, a growing trend is for franchisees, who, for example, may operate 10 franchised

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restaurants, stores, or whatever, to buy out their part of the business from their franchiser (corporate owner). A growing rift between franchisees and franchisers is escalating as the offspring often outperforms the parent. Restaurant chains are increasingly being pressured to own fewer of their locations. For example, TGI Fridays recently sold its 250 company-owned restaurants in the United States to franchisees as well as its 63 company-owned restaurants in the United Kingdom. Applebee’s also is becoming much more a franchisee-owned business. Burger King is converting virtually all of its company-owned outlets to franchised operations, with revenue from franchisees going from 30 percent of sales in 2011 to 90 percent in 2015. This change results in a drop in Burger King revenues, since franchisees show revenues on their own personal income statements. In contrast, rival Yum Brands owns virtually all of its outside-U.S. restaurants and says that policy gives greater control and benefits if things go well (or bad). The following six guidelines indicate when forward integration may be an especially effective strategy:4 1. An organization’s present distributors are especially expensive, unreliable, or incapable of meeting the firm’s distribution needs. 2. The availability of quality distributors is so limited as to offer a competitive advantage to those firms that promote forward integration. 3. An organization competes in an industry that is growing and is expected to continue to grow markedly; this is a factor because forward integration reduces an organization’s ability to diversify if its basic industry falters. 4. An organization has both the capital and human resources needed to manage the new business of distributing its own products. 5. The advantages of stable production are particularly high; this is a consideration because an organization can increase the predictability of the demand for its output through forward integration. 6. Present distributors or retailers have high profit margins; this situation suggests that a company could profitably distribute its own products and price them more competitively byintegrating forward.

Backward Integration Backward integration is a strategy of seeking ownership or increased control of a firm’s suppliers. This strategy can be especially appropriate when a firm’s current suppliers are unreliable, too costly, or cannot meet the firm’s needs. Starbucks recently purchased its first coffee farm—a 600-acre property in Costa Rica. This backward integration strategy was utilized primarily to develop new coffee varieties and to test methods to combat a fungal disease known as coffee rust that plagues the industry. Manufacturers as well as retailers purchase needed materials from suppliers. The huge wine and beer producer, Constellation Brands, recently purchased several glassbottle factories after experiencing problems with several suppliers of their bottles. Constellation acquired a controlling interest in a Mexican Anheuser-Busch glass-bottle factory, giving Constellation ownership now of more than 50 percent of the glass bottles it uses. Some industries, such as automotive and aluminum producers, are reducing their historical pursuit of backward integration. Instead of owning their suppliers, companies negotiate with several outside suppliers. Ford and Chrysler buy more than half of their component parts from outside suppliers such as TRW, Eaton, General Electric (GE), and Johnson Controls. De-integration makes sense in industries that have global sources of supply. Companies today shop around, play one seller against another, and go with the best deal. Global competition is also spurring firms to reduce their number of suppliers and to demand higher levels of service and quality from those they keep. Although traditionally relying on many suppliers to ensure uninterrupted supplies and low prices, many U.S. firms now are following the lead of Japanese firms, which have far fewer suppliers and closer, long-term relationships with those few. “Keeping track of so many suppliers is onerous,” said Mark Shimelonis, formerly of Xerox. Seven guidelines when backward integration may be an especially effective strategy are:5 1. An organization’s present suppliers are especially expensive, unreliable, or incapable of meeting the firm’s needs for parts, components, assemblies, or raw materials.

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2. The number of suppliers is small and the number of competitors is large. 3. An organization competes in an industry that is growing rapidly; this is a factor because integrative-type strategies (forward, backward, and horizontal) reduce an organization’s ability to diversify in a declining industry. 4. An organization has both capital and human resources to manage the new business of supplying its own raw materials. 5. The advantages of stable prices are particularly important; this is a factor because an organization can stabilize the cost of its raw materials and the associated price of its product(s) through backward integration. 6. Present suppliers have high profit margins, which suggest that the business of supplying products or services in a given industry is a worthwhile venture. 7. An organization needs to quickly acquire a needed resource.

Horizontal Integration Seeking ownership of or control over a firm’s competitors, horizontal integration is arguably the most common growth strategy. Thousands of mergers, acquisitions, and takeovers among competitors are consummated annually. Nearly all these transactions aim for increased economies of scale and enhanced transfer of resources and competencies. Kenneth Davidson makes the following observation about horizontal integration: The trend towards horizontal integration seems to reflect strategists’ misgivings about their ability to operate many unrelated businesses. Mergers between direct competitors are more likely to create efficiencies than mergers between unrelated businesses, both because there is a greater potential for eliminating duplicate facilities and because the management of the acquiring firm is more likely to understand the business of the target.6 In the cigarette industry, Reynolds American recently acquired Lorillard for $25 billion. The merger combined Reynolds’ Pall Mall and Camel brands (with 8.1 percent market share each in the United States) with Lorillard’s Newport brand (with 12.2 market share) to combat industry leader Altria’s Marlboro brand that commands 40.2 percent market share in the United States. As part of the transaction, to combat antitrust concerns, Reynolds CEO Susan Cameron said her company will divest Lorillard’s Blu e-cigarette to Imperial Tobacco (another rival firm), while keeping and growing Reynolds’ Vuse e-cigarette. Reynolds also divested its Kool, Winston, Salem, and Maverick brands to Imperial. Both Dollar General and Dollar Tree recently competed for months to acquire Family Dollar. The winner, Dollar Tree, is reducing prices and converting Family Dollar stores into bright, clean, friendly places. Dollar Tree still sells more items for a dollar or less, whereas Family Dollar sells more branded merchandise. About 5,000 Dollar Tree stores and 8,300 Family Dollar stores now compete with industry leader Dollar General’s 11,500 stores. Charter Communications (CHTR) recently acquired (1) Time Warner Cable (TWC) for $55.33 billion and (2) Bright House Networks for $10.4 billion, creating a giant U.S. TV and Internet firm. The new Charter has nearly 24 million customers, below the leader Comcast’s (CMCSK) 27.2 million customers. Comcast owns NBCUniversal. Charter also lags AT&T (T), whose recent merger with DirecTV (DTV) gave AT&T 26.4 million TV customers and 16.1million fixed Internet customers, as well as tens of millions of wireless customers. Several major factors are spurring horizontal integration in the TV and Internet business, including that cable providers are rapidly losing TV subscribers, and pressure from online video services such as Netflix (NFLX), Hulu, and Amazon is increasing dramatically. The following five guidelines indicate when horizontal integration may be an especially effective strategy:7 1. An organization can gain monopolistic characteristics in a particular area or region without being challenged by the federal government for “tending substantially” to reduce competition. 2. An organization competes in a growing industry. 3. Increased economies of scale provide major competitive advantages. 4. An organization has both the capital and human talent needed to successfully manage an expanded organization.

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5. Competitors are faltering as a result of a lack of managerial expertise or a need for particular resources that an organization possesses; note that horizontal integration would not be appropriate if competitors are doing poorly because in that case overall industry sales are declining.

Intensive Strategies Market penetration, market development, and product development are sometimes referred to as intensive strategies because they require intensive efforts if a firm’s competitive position with existing products is to improve.

Market Penetration A market penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts. This strategy is widely used alone and in combination with other strategies. Market penetration includes increasing the number of salespersons, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts. For example, Anheuser annually purchases several $4.5+ million, 30-second advertising slots during the Super Bowl. Tiffany & Co. recently began using same-sex couples in advertising, preceded by J. Crew casting one of its designers and his boyfriend in a catalogue. Gap uses a handsome couple in a billboard, and Jeremiah Brent and Nate Berkus appear in a Banana Republic advertising campaign. The following five guidelines indicate when market penetration may be an especially effective strategy:8 1. Current markets are not saturated with a particular product or service. 2. The usage rate of present customers could be increased significantly. 3. The market shares of major competitors have been declining while total industry sales have been increasing. 4. The correlation between dollar sales and dollar marketing expenditures historically has been high. 5. Increased economies of scale provide major competitive advantages.

Market Development Market development involves introducing present products or services into new geographic areas. For example, Whirlpool recently acquired Indesit, an Italian company that sells appliances, in order to double Whirlpool’s size in Europe, where the company has struggled to compete against Electrolux AB of Sweden, LG Electronics Inc. of South Korea, and Haier Group of China. Indesit had 13 percent of the major appliance market share in eastern Europe and Whirlpool had 5 percent, so now 18 percent of the major appliances sold in eastern Europe are Whirlpool. In western Europe, the Indesit acquisition gave Whirlpool a 17 percent market share behind the leader, BSH Bosch & Siemens Hausgerate GmbH’s 20 percent. The largest online video-streaming company, Netflix, recently launched it services into France, Germany, Belgium, and Switzerland, as well as eastern and southern Europe, and expects to be a global service provider by 2018. Netflix’s major rival in Europe is Vivendi SA’s pay-TV unit Canal Plus that offers Netflix-like services through its Canal Play services. These six guidelines indicate when market development may be an especially effective strategy:9 1. New channels of distribution are available that are reliable, inexpensive, and of good quality. 2. An organization is successful at what it does. 3. New untapped or unsaturated markets exist. 4. An organization has the needed capital and human resources to manage expanded operations. 5. An organization has excess production capacity. 6. An organization’s basic industry is rapidly becoming global in scope.

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Product Development Product development is a strategy that seeks increased sales by improving or modifying present products or services. Product development usually entails large research and development expenditures. Walt Disney Company recently developed a Disney Baby line of products and services that it expects to become a powerful baby brand for customers ages 0 to 2. Bob Chapek, president of Disney Consumer Products, stated, “This gives Disney the opportunity to reach out to moms when magical moments begin; there is no more special occasion than the birth of a baby.” The action camera company, GoPro, recently unveiled new high- and low-end cameras. GoPro is the leading producer of wearable and durable high-definition video cameras used by outdoor enthusiasts such as scuba divers and surfers. Based in San Mateo, California, GoPro’s rival firms include Sony, Canon, Garmin, and Polaroid, but GoPro is doing great by selling products in more than 100 countries and through more than 25,000 retail outlets. The new Apple Watch is actually a wrist-top computer, and now competes with various Android-powered devices from Motorola and Samsung Electronics. “Wearable computers” are good for the people to monitor their healthiness among countless other things. The firm Sensoria is making smart garments, including smart socks, which yes, are washable. Opportunities for product development strategies are endless, given rapid technological changes occurring daily. These following five guidelines indicate when product development may be an especially effective strategy to pursue:10 1. An organization has successful products that are in the maturity stage of the product life cycle; the idea here is to attract satisfied customers to try new (improved) products as a result of their positive experience with the organization’s present products or services. 2. An organization competes in an industry that is characterized by rapid technological developments. 3. Major competitors offer better-quality products at comparable prices. 4. An organization competes in a high-growth industry. 5. An organization has especially strong research and development capabilities.

Diversification Strategies The two general types of diversification strategies are related diversification and unrelated diversification. Businesses are said to be related when their value chains possess competitively valuable cross-business strategic fits; businesses are said to be unrelated when their value chains are so dissimilar that no competitively valuable cross-business relationships exist.11 Most companies favor related diversification strategies to capitalize on synergies as follows: •

• •

Transferring competitively valuable expertise, technological know-how, or other capabilities from one business to another Combining the related activities of separate businesses into a single operation to achieve lower costs Exploiting common use of a well-known brand name Cross-business collaboration to create competitively valuable resource strengths and capabilities12

Diversification strategies are becoming less popular because organizations are finding it more difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify to avoid being dependent on any single industry, but the 1980s saw a general reversal of that thinking. Diversification is still on the retreat. Michael Porter, of the Harvard Business School, commented, “Management found it couldn’t manage the beast.” Businesses are still selling, closing, or spinning off less profitable or “different” divisions to focus on their core businesses. For example, ITT recently divided itself into three separate, specialized companies. At one time, ITT owned everything from Sheraton hotels and Hartford Insurance to the maker of Wonder Bread and Hostess Twinkies. About the ITT breakup, analyst Barry Knap said, “Companies generally are not very efficient diversifiers; investors usually can do a better job of that by purchasing stock in a variety of companies.” Rapidly appearing new technologies, new products, and fast-shifting buyer preferences make diversification difficult.

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Diversification must do more than simply spread business risks across different industries; after all, shareholders could accomplish this by simply purchasing equity in different firms across different industries or by investing in mutual funds. Diversification makes sense only to the extent that the strategy adds more to shareholder value than what shareholders could accomplish acting individually. Any industry chosen for diversification must be attractive enough to yield consistently high returns on investment and offer potential across the operating divisions for synergies greater than those entities could achieve alone. Many strategists contend that firms should “stick to the knitting” and not stray too far from the firms’ basic areas of competence. A few companies today, however, pride themselves on being conglomerates, from small firms such as Pentair Inc. and Blount International to huge companies such as Textron, Berkshire Hathaway, Allied Signal, Emerson Electric, GE, Viacom, Amazon, Google, Disney, and Samsung. Conglomerates prove that focus and diversity are not always mutually exclusive. In an unattractive industry, for example, diversification makes sense, such as for Philip Morris, because cigarette consumption is declining, product liability suits are a risk, and some investors reject tobacco stocks on principle.

Related Diversification Alcoa recently diversified further into the jet-engine parts industry by acquiring Firth Rixson Ltd. for nearly $3 billion. The move away from total reliance on aluminum puts Alcoa in position to become a major player in the aerospace jet-engine market. Jet engines utilize a lot of aluminum but still this strategy is best classified as related diversification rather than forward integration due to the new high-tech competencies required. With its new Apply Pay product being linked with iBeacon so stores can detect and locate iPhone users via a Bluetooth wireless signal as they enter the premises, Apple recently entered the online payments business, competing directly with PayPal. Using their iPhone and/or Apple Watch, consumers can now make retail purchases by tapping their device at participating checkout registers. Apple is basically diversifying into the banking business with these new products, but the threat to PayPal in particular is spurring eBay and Google to cooperate in this arena. The guidelines for when related diversification may be an effective strategy are as follows.13 1. An organization competes in a no-growth or a slow-growth industry. 2. Adding new, but related, products would significantly enhance the sales of current products. 3. New, but related, products could be offered at highly competitive prices. 4. New, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valleys. 5. An organization’s products are currently in the declining stage of the product’s life cycle. 6. An organization has a strong management team.

Unrelated Diversification Privately held Mars Inc., best known for its M&M chocolates and its Mars and Snickers candy bars, recently became the world’s largest pet-food company, purchasing 80 percent of Procter& Gamble’s pet-food brands for $2.9 billion, to go with its own Whiskas, Pedigree, and Royal Canin pet brands. Mars has over 25 percent market share in the global pet-food industry, slightly ahead of Nestlé S.A., which owns Purina and Friskies. Google now offers an electric-powered driverless car that has no steering wheel, brake, or gas pedal; rather, the car is equipped with buttons for go and stop, and travels at a top speed of 25mph. Further diversifying, Google recently acquired Skybox Imaging to collect and provide data from the sky using satellites that collect daily photos and video of the Earth. With the acquisition, Google is also trying to cover the globe with fast Internet access from the sky, using balloons, drones, and satellites. Honda Motor Company diversified in 2015 by developing, producing, and marketing its first business jet, named the HondaJet HA-420 that has a range of 1,180 miles and a top speed of 420 knots, and can carry seven passengers. This new product competes directly with the Cessna Citation M2 and Embraer Phenom 100E business jets. These business jets sell for about $4.5million each.

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An unrelated diversification strategy favors capitalizing on a portfolio of businesses that are capable of delivering excellent financial performance in their respective industries, rather than striving to capitalize on value chain strategic fits among the businesses. Firms that employ unrelated diversification continually search across different industries for companies that can be acquired for a deal and yet have potential to provide a high return on investment. Pursuing unrelated diversification entails being on the hunt to acquire companies whose assets are undervalued, companies that are financially distressed, or companies that have high-growth prospects but are short on investment capital. Given below are 10 guidelines when unrelated diversification may be an especially effective strategy.14 1. Revenues derived from an organization’s current products or services would increase significantly by adding the new, unrelated products. 2. An organization competes in a highly competitive or a no-growth industry, as indicated by low industry profit margins and returns. 3. An organization’s present channels of distribution can be used to market the new products to current customers. 4. New products have countercyclical sales patterns compared to an organization’s present products. 5. An organization’s basic industry is experiencing declining annual sales and profits. 6. An organization has the capital and managerial talent needed to compete successfully in a new industry. 7. An organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity. 8. Financial synergy exists between the acquired and acquiring firm. (Note that a key difference between related and unrelated diversification is that the former should be based on some commonality in markets, products, or technology, whereas the latter is based more on profit considerations.) 9. Existing markets for an organization’s present products are saturated. 10. Antitrust action could be charged against an organization that historically has concentrated on a single industry.

Defensive Strategies In addition to integrative, intensive, and diversification strategies, organizations also could pursue defensive strategies such as retrenchment, divestiture, or liquidation.

Retrenchment Retrenchment occurs when an organization regroups through cost and asset reduction to reverse declining sales and profits. Sometimes called a turnaround or reorganizational strategy, retrenchment is designed to fortify an organization’s basic distinctive competence. During retrenchment, strategists work with limited resources and face pressure from shareholders, employees, and the media. Retrenchment can involve selling off land and buildings to raise needed cash, pruning product lines, closing marginal businesses, closing obsolete factories, automating processes, reducing the number of employees, and instituting expense control systems. Levi Strauss & Co. recently cut 20 percent of its nonretail and nonmanufacturing workforce as part of a retrenchment strategy aimed at streamlining the firm’s operations and generating cost savings of nearly $200 million per year. The 160-year-old company headquartered in San Francisco is having trouble competing in the intensely competitive retail clothing industry, marked by fleeting fashions and “sale only” shoppers. Cisco Systems recently removed 6,000 employees from its payrolls, comprising 8 percent of the company’s total workforce. The routing and switching system company is experiencing declining revenue and profits. The Turner Broadcasting division of Time Warner recently deleted 1,475 jobs, or 10 percent of its workforce. The Turner division generates about half of Time Warner’s operating profit and has more than 5,000 full-time employees in its home city of Atlanta. Staples closed 170 stores in North America in 2014, and closed another 55 stores in 2015.

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In some cases, declaring bankruptcy can be an effective retrenchment strategy. Bankruptcy can allow a firm to avoid major debt obligations and to void union contracts. There are five major types of bankruptcy: Chapter 10, Chapter 11, Chapter 2, Chapter 12, and Chapter 13. The first type, Chapter 10 bankruptcy, is a liquidation procedure used only when a corporation sees no hope of being able to operate successfully or to obtain the necessary creditor agreement. All the organization’s assets are sold in parts for their tangible worth. Several hundred thousand companies declare Chapter 10 bankruptcy annually. Chapter 11 bankruptcy applies to municipalities. Detroit, Michigan, is the largest U.S. city to declare bankruptcy, but others include Stockton, California, and Birmingham, Alabama. Chapter 2 bankruptcy allows organizations to reorganize and come back after filing a petition for protection. Quiznos recently filed Chapter 2 bankruptcy as its 2,100 stores simply cannot compete with rival Subway’s 41,000 stores. Quiznos collects a 7 percent royalty fee and another 4 percent advertising from is disgruntled franchisees, compared to the industry average 6percent royalty fee and 2 percent marketing fee. The average Quiznos store has about $300,000 in annual revenue, down from $425,000 a few years ago. Also, Sbarro recently filed Chapter 2 bankruptcy for a second time in less than three years. The pizza chain blamed its recent financial troubles on “an unprecedented decline in mall traffic.” Based in Melville, New York, Sbarro is a privately held firm with about 800 stores in more than 40 countries. An artificial-sapphire producer for Apple, GT Advanced Technologies, recently filed for bankruptcy, soon after Apple decided to go with glass screens rather than sapphire. GT’s stock price dropped 93 percent the same day the bankruptcy news released. By using sapphire, Apple was hoping for a more scratch- and shatter-resistant cover for its smartphones, but decided instead to use hardened glass. Chapter 12 bankruptcy was created by the Family Farmer Bankruptcy Act of 1986. This law provides special relief to family farmers with debt equal to or less than $1.5 million. Chapter 13 bankruptcy is a reorganization plan similar to Chapter 2, but it is available only to small businesses owned by individuals with unsecured debts of less than $100,000 and secured debts of less than $350,000. The Chapter 13 debtor is allowed to operate the business while a plan is being developed to provide for the successful operation of the business in the future. Five guidelines for when retrenchment may be an especially effective strategy to pursue are as follows:15 1. An organization has a clearly distinctive competence but has failed consistently to meet its objectives and goals over time. 2. An organization is one of the weaker competitors in a given industry. 3. An organization is plagued by inefficiency, low profitability, poor employee morale, and pressure from stockholders to improve performance. 4. An organization has failed to capitalize on external opportunities, minimize external threats, take advantage of internal strengths, and overcome internal weaknesses over time; that is, when the organization’s strategic managers have failed (and possibly will be replaced by more competent individuals). 5. An organization has grown so large so quickly that major internal reorganization is needed.

Divestiture Selling a division or part of an organization is called divestiture. It is often used to raise capital for further strategic acquisitions or investments. Divestiture can be part of an overall retrenchment strategy to rid an organization of businesses that are unprofitable, that require too much capital, or that do not fit well with the firm’s other activities. Divestiture has also become a popular strategy for firms to focus on their core businesses and become less diversified. The largest consumer-products company in the world, Procter & Gamble (P&G), is in the process of divesting (selling) more than half of its brands (nearly 100) in order to focus on its core brands (about 80). With brands such as Pampers, Tide, Era, Cheer, Metamucil, Clairol, Wella, Oral-B, Duracell, Fixodent, Ivory, and Clearblue (pregnancy tests), P&G has 23 brands that have more than $1 billion annual sales each. Ivory might be divested, as Americans have increasingly opted for body washes and liquid hand soap over plain bar soaps.

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Airbus Group NV is in the process of divesting its defense assets in order to focus solely on its commercial-airplane business. Airbus is selling its secure-communications business, Fairchild Controls, as well as Rostock System-Technik, AvDef, ESG, and its Atlas Elektronik naval-technology joint venture with ThyseenKrupp AG. Airbus is also divesting its 46 percent nonvoting interest in Dassault Aviation SA that makes France’s Rafale combat jets and Falcon business jets. A version of divestiture occurs when a corporation splits into two or more parts. For example, Hewlett-Packard (HP) recently separated its personal computer and printer businesses from its corporate hardware and services operations. Most often, divested segments become separate, publically traded companies. Many large conglomerate firms are employing this strategy. Sometimes this strategy is a prelude to the firm selling the separated part(s) to a rival firm, such as HP’s corporate hardware and services business perhaps merging with EMC Corporation. PepsiCo is under pressure to split its soft drinks division away from its snacks operations. Even General Electric is facing pressure from investors to spin off some of its diverse operations ranging from power plants to locomotives to MRI machines. Dupont is splitting off a segment that generates 20 percent of its revenue. Gannet Company, owner of USA Today and Wall Street Journal, recently split their print-publishing business from their television-film business. In 2014 alone, corporations globally split off about $2 trillion worth of subsidiaries. Part of the reason for splitting diversified firms is that the homogenous parts are generally much more attractive for potential buyers. Most times, the acquiring firms desire to promote homogeneity to complement their own operations, rather than heterogeneity, and are willing to pay for homogeneity. For example, Fiat Chrysler Automobiles NV recently “spun off” its Ferrari segment into a separate IPO, possibly raising as much as $10 billion for Fiat. In the United States, Ferrari sports cars are priced between $190,000 and $400,000, with limited edition models exceeding $3 million each. Germany’s huge power utility, E.ON SE, recently split into two companies, one focusing on the utility’s green energy initiatives, while the other company is comprised of the firm’s conventional power-generation operations. Germany is in the midst of an aggressive policy to phase out all of its nuclear energy power plants by 2025. Here are some guidelines for when divestiture may be an especially effective strategy to pursue:16 1. An organization has pursued a retrenchment strategy and failed to accomplish needed improvements. 2. To be competitive, a division needs more resources than the company can provide. 3. A division is responsible for an organization’s overall poor performance. 4. A division is a misfit with the rest of an organization; this can result from radically different markets, customers, managers, employees, values, or needs. 5. A large amount of cash is needed quickly and cannot be obtained reasonably from other sources. 6. Government antitrust action threatens an organization.

Liquidation Selling all of a company’s assets, in parts, for their tangible worth is called liquidation; it is associated with Chapter 10 bankruptcy. Liquidation is a recognition of defeat and consequently can be an emotionally difficult strategy. However, it may be better to cease operating than to continue losing large sums of money. For example, based in New York City, Crumbs Bake Shop, the nation’s largest cupcake company, filed for Chapter 10 bankruptcy liquidation of its 65 stores in 12 states and Washington, DC. Crumbs Bake Shop was famous for selling giant cupcakes in flavors such as Red Velvet, Cookie Dough, and Girl Scouts Thin Mints. The company notified all its 165 full-time employees and 655 part-time hourly employees that the business was closing. Crumbs’ last day on the Nasdaq was June 30, 2014, at a stock price of 11 cents. The midwestern retailer, Alco Stores, in early 2015 liquidated (closed) all its stores after earlier operating under Chapter 2 bankruptcy. Founded in 1901 as a general-merchandising store in Abilene, Kansas, Alco had major offices both in Abilene and in Coppell, Texas. More than 3,000 employees lost their job as Alco liquidated its assets. Based in Bonita Springs, Florida, one of the largest distributors of magazines in the United States, Source Interlink Distribution, recently liquidated, laying off its 6,000 employees and

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forgoing its $750 million a year in revenue. Source Interlink had played a major role in arranging for printed magazines to be distributed to retailers, large and small. These three guidelines indicate when liquidation may be an especially effective strategy to pursue:17 1. An organization has pursued both a retrenchment strategy and a divestiture strategy, and neither has been successful. 2. An organization’s only alternative is bankruptcy. Liquidation represents an orderly and planned means of obtaining the greatest possible amount of cash for an organization’s assets. A company can legally declare bankruptcy first and then liquidate various divisions to raise needed capital. 3. The stockholders of a firm can minimize their losses by selling the organization’s assets.

Michael Porter’s Five Generic Strategies Probably the three most widely read books on competitive analysis in the 1980s were Michael Porter’s Competitive Strategy (1980), Competitive Advantage (1985), and Competitive Advantage of Nations (1989). According to Porter, strategies allow organizations to gain competitive advantage from three different bases: cost leadership, differentiation, and focus. Porter calls these bases generic strategies. Cost leadership emphasizes producing standardized products at a low per-unit cost for consumers who are price sensitive. Two alternative types of cost leadership strategies can be defined. Type 1 is a low-cost strategy that offers products or services to a wide range of customers at the lowest price available on the market. Type 2 is a best-value strategy that offers products or services to a wide range of customers at the best price-value available on the market. The best-value strategy aims to offer customers a range of products or services at the lowest price available compared to a rival’s products with similar attributes. Both Type 1 and Type 2 strategies target a large market. Porter’s Type 3 generic strategy is differentiation, a strategy aimed at producing products and services considered unique to the industry and directed at consumers who are relatively price insensitive. Focus means producing products and services that fulfill the needs of small groups of consumers. Two alternative types of focus strategies are Type 4 and Type 5. Type 4 is a lowcost focus strategy that offers products or services to a small range (niche group) of customers at the lowest price available on the market. Examples of firms that use the Type 4 strategy include Jiffy Lube International and Pizza Hut, as well as local used car dealers and hot dog restaurants. Type 5 is a best-value focus strategy that offers products or services to a small range of customers at the best price-value available on the market. Sometimes called “focused differentiation,” the best-value focus strategy aims to offer a niche group of customers the products or services that meet their tastes and requirements better than rivals’ products do. Both Type 4 and Type 5 focus strategies target a small market. However, the difference is that Type 4 strategies offer products or services to a niche group at the lowest price, whereas Type 5 offers products and services to a niche group at higher prices but loaded with features so the offerings are perceived as the best value. Bed-and-breakfast inns and local retail boutiques are examples of Type 5 firms. Porter’s five strategies imply different organizational arrangements, control procedures, and incentive systems. Larger firms with greater access to resources typically compete on a cost leadership or differentiation basis, whereas smaller firms often compete on a focus basis. Porter’s five generic strategies are illustrated in Figure 4-3. Note that a differentiation strategy (Type 3) can be pursued with either a small target market or a large target market. However, it is not effective to pursue a cost leadership strategy in a small market because profits margins are generally too small. Likewise, it is not effective to pursue a focus strategy in a large market because economies of scale would generally favor a low-cost or best-value cost leadership strategy to gain or sustain competitive advantage. Porter stresses the need for strategists to perform cost-benefit analyses to evaluate “sharing opportunities” among a firm’s existing and potential business units. Sharing activities and

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SIZE OF MARKET

Type 1: Cost Leadership—Low Cost Type 2: Cost Leadership—Best Value Type 3: Differentiation Type 4: Focus—Low Cost Type 5: Focus—Best Value

GENERIC STRATEGIES

Cost Leadership

Differentiation

Focus

Large

Type 1 Type 2

Type 3

Small

Type 3

Type 4 Type 5

Figure 4-3 Porter’s Five Generic Strategies Source: Based on Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980), 35–40.

resources enhances competitive advantage by lowering costs or increasing differentiation. In addition to prompting sharing, Porter stresses the need for firms to effectively “transfer” skills and expertise among autonomous business units to gain competitive advantage. Depending on factors such as type of industry, size of firm, and nature of competition, various strategies could yield advantages in cost leadership, differentiation, and focus.

Cost Leadership Strategies (Type 1 and Type 2) A primary reason for pursuing forward, backward, and horizontal integration strategies is to gain low-cost or best-value cost leadership benefits. But cost leadership generally must be pursued in conjunction with differentiation. A number of cost elements affect the relative attractiveness of generic strategies, including economies or diseconomies of scale achieved, learning and experience curve effects, the percentage of capacity utilization achieved, and linkages with suppliers and distributors. Other cost elements to consider in choosing among alternative strategies include the potential for sharing costs and knowledge within the organization, research and development (R&D) costs associated with new product development or modification of existing products, labor costs, tax rates, energy costs, and shipping costs. Striving to be the low-cost producer in an industry can be especially effective when the market is composed of many price-sensitive buyers, when there are few ways to achieve product differentiation, when buyers do not care much about differences from brand to brand, or when there are a large number of buyers with significant bargaining power. The basic idea is to underprice competitors and thereby gain market share and sales, entirely driving some competitors out of the market. Companies employing a low-cost (Type 1) or best-value (Type 2) cost leadership strategy must achieve their competitive advantage in ways that are difficult for competitors to copy or match. If rivals find it relatively easy or inexpensive to imitate the leader’s cost leadership methods, the leaders’ advantage will not last long enough to yield a valuable edge in the marketplace. Recall that for a resource to be valuable, it must be either rare, hard to imitate, or not easily substitutable. To employ a cost leadership strategy successfully, a firm must ensure

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that its total costs across its overall value chain are lower than competitors’ total costs. There are two ways to accomplish this:18 1. Perform value chain activities more efficiently than rivals and control the factors that drive the costs of value chain activities. Such activities could include altering the plant layout, mastering newly introduced technologies, using common parts or components in different products, simplifying product design, finding ways to operate close to full capacity year-round, and so on. 2. Revamp the firm’s overall value chain to eliminate or bypass some cost-producing activities. Such activities could include securing new suppliers or distributors, selling products online, relocating manufacturing facilities, avoiding the use of union labor, and so on. When employing a cost leadership strategy, a firm must be careful not to use such aggressive price cuts that its own profits are low or nonexistent. Constantly be mindful of cost-saving technological breakthroughs or any other value chain advancements that could erode or destroy the firm’s competitive advantage. A Type 1 or Type 2 cost leadership strategy can be especially effective under the following conditions:19 1. Price competition among rival sellers is especially vigorous. 2. Products of rival sellers are essentially identical and supplies are readily available from any of several eager sellers. 3. There are few ways to achieve product differentiation that have value to buyers. 4. Most buyers use the product in the same ways. 5. Buyers incur low costs in switching their purchases from one seller to another. 6. Buyers are large and have significant power to bargain down prices. 7. Industry newcomers use introductory low prices to attract buyers and build a customer base. A successful cost leadership strategy usually permeates the entire firm, as evidenced by high efficiency, low overhead, limited perks, intolerance of waste, intensive screening of budget requests, wide spans of control, rewards linked to cost containment, and broad employee participation in cost control efforts. Some risks of pursuing cost leadership are that competitors may imitate the strategy, thus driving overall industry profits down; technological breakthroughs in the industry may make the strategy ineffective; or buyer interest may swing to other differentiating features besides price. The dollar stores are well known for their low-cost leadership strategies.

Differentiation Strategies (Type 3) Different strategies offer different degrees of differentiation. Differentiation does not guarantee competitive advantage, especially if standard products sufficiently meet customer needs or if rapid imitation by competitors is possible. Durable products protected by barriers to quick copying by competitors are best. Successful differentiation can mean greater product flexibility, greater compatibility, lower costs, improved service, less maintenance, greater convenience, or more features. Product development is an example of a strategy that offers the advantages of differentiation. A differentiation strategy should be pursued only after a careful study of buyers’ needs and preferences to determine the feasibility of incorporating one or more differentiating features into a unique product that showcases the desired attributes. A successful differentiation strategy allows a firm to charge a higher price for its product and to gain customer loyalty because consumers may become strongly attached to the differentiation factors. Special features that differentiate one’s product can include superior service, spare parts availability, engineering design, product performance, useful life, gas mileage, or ease of use. A risk of pursuing a differentiation strategy is that the unique product may not be valued highly enough by customers to justify the higher price. When this happens, a cost-leadership strategy easily will defeat a differentiation strategy. Another risk of pursuing a differentiation strategy is that competitors may quickly develop ways to copy the differentiating features. Firms thus must find durable sources of uniqueness that cannot be imitated quickly or cheaply by rival firms.

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Common organizational requirements for a successful differentiation strategy include strong coordination among the R&D and marketing functions and substantial amenities to attract scientists and creative people. Firms can pursue a differentiation (Type 3) strategy based on many different competitive aspects. Differentiation opportunities exist or can potentially be developed anywhere along the firm’s value chain, including supply chain activities, product R&D activities, production and technological activities, manufacturing activities, human resource management activities, distribution activities, or marketing activities. The most effective differentiation bases are those that are hard or expensive for rivals to duplicate. Competitors are continually trying to imitate, duplicate, and outperform rivals along any differentiation variable that has yielded competitive advantage. For example, when U.S. Airways cut its prices, Delta quickly followed suit. When Caterpillar instituted its quick-delivery-of-spareparts policy, John Deere soon followed suit. To the extent that differentiating attributes are tough for rivals to copy, a differentiation strategy will be especially effective, but the sources of uniqueness must be time consuming, cost prohibitive, and simply too burdensome for rivals to match. A firm, therefore, must be careful when employing a differentiation (Type 3) strategy. Buyers will not pay the higher differentiation price unless their perceived value exceeds the price they are currently paying.20 Based on such matters as attractive packaging, extensive advertising, quality of sales presentations, quality of website, list of customers, professionalism, size of the firm, or profitability of the company, perceived value may be more important to customers than actual value. A Type 3 differentiation strategy can be especially effective under the following four conditions:21 1. There are many ways to differentiate the product or service and many buyers perceive these differences as having value. 2. The buyer’s needs and uses are diverse. 3. Few rival firms are following a similar differentiation approach. 4. Technological change is fast paced and competition revolves around rapidly evolving product features.

Focus Strategies (Type 4 and Type 5) A successful focus strategy depends on an industry segment that is of sufficient size, has good growth potential, and is not crucial to the success of other major competitors. Strategies such as market penetration and market development offer substantial focusing advantages. Midsize and large firms can effectively pursue focus-based strategies only in conjunction with differentiation or cost leadership–based strategies. All firms essentially follow a differentiated strategy. Because only one firm can differentiate itself with the lowest cost, the remaining firms in the industry must find other ways to differentiate their products. Focus strategies are most effective when consumers have distinctive preferences or requirements and when rival firms are not attempting to specialize in the same target segment. For example, Clorox Company, which obtains 80 percent of its revenue from the United States, is focusing on brands viewed as environmentally friendly. Marriott continues to focus on its hotel business by announcing plans to double its hotels in Asia to 275 by 2017, especially growing its China-based hotels to about 125 from 60 and covering nearly 75 percent of Chinese provinces. Reasoning for Marriott’s strategy is that Chinese tourists are traveling at home and abroad in dramatically increased numbers, up 21 percent on average year after year. Risks of pursuing a focus strategy include the possibility that numerous competitors will recognize the successful focus strategy and copy it or that consumer preferences will drift toward the product attributes desired by the market as a whole. An organization using a focus strategy may concentrate on a particular group of customers, geographic markets, or particular productline segments to serve a well-defined but narrow market better than competitors who serve a broader market. A low-cost (Type 4) or best-value (Type 5) focus strategy can be especially attractive under these conditions:22 1. The target market niche is large, profitable, and growing. 2. Industry leaders do not consider the niche to be crucial to their own success.

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3. Industry leaders consider it too costly or difficult to meet the specialized needs of the target market niche while taking care of their mainstream customers. 4. The industry has many different niches and segments, thereby allowing a focuser to pick a competitively attractive niche suited to its own resources. 5. Few, if any, other rivals are attempting to specialize in the same target segment.

Means for Achieving Strategies Cooperation among Competitors Fierce competitors for decades, Apple and IBM recently formed an alliance to cooperate in developing apps and selling iPhones and iPads. For Apple, the alliance allows the company to expand the reach of its products into the business world, whereas for IBM the alliance allows the firm to move more of its business software onto mobile devices. In a joint interview with IBM CEO Virginia Rometty, Apple’s CEO Tim Cook observed, “In 1984, we were competitors, but today, I don’t think you can find two more complementary companies.” Apple and IBM are today developing more than 100 apps together. Also fierce competitors for decades, Apple and Google recently agreed to share rights to digital content with any consumer who buys a Disney movie using the Disney Movies Anywhere app. Previously, both Apple and Google had restricted movies, TV shows, and other content to its own family of iOS or Android-powered devices, respectively. Now, both Apple and Google pay Walt Disney Company a wholesale rate for each copy of a Disney film that they sell, regardless of the type device people use. Strategies that stress cooperation among competitors are being used more. For collaboration between competitors to succeed, both firms must contribute something distinctive, such as technology, distribution, basic research, or manufacturing capacity. But a major risk is that unintended transfers of important skills or technology may occur at organizational levels below where the deal was signed.23 Information not covered in the formal agreement often gets traded in the day-to-day interactions and dealings of engineers, marketers, and product developers. Firms often give away too much information to rival firms when operating under cooperative agreements! Tighter formal agreements are needed. Perhaps the best example of rival firms in an industry forming alliances to compete against each other is the airline industry. Today, there are three major alliances: Star, SkyTeam, and Oneworld. Joint ventures and cooperative arrangements among competitors demand a certain amount of trust if companies are to combat paranoia about whether one firm will injure the other. Increasing numbers of domestic firms are joining forces with competitive foreign firms to reap mutual benefits. Kathryn Harrigan at Columbia University contends, “Within a decade, most companies will be members of teams that compete against each other.” Often, U.S. companies enter alliances primarily to avoid investments, being more interested in reducing the costs and risks of entering new businesses or markets than in acquiring new skills. In contrast, learning from the partner is a major reason why Asian and European firms enter into cooperative agreements. American firms, too, should place learning high on the list of reasons to be cooperative with competitors. Companies in the United States often form alliances with Asian firms to gain an understanding of their manufacturing excellence, but Asian competence in this area is not easily transferable. Manufacturing excellence is a complex system that includes employee training and involvement, integration with suppliers, statistical process controls, value engineering, and design. In contrast, U.S. know-how in technology and related areas can be imitated more easily. Therefore, U.S. firms need to be careful not to give away more intelligence than they receive in cooperative agreements with rival Asian firms. Academic Research Capsule 4-1 examines whether international alliances are more effective with competitors or noncompetitors.

Joint Venture and Partnering Joint venture is a popular strategy that occurs when two or more companies form a temporary partnership or consortium for the purpose of capitalizing on some opportunity. Often, the two or more sponsoring firms form a separate organization and have shared equity ownership in the new entity.

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Are International Alliances More Effective with Competitors or Noncompetitors? Recent research reveals that small- and medium-size firms expanding into other countries should form alliances with noncompetitors rather than with rival firms. Alliances with competitors are more costly, directly and indirectly, and provide redundant knowledge and resources, leading researchers to conclude that small- and mediumsize firms should strive to form alliances with noncompetitors rather than competitors whenever possible. Researchers report that the benefits of allying with competitors are offset by higher monitoring and control costs. Also, competing firms oftentimes share less knowledge than they could or should. Even though small- and medium-size firms typically have resource constraints as they expand

globally and need alliances to grow, research shows that alliances with noncompetitors are positively associated with international performance, whereas alliances with competitors are negatively related. These findings are based on a recent study involving 162 British and U.S. private small- and medium-sized businesses. Source: Based on K. Brouthers & P. Dimitratos, “International Alliances with Competitors and Non-Competitors: The Disparate Impact on SME International Performance,” Strategic Entrepreneurship Journal, 8, no. 2 (June 2014): 167–182.

Other types of cooperative arrangements include research and development partnerships, crossdistribution agreements, cross-licensing agreements, cross-manufacturing agreements, and jointbidding consortia. Although joint ventures and partnerships are increasingly preferred over mergers as a means for achieving strategies, they are not always successful, for four primary reasons: 1. Managers who must collaborate daily in operating the venture are not involved in forming or shaping the venture. 2. The venture may benefit the partnering companies but may not benefit customers, who then complain about poorer service or criticize the companies in other ways. 3. The venture may not be supported equally by both partners. If supported unequally, problems arise. 4. The venture may begin to compete more with one of the partners than the other.24 Joint ventures are being used increasingly because they allow companies to improve communications and networking, to globalize operations, and to minimize risk. They are formed when a given opportunity is too complex, uneconomical, or risky for a single firm to pursue alone, or when an endeavor requires a broader range of competencies and know-how than any one firm can marshal. Kathryn Rudie Harrigan, summarizes the trend toward increased joint venturing: In today’s global business environment of scarce resources, rapid rates of technological change, and rising capital requirements, the important question is no longer “Shall we form a joint venture?” Now the question is “Which joint ventures and cooperative arrangements are most appropriate for our needs and expectations?” followed by “How do we manage these ventures most effectively?”25 In a global market tied together by the Internet, joint ventures, partnerships, and alliances are proving to be a more effective way to enhance corporate growth than mergers and acquisitions.26 Strategic partnering takes many forms, including outsourcing, information sharing, joint marketing, and joint research and development. There are today more than 10,000 joint ventures formed annually—more than all mergers and acquisitions. Walmart’s successful joint venture with Mexico’s Cifra is indicative of how a domestic firm can benefit immensely by partnering with a foreign company to gain substantial presence in that new country. Technology also is a major reason behind the need to form strategic alliances, with the Internet linking widely dispersed partners. For example, IBM recently signed partnerships with both Twitter and Facebook, enabling IBM to mine information from Twitter’s 302 million monthly active users and Facebook’s 1.4 billion users. With data from those partnerships, IBM is using its cloud analytics and data analytics services to help companies create social data-enabled apps. The leading data analytics, or business analytics, company is Tableau Software, followed by Qlik Technologies.

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Although evidence is mounting that firms should use partnering as a means for achieving strategies, most U.S. firms in many industries—such as financial services, forest products, metals, and retailing—still operate in a merge or acquire mode to obtain growth. Partnering is not yet taught at most business schools and is often viewed within companies as a financial issue rather than a strategic issue. However, partnering has become a core competency, a strategic issue of such high importance. Six guidelines for when a joint venture may be an especially effective means for pursuing strategies are:27 1. A privately owned organization is forming a joint venture with a publicly owned organization. There are some advantages to being privately held, such as closed ownership. There are also some advantages of being publicly held, such as access to stock issuances as a source of capital. Sometimes the unique advantages of being privately and publicly held can be synergistically combined in a joint venture. 2. A domestic organization is forming a joint venture with a foreign company. A joint venture can provide a domestic company with the opportunity for obtaining local management in a foreign country, thereby reducing risks such as expropriation and harassment by host country officials. 3. The distinct competencies of two or more firms complement each other especially well. 4. Some project is potentially profitable but requires overwhelming resources and risks. 5. Two or more smaller firms have trouble competing with a large firm. 6. There is a need to quickly introduce a new technology.

Merger/Acquisition Merger and acquisition are two commonly used ways to pursue strategies. A merger occurs when two organizations of about equal size unite to form one enterprise. An acquisition occurs when a large organization purchases (acquires) a smaller firm or vice versa. If a merger or acquisition is not desired by both parties, it is called a hostile takeover, as opposed to a friendly merger. Most mergers are friendly, but the number of hostile takeovers is on the rise. Not all mergers are effective and successful. For example, soon after Halliburton acquired Baker Hughes, Halliburton’s stock price declined 11 percent. So, a merger between two firms can yield great benefits, but the price and reasoning must be right. Some key reasons why many mergers and acquisitions fail are provided in Table 4-5. There were far more global mergers and acquisitions in 2014 than in any year since 2007, exceeding $3.5 billion. Three contributory reasons for this trend are (1) the desire of diversified firms to “spin off” segments into separate companies that are then acquired by other firms, (2) the desire of firms to acquire similar companies in countries with low corporate tax rates and to shift company profits from the United States through those countries, and (3) the desire of shareholders for firms to continually grow revenues. Often, growth is most effective through acquisition, as opposed to internal (organic) growth. In the United States, mergers and acquisitions totaled $1.52 trillion in 2014, comprising 45 percent of global deals, up from $998 billion, or 43 percent, the prior year. The data firm Dealogic reported in mid-2015 that global mergers and acquisitions in 2015 likely will hit an all-time record of $4.58 trillion. Table 4-5 Nine Reasons Why Many Mergers and Acquisitions Fail 1. 2. 3. 4. 5. 6. 7. 8. 9.

Integration difficulties Inadequate evaluation of target Large or extraordinary debt Inability to achieve synergy Too much diversification Managers overly focused on acquisitions Too large an acquisition Difficult to integrate different organizational cultures Reduced employee morale due to layoffs and relocations

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However, the U.S. Treasury Department’s new rules cracking down on tax inversions, where a company acquires a foreign company in order to avoid paying federal taxes, will likely somewhat curtail the number of mergers and acquisitions going forward. More than 10,000 mergers transpire annually in the United States, with same-industry combinations predominating. A general market consolidation is occurring in many industries, especially energy, banking, insurance, defense, and health care, but also in pharmaceuticals, food, airlines, accounting, publishing, computers, retailing, financial services, and biotechnology. Table 4-6 presents the potential benefits of merging with or acquiring another firm. A leveraged buyout (LBO) occurs when a corporation’s shareholders are bought (hence buyout) by the company’s management and other private investors using borrowed funds (hence leverage). Besides trying to avoid a hostile takeover, other reasons for initiating an LBO include whenever a particular division(s) does not fit into an overall corporate strategy, or whenever selling a division could raise needed cash. An LBO converts a public firm into a private company.

Private-Equity Acquisitions Private equity (PE) firms are acquiring and taking private a wide variety of companies almost daily in the business world. For example, one of the world’s largest private-equity firms, Apollo Global Management LLC, recently acquired 577 Chuck E. Cheese stores, the party pizza and arcade game venues, in 47 states and 10 foreign countries or territories. Apollo paid about $950 million for the parent company, CEC Entertainment, or a 12 percent premium over the company’s stock price. Chuck E. Cheese’s profit and revenue has been on the decline of late and the number of birthday parties hosted falling. Another large PE firm, Carlyle Group LP, recently acquired Johnson & Johnson’s blood-testing business for $4.15 billion. Private equity firms are an integral part of the business world, especially in the United States but also in Europe, Asia, and, more recently, Latin America. Private equity firms such as Kohlberg Kravis Roberts (KKR) have jumped aggressively back into the business of acquiring and selling firms, and releasing new initial public offerings (IPO). A large PE firm, Cerberus Capital Management, recently bought the second-largest U.S. grocery store chain, Safeway Inc., based in Pleasanton, California, for $9.4 billion. Cerberus already owns Albertsons, the fifth-largest U.S. grocery store chain. Cerberus plans to unite the two companies’ distribution and purchasing operations to save money and compete better with major rivals, Wal-Mart Stores and Kroger. Headquartered in Phoenix, Arizona, PetSmart was acquired in December 2014 by Londonbased PE firm BC Partners for $8.8 billion, the largest U.S. private equity deal of the year. PetSmart reportedly had received a joint bid offer from KKR and Clayton Dubilier & Rice, and a bid from Apollo, all PE firms. PetSmart operates 1,387 retail pet stores in the United States, Canada, and Puerto Rico. BC Partners paid $83 per share for PetSmart, a 6.86 percent premium over PetSmart’s closing stock price.

Table 4-6 Eleven Potential Benefits of Merging with or Acquiring Another Firm 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

To provide improved capacity utilization To make better use of the existing sales force To reduce managerial staff To gain economies of scale To smooth out seasonal trends in sales To gain access to new suppliers, distributors, customers, products, and creditors To gain new technology To gain market share To enter global markets To gain pricing power To reduce tax obligations

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The intent of virtually all PE acquisitions is to buy firms at a low price and sell them later at a high price, arguably just good business. Private equity firms also are buying companies from other PE firms, such as Clayton, Dubilier & Rice’s recent purchase of David’s Bridal from Leonard Green & Partners LP for $1.05 billion. Such PE-to-PE acquisitions are called secondary buyouts. In addition, PE firms especially, but other firms too, sometimes borrow money simply to fund dividend payouts to themselves, a controversial practice known as dividend recapitalizations. Critics say dividend recapitalization saddles a company with debt, thus burdening its operations.

Tactics to Facilitate Strategies Strategists use numerous tactics to accomplish strategies, including being a “first mover,” outsourcing, and reshoring. There are advantages and disadvantages of such tactics, as discussed next.

First Mover Advantages First mover advantages refer to the benefits a firm may achieve by entering a new market or developing a new product or service prior to rival firms. As indicated in Table 4-7, some advantages of being a first mover include securing access to rare resources, gaining new knowledge of key factors and issues, and carving out market share and a position that is easy to defend and costly for rival firms to overtake. First mover advantages are analogous to taking the high ground first, which puts one in an excellent strategic position to launch aggressive campaigns and to defend territory. Being the first mover can be an excellent strategy when such actions (1) build a firm’s image and reputation with buyers; (2) produce cost advantages over rivals in terms of new technologies, new components, new distribution channels, and so on; (3) create strongly loyal customers, and (4) make imitation or duplication by a rival difficult or unlikely. To sustain the competitive advantage gained by being the first mover, a firm needs to be a fast learner. There are, however, risks associated with being the first mover, such as unexpected and unanticipated problems and costs that occur from being the first firm doing business in the new market. Therefore, being a slow mover (also called fast follower or late mover) can be effective when a firm can easily copy or imitate the lead firm’s products or services. If technology is advancing rapidly, slow movers can often leapfrog a first mover’s products with improved second-generation products. Samsung is an example in the smartphone business. Apple has always been a good example of a first mover firm. First mover advantages tend to be greatest when competitors are roughly the same size and possess similar resources. If competitors are not similar in size, then larger competitors can wait while others make initial investments and mistakes, and then respond with greater effectiveness and resources. Lenovo has done this of late, as has Volkswagen.

Outsourcing and Reshoring The second largest U.S. airline by traffic, United Continental Holdings, recently outsourced its check-in, baggage-handling, and customer service jobs to vendors who perform the duties at a lower cost. Outsourcing involves companies hiring other companies to take over various parts of

Table 4-7 Five Benefits of a Firm Being the First Mover 1. 2. 3. 4.

Secure access and commitments to rare resources. Gain new knowledge of critical success factors and issues. Gain market share and position in the best locations. Establish and secure long-term relationships with customers, suppliers, distributors, and investors. 5. Gain customer loyalty and commitments.

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their functional operations, such as human resources, information systems, payroll, accounting, customer service, and even marketing. For more than a decade, U.S. and European companies have been outsourcing their manufacturing, tech support, and back-office work, but most insisted on keeping research and development activities in-house. However, an ever-growing number of firms today are outsourcing their product design to Asian developers. China and India are becoming increasingly important suppliers of intellectual property. The details of what work to outsource, to whom, where, and for how much can challenge even the biggest, most sophisticated companies. And some outsourcing deals do not work out, such as the J. P. Morgan Chase deal with IBM and Dow Chemical’s deal with Electronic Data Systems. Both outsourcing deals were abandoned after several years. India has become a booming place for outsourcing. Table 4-8 reveals some of the potential benefits that firms strive to achieve through outsourcing. Notice that benefit #1 is that outsourcing is oftentimes used to access lower wages in foreign countries. Reshoring is the new term that refers to U.S. companies planning to move some of their manufacturing back to the United States. Many U.S. companies plan to reshore in 2016–2017 for the following reasons: a desire to get products to market faster and respond rapidly to customer orders, savings from reduced transportation and warehousing, improved quality and protection of intellectual property, pressure to increase U.S. jobs.28 “Made in the USA” is making a comeback. Walmart, for example, is spending an added $250 billion in the next 10 years on USAmade goods. Consequently, numerous Walmart suppliers, such as Element Electronics based in Eden Prairie, Minnesota, are bringing manufacturing and assembly operations back to the United States. Element now assembles flat screen televisions in Winnsboro, South Carolina. Whirlpool and General Electric have also reshored some of their production operations back to the United States. However, the management consulting firm A. T. Kearney reports that reshoring has stalled, and that U.S. firms are increasingly producing goods in lower-cost countries.29 The strength of the dollar also has led U.S. firms to look outside the United States more and more to produce goods. The high value of the dollar makes U.S. goods more expensive overseas and

Table 4-8 Thirteen Potential Benefits of Outsourcing 1. Cost savings: Access lower wages in foreign countries. 2. Focus on core business: Focus resources on developing the core business rather than being distracted by other functions. 3. Cost restructuring: Outsourcing changes the balance of fixed costs to variable costs by moving the firm more to variable costs. Outsourcing also makes variable costs more predictable. 4. Improve quality: Improve quality by contracting out various business functions to specialists. 5. Knowledge: Gain access to intellectual property and wider experience and knowledge. 6. Contract: Gain access to services within a legally binding contract with financial penalties and legal redress. This is not the case with services performed internally. 7. Operational expertise: Gain access to operational best practice that would be too difficult or time consuming to develop in-house. 8. Access to talent: Gain access to a larger talent pool and a sustainable source of skills, especially science and engineering. 9. Catalyst for change: Use an outsourcing agreement as a catalyst for major change that cannot be achieved alone. 10. Enhance capacity for innovation: Use external knowledge to supplement limited in-house capacity for product innovation. 11. Reduce time to market: Accelerate development or production of a product through additional capability brought by the supplier. 12. Risk management: Manage risk by partnering with an outside firm. 13. Tax benefit: Capitalize on tax incentives to locate manufacturing plants to avoid high taxes in various countries.

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makes imports to the United States cheaper. However, seven benefits of reshoring back into the United States are as follows: 1. 2. 3. 4. 5. 6. 7.

Stable wages Reduced gas and electricity costs Excellent security to protect designs from overseas copycats Enable closer tabs on quality control and supply chains Excellent economy with consumers purchasing more Less shipment costs with consumers nearby Excellent human rights, education, legal, and political systems that promote freedom and opportunity for citizens

Strategic Management in Nonprofit, Governmental, and Small Firms Nonprofit organizations are basically just like for-profit companies except for two major differences: (1) nonprofits do not pay taxes and (2) nonprofits do not have shareholders to provide capital. In virtually all other ways, these two types of organizations are like one another. Nonprofits have employees, customers, creditors, suppliers, and distributors as well as financial budgets, income statements, balance sheets, cash flow statements, and so on. Nonprofit organizations embrace strategic planning just as much as for-profit firms, and perhaps even more, because equity capital is not an alternative source of financing. Nonprofits also have competitors that want to put them out of business. The strategic-management process is being used effectively by countless nonprofit and governmental organizations, such as the Girl Scouts, Boy Scouts, the Red Cross, chambers of commerce, educational institutions, medical institutions, public utilities, libraries, government agencies, zoos, cities, and churches. The nonprofit sector, surprisingly, is by far the largest employer in the United States. Many nonprofit and governmental organizations outperform private firms and corporations on innovativeness, motivation, productivity, and strategic management. Compared to for-profit firms, nonprofit and governmental organizations may be totally dependent on outside financing. Especially for these organizations, strategic management provides an excellent vehicle for developing and justifying requests for needed financial support. Nonprofits and governmental organizations owe it to their constituencies to garner and use monies wisely; that requires excellent strategy formulation, implementation, and evaluation.

Educational Institutions The world of higher education is rapidly moving to online courses and degrees. The American Council on Education, an association for higher education presidents, is considering allowing free, online courses to be eligible for credit toward a degree and eligible for transfer credit. Educational institutions are more frequently using strategic-management techniques and concepts. Richard Cyert, former president of Carnegie Mellon University, said, “I believe we do a far better job of strategic management than any company I know.” Population shifts nationally from the Northeast and Midwest to the Southeast and West are but one factor causing trauma for educational institutions that have not planned for changing enrollments. Ivy League schools in the Northeast are recruiting more heavily in the Southeast and West. This trend represents a significant change in the competitive climate for attracting the best high school graduates each year. Online degrees are a threat to traditional colleges and universities. “You can put the kids to bed and go to law school,” says Andrew Rosen, chief operating officer of Kaplan Education Centers, a subsidiary of the Washington Post Company. Reduced state and federal funding for higher education has resulted in more aggressive fund raising by colleges and universities. President Obama’s call for free community college education for all could also erode attendance in fouryear colleges’ 100- and 200-level courses. All institutions of higher learning need an excellent strategic plan to survive and prosper.

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Medical Organizations Declining occupancy rates, deregulation, and accelerating growth of health maintenance organizations, preferred provider organizations, urgent care centers, outpatient surgery centers, diagnostic centers, specialized clinics, and group practices are other major threats facing hospitals today. Many private and state-supported medical institutions are in financial trouble as a result of traditionally taking a reactive rather than a proactive approach in dealing with their industry. Originally intended to be warehouses for people dying of tuberculosis, smallpox, cancer, pneumonia, and infectious disease, hospitals are creating new strategies today as advances in the diagnosis and treatment of chronic diseases are undercutting that previous mission. Hospitals are beginning to bring services to the patient as much as bringing the patient to the hospital; health care is more and more being concentrated in the home and in the residential community rather than on the hospital campus. Current strategies being pursued by many hospitals include creating home health services, establishing nursing homes, and forming rehabilitation centers. Backward integration strategies that some hospitals are pursuing include acquiring ambulance services, waste disposal services, and diagnostic services. Millions of people annually research medical ailments online, causing a dramatic shift in the balance of power between doctor, patient, and hospitals.

Governmental Agencies and Departments Federal, state, county, and municipal agencies and departments, such as police departments, chambers of commerce, forestry associations, and health departments, are responsible for formulating, implementing, and evaluating strategies that use taxpayers’ dollars in the most cost-effective way to provide services and programs. Strategic-management concepts are generally required and thus widely used to enable governmental organizations to be more effective and efficient. Strategists in governmental organizations operate with less strategic autonomy than their counterparts in private firms. Public enterprises generally cannot diversify into unrelated businesses or merge with other firms. Governmental strategists usually enjoy little freedom in altering the organizations’ missions or redirecting objectives. Legislators and politicians often have direct or indirect control over major decisions and resources. Strategic issues get discussed and debated in the media and legislatures. Issues become politicized, resulting in fewer strategic choice alternatives. There is now more predictability in the management of public sector enterprises. Government agencies and departments are finding that their employees get excited about the opportunity to participate in the strategic-management process and thereby have an effect on the organization’s mission, objectives, strategies, and policies. In addition, government agencies are using a strategic-management approach to develop and substantiate formal requests for additional funding.

Small Firms “Becoming your own boss” is a dream for millions of people and a reality for millions more. Almost everyone wants to own a business—from teens and college students, who are signing up for entrepreneurial courses in record numbers, to those older than age 65, who are forming more companies every year. However, the January 3, 2015, issue of the Wall Street Journal (page A1) reported that the percentage of people under age 30 who own private businesses has reached a 24-year low in the United States, to about 3.6 percent, down from 10.6 percent in 1989. The stereotype that 20-somethings are entrepreneurial risk-takers is simply false, as millions of young adults struggle in underpaid jobs to maintain their own household, rather than living with their parents. Reasons for the decline vary, but reduced bank lending for small business startups, more indebtedness among young people, and increasing numbers of competitors due to the Internet, all contribute to a more risk-averse, under-30 age group for becoming entrepreneur strategists. The strategic-management process is just as vital for small companies as it is for large firms. From their inception, all organizations have a strategy, even if the strategy just evolves from day-to-day operations. Even if conducted informally or by a single owner or entrepreneur, the strategic-management process can significantly enhance small firms’ growth and prosperity. However, a lack of strategic-management knowledge is a serious obstacle for many small business owners, as is a lack of sufficient capital to exploit external opportunities and a day-to-day

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cognitive frame of reference. Research indicates that strategic management in small firms is more informal than in large firms, but small firms that engage in strategic management generally outperform those that do not. Academic Research Capsule 4-2 reveals the key attributes of great entrepreneurs, many of whom never went to college and never were an expert at their trade.

AcADemic reseArcH cApsuLe 4-2

What Attributes Do Great Entrepreneurs Possess? Many people dream of becoming a professional football player, musician, doctor, or entrepreneur, but many of us do not think we have the perceived special skills required to become greatly successful. Most aspiring entrepreneurs mistakenly believe those special skills are mandatory versus other skill sets we devalue. Baron and Henry carefully examined what attributes most great entrepreneurs possess, and found that many great strategists began as great entrepreneurs, including Michael Dell, Steve Jobs, Milton Hershey, Walt Disney, Henry Ford, and Bill Gates. Baron and Henry report that neither “years of experience” nor “God given natural ability” are top attributes that explain the success of most entrepreneurs. There does indeed need to be some level of natural “special” competence, but importantly, most of us are competent enough to become surprisingly successful at any endeavor we choose. Baron and Henry found that most aspiring entrepreneurs can gain or already have the necessary experience in a particular area, and additional experience yields only incremental improvements; they contend that experience, in fact, can become an inhibiting factor. This finding is surprising because experience is highly valued in most professions, especially by those making hiring decisions. Many students, for example, when applying for jobs, are told, “You don’t have enough work experience.” So, if innate talent (special skills) and experience are not overriding keys to entrepreneurial success, what is? Baron and Henry provide the answer, reporting that the dominating, overriding factor accounting for the success of most great entrepreneurs is that they possess a high level of deliberate practice. Deliberate practice is best described as “an intense focusing on all aspects related to a subject

matter or business idea.” Deliberate practice goes well beyond hard work or routine practice, so much so that even the most successful entrepreneurs cannot engage in deliberate practice for more than a few hours each day. This characteristic includes examining yourself as a person, your competition, and a wide array of factors related to the entrepreneurial endeavor at hand. Several antecedents of deliberate practice include strong motivation, self-efficacy, self-discipline, delayed gratification, and self-control. Other factors are determination, strong work ethic, goal-oriented, dedication, time management, and “being on a mission.” Deliberate practice entails working “hard and smart” simultaneously; it is all about developing and utilizing a strategic mental approach to the endeavor at hand, rather than having a special innate talent or gaining 20 years of experience. Mr. Disney, Ford, Dell, Gates, Hershey, and Jobs utilized deliberate practice right out of the gate, rather than waiting to obtain innate talent or work experience. These great entrepreneurs (strategists) generally had neither innate talent nor years of work experience. Baron and Henry assert that anyone can become great through deliberate practice. Thus, do not get discouraged by having minimal innate talent or work experience. Rather, use the deliberate practice process to become successful in your chosen endeavor. Source: Based on R. A. Baron & R. Henry, “How Entrepreneurs Acquire the Capacity to Excel: Insights from Research on Expert Performance,” Strategic Entrepreneurship Journal, 4 (2019): 49–65. (Note: This is the most downloaded article in this journal in the last five years.)

impLicAtions for strAtegists Figure 4-4 reveals that to gain and sustain competitive advantages, firms must collect, analyze, and prioritize large amounts of information in order to make excellent decisions. A “strategic plan” is very much akin to an athletic team’s “game plan” in the sense that both a strategic plan and a game plan are developed after carefully studying rival firms (teams); success of the firm (or team) depends greatly on that plan being a better plan than the rival’s plan. Any strategist, much like any coach, puts his or her firm in great jeopardy of failure if the opposing strategist (coach) has a better strategic plan. Substantial deliberate practice, as discussed in Academic Research Capsule 4-2, is required to create, identify, nurture, and exploit competitive advantages that can lead to success. Parity (and commoditization) is becoming commonplace in both business and athletics; as parity increases, the intrinsic value of the overarching strategic plan, or game plan, increases exponentially.

For example, in college football, great parity exists among teams such as Auburn, Alabama, Ohio State, Florida State, Kansas State, Oregon, Arizona State, Michigan State, and Michigan, so the game plan can make the difference between winning and losing. Most of the strategies described in this chapter would separately yield substantial benefits for firms, but no firm has sufficient resources to pursue more than a few basic strategies. Thus, strategists must select from a number of excellent alternatives, eliminate other excellent options, and consider risks, tradeoffs, costs, and other key factors. Any strategist, or coach, that gets “outstrategized” by his or her opposing strategist (or coach) puts his or her firm (or team) at a major disadvantage. Being outcoached can doom even a superior team (or firm). Therefore, in Chapter 8 we examine six additional analytical tools being widely used by strategists to help develop a winning strategic plan.

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Establish A Clear Vision & Mission

Evaluate & Monitor Results: Take Corrective Actions; Adapt To Change

Gain & Sustain Competitive Advantages

Formulate Strategies: Collect, Analyze, & Prioritize Data Using Matrices; Establish A Clear Strategic Plan

Implement Strategies: Establish Structure; Allocate Resources; Motivate & Reward; Attract Customers; Manage Finances

Figure 4-4 How to Gain and Sustain Competitive Advantages

impLicAtions for stuDents Numerous alternative strategies could benefit any firm, but your strategic-management case analysis should result in specific recommendations that you decide will best provide the firm with competitive advantages. Because company recommendations with costs comprise the most important pages or slides in your case project, introduce bits of that information early in the presentation as relevant supporting material is presented to justify your expenditures. Your recommendations page(s) itself should therefore be a summary of suggestions mentioned throughout your paper or presentation,

rather than being a surprise shock to your reader or audience. You may even want to include with your recommendations insight as to why certain other feasible strategies were not chosen for implementation. That information, too, should be anchored in the notion of competitive advantage and disadvantage with respect to perceived costs and benefits. If someone asks, “What is the difference between recommendations and strategies?”, respond with “Recommendations are alternative strategies actually selected for implementation.”

Chapter Summary The main appeal of any managerial approach is the expectation that it will enhance organizational performance. This is especially true of strategic management. Through involvement in strategic-management activities, managers and employees achieve a better understanding of an organization’s priorities and operations. Strategic management allows organizations to be efficient, but more important, it allows them to be effective. Although strategic management does not guarantee organizational success, the process allows proactive rather than reactive decision

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making. Strategic management may represent a radical change in philosophy for some organizations, so strategists must be trained to anticipate and constructively respond to questions and issues as they arise. The strategies discussed in this chapter can represent a new beginning for many firms, especially if managers and employees in the organization understand and support the plan for action.

MyManagementLab® To complete the problems with the

, go to EOC Discussion Questions in the MyLab.

Key Terms and Concepts acquisition (p. 140) backward integration (p. 126) bankruptcy (p. 132) combination strategy (p. 123) cost leadership (p. 134) de-integration (p. 126) deliberate practice (p. 146) differentiation (p. 134) diversification strategies (p. 129) divestiture (p. 132) dividend recapitalizations (p. 142) financial objectives (p. 121) first mover advantages (p. 142) focus (p. 134) forward integration (p. 125) franchising (p. 125) friendly merger (p. 140) generic strategies (p. 134) horizontal integration (p. 124)

hostile takeover (p. 140) integration strategies (p. 124) intensive strategies (p. 128) joint venture (p. 138) leveraged buyout (LBO) (p. 141) liquidation (p. 133) long-term objectives (p. 120) market development (p. 128) market penetration (p. 128) merger (p. 140) outsourcing (p. 142) product development (p. 129) related diversification (p. 129) reshoring (p. 143) retrenchment (p. 131) secondary buyouts (p. 142) strategic objectives (p. 121) unrelated diversification (p. 129) vertical integration (p. 124)

Issues for Review and Discussion 4-1. For Petronas, featured at the beginning of the chapter, give a hypothetical strategy for each of the following categories: market penetration, related diversification, divestiture, and retrenchment. 4-2. For Petronas, featured at the beginning of the chapter, give a hypothetical strategy for each of the following categories: market development, unrelated diversification, backward integration, and product development. 4-3. Identify five situations when forward integration is a particularly good strategy. Forward integration involves gaining ownership or increased control over distributors or retailers. Increasing numbers of manufacturers (suppliers) are pursuing a forward integration strategy

4-4. 4-5. 4-6.

4-7.

by establishing websites to sell their products directly to consumers. What three strategies defined in the chapter do you feel are most widely used by small businesses? Should non-profit organizations post their strategic plan on their website? What about corporations? Why? Give some guidelines of when divestiture is a particularly effective strategy. Selling a division or part of an organization is called divestiture. It is often used to raise capital for further strategic acquisitions or investments. Which two strategies do you consider the best for Nestle to pursue? Why?

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4-8. Give some examples of Type 4 and Type 5 focus strategies according to Porter’s generic strategy approach. 4-9. List three industries where cooperation among competitors is most likely and explain why. 4-10. Do a Google search on joint ventures. What important new concepts did you learn that were not presented in the chapter? 4-11. Identify three joint ventures that have worked especially well in the past. 4-12. List four important reasons why many mergers and acquisitions fail. 4-13. Explain how strategic management differs in governmental organizations as compared to educational institutions. 4-14. Explain how and why Petronas has been so successful in recent years. 4-15. List six characteristics of objectives and an example of each. 4-16. In order of importance, rank six major benefits of a firm having objectives. 4-17. Give a hypothetical example of forward integration, backward integration, and horizontal integration for Volkswagen. 4-18. Give a hypothetical example of market penetration, market development, and product development for Toyota Motors. 4-19. Give a hypothetical example of related diversification and an example of unrelated diversification for Google. 4-20. Give a hypothetical example of retrenchment and divestiture for Wal-Mart. Students’ answers may vary. 4-21. When would market development generally be the preferred strategy over backward or forward integration? 4-22. Why is it not advisable to pursue too many strategies at once? 4-23. What conditions, externally and internally, would be desired/necessary for a firm to diversify? 4-24. List and describe the five types of bankruptcy. If your college or university had to declare bankruptcy, which type would be appropriate? 4-25. Explain why you believe some analysts consider Michael Porter’s generic strategies to be too few and too vague. 4-26. Explain the difference between joint ventures and partnerships as a means for achieving various strategies 4-27. List the pros and cons of a hostile versus friendly takeover of another firm. 4-28. In order of importance, list six reasons why many mergers and acquisitions fail.

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4-29. In order of importance, list six potential benefits of two firms merging. 4-30. What are the major advantages and disadvantages of diversification? 4-31. List three ways a country could prevent its companies from outsourcing jobs to other countries. 4-32. How does strategic management differ in for-profit and nonprofit organizations? 4-33. Identify three local businesses in your city. What three strategies do these three firms pursue? List the strategies in order of prevalence. 4-34. With different types of strategies, how can firms best cope with the turbulent, high-velocity markets or uncertainty in the business environment? 4-35. Based on the information given for Petronas, what three strategies are being pursued by the firm? 4-36. Prepare a strategic-management case analysis presentation referring to the chapter’s “Implications for Students” section. 4-37. Identify three companies that use outsourcing effectively. Explain how and why those firms utilize this management approach. 4-38. What are the pros and cons of a firm merging with a rival firm? 4-39. Discuss the nature of as well as the pros and cons of a “friendly merger” versus “hostile takeover” in acquiring another firm. Give an example of each. 4-40. The big USA appliance maker, Whirlpool, recently acquired Indesit, an Italian company that sells appliances, in order to double Whirlpool’s size in Europe, where the company has struggled to compete against Electrolux AB of Sweden, LG Electronics Inc. of South Korea, and Haier Group of China. Indesit had 13 percent of the major appliance market share in Eastern Europe and Whirlpool had 5 percent, so now Whirlpool has 18 percent. What type strategy is this for Whirlpool? 4-41. The world’s largest furniture retailer, IKEA based in Stockholm, Sweden, recently entered the insurance business, including child, pregnancy, and home insurance products being available at many IKEA stores. IKEA has over 59 million members of its Club, customers who regularly shop at its stores, and now these folks can purchase insurance. What type strategy is this for IKEA? 4-42. Are international alliances more effective with competitors or non-competitors?

MyManagementLab® Go to the Assignments section of your MyLab to complete these writing exercises. 4-43. If a company has $1 million to spend on a new strategy 4-44. Discuss five reasons why many mergers or acquisitions and is considering market development versus product historically have failed. development, what determining factors would be most important to consider?

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AssurAnce of LeArning exercises exercise 4A

Market Development for Petronas Purpose Petronas is featured in the opening chapter case as a firm that engages in excellent strategic planning, despite being hurt recently by falling oil prices. The purpose of this exercise is to give you practice extending a company’s global strategy into new geographic regions.

Instructions Step 1

Step 2 Step 3

Visit the website and review the company’s latest Annual Report. Especially assess where and in what respect does Petronas do business in Asia, Australia, and the Middle East. Identify six countries that Petronas currently does not do business with. Based on your analysis in Step 1, evaluate the six countries identified in terms of their business culture, environment, and attractiveness for Petronas to begin doing business there. Rank order the six countries identified and evaluated in terms of a proposed plan for Petronas to begin doing business in these places. Prepare a two-page executive summary to support your suggested plan.

exercise 4B

Alternative Strategies for Petronas Purpose This exercise will give you practice labeling hypothetical strategies that a firm could pursue.

Instructions For each of the strategies listed below, identify a hypothetical strategy that you believe may be good for Petronas to pursue. Refer to Chapter 6 for a description of the strategies. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Forward Integration Backward Integration Horizontal Integration Market Penetration Market Development Product Development Related Diversification Unrelated Diversification Retrenchment Divestiture Liquidation

exercise 4c

Private-Equity Acquisitions Purpose As stock prices increase and companies become more cash-rich, private-equity firms such as Kohlberg Kravis Roberts (KKR) have jumped aggressively back into the business of acquiring and selling firms. Private-equity firms have unleashed a wave of new initial public offerings (IPOs). Apollo Global Management is a large private-equity firms that owns many companies. The purpose of this exercise is to give you practice identifying and evaluating the nature and role of private-equity acquisitions in Europe.

Instructions Step 1 Step 2 Step 3

Identify the top five IPOs in Europe in the last 12 months. Identify the top five private-equity firms in Europe. Prepare a two-page executive summary of the nature and role of private-equity acquisitions in Europe in the last 12 months. Include your expectations over the next 12 months for this activity to increase or decrease across Europe. Give supporting rationales.

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exercise 4D

The Strategies of Nestlé S.A.: 2015–2017 Purpose In performing strategic management case analysis, you can find information about the company’s actual and planned strategies. Comparing what is planned versus what you recommend is an important part of case analysis. Do not recommend what the firm actually plans, unless in-depth analysis of the situation reveals those strategies to be the best among all feasible alternatives. This exercise gives you experience conducting library and Internet research to determine what Nestlé plans to do in 2015–2017.

Instructions Step 1 Step 2

Go the Nestlé’s corporate website as well as the www.finance.yahoo.com website. Locate information about Nestlé’s recent strategic actions. Prepare a three-page report titled “Strategies Being Pursued by Nestlé in 2015–2017.”

exercise 4e

Lessons in Doing Business Globally Purpose The purpose of this exercise is to discover some important lessons learned by local businesses that do business internationally.

Instructions Contact several local business leaders by telephone. Find at least three firms that engage in international or export operations. Visit the owner or manager of each business in person. Ask the businessperson to give you several important lessons that his or her firm has learned in globally doing business. Record the lessons on paper and report your findings to the class.

exercise 4f

What Are Petronas’ Strategies in 2015–2017? Purpose In performing strategic management case analysis, you should find information about the company’s actual and planned strategies. Comparing what is planned versus what you recommend is an important part of case analysis. Do not recommend what the firm actually plans, unless in-depth analysis of the situation reveals those strategies to be the best among all feasible alternatives. This exercise gives you experience conducting library and Internet research to determine what Petronas plans to do in 2015–2017.

Instructions Step 1 Step 2

Go to the Petronas corporate website. Study the information provided there. Prepare a three-page report titled “Strategies Being Pursued by Petronas in 2015–2017.”

exercise 4g

What Strategies Are Most Risky? Purpose This exercise encourages you to think about the relative riskiness of various strategies.

Instructions Step 1 Step 2

List the strategies defined in Chapter 6 in order of low risk to high risk. Write a synopsis that explains your rankings.

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exercise 4H

Explore Bankruptcy Purpose Bankruptcy is becoming more and more common among business firms. This exercise is designed to enhance your knowledge of bankruptcy.

Instructions Identify five firms in your country that are operating under bankruptcy. Compare and contrast the nature of the bankruptcy among these firms.

exercise 4i

Examine Strategy Articles Purpose Strategy articles can be found weekly in journals, magazines, and newspapers. By reading and studying strategy articles, you can gain a better understanding of the strategic management process. Several of the best journals in which to find corporate strategy articles are: Advanced Management Journal, Business Horizons, Long Range Planning, Journal of Business Strategy, and Strategic Management Journal. These journals are devoted to reporting the results of empirical research in management. They apply strategic management concepts to specific organizations and industries. They introduce new strategic management techniques and provide short case studies on selected firms. Other good journals in which to find strategic management articles are Harvard Business Review, Sloan Management Review, California Management Review, Academy of Management Review, Academy of Management Journal, Academy of Management Executive, Journal of Management, and Journal of Small Business Management. In addition to journals, many magazines regularly publish articles that focus on business strategies. Several of the best magazines in which to find applied strategy articles are: Dun’s Business Month, Fortune, Forbes, Business Week, Inc., and Industry Week. Newspapers such as USA Today, Wall Street Journal, New York Times, and Barron’s cover strategy events when they occur—for example, a joint venture announcement, a bankruptcy declaration, a new advertising campaign start, acquisition of a company, divestiture of a division, a chief executive officer’s hiring or firing, or a hostile takeover attempt. In combination, journal, magazine, and newspaper articles can make the strategic-management course more exciting. These sources provide information about the strategies of for-profit and non-profit organizations.

Instructions Step 1

Step 2

Go to your college library and find a recent journal article that focuses on a strategic management topic. Select your article from one of the journals listed previously, not from a magazine. Copy the article and bring it to class. Give a 3-minute oral report summarizing the most important information in your article. Include comments giving your personal reaction to the article. Pass your article around in class.

exercise 4J

Classify Some Strategies Purpose This exercise can improve your understanding of various strategies by giving you experience classifying strategies. This skill will help you use the strategy-formulation tools presented later. Consider the following 12 (actual or possible) strategies by various firms: 1. 2. 3. 4. 5.

Dunkin’ Donuts is increasing the number of its U.S. stores to over 15,000. Brown-Forman Corp. selling its Hartmann luggage and leather-goods business. Motorola, which makes TVs, acquired Terayon Communication, a supplier of TV equipment. Macy’s department stores adding bistros and Starbucks coffee shops at many of its stores. Dell allowing Wal-Mart to begin selling its computers. This was its first move away from direct mail order selling of computers. 6. Motorola cutting 7,500 additional jobs.

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7. Hilton Hotels building 55 new properties in Russia, the United Kingdom, and Central America. 8. Video-sharing website YouTube launching its services in nine new countries. 9. Cadbury Schweppes PLC slashing 7,500 jobs, shedding product variations, and closing factories globally. 10. General Electric selling its plastics division for $11.6 million to Saudi Basic Industries Corp. of Saudi Arabia. 11. Cadbury Schweppes PLC, the maker of Trident gum, buying Turkish gum maker Intergum. 12. Limited Brands selling its Express and Limited divisions to focus on its Victoria’s Secret and Bath & Body Works divisions.

Instructions Step 1 Step 2 Step 3

On a separate sheet of paper, write down numbers 1 to 12. These numbers correspond to the strategies described. What type of strategy best describes the 12 actions cited? Indicate your answers. Exchange papers with a classmate, and grade each other’s paper as your instructor gives the right answers.

mini-cAse on tiger BrAnDs LimiteD

IS TIGER BRANDS STRATEGICALLY READY TO COMPETE AND COOPERATE? Headquartered in Bryanston, South Africa, Tiger Brands Limited has been one of the largest manufacturers and marketers of food, home and personal care brands, and baby products in Southern Africa for several decades. Founded in 1921, the consumer goods company has used expansion, acquisitions, and joint ventures to achieve a distribution network that now spans across more than 22 African countries. Apart from its operations in South Africa, Tiger Brands also has interests in international food businesses in Chile, Zimbabwe, Nigeria, Kenya, and Cameroon. For the period October 2014 to March 2015, Tiger Brands reported a 9 percent increase in operating profit from domestic businesses; the total group turnover increased by 7 percent to 15.9 billion South African Rand, while operating profit before the IFRS 2 charges declined by 3 percent to 1.7 billion South African Rand. In 2010, the Competition Commission found Tiger Brands, and its competitors Pioneer Foods and Premier Foods, guilty of anti-competitive behavior and conspiring to increase the price of bread. However, Pioneer settled on a penalty of nearly 1 billion South African Rand and Premier was granted immunity for co-operating with the commission, while Tiger Brands, despite co-operating had to pay a fine of nearly 90 million South African Rand. Tiger Brands’ statements of vision and mission, posted on their corporate website, include its aim to be the world’s most admired brand for consumer packaged-goods in emerging markets. Tiger Brands is also working towards being a high performing, fast–moving company that operates across the globe in several emerging territories. Questions

1. How well does Tiger Brand’s vision and mission statements help narrow down feasible alternative strategies available for the firm? 2. Does Tiger Brand pursue a cost leadership, differentiation, or focus strategy? Evaluate its strategic approach in comparison to its competitors. Source: Based on company documents.

Source: © MaraZe. Shutterstock

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Current Readings Cabral, Sandro, Bertrand Quelin, and Walmir Maia. “Outsourcing Failure and Reintegration: The Influence of Contractual and External Factors.” Long Range Planning 47, no. 6 (December 2014): 365–378. Dobni, C. Brooke, Mark Klassen, and W. Thomas Nelson. “Innovation Strategy in the US: Top Executives Offer Their Views.” Journal of Business Strategy 36, no. 1 (2015): 3–13. Fogarty, David, and Peter C. Bell. “Should You Outsource Analytics?” MIT Sloan Management Review 55, no. 2 (2014): 41–45. MacCormack, Alan, Fiona Murray, and Erika Wagner. “Spurring Innovation through Competitions.” (Cover Story). MIT Sloan Management Review 55, no. 1 (2013): 25–32. Martinez-Jerez, F. Asis. “Rewriting the Playbook for Corporate Partnerships.” MIT Sloan Management Review 55, no. 2 (2014): 63–70. Mckinley, William, Scott Latham, and Michael Braun. “Organizational Decline and Innovation: Turnarounds and Downward Spirals.” Academy of Management Review 39, no. 1 (2014): 88–110.

Nadkarni, Sucheta, and Jianhong Chen. “Bridging Yesterday, Today, and Tomorrow: CEO Temporal Focus, Environmental Dynamism, and Rate of New Product Introduction.” Academy of Management Journal 57 (December 2014): 1,810–1,833. Roloff, Julia, Michael S. Ablander, and Dilek Z. Nayir. “The Supplier Perspective: Forging Strong Partnerships with Buyers.” Journal of Business Strategy 36, no. 1 (2015): 25–32. Rubera, Gaia, and Gerard J. Tetlis. “Spinoffs versus Buyouts: Profitability of Alternate Routes for Commercializing Innovations.” Strategic Management Journal, 35, no. 13 (December 2014): 2,043–2,052. Smith, Wendy K. “Dynamic Decision Making: A Model of Senior Leaders Managing Strategic Paradoxes.” Academy of Management Journal 57 (December 2014): 1,592–1,623. Trahms, Cheryl A., Hermann Achidi Ndofor, and David G. Sirmon. “Organizational Decline and Turnaround: A Review and Agenda for Future Research.” Journal of Management 39, no. 5 (2013): 1,277–1,307.

Endnotes 1. John Byrne, “Strategic Planning—It’s Back,” BusinessWeek (August 26, 1996): 46. 2. Steven C. Brandt, Strategic Planning in Emerging Companies (Reading, MA: Addison-Wesley, 1981). Reprinted with permission of the publisher. 3. F. Hansen and M. Smith, “Crisis in Corporate America: The Role of Strategy,” Business Horizons (January– February 2003): 9. 4. Based on F. R. David, “How Do We Choose among Alternative Growth Strategies?” Managerial Planning 33, no. 4 (January–February 1985): 14–17, 22. 5. Ibid. 6. Kenneth Davidson, “Do Megamergers Make Sense?” Journal of Business Strategy 7, no. 3 (Winter 1987): 45. 7. David, “How Do We Choose.” 8. Ibid. 9. Ibid. 10. Ibid. 11. Arthur Thompson Jr., A. J. Strickland III, and John Gamble, Crafting and Executing Strategy: Text and Readings (New York: McGraw-Hill/Irwin, 2005), 241.

12. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980), 53–57, 318–319. 13. David, “How Do We Choose.” 14. Ibid. 15. Ibid. 16. Ibid. 17. Ibid. 18. Michael Porter, Competitive Advantage (New York: Free Press, 1985), 97. See also Arthur Thompson Jr., A. J. Strickland III, and John Gamble, Crafting and Executing Strategy: Text and Readings (New York: McGraw-Hill/ Irwin, 2005), 117. 19. Arthur Thompson Jr., A. J. Strickland III, and John Gamble, Crafting and Executing Strategy: Text and Readings (New York: McGraw-Hill/Irwin, 2005), 125–126. 20. Porter, Competitive Advantage, 160–162. 21. Thompson, Strickland, and Gamble, Crafting and Executing Strategy, 129–130. 22. Ibid., 134.

23. Gary Hamel, Yves Doz, and C. K. Prahalad, “Collaborate with Your Competitors—and Win,” Harvard Business Review 67, no. 1 (January–February 1989): 133. 24. Matthew Schifrin, “Partner or Perish,” Forbes (May 21, 2001): 32. 25. Kathryn Rudie Harrigan, “Joint Ventures: Linking for a Leap Forward,” Planning Review 14, no. 4 (July–August 1986): 10.

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26. Schifrin, “Partner or Perish,” p. 26. 27. David, “How Do We Choose.” 28. James Hagerty, “Some Firms Opt to Bring Manufacturing Back to USA,” Wall Street Journal, July 18, 2012, B8. 29. James Hagerty, “Offshoring Outpaces ‘Reshoring,’” Wall Street Journal, December 15, 2014, B3.

Source: © Paylessimages/Fotolia

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Vision and Mission Analysis LeArning oBjectives After studying this chapter, you should be able to do the following: 5-1. Describe the nature and role of vision statements in strategic management. 5-2. Describe the nature and role of mission statements in strategic management. 5-3. Discuss the process of developing a vision and mission statement. 5-4. Discuss how clear vision and mission statements can benefit other strategic-management activities. 5-5. Describe the characteristics of a good mission statement. 5-6. Identify the components of mission statements. 5-7. Evaluate mission statements of different organizations and write effective vision and mission statements.

AssurAnce of LeArning exercises The following exercises are found at the end of this chapter: exercise 5A

exercise 5B exercise 5c exercise 5D

exercise 5e

exercise 5f

Examine Potential Changes Needed in a Firm’s Vision/Mission Studying an Alternative View of Mission Statement Content Evaluate Mission Statements Evaluate the Vision and Mission Statements of Unilever, Nestlé’s Competitor Selecting the Best Vision and Mission Statements in a Given Industry Write an Excellent Vision and Mission Statement for Novartis AG

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T

his chapter focuses on the concepts and tools needed to evaluate and write business vision and mission statements. It also provides a practical framework for developing and creating effective vision and mission statements. Actual mission statements from large and small organizations and for-profit and nonprofit enterprises are presented and critiqued. The exemplary company examined in the beginning of this chapter, Samsung Electronics, is exemplary in terms of both its vision and mission concepts as well as its strategic management. We can perhaps best understand vision and mission by focusing on a business when it is first started. In the beginning, a new business is simply a collection of ideas. Starting a new business rests on a set of beliefs that the new organization can offer some product or service to some customers in some geographic area using some type of technology at a profitable price. A new business owner typically believes his or her philosophy of the new enterprise will result in a favorable public image, and the business concept can be effectively communicated to and adopted by important constituencies. When the set of beliefs about a business at its inception is put into writing, the resulting document mirrors the same basic ideas that underlie vision and mission statements. As a business grows, owners or managers find it necessary to revise the founding set of beliefs, but those original ideas usually are reflected in the revised statements of vision and mission. Vision and mission statements often can be found in the front of annual reports. They often are displayed throughout a firm’s premises and are distributed with company information sent to constituencies. The statements are part of numerous internal reports, such as loan requests, supplier agreements, labor relations contracts, business plans, and customer service agreements.

Vision Statements: What Do We Want to Become? It is especially important for managers and executives in any organization to agree on the basic vision that the firm strives to achieve in the long term. A vision statement should answer the basic question, “What do we want to become?” A clear vision provides the foundation for developing a comprehensive mission statement. Many organizations have both a vision and mission

exempLAry compAny showcAseD

Samsung Electronics Co. Limited (SSNLF) Headquartered in Suwon, South Korea, Samsung is the world’s largest information company. With over 270,000 employees, Samsung has assembly plants and sales networks across 88 countries. A leader amongst smartphone manufacturer, Samsung also leads in the production of electronic components like lithium-ion batteries, semiconductors chips, and tablet computers. Samsung’s values and philosophy are provided on the About Us section of the company’s website. Samsung’s vision statement, posted on their website, states that the company aims to develop innovative technologies and efficient processes to enter new territories, improve people’s lives, and carry on as a leader in the digital platform. The company’s mission statement is called a statement of philosophy Right beneath the firm’s vision and mission on the website, the company’s core values are listed and described

under five categories: People, Excellence, Change, Integrity, and Co-Prosperity. The website also provides the company’s Vision 2020 which reinforces the firm’s mission statement. The firm is exemplary in terms of both its vision and mission concepts as well as its strategic management. Source: Based on company documents.

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statement, but the vision statement should be established first and foremost. The vision statement should be short, preferably one sentence, and as many managers as possible should have input into developing the statement. Where there is no vision, the people perish (Proverbs 29:18). For many, if not most, corporations, profit rather than mission or vision is the primary motivator. But profit alone is not enough to motivate people. Profit is perceived negatively by many stakeholders of a firm. For example, employees may see profit as something that they earn and management then uses and even gives away to shareholders. Although this perception is undesired and disturbing to management, it clearly indicates that both profit and vision are needed to motivate a workforce effectively. When employees and managers together shape or fashion the vision and mission statements for a firm, the resultant documents can reflect the personal visions that managers and employees have in their hearts and minds about their own futures. Shared vision creates a commonality of interests that can lift workers out of the monotony of daily work and put them into a new world of opportunity and challenge. Although typically a single sentence, vision statements need to be written from a customer perspective. For example, eBay’s vision is “To provide a global trading platform where practically anyone can trade practically anything.” Vision statements need to do more than identify the product/service a firm offers. The old Ford Motor Company vision, for example, was productoriented: “To make the automobile accessible to every American,” but today Ford has a more effective customer-oriented vision statement: “To provide personal mobility for people around the world.” Examples of vision statements are provided in Table 5-1.

Vision Statement Analysis At a minimum, a vision statement should reveal the type of business the firm engages. For example, to have a vision that says, “to become the best retailing firm in the USA” is much too broad, because that firm could be selling anything from boats to bunnies. Notice here how Starbucks’ vision statement is improved. Starbucks Vision Statement (paraphrased) Starbucks strives to be the premier roaster and retailer of specialty coffee globally. Starbucks “Improved” Vision Statement Starbucks’ vision is to be the most well-known, specialty coffee, tea, and pastry restaurant in the world, offering sincere customer service, a welcoming atmosphere, and unequaled quality. Author Comments •

The first vision statement does not state what the company wants to become. Nor does it acknowledge the firm’s movement into specialty tea offerings. It is not as customeroriented as needed. The improved vision statement reveals the company’s aspirations for the future and acknowledges that upscale tea and pastries complement their premium coffee offerings.

Table 5-1 Vision Statement Examples •

General Motors’ vision is to be the world leader in transportation products and related services. (Author comment: Good statement) PepsiCo’s responsibility is to continually improve all aspects of the world in which we operate— environment, social, economic—creating a better tomorrow than today. (Author comment: Statement is too vague; it should reveal how the firm’s food and beverage business benefits people) Royal Caribbean’s vision is to empower and enable our employees to deliver the best vacation experience for our guests, thereby generating superior returns for our shareholders and enhancing the well-being of our communities. (Author comment: Statement is good but could end after the word guests)

Sources: Courtesy General Motors; © 2013 PepsiCo Inc. Used with permission; Courtesy Royal Caribbean.

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Mission Statements: What Is Our Business? Current thought on mission statements is based largely on guidelines set forth in the mid-1970s by Peter Drucker, who is often called “the father of modern management” for his pioneering studies at General Motors and for his 22 books and hundreds of articles. Drucker believes that asking the question “What is our business?” is synonymous with asking “What is our mission?” An enduring statement of purpose that distinguishes one organization from other similar enterprises, the mission statement is a declaration of an organization’s “reason for being.” It answers the pivotal question “What is our business?” A clear mission statement is essential for effectively establishing objectives and formulating strategies. Sometimes called a creed statement, a statement of purpose, a statement of philosophy, a statement of beliefs, a statement of business principles, or a statement “defining our business,” a mission statement reveals what an organization wants to be and whom it wants to serve. All organizations have a reason for being, even if strategists have not consciously transformed this reason into writing. As illustrated with white shading in Figure 5-1, carefully prepared statements of vision and mission are widely recognized by both practitioners and academicians as the

Chapter 2: Outside-USA Strategic Planning

The Internal Audit Chapter 6

Vision and Mission Analysis Chapter 5

Types of Strategies Chapter 4

Strategy Generation and Selection Chapter 8

Strategy Implementation Chapter 9

Strategy Execution Chapter 10

Strategy Monitoring Chapter 11

The External Audit Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 5-1 A Comprehensive Strategic-Management Model Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.

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first step in strategic management. Drucker has the following to say about mission statements (paraphrased): A mission statement is the foundation for priorities, strategies, plans, and work assignments. It is the starting point for the design of jobs and organizational structures. Nothing may seem simpler or more obvious than to know what a company’s business is. A lumber mill makes lumber, an airline carries passengers and freight, and a bank lends money. But “What is our business?” is almost always a difficult question and the right answer is usually anything but obvious. The answer to this question is the first responsibility of strategists.1 Some strategists spend almost every moment of every day on administrative and tactical concerns; those who rush quickly to establish objectives and implement strategies often overlook the development of a vision and mission statement. This problem is widespread even among large organizations. Many corporations in the United States have not yet developed a formal vision or mission statement. An increasing number of organizations, however, are developing these statements. Some companies develop mission statements simply because owners or top management believe it is fashionable, rather than out of any real commitment. However, as described in this chapter, firms that develop and systematically revisit their vision and mission statements, treat them as living documents, and consider them to be an integral part of the firm’s culture realize great benefits. For example, managers at Johnson & Johnson (J&J) meet regularly with employees to review, reword, and reaffirm the firm’s vision and mission. The entire J&J workforce recognizes the value that top management places on this exercise, and these employees respond accordingly.

The Process of Developing Vision and Mission Statements As indicated in the strategic-management model, clear vision and mission statements are needed before alternative strategies can be formulated and implemented. As many managers as possible should be involved in the process of developing these statements because, through involvement, people become committed to an organization. A widely used approach to developing a vision and mission statement is first to select several articles (such as those listed as Current Readings at the end of this chapter) about these statements and ask all managers to read these as background information. Then, ask managers to individually prepare a vision and mission statement for the organization. A facilitator or committee of top managers should then merge these statements into a single document and distribute the draft statements to all managers. A request for modifications, additions, and deletions is needed next, along with a meeting to revise the document. To the extent that all managers have input into and support the final documents, organizations can more easily obtain managers’ support for other strategy formulation, implementation, and evaluation activities. Thus, the process of developing vision and mission statements represents a great opportunity for strategists to obtain needed support from all managers in the firm. During the process of developing vision and mission statements, some organizations use discussion groups of managers to develop and modify existing statements. Other organizations hire an outside consultant or facilitator to manage the process and help draft the language. At times an outside person with expertise in developing such statements, who has unbiased views, can manage the process more effectively than an internal group or committee of managers. Decisions on how best to communicate the vision and mission to all managers, employees, and external constituencies of an organization are needed when the documents are in final form. Some organizations even create a videotape to explain the statements and how they were developed. An article by Campbell and Yeung emphasizes that the process of developing a mission statement should create an “emotional bond” and “sense of mission” between the organization and its employees.2 Commitment to a company’s strategy and intellectual agreement on the

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strategies to be pursued do not necessarily translate into an emotional bond; hence, strategies that have been formulated may not be implemented. These researchers stress that an emotional bond comes when an individual personally identifies with the underlying values and behavior of a firm, thus turning intellectual agreement and commitment to strategy into a sense of mission. Campbell and Yeung also differentiate between the terms vision and mission, saying that vision is “a possible and desirable future state of an organization” that includes specific goals, whereas mission is more associated with behavior and the present.

The Importance (Benefits) of Vision and Mission Statements The importance (benefits) of vision and mission statements to effective strategic management is well documented in the literature, although research results are mixed. As indicated in Academic Research Capsule 5-1, there is a positive relationship between mission statements and measures of financial performance. In actual practice, wide variations exist in the nature, composition, and use of both vision and mission statements. King and Cleland recommend that organizations carefully develop a written mission statement in order to reap the following benefits: 1. To make sure all employees/managers understand the firm’s purpose or reason for being. 2. To provide a basis for prioritization of key internal and external factors utilized to formulate feasible strategies. 3. To provide a basis for the allocation of resources. 4. To provide a basis for organizing work, departments, activities, and segments around a common purpose.3 Reuben Mark, former CEO of Colgate, maintains that a clear mission increasingly must make sense internationally. Mark’s thoughts on vision are as follows: When it comes to rallying everyone to the corporate banner, it’s essential to push one vision globally rather than trying to drive home different messages in different cultures. The trick is to keep the vision simple but elevated: “We make the world’s fastest computers” or “Telephone service for everyone.” You’re never going to get anyone to charge the machine guns only for financial objectives. It’s got to be something that makes people feel better, feel a part of something.4

AcADemic reseArch cApsuLe 5-1

The Mission Statement/Firm Performance Linkage A meta-analysis of 20 years of empirical research on mission statements concluded that “there is a small positive relationship between mission statements and measures of financial organizational performance” (Desmidt et al., 2011, p. 468). However, research in marketing explains that customer satisfaction has a strong positive relationship with organizational performance (Devasagayam et al., 2013). Indeed, researchers have noted that “managers increasingly tend to see customer satisfaction as a valuable intangible asset” (Luo et al., 2012, p. 745). Thus, mission statements designed from a customer perspective could positively impact organizational performance by enhancing customer satisfaction. If written from a customer perspective, mission statements could spur employees, salespersons, and managers to provide exemplary customer service, which arguably would enhance customer loyalty and translate into customers being “on a mission”

to seek out, use, and promote the firm’s products and services. Written from a customer perspective, mission statements may indeed “accomplish their mission.” Sources: Based on S. Desmidt, A. Prinzie, & A. Decramer, A. “Looking for the Value of Mission Statements: A Meta-Analysis of 20 Years of Research,” Management Decision, 49, no. 3 (2011): 468–483; R. Devasagayam, N. R. Stark, & L. S. Valestin, “Examining the Linearity of Customer Satisfaction: Return on Satisfaction as an Alternative,” Business Perspectives and Research 1, no. 2 (2013): 1–8; X. Luo, J. Wieseke, & C. Homburg, “Incentivizing CEOs to Build Customer- and Employee-Firm Relations for Higher Customer Satisfaction and Firm Value,” Journal of the Academy of Marketing Science 40, no. 6 (2012): 45–758; M. E. David, Forest R. David, & Fred R. David, “Mission Statement Theory and Practice: A Content Analysis and New Direction,” International Journal of Business, Marketing, and Decision Sciences 7, no. 1 (Summer 2014): 95–109.

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A Resolution of Divergent Views Another benefit of developing a comprehensive mission statement is that divergent views among managers can be revealed and resolved through the process. The question “What is our business?” can create controversy. Raising the question often reveals differences among strategists in the organization. Individuals who have worked together for a long time and who think they know each other suddenly may realize that they are in fundamental disagreement. For example, in a college or university, divergent views regarding the relative importance of teaching, research, and service often are expressed during the mission statement development process. Negotiation, compromise, and eventual agreement on important issues are needed before people can focus on more specific strategy-formulation activities. Considerable disagreement among an organization’s strategists over vision and mission statements can cause trouble if not resolved. For example, unresolved disagreement over the business mission was one of the reasons for W. T. Grant’s bankruptcy and eventual liquidation. Top executives of the firm, including Ed Staley and Lou Lustenberger, were firmly entrenched in opposing positions that W. T. Grant should be like Kmart or JC Penney, respectively. W. T. Grant decided to become a bit like both Kmart and JC Penney; this compromise was a huge strategic mistake. In other words, top executives of W. T. Grant never resolved their vision/mission issue, which ultimately led to the firm’s disappearance.5 Too often, strategists develop vision and mission statements only when the organization is in trouble. Of course, the documents are needed then. Developing and communicating a clear mission during troubled times indeed may have spectacular results and may even reverse decline. However, to wait until an organization is in trouble to develop a vision and mission statement is a gamble that characterizes irresponsible management. According to Drucker, the most important time to ask seriously, “What do we want to become?” and “What is our business?” is when a company has been successful: Success always obsoletes the very behavior that achieved it, always creates new realities, and always creates new and different problems. Only the fairy tale story ends, “They lived happily ever after.” It is never popular to argue with success or to rock the boat. It will not be long before success will turn into failure. Sooner or later, even the most successful answer to the question “What is our business?” becomes obsolete.6 In multidivisional organizations, strategists should ensure that divisional units perform strategic-management tasks, including the development of a statement of vision and mission. Each division should involve its own managers and employees in developing a vision and mission statement that is consistent with and supportive of the corporate mission. Ten benefits of having a clear mission and vision are provided in Table 5-2. An organization that fails to develop a vision statement, as well as a comprehensive and inspiring mission statement, loses the opportunity to present itself favorably to existing and

Table 5-2 Ten Benefits of Having a Clear Mission and Vision 1. Achieve clarity of purpose among all managers and employees. 2. Provide a basis for all other strategic planning activities, including internal and external assessment, establishing objectives, developing strategies, choosing among alternative strategies, devising policies, establishing organizational structure, allocating resources, and evaluating performance. 3. Provide direction. 4. Provide a focal point for all stakeholders of the firm. 5. Resolve divergent views among managers. 6. Promote a sense of shared expectations among all managers and employees. 7. Project a sense of worth and intent to all stakeholders. 8. Project an organized, motivated organization worthy of support. 9. Achieve higher organizational performance. 10. Achieve synergy among all managers and employees.

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potential stakeholders. All organizations need customers, employees, and managers, and most firms need creditors, suppliers, and distributors. Vision and mission statements are effective vehicles for communicating with important internal and external stakeholders. The principal benefit of these statements as tools of strategic management is derived from their specification of the ultimate aims of a firm. Vision and mission statements reveal the firm’s shared expectations internally among all employees and managers. For external constituencies, the statements reveal the firm’s long-term commitment to responsible, ethical action in providing a needed product and/or service for customers.

Characteristics of a Mission Statement A mission statement is a declaration of attitude and outlook. It usually is broad in scope for at least two major reasons. First, a good mission statement allows for the generation and consideration of a range of feasible alternative objectives and strategies without unduly stifling management creativity. Excess specificity would limit the potential of creative growth for the organization. However, an overly general statement that does not exclude any strategy alternatives could be dysfunctional. Apple Computer’s mission statement, for example, should not open the possibility for diversification into pesticides—or Ford Motor Company’s into food processing. Second, a mission statement needs to be broad to reconcile differences effectively among, and appeal to, an organization’s diverse stakeholders, the individuals and groups of individuals who have a special stake or claim on the company. Thus, a mission statement should be reconciliatory. Stakeholders include employees, managers, stockholders, boards of directors, customers, suppliers, distributors, creditors, governments (local, state, federal, and foreign), unions, competitors, environmental groups, and the general public. Stakeholders affect and are affected by an organization’s strategies, yet the claims and concerns of diverse constituencies vary and often conflict. For example, the general public is especially interested in social responsibility, whereas stockholders are more interested in profitability. Claims on any business literally may number in the thousands, and they often include clean air, jobs, taxes, investment opportunities, career opportunities, equal employment opportunities, employee benefits, salaries, wages, clean water, and community services. All stakeholders’ claims on an organization cannot be pursued with equal emphasis. A good mission statement indicates the relative attention that an organization will devote to meeting the claims of various stakeholders. The fine balance between specificity and generality is difficult to achieve, but it is well worth the effort. George Steiner offers the following insight on the need for a mission statement to be broad in scope: Most business statements of mission are expressed at high levels of abstraction. Vagueness nevertheless has its virtues. Mission statements are not designed to express concrete ends, but rather to provide motivation, general direction, an image, a tone, and a philosophy to guide the enterprise. An excess of detail could prove counterproductive since concrete specification could be the base for rallying opposition. Precision might stifle creativity in the formulation of an acceptable mission or purpose. Once an aim is cast in concrete, it creates a rigidity in an organization and resists change. Vagueness leaves room for other managers to fill in the details.7 As indicated in Table 5-3, in addition to being broad in scope, an effective mission statement should not be too lengthy; recommended length is less than 150 words. An effective mission statement should arouse positive feelings and emotions about an organization; it should be inspiring in the sense that it motivates readers to action. A mission statement should be enduring. All of these are desired characteristics of a statement. An effective mission statement generates the impression that a firm is successful, has direction, and is worthy of time, support, and investment—from all socioeconomic groups of people. A business mission reflects judgments about future growth directions and strategies that are based on forward-looking external and internal analyses. The statement should provide useful criteria for selecting among alternative strategies. A clear mission statement provides a basis

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Table 5-3 Characteristics of a Mission Statement 1. 2. 3. 4. 5. 6. 7.

Broad in scope; does not include monetary amounts, numbers, percentages, ratios, or objectives Fewer than 150 words in length Inspiring Identifies the utility of a firm’s products Reveals that the firm is socially responsible Reveals that the firm is environmentally responsible Includes nine components: customers, products or services, markets, technology, concern for survival/growth/profits, philosophy, self-concept, concern for public image, concern for employees 8. Reconciliatory 9. Enduring

for generating and screening strategic options. The statement of mission should be sufficiently broad to allow judgments about the most promising growth directions and those considered less promising.

A Customer Orientation An effective mission statement describes an organization’s purpose, customers, products or services, markets, philosophy, and basic technology. According to Vern McGinnis, a mission statement should (1) define what the organization is and what the organization aspires to be, (2) be limited enough to exclude some ventures and broad enough to allow for creative growth, (3) distinguish a given organization from all others, (4) serve as a framework for evaluating both current and prospective activities, and (5) be stated in terms sufficiently clear to be widely understood throughout the organization.8 The mission statement should reflect the anticipations of customers. Rather than developing a product and then trying to find a market, the operating philosophy of organizations should be to identify customers’ needs and then provide a product or service to fulfill those needs. Good mission statements identify the utility of a firm’s products to its customers. This is why AT&T’s mission statement focuses on communication rather than on telephones; it is why ExxonMobil’s mission statement focuses on energy rather than on oil and gas; it is why Union Pacific’s mission statement focuses on transportation rather than on railroads; it is why Universal Studios’ mission statement focuses on entertainment rather than on movies. A major reason for developing a mission statement is to attract customers who give meaning to an organization. The following utility statements are relevant in developing a mission statement: Do not offer me things. Do not offer me clothes. Offer me attractive looks. Do not offer me shoes. Offer me comfort for my feet and the pleasure of walking. Do not offer me a house. Offer me security, comfort, and a place that is clean and happy. Do not offer me books. Offer me hours of pleasure and the benefit of knowledge. Do not offer me CDs. Offer me leisure and the sound of music. Do not offer me tools. Offer me the benefits and the pleasure that come from making beautiful things. Do not offer me furniture. Offer me comfort and the quietness of a cozy place. Do not offer me things. Offer me ideas, emotions, ambience, feelings, and benefits. Please, do not offer me things.

Components of a Mission Statement Mission statements can and do vary in length, content, format, and specificity. Most practitioners and academicians of strategic management feel that an effective statement should include the nine mission statement components given here. Because a mission statement is often the most

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visible and public part of the strategic-management process, it is important that it includes not only the characteristics as summarized in Table 5-3 but also the following nine components: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Customers—Who are the firm’s customers? Products or services—What are the firm’s major products or services? Markets—Geographically, where does the firm compete? Technology—Is the firm technologically current? Survival, growth, and profitability—Is the firm committed to growth and financial soundness? Philosophy—What are the basic beliefs, values, aspirations, and ethical priorities of the firm? Self-concept (distinctive competence)—What is the firm’s major competitive advantage? Public image—Is the firm responsive to social, community, and environmental concerns? Employees—Are employees a valuable asset of the firm?9

To exemplify how mission statements could be written from a customer perspective, a component-by-component example for a charter boat fishing company is provided in Table 5-4. Note the charter company’s customers are “outdoor enthusiasts.” “Customers” is a key component to include in a mission statement, but simply including the word customer or consumer does not qualify that component to be considered “written from a customer perspective.” The statement needs to identify more precisely the target groups of customers. All nine components in Table 5-4 are written from a customer perspective. For example, regarding the “product/ service” component, the charter fishing company provides “memories for a lifetime”—thus revealing the “utility” of the service offered. Regarding the “distinctive competence” component, whereby the firm reveals the major competitive advantage its products/services provide, the statement says: “for customer enjoyment and safety, we provide the most experienced staff in the industry.”

Evaluating and Writing Mission Statements There is no one best mission statement for a particular organization, so when it comes to evaluating mission statements, good judgment is required. Ideally, the statement will provide more than simply inclusion of a single word such as products or employees regarding a respective

Table 5-4 Mission Statement Components Written from a Customer Perspective 1. Customers—Our customers are outdoor enthusiasts seeking fishing excitement and adventure. 2. Products or services—We provide fast, clean boats, all the bait and tackle needed, and friendly first mates to create memories for a lifetime. 3. Markets—Our fleet of fast, clean vessels operate all along the Florida Gulf Coast. 4. Technology—Our vessels are equipped with the very latest safety and fish finding equipment to ensure that customers comfortably are “catching rather than just fishing.” 5. Survival, growth, and profitability—Our prices are as low as possible to provide customers great value in conjunction with high employee morale and a reasonable return for our owners. 6. Philosophy—We assure customers the upmost courtesy and care as our motto on every vessel is to follow the Golden Rule. 7. Self-concept—For customer enjoyment and safety, we provide the most experienced staff in the industry. 8. Public image—Our vessels use emission-friendly engines; we strive to bring repeat tourists to all communities where we operate. 9. Employees—Our on-the-water and off-the-water employees are “on a mission” to help customers have a great time. Source: Based on Meredith E. David, Forest R. David, & Fred R. David, “Mission Statement Theory and Practice: A Content Analysis and New Direction,” International Journal of Business, Marketing, and Decision Sciences 7, no. 1 (Summer 2014): 95–109.

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component. Why? Because the statement should motivate stakeholders to action, as well as be customer-oriented, informative, inspiring, and enduring.

Two Mission Statements Critiqued Perhaps the best way to develop a skill for writing and evaluating mission statements is to study actual company missions. Thus, Table 5-5 provides a component-by-component critique of two actual mission statements from PepsiCo, and Royal Caribbean. The Royal Caribbean statement includes only six of the nine components, comprises 86 words total, and lacks a customer perspective. The Royal Caribbean statement merely includes the word customer(s), which is inadequate to be considered written from a customer perspective.

Five Mission Statements Revised As additional guidance for practitioners (and students), five actual mission statements are revised/rewritten from a customer perspective and presented in Table 5-6. The improved statements include all nine components written from a customer perspective, and, additionally, are inspiring, concise, and comprised of fewer than 90 words each. Regarding the “customer” component, the new Best Buy statement refers to “individuals and businesses”; the new Lowe’s statement refers to “homebuilders and homeowners”; and the improved Crocs statement refers to “men, women, and children.” In contrast, the Crocs, Best Buy, Rite Aid, and Lowe’s actual statements merely include (or not) the word customer or consumer. The statements are revised to potentially enhance customer satisfaction, especially if communicated to customers by marketers, and backed by company commitment to and implementation of the mission message. The proposed statement for the footwear company Crocs, Inc., for example, talks about “dependable and lasting comfort all day,” whereas the UPS proposed statement talks about “the most timely, dependable, and accurate delivery times in the world.”

Two Mission Statements Proposed The process by which mission statements are developed and the exact language/wording included in the statement can significantly impact their effectiveness as a tool for strategic management and marketing strategy. Firms strive to have customers exhibit an emotional bond with the firm’s

Table 5-5 Two Mission Statements Critiqued The numbers in parentheses correspond to the nine mission statement components. Pepsico We aspire to make PepsiCo the world’s (3) premier consumer products company, focused on convenient foods and beverages (2). We seek to produce healthy financial rewards for investors (5) as we provide opportunities for growth and enrichment to our employees (9), our business partners and the communities (8) in which we operate. And in everything we do, we strive to act with honesty, openness, fairness and integrity (6). (Author comment: Statement lacks three components: Customers (1), Technology (4), and Distinctive Competence (7); 62 words) royal caribbean We are loyal to Royal Caribbean and Celebrity and strive for continuous improvement in everything we do. We always provide service with a friendly greeting and a smile (7). We anticipate the needs of our customers and make all efforts to exceed our customers’ expectations. We take ownership of any problem that is brought to our attention. We engage in conduct that enhances our corporate reputation and employee morale (9). We are committed to act in the highest ethical manner and respect the rights and dignity of others. (6). (Author comment: Statement lacks six components: Customers (1), Products/ Services (2), Markets (3), Technology (4), Survival/Growth/Profits (5), and Public Image (8); 86 words) Source: Based on Meredith E. David, Forest R. David, & Fred R. David, “Mission Statement Theory and Practice: A Content Analysis and New Direction,” International Journal of Business, Marketing, and Decision Sciences 7, no. 1 (Summer 2014): 95–109. Also based on information found at the various corporate websites. © 2013 PepsiCo Inc. Used with Permission. Courtesy Royal Caribbean.

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Table 5-6 Five Mission Statements Revised The numbers in parentheses correspond to the nine mission statement components. rite aid We are on a mission to offer the best possible drugstore experience for people of all ages (1) around the United States (3). We have a state-of-the-art information system (4) that provides our pharmacists (9) with warnings of any possible drug interactions to help better ensure customer safety (8). We are determined to improve our customers’ overall health through our wellness programs (5). We offer an extensive line of other beauty, food, drink, cosmetic, and vitamin products through our alliance with GNC (2). We believe in treating our customers like family (6) and strive to maintain our reputation as the most personable drugstore (7). (88 words total) Best Buy We are committed to providing individuals and businesses (1) the latest high-tech products (2) at the lowest prices of any retail store (7). Serving North America, China, and other markets (3), all Best Buy employees (9) are exceptionally knowledgeable about the products we offer. We believe good ethics is good business (6) and use business analytics (4) to better understand customer trends. We strive to make a profit for our shareholders (5) and be a good community citizen everywhere we operate (8). (72 words) lowe’s We are committed to exceeding the expectations of our homebuilder, homeowner, and other customers (1). We offer superior home improvement products (2) and expert advice (7) at nearly 2,000 Lowe’s stores in the United States, Canada, and Mexico (3). We have a best-in-class electronic in-store tracking system (4) to help customers. We continue to create jobs (8) in all communities where we operate. Up to 80 percent of our employees work on a full-time basis (9) and have high ethical standards (6). We put the customer first as we strive to grow profitably for our shareholders (8). (88 words) United Parcel Service (UPS) We strive to be the most timely and dependable parcel and freight forwarding delivery service (2)in the world (3). By implementing the latest tracking technology (4), we are able to profitably grow (5)by offering individuals and businesses (1) dependable and accurate delivery times (7). We promote from within to improve morale among all employees (9). Our philosophy (6) is to responsibly balance the needs of our customers, employees, shareholders, and communities (8) in an exemplary manner. (68words) crocs, inc. Crocs is committed to providing profound comfort, fun and innovation in all the shoe models (2) we produce. Through our Croslite technology (4) (7), we are able to provide men, women, and children (1)dependable and lasting comfort all day. We strive to expand our brand throughout the world (3) and are able to save on costs (5), while protecting the environment (8) with our package-less shoes. We adhere to the belief that good ethics is good business (6) in all that we do as we strive to take care of our employees and shareholders. (85 words) Source: Based on Meredith E. David, Forest R. David, & Fred R. David, “Mission Statement Theory and Practice: A Content Analysis and New Direction,” International Journal of Business, Marketing, and Decision Sciences 7, no. 1 (Summer 2014): 95–109.

products/services and be “on a mission” to use and promote those offerings. Mission statements should be developed and used to foster customer satisfaction and create a bond between a firm and its customers. Involving marketers and sales representatives in the mission statement development process, coupled with including the nine components written from a customer perspective, could enable firms to create an emotional bond with customers, and enhance the likelihood that salespersons would be “on a mission” to provide excellent customer service. Avon and L’Oréal’s customers, for example, often portray an emotional bond or attachment to the firm’s products. Proposed, exemplary mission statements for Avon and L’Oréal are provided in Table5-7. These rival firms have uniquely different competitive advantages in that Avon utilizes door-to-door sales representatives to gain competitive advantage, whereas L’Oréal markets products in thousands of retail outlets. The proposed Avon and L’Oréal statements have the characteristics described earlier,

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Table 5-7 Two Exemplary, Proposed Mission Statements The numbers in parentheses correspond to the nine mission statement components. avon Our mission is to provide women (1) quality fragrances, cosmetics, and jewelry (2) at reasonable prices backed by outstanding customer service provided by our thousands of door-to-door sales representatives (7, 9) operating globally (3). We use the latest technology (4) to profitably develop and market products desired by women all over the world (5). Avon representatives put integrity first (6) in setting a good example in every community (8) they operate—as they sell beauty. (58 words) l’oréal Our mission is to design, produce, and distribute the world’s best fragrances, perfumes, and personal care products (2) to women, men, and children (1) by utilizing the latest technological improvements (4).We empower our highly creative team of researchers to develop safe, eco-friendly (7) products that will enable our firm to profitably grow (5) through thousands of retail outlets. We strive to be one of the most socially responsible (8) firms on the planet (3) and appreciate our employees (9) making that happen, while following the “golden rule” in all that we do (6). (85 words) Source: Based on Meredith E. David, Forest R. David, & Fred R. David, “Mission Statement Theory and Practice: A Content Analysis and New Direction,” International Journal of Business, Marketing, and Decision Sciences 7, no. 1 (Summer 2014): 95–109.

and include the nine components written from a customer perspective. The proposed Avon statement includes the nine components in 58 words, and provides a basis for an emotional bond to be established between the firm and its customers. For example, the Avon statement reveals that if you purchase Avon products, you will be rewarded with “outstanding customer service provided by a personal sales representative who adheres to the highest ethical standards, while providing fragrances, cosmetics, and jewelry that exhibit the highest technological advancements.” There is quite a lot in that brief statement that an Avon customer can become loyal to, especially when the Avon marketing representative reinforces the statement with her actions. Also written from a customer perspective, the proposed L’Oréal mission statement provides a basis for an emotional bond to be formed between the firm and its customers. Potential customers are reassured in the statement that the L’Oréal’s fragrances, perfumes, and personal care products are “organic” and developed by excellent teams of researchers. In addition, the statement reveals that L’Oréal does great philanthropy work and follows the “golden rule” in all endeavors. Customers may become more dedicated to L’Oréal when they see the company’s marketing communications reinforce the basic content given in the proposed mission statement. Loyal customers are a competitive advantage for any firm.

impLicAtions for strAtegists Figure 5-2 reveals that establishing and nurturing an effective vision and mission is a vital first step in gaining and maintaining competitive advantages. Businesses succeed by attracting and keeping customers, and they do this by providing better value for customers than do their rival firms. Marketers continually assess customers’ changing needs and wants and make appropriate adjustments in the design and delivery of products and services to sustain competitive advantage. Developing and communicating a clear business vision and mission is essential because without an effective vision and mission statements, a firm’s short-term actions may be counterproductive to long-term interests. A clear vision and mission provides direction for all subsequent activities that endeavor to see customers, employees, and shareholders concurrently “on a mission” to see the firm succeed. Vision and mission statements are not just words that look nice when framed or engraved; they provide a basis for strategy

and action; they reveal the reason a business opens its doors every day, the reason salespersons sell, the reason customers buy, and the reason employees work. The statements ideally are the passion behind the company, the foundation for employee morale, and the basis for customer loyalty. Written from a customer perspective and included in both oral and written communication with customers, the statements could be used to attract and keep customers. Vision and mission statements do matter. Marketers pursue projects and managers make daily decisions mindful of the firm’s basic vision, mission, and resources. Managers work hard every day trying to motivate employees. Executives are on a mission to present the firm favorably to many stakeholders. A clear vision and mission enables strategists to lead the way as a firm strives to gain, sustain, and grow its customer base and competitive advantages.

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Establish A Clear Vision & Mission

Evaluate & Monitor Results: Take Corrective Actions; Adapt To Change

Gain & Sustain Competitive Advantages

Formulate Strategies: Collect, Analyze, & Prioritize Data Using Matrices; Establish A Clear Strategic Plan

Implement Strategies: Establish Structure; Allocate Resources; Motivate & Reward; Attract Customers; Manage Finances

Figure 5-2 How to Gain and Sustain Competitive Advantages

impLicAtions for stuDents Because gaining and sustaining competitive advantage is the essence of strategic management, when presenting your vision and mission statements as part of a case analysis, be sure to address the “self-concept (distinctive competence)” component. Compare your recommended vision and mission statement with the firm’s existing statements, and with rival firms’ statements to clearly reveal how your recommendations or strategic plan enables the firm to gain and sustain competitive advantage. Your proposed mission statement

should certainly include the nine components and nine characteristics, but in your vision or mission discussion, focus on competitive advantage. In other words, be prescriptive, forward-looking, and insightful—couching your vision/mission overview in terms of how you believe the firm can best gain and sustain competitive advantage. Do not be content with merely showing a nine-component comparison of your proposed statement with rival firms’ statements, although that would be nice to include in your analysis.

Chapter Summary Every organization has a unique purpose and reason for being. This uniqueness should be reflected in vision and mission statements. The nature of a business vision and mission can represent either a competitive advantage or disadvantage for the firm. An organization achieves a heightened sense of purpose when strategists, managers, and employees develop and communicate a clear business vision and mission. Drucker says that developing a clear business vision and mission is the “first responsibility of strategists.” A good mission statement reveals an organization’s customers; products or services; markets; technology; concern for survival, growth, and profitability; philosophy; self-concept; concern for

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public image; and concern for employees. These nine basic components serve as a practical framework for evaluating and writing mission statements. As the first step in strategic management, the vision and mission statements provide direction for all planning activities. As indicated next in the mini-case, Citizen Holdings’ vision and mission statement is clear and working well for the company. Well-designed vision and mission statements are essential for formulating, implementing, and evaluating strategy. Developing and communicating a clear business vision and mission are the most commonly overlooked tasks in strategic management. Without clear statements of vision and mission, a firm’s short-term actions can be counterproductive to long-term interests. Vision and mission statements always should be subject to revision, but, if carefully prepared, they will require infrequent major changes. Organizations usually reexamine their vision and mission statements annually. Effective vision and mission statements stand the test of time. Vision and mission statements are essential tools for strategists—a fact illustrated in a short story told by Porsche’s former CEO Peter Schultz (paraphrased): Three guys were at work building a large church. All were doing the same job, but when each was asked what his job was, the answers varied: “Pouring cement,” the first replied; “Earning a paycheck,” responded the second; “Helping to build a cathedral,” said the third. Few of us can build cathedrals. But to the extent we can see the cathedral in whatever cause we are following, the job seems more worthwhile. Good strategists and a clear mission help us find those cathedrals in what otherwise could be dismal issues and empty causes.10

MyManagementLab® To complete the problems with the

, go to EOC Discussion Questions in the MyLab.

Key Terms and Concepts employees (p. 166) public image (p. 166) survival, growth, and profitability (p. 166) creed statement (p. 160) customers (p. 166) markets (p. 166) mission statement (p. 160) mission statement components (p. 166)

philosophy (p. 166) products or services (p. 166) reconciliatory (p. 164) self-concept (distinctive competence) (p. 166) stakeholders (p. 164) technology (p. 166) vision statement (p. 158)

Issues for Review and Discussion 5-1. Develop (or find) a mission statement for Samsung Electronics. Analyze the company’s mission statement in light of the guidelines in Chapter 4. 5-2. Summarize Samsung’s successful global strategy for the last decade. Can that strategy be as successful in 2016? Explain. 5-3. See if you can find a vision statement for Samsung. If not, write a proposed vision statement for the company. 5-4. Should the mission statement components vary in importance depending on type of business? If yes, how would their relative importance vary for Samsung versus Singapore Airlines? 5-5. List three things you are on a mission to accomplish in the next three years. How relevant is the concept of vision/mission to an individual in their personal and professional life? Explain.

5-6. Conduct a Google search for the key words “mission statement.” What are the two best websites in your opinion that provide example mission statements? 5-7. Write a vision statement for your university. Write a vision statement for your School (or College) of Business within the university. 5-8. If you just purchased a 10-employee company, how would you establish a clear vision and mission? 5-9. Search the web for six mission statement examples. Evaluate the six statements and bring your analysis to class. 5-10. How and why could the process of developing a vision and mission statement vary across countries? 5-11. In order of importance, list six benefits of having a clearly defined vision and mission statement. 5-12. Only the fairytale ends with a “they lived happily ever after.” What is the relevance of this

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5-13. 5-14. 5-15. 5-16. 5-17. 5-18.

5-19.

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statementto the concepts vision and mission statement? Define “reconciliatory” and give an example of how this “characteristic” can be met in a mission statement. List the nine mission statement components. Give an example of each component for your college or university. In order of importance, rank seven characteristics of a mission statement. Write a vision and mission statement for a local restaurant in your area. Write an excellent sentence for Samsung, which includes four mission statement components. Within a given industry, compare the mission statements of three companies in your country versus three competing companies from the United States. How do they differ? Does Singapore Airlines have its vision and mission statement posted on its website? Should the company? Why or why not?

5-20. How often do you think a firm’s vision and mission statements should be changed? Why? 5-21. Explain how a mission statement can be “reconciliatory.” Give an example. 5-22. Do local fast food restaurants need a mission statement posted in their place of business? Why or why not? 5-23. Understand the “Implications for Students” and explain how a team of students should couch their mission statement discussion of slides in a presentation. 5-24. List the four most important characteristics of a mission statement for a small retail store. Explain. 5-25. Give an example of how the “product” component of a mission statement could have a customer orientation for a charter fishing company. 5-26. Give an example of how the “technology” component of a mission statement could have a customer orientation for a charter fishing company. 5-27. Give an example of how the “philosophy” component of a mission statement could have a customer orientation for a charter fishing company.

MyManagementLab® Go to the Assignments section of your MyLab to complete these writing exercises. 5-28. Explain why a mission statement should not include 5-29. List seven characteristics of a mission statement. strategies and objectives.

AssurAnce of LeArning exercises exercise 5A

Examine Potential Changes Needed in a Firm’s Vision/Mission Purpose Samsung Electronics is featured in the opening chapter insert as a firm that engages in excellent strategic planning. This exercise gives you practice examining the change or needed change in a company’s vision and mission statements, given a change in the company’s product offerings. Visit the Samsung corporate website. Samsung’s vision statement is posted on their website, as: “Samsung is dedicated to developing innovative technologies and efficient processes that create new markets, enrich people’s lives and continue to make Samsung a digital leader.” The company’s mission statement is called a statement of philosophy and also is given on the corporate website. Samsung does an excellent job in strategic management.

Instructions Step 1 Step 2

Evaluate Samsung’s vision and mission statements in light of the characteristics and components in Chapter 5. Write improved vision and mission statements for Samsung Electronics given shortcomings of the statements based on Chapter 4 concepts and Samsung’s new products being rolled out globally.

exercise 5B

Studying an Alternative View of Mission Statement Content Purpose This exercise presents a somewhat different view of mission statements as compared to concepts presented in Chapter 5. For example, according to Bart, 1997, a mission statement consists of three essential components:

CHAPTER5 • VisionAndMissionAnAlysis

1. Key market—Who is your target client/customer? 2. Contribution—What product or service do you provide to that client? 3. Distinction—What makes your product or service unique, so that the client would choose you? For example, if you locate McDonald’s mission statement on the Internet, Bart’s essential components are covered in the following ways: • • •

Key Market: the fast food customer worldwide Contribution: tasty and reasonably-priced food prepared in a high-quality manner Distinction: delivered consistently (world-wide) in a low-key décor and friendly atmosphere.

Instructions Compare and contrast the guidelines presented by Bart with the guidelines presented in Chapter 5. Source: Based on information at Christopher K. Bart. “Sex, Lies, and Mission Statements,” Business Horizons, p. 9–18, November, 1997.

exercise 5c

Evaluate Mission Statements Purpose A business mission statement is an integral part of strategic management. It provides direction for formulating, implementing, and evaluating strategic activities. This exercise will give you practice evaluating mission statements, a skill that is a prerequisite to writing a good mission statement. The mission statement for Nestlé is given below:

Instructions Step 1 Step 2

Step 3

On a separate sheet of paper, write the nine mission statement components down the left side. Write “yes” or “no” beside each number to indicate whether you feel the Nestlé mission statement has included the respective component. For any component that you record a “no,” write a good sentence to encompass that component. Submit your paper to your instructor for a grade.

exercise 5D

Evaluate the Vision and Mission Statements of Unilever, Nestlé’s Competitor Purpose There is always room for improvement in regard to an existing vision and mission statement. A major competitor to Nestlé is Unilever. Those two firms for example produce one third of all the ice cream sold on the planet. Go to the Unilever’s website, visit the “our vision” page, and review their corporate vision statement and purpose (mission) statement.

Instructions Step 1 Step 2

Step 3 Step 4

On a separate sheet of paper, write the nine mission statement components down the left side. Write “yes” or “no” beside each number to indicate whether you feel the Unilever mission statement has included the respective component. For any component that you record a “no,” write a good sentence to encompass that component. Turn your paper in to your instructor for a grade. Write a new and improved vision statement for Unilever.

exercise 5e

Selecting the Best Vision and Mission Statements in a Given Industry Purpose This exercise is designed to get you familiar with existing vision and mission statements in an industry of your choice.

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Instructions Identify companies in an industry that you are interested in working in one day. Find five company vision statements and five company mission statements. Rank your five vision statements and your five mission statements in order of attractiveness, with 1 being the best and 5 being the worst. Give a rationale for your rankings.

exercise 5f

Write an Excellent Vision and Mission Statement for Novartis AG Purpose This exercise is designed to give you practice developing from scratch or improving an existing vision and mission statement.

Instructions Step 1

Step 2

Go to the Novartis AG website and look for the company’s vision statement and mission statement. Look at https://www.novartis.com/about-us. Recall from Chapter 4 that companies use different names or titles for these documents. Prepare an improved vision and mission statement for Novartis AG whether or not you were able to find these statements on the company’s website or in the firm’s Annual Report.

mini-cAse on citizen hoLDings compAny LimiteD (cizn)

DOES CITIZEN HOLDINGS’ HAVE A CLEAR VISION OR MISSION?

Source: © georgy Kopytin.123rf

Citizen Holdings, headquartered in Nishitokyo, Japan, manufactures Cincom precision lathe machine tools as well as Citizen and Bulova watches. The company has five segments—watches and clocks, machine tools, devices and components, electronic products, and other products. The financial results for the first quarter of the fiscal year ending March 31, 2016, saw the watches and clocks segment increase profits, with net sales of ¥43.0 billion (up 13.3 percent year-on-year) and operating income of ¥4.5 billion (up 101.3 percent year-on-year). The machine tools segment achieved higher sales but lower profits, with net sales of ¥12.2 billion (up 5.4 percent year-on-year) and operating income of ¥1.2 billion (down 12.5 percent year-on-year). The devices and components segment saw net sales of ¥19.8 billion (up 18.9 percent year-on-year) and operating income of ¥1.7 billion (up 3.1 percent year-on-year). However, the electronic products segment fell in both sales and profit, with net sales of ¥5.7 billion (down 11.3 percent year-on-year) and operating income of ¥0.0 billion (down 99.9 percent year-on-year), and the other product segment, as a whole, recorded lower sales but higher profits, with net sales of ¥2.7 billion and operating loss of ¥0.1 billion. For the three months ended June 30, 2015, Citizen’s sales amounted to ¥83,690 million, a 10.2 percent increase from the previous year. The company’s operating income for the three months ending June 30, 2015 was ¥6,350 million, which was a 39 percent increase from the previous year. For now Citizen Holdings Company is ticking along very nicely. Questions

1. Visit the corporate index on Citizen’s global website. This provides Citizen’s corporate profile. Check whether a vision/mission statement is given. If yes, evaluate that statement in light of the content provided in the chapter. If no vision or mission is found, write an excellent vision and mission statement for the bank. 2. On the About Us section of the company’s website, go to the message section. It appears that the CEO of Citizen Holdings, Toshio Tokura, has a vision for the company. It is “Aiming to be a ‘Solid Global Company’.” Is that slogan useful as a vision statement? Explain. Source: Based on company documents.

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Current Readings Bartkus, Barbara, Myron Glassman, and R. Bruce McAfee. “Mission Statements: Are They Smoke and Mirrors?” Business Horizons 43, no. 6 (November–December 2000): 23. Binns, Andy, et al. “The Art of Strategic Renewal.” MIT Sloan Management Review 55, no. 2 (2014): 21–23. Birkinshaw, Julian, Nicolai J. Foss, and Siegwart Lindenberg. “Combining Purpose with Profits.” MIT Sloan Management Review 55, no. 3 (2014): 49–56. Braun, S., J. S. Wesche, D., Frey, S. Weisweller, & C. Paus. “Effectiveness of Mission Statements in Organizations—AReview.” Journal of Management & Organization, 18 (2012): 430–444. Canton, Andrew M., Chad Murphy, and Jonathan R. Clark. “A(Blurry) Vision of the Future: How Leader Rhetoric about Ultimate Goals Influences Performance.” Academy of Management Journal, 57 (December 2014): 1,544–1,570. Church Mission Statements, http://www.missionstatements. com/church_mission_statements.html Collins, David J., and Michael G. Rukstad. “Can You Say What Your Strategy Is?” Harvard Business Review (April 2008): 82. Company Mission Statements, http://www.missionstatements.com/company_mission_statements.html Conger, Jay A., and Douglas A. Ready. “Enabling Bold Visions.” MIT Sloan Management Review 49, no. 2 (Winter 2008): 70. Craig, Nick, and Scott Snook. “From Purpose to Impact.” Harvard Business Review 92, no. 5 (2014): 104–111. David, Meredith E., Forest R. David, and Fred R. David. “Mission Statement Theory and Practice: A Content Analysis and New Direction.” International Journal of Business, Marketing, and Decision Sciences 7, no. 1 (Summer 2014): 95–109. Day, George S., and Paul Schoemaker. “Peripheral Vision: Sensing and Acting on Weak Signals.” Long Range Planning 37, no. 2 (April 2004): 117. Desmidt, S., A. Prinzie, and A. Decramer. “Looking for theValue of Mission Statements: A Meta-Analysis of 20Years of Research.” Management Decision, 49 (2011): 468–483. Devasagayam, R., N. R. Stark, and L. S. Valestin. “Examining the Linearity of Customer Satisfaction: Return on Satisfaction as an Alternative.” Business Perspectives and Research, 1 (2013): 1–8.

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Hollensbe, Elaine, Charles Wookey, Loughlin Hickey, and Gerard George, “Organizations with Purpose.” Academy of Management Journal 57, no. 5 (October 2014): 1227–1234. Ibarra, Herminia, and Otilia Obodaru. “Women and the Vision Thing.” Harvard Business Review (January 2009): 62–71. Lissak, Michael, and Johan Roos. “Be Coherent, Not Visionary.” Long Range Planning 34, no. 1 (February 2001): 53. Luo, X, J. Wieseke, and C. Homburg. “Incentivizing CEOs to Build Customer- and Employee-Firm Relations for Higher Customer Satisfaction and Firm Value.” Journal of the Academy of Marketing Science, 40 (2012): 745–758. MacMillan, Martin I. “Managing Your Mission—Critical Knowledge.” Harvard Business Review (January–February 2015). Newsom, Mi Kyong, David A. Collier, and Eric O. Olsen. “Using ‘Biztainment’ to Gain Competitive Advantage.” Business Horizons (March–April 2009): 167–166. Nonprofit Organization Mission Statements, http://www.missionstatements.com/nonprofit_mission_statements.html Palmer, T. B., and J. C. Short. “Mission Statements in U.S. Colleges of Business: An Empirical Examination of Their Content with Linkages to Configurations and Performance.” Academy of Management Learning & Education 7 (2008): 454–470. Peyrefitte, Joe, and Forest R. David. “A Content Analysis of the Mission Statements of United States Firms in Four Industries.” International Journal of Management, 23 (2006): 296–301. Powers, E. L. “Organizational Mission Statement Guidelines Revisited.” International Journal of Management & Information Systems 16 (2012): 281–290. Rarick, C., and J. Vitton. “Mission Statements That Make Cents.” Journal of Business Strategy, 16 (1995): 11–12. Restaurant Mission Statements, http://www.missionstatements. com/restaurant_mission_statements.html School Mission Statements, http://www.missionstatements. com/school_mission_statements.html Sidhu, J. “Mission Statements: Is It Time to Shelve Them?” European Management Journal 21 (2003): 439–446. Smith, M., R. B. Heady, P. P. Carson, and K. D. Carson. “Do Missions Accomplish Their Missions? An Exploratory Analysis of Mission Statement Content and Organizational Longevity.” The Journal of Applied Management and Entrepreneurship 6 (2001): 75–96.

Endnotes 1. Peter Drucker, Management: Tasks, Responsibilities, and Practices (New York: Harper & Row, 1974), 61. 2. Andrew Campbell and Sally Yeung, “Creating a Sense of Mission,” Long Range Planning 24, no. 4 (August 1991): 17. 3. W. R. King and D. I. Cleland, Strategic Planning and Policy (New York: Van Nostrand Reinhold, 1979), 124. 4. Brian Dumaine, “What the Leaders of Tomorrow See,” Fortune (July 3, 1989), 50. 5. “How W. T. Grant Lost $175 Million Last Year,” Business Week (February 25, 1975), 75. 6. Drucker, Management, 88.

7. John Pearce II, “The Company Mission as a Strategic Tool,” Sloan Management Review 23, no. 3 (Spring 1982): 74. 8. George Steiner, Strategic Planning: What Every Manager Must Know (New York: The Free Press, 1979), 160. 9. David, Meredith E., David, Forest R., and David, Fred R. “Mission Statement Theory and Practice: A Content Analysis and New Direction,” International Journal of Business, Marketing, and Decision Sciences, Vol. 7, No. 1, Summer 2014, 95-109. 10. http://ezinearticles.com/?Elements-of-a-MissionStatement&id=3846671

Source: © Dabarti CGI.Shutterstock

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The Internal Audit LeArning oBjectives After studying this chapter, you should be able to do the following: 6-1. Describe the nature and role of an internal assessment in formulating strategies. 6-2. Discuss why organizational culture is so important in formulating strategies. 6-3. Identify the basic functions (activities) that make up management and their relevance in formulating strategies. 6-4. Identify the basic functions of marketing and their relevance in formulating strategies. 6-5. Discuss the nature and role of finance/accounting in formulating strategies. 6-6. Discuss the nature and role of production/operations in formulating strategies. 6-7. Discuss the nature and role of research and development (R&D) in formulating strategies. 6-8. Discuss the nature and role of management information systems (MIS) in formulating strategies. 6-9. Explain value chain analysis and its relevance in formulating strategies. 6-10. Develop and use an Internal Factor Evaluation (IFE) Matrix.

AssurAnce of LeArning exercises The following exercises are found at the end of this chapter: exercise 6A exercise 6B

exercise 6c exercise 6D exercise 6e exercise 6f

Develop a Corporate IFE Matrix for Volkswagen Group Should Volkswagen Deploy More (or Less) Resources Outside of Europe? Apply Breakeven Analysis Perform a Financial Ratio Analysis for Nestlé Construct an IFE Matrix for Nestlé Analyze Your College or University’s Internal Strategic Situation

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his chapter focuses on identifying and evaluating a firm’s strengths and weaknesses in the functional areas of business, including management, marketing, finance, accounting, production/operations, research and development (R&D), and management information systems (MIS). Relationships among these areas of business are examined. Also, strategic implications of important functional area concepts are explained. In addition, this chapter describes the process of performing an internal audit. The resource-based view (RBV) of strategic management is introduced, as is value chain analysis (VCA) and benchmarking. Showcased here for exemplary strategic management, Vodafone does an excellent job using its strengths to capitalize on external opportunities. Expanding rapidly globally, Vodafone is the world’s second largest mobile telecommunications, behind China Mobile, and is attracting potential customers globally.

The Nature of an Internal Audit All organizations have strengths and weaknesses in the functional areas of business. No enterprise is equally strong or weak in all areas. Maytag, for example, is known for excellent production and product design, whereas Procter & Gamble is known for superb marketing. Internal strengths and weaknesses, coupled with external opportunities and threats and clear vision and mission statements, provide the basis for establishing objectives and strategies. Objectives and strategies are established with the intention of capitalizing on internal strengths and overcoming weaknesses. The internal-audit part of the strategic-management process is illustrated in Figure6-1 with white shading.

exempLAry compAny showcAseD

Vodafone Group Plc (VOD) Vodafone is based in London, the United Kingdom, and is considered to be the second largest mobile telecommunications. It holds and operates networks in 30 countries with partner networks in almost 60 countries. Vodafone recently announced results for the six months ended September 30, 2015. The Group highlighted organic service revenue growth of 1.0 percent and indicated that its revenue fell by 2.3 percent to £20.3 billion. The 2015 results was the company’s fifth consecutive quarter of improving revenue trends, with a second quarter organic service revenue growth of 1.2 percent. The company’s website states that EBITDA was up by 1.9 percent to £5.8 billion. Increasing operating and acquisition costs related to Project Spring were offset by service revenue growth, with the phasing out of Project Spring being reflected in the company’s free cash outflow of £0.5 billion. While the interim dividend per share increased by 2.2 percent, Vodafone had a net debt £28.9 billion, or £25.4 billion net of $5.2 billion Verizon loan notes. Vodafone’s revenue for the six months that ended September 30, 2015, for Europe was €12,104, up 1.8 percent from the prior period, and for Africa, Middle East, and Asia Pacific (AMAP) was €5,889, down 1.7 percent from the previous year. The company’s operating

profit for that six-month period was € 933, up 1.7 percent from the prior period. Vodafone now has 29.9 million 4G customers and provides 4G coverage to 80 percent of Europe. Vodafone also saw other positive statistics, including an H1 mobile data traffic growth of 75 percent, an increase in the average usage per customer in Europe, 12.5 million broadband customers, and marketing high speed broadband to 66 million homes in Europe. In the commercial front Vodafone had 2.7 million mobile contract net adds and 0.5 million net new broadband customers in H1. In the second quarter, the enterprise revenue was above 29.2 percent, machine-to-machine, and the Group’s global enterprise above 7.3 percent. While sustaining its commercial momentum in emerging markets, Vodafone’s preparations for IPO in India are in progress. Source: Based on company documents.

CHAPTER6 • THEInTERnAlAudIT

Chapter 2: Outside-USA Strategic Planning

The Internal Audit Chapter 6

Vision and Mission Analysis Chapter 5

Types of Strategies Chapter 4

Strategy Generation and Selection Chapter 8

Strategy Implementation Chapter 9

Strategy Execution Chapter 10

Strategy Monitoring Chapter 11

The External Audit Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 6-1 A Comprehensive Strategic-Management Model Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.

Key Internal Forces It is impossible in a strategic-management text to review in depth all the material presented in courses such as marketing, finance, accounting, management, management information systems, and production and operations; there are many subareas within these functions, such as customer service, warranties, advertising, packaging, and pricing under marketing. However, strategic planning must include a detailed assessment of how the firm is doing in all internal areas. A complete internal assessment is vital to help a firm formulate, implement, and evaluate strategies to enable it to gain and sustain competitive advantages. For different types of organizations, such as hospitals, universities, and government agencies, the functional business areas differ. In a hospital, for example, functional areas may include cardiology, hematology, nursing, maintenance, physician support, and receivables. Functional areas of a university can include athletic programs, placement services, housing, fund-raising, academic research, counseling, and intramural programs. Regardless of the type or size of firm, effective strategic planning hinges on identification and prioritization of internal strengths and weaknesses.

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Weaknesses 1 Strenghts 1 Distinctive Competencies 1 Competitive Advantage

Figure 6-2 The Process of Gaining Competitive Advantage in a Firm

Strengths that cannot be easily matched or imitated by competitors are called distinctive competencies. Building competitive advantages involves taking advantage of distinctive competencies. Strategies are designed in part to improve on a firm’s weaknesses, turning them into strengths—and maybe even into distinctive competencies. Figure 6-2 illustrates that all firms should continually strive to improve on their weaknesses, turning them into strengths, and ultimately develop distinctive competencies that can provide the firm with competitive advantages over rival firms.

The Process of Performing an Internal Audit The process of performing an internal audit closely parallels the process of performing an external audit. Representative managers and employees from throughout the firm need to be involved in determining a firm’s strengths and weaknesses. The internal audit requires gathering, assimilating, and prioritizing information about the firm’s management, marketing, finance and accounting, production and operations, R&D, and MIS operations to reveal the firm’s most important strengths and most severe weaknesses. Compared to the external audit, the process of performing an internal audit provides more opportunity for participants to understand how their jobs, departments, and divisions fit into the whole organization. This is a great benefit because managers and employees perform better when they understand how their work affects other areas and activities of the firm. For example, when marketing and manufacturing managers jointly discuss issues related to internal strengths and weaknesses, they gain a better appreciation of the issues, problems, concerns, and needs of all the functional areas. Thus, performing an internal audit is an excellent vehicle or forum for improving the process of communication in an organization. William King believes a task force of managers from different units of the organization, supported by staff, should be charged with determining the 20 most important strengths and weaknesses that should influence the future of the firm. According to King, The development of conclusions on the 20 most important organizational strengths and weaknesses can be, as any experienced manager knows, a difficult task, when it involves managers representing various organizational interests and points of view. Developing a 20-page list of strengths and weaknesses could be accomplished relatively easily, but a list of the 20 most important ones involves significant analysis and negotiation. This is true because of the judgments that are required and the impact which such a list will inevitably have as it is used in the formulation, implementation, and evaluation of strategies.1 Strategic planning is most successful when managers and employees from all functional areas work together to provide ideas and information. Financial managers, for example, may need to restrict the number of feasible options available to operations managers, or R&D managers may develop products for which marketing managers need to set higher objectives. A key to organizational success is effective coordination and understanding among managers from all functional business areas. Through involvement in performing an internal strategicmanagement audit, managers from different departments and divisions of the firm come to understand the nature and effect of decisions in other functional business areas in their firm. Knowledge of these relationships is critical for effectively establishing objectives and strategies. Financial ratio analysis, for example, exemplifies the complexity of relationships among the functional areas of business. A declining return on investment or profit margin ratio could, for example, be the result of ineffective marketing, poor management policies, R&D errors, or a weak MIS.

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The Resource-Based View Some researchers emphasize the importance of the internal-audit part of the strategic-management process by comparing it to the external audit. Robert Grant, for example, concluded that the internal audit is more important, saying: In a world where customer preferences are volatile, the identity of customers is changing, and the technologies for serving customer requirements are continually evolving, an externally focused orientation does not provide a secure foundation for formulating longterm strategy. When the external environment is in a state of flux, the firm’s own resources and capabilities may be a much more stable basis on which to define its identity. Hence, a definition of a business in terms of what it is capable of doing may offer a more durable basis for strategy.2 The resource-based view (RBV) approach to competitive advantage contends that internal resources are more important for a firm than external factors in achieving and sustaining competitive advantage. In contrast to the Industrial Organization (I/O) theory presented in the previous chapter, proponents of the RBV view/theory contend that organizational performance will primarily be determined by internal resources that can be grouped into three all-encompassing categories: physical resources, human resources, and organizational resources.3 Physical resources include all plant and equipment, location, technology, raw materials, and machines; human resources include all employees, training, experience, intelligence, knowledge, skills, and abilities; and organizational resources include firm structure, planning processes, information systems, patents, trademarks, copyrights, databases, and so on. A firm’s resources can be tangible, such as labor, capital, land, plant, and equipment, or resources can be intangible, such as culture, knowledge, brand equity, reputation, and intellectual property. Since tangible resources can more easily be bought and sold, intangible resources are often more important for gaining and sustaining competitive advantage. Resource-based view theory asserts that resources are actually what helps a firm exploit opportunities and neutralize threats. As indicated in the Academic Research Capsule 6-1, RBV theory may be helpful in identifying diversification targets. The basic premise of the RBV is that the mix, type, amount, and nature of a firm’s internal resources should be considered first and foremost in devising strategies that can lead to sustainable competitive advantage. Managing strategically according to the RBV involves developing and exploiting a firm’s unique resources and capabilities, and continually maintaining and strengthening those resources. The theory asserts that it is advantageous for a firm to pursue a strategy that is not currently being implemented by any competing firm. When other firms are unable to duplicate a particular strategy, then the focal firm has a sustainable competitive advantage, according to RBV theorists. A resource can be considered valuable to the extent that it is (1) rare, (2) hard to imitate, or (3) not easily substitutable. Often called empirical indicators, these three characteristics of resources enable a firm to implement strategies that improve its efficiency and effectiveness and lead to a sustainable competitive advantage. The more a resource(s) is rare (not held by many

AcADemic reseArch cApsuLe 6-1

Does RBV Theory Determine Diversification Targets? Recent research by Neffke and Henning basically says the answer to this question is yes. Their empirical evidence reveals that it is the nature of a firm’s human capital, more than any other variable in the firm’s value chain, that impacts that firm’s choice of diversification targets. Specifically, firms select acquisition targets that offer opportunities to leverage existing human resources. Neffke and Henning report that firms are far more likely to diversify into industries that have ties to the firms’ core RBV activities in terms of their existing

workforce, rather than into industries without such ties. In fact, the researchers report that “firms are over 100 times more likely to diversify into industries to which the firms’ internal human assets are strongly complementary, rather than into industries for which such skill-relatedness linkages are weak.” Source: Based on F. Neffke & M. Henning, “Skill Relatedness and Firm Diversification,” Strategic Management Journal 34 (2013): 297–316.

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firms in the industry), hard to imitate (hard to copy or achieve), and/or not easily substitutable (invulnerable to threat of substitution from different products), the stronger a firm’s competitive advantage will be and the longer it will last.

Integrating Strategy and Culture Every business entity has a unique organizational culture that impacts strategic-planning activities. Organizational culture is “a pattern of behavior that has been developed by an organization as it learns to cope with its problem of external adaptation and internal integration, and that has worked well enough to be considered valid and to be taught to new members as the correct way to perceive, think, and feel.”4 This definition emphasizes the importance of matching external with internal factors in making strategic decisions. Organizational culture captures the subtle, elusive, and largely unconscious forces that shape a workplace. Remarkably resistant to change, culture can represent a major strength or weakness for any firm. It can be an underlying reason for strengths or weaknesses in any of the major business functions. Defined in Table 6-1, cultural products include values, beliefs, rites, rituals, ceremonies, myths, stories, legends, sagas, language, metaphors, symbols, folktales, and heroes and heroines. These products or dimensions are levers that strategists can use to influence and direct strategy formulation, implementation, and evaluation activities. An organization’s culture compares to an individual’s personality in the sense that no two organizations have the same culture and no two individuals have the same personality. Both culture and personality are enduring and can be warm, aggressive, friendly, open, innovative, conservative, liberal, harsh, or likable. At Google and Facebook, for example, the cultures are informal. Google employees are encouraged to wander the halls on employee-sponsored scooters and brainstorm on public whiteboards provided everywhere. In contrast, the culture at Procter & Gamble (P&G) is so rigid that employees jokingly call themselves “Proctoids.” Despite this difference, the two companies are swapping employees and participating in each other’s staff training sessions. Why? One reason is that P&G spends more money on advertising than any other company and Google desires more of P&G’s roughly $8 billion in annual advertising expenses.

Table 6-1 Examples of Cultural Products Defined Rites Ceremonies Rituals Myths Sagas Legends Stories Folktales Symbols Language Metaphors Values Beliefs Heroes/Heroines

Planned sets of activities that consolidate various forms of cultural expressions into one event Several rites connected together Standardized sets of behaviors used to manage anxieties Narratives of imagined events, usually not supported by facts Historical narratives describing the unique accomplishments of a group and its leaders Handed-down narratives of some wonderful event, usually not supported by facts Narratives usually based on true events Fictional stories Any object, act, event, quality, or relation used to convey meaning The manner in which members of a group communicate Shorthand of words used to capture a vision or to reinforce old or new values Life-directing attitudes that serve as behavioral guidelines Understanding of particular phenomena Individuals greatly respected

Source: Based on H. M. Trice and J. M. Beyer, “Studying Organizational Cultures through Rites and Ceremonials,” Academy of Management Review 9, no. 4 (October 1984): 655.

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Dimensions of organizational culture permeate all the functional areas of business. It is something of an art to uncover the basic values and beliefs that are deeply buried in an organization’s rich collection of stories, language, heroes, and rituals, but cultural products can represent both important strengths and weaknesses. Culture is an aspect of an organization that can no longer be taken for granted in performing an internal strategic-management audit, because culture and strategy must work together. The strategic-management process takes place largely within a particular organization’s culture. Lorsch found that executives in successful companies are emotionally committed to the firm’s culture, but he concluded that culture can inhibit strategic management in two basic ways. First, managers frequently miss the significance of changing external conditions because they are blinded by strongly held beliefs. Second, when a particular culture has been effective in the past, the natural response is to stick with it in the future, even during times of major strategic change.5 An organization’s culture must support the collective commitment of its people to a common purpose. It must foster competence and enthusiasm among managers and employees. Organizational culture significantly affects business decisions and must therefore be evaluated during an internal strategic-management audit. If strategies can capitalize on cultural strengths, such as a strong work ethic or highly ethical beliefs, then management often can swiftly and easily implement changes. However, if the firm’s culture is not supportive, strategic changes may be ineffective or even counterproductive. A firm’s culture can become antagonistic to new strategies, with the result being confusion and disorientation. Table 6-2 provides some example (possible) aspects of an organization’s culture. Note that you might want to ask employees and managers to rate the degree that the dimension characterizes the firm. When one firm acquires another firm, integrating the two cultures effectively can be vital for success. For example, in Table 6-2, one firm may score mostly 1s (low) and the other firm may score mostly 5s (high), which would present a challenging strategic problem. An organization’s culture should infuse individuals with enthusiasm for implementing strategies. Allarie and Firsirotu emphasized the need to understand culture: Culture provides an explanation for the insuperable difficulties a firm encounters when it attempts to shift its strategic direction. Not only has the “right” culture become the essence and foundation of corporate excellence, it is also claimed that success or failure of reforms hinges on management’s sagacity and ability to change the firm’s driving culture in time and in time with required changes in strategies.6 Internal strengths and weaknesses associated with a firm’s culture sometimes are overlooked because of the interfunctional nature of this phenomenon. This is a key reason why strategists Table 6-2 Fifteen Example (Possible) Aspects of an Organization’s Culture Dimension 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Strong work ethic; arrive early and leave late High ethical beliefs; clear code of business ethics followed Formal dress; shirt and tie expected Informal dress; many casual dress days Socialize together outside of work Do not question supervisor’s decision Encourage whistle-blowing Be health conscious; have a wellness program Allow substantial “working from home” Encourage creativity, innovation, and open-mindedness Support women and minorities; no glass ceiling Be highly socially responsible; be philanthropic Have numerous meetings Have a participative management style Preserve the natural environment; have a sustainability program

low 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Degree 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2

3 3 3 3 3 3 3 3 3 3 3 3 3 3 3

4 4 4 4 4 4 4 4 4 4 4 4 4 4 4

High 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5

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need to view and understand their firm as a sociocultural system. Success is oftentimes determined by linkages between a firm’s culture and strategies. The challenge of strategic management today is to bring about the changes in organizational culture and individual mind-sets that are needed to support the formulation, implementation, and evaluation of strategies.

Management The functions of management consist of five basic activities: planning, organizing, motivating, staffing, and controlling. An overview of these activities is provided in Table 6-3. These activities must be examined in strategic planning because an organization should continually capitalize on its strengths and improve on its weaknesses in these five areas.

Planning The only thing certain about the future of any organization is change, and planning is the essential bridge between the present and the future that increases the likelihood of achieving desired results. Planning is the process by which a person (1) determines whether to attempt a task, (2)works out the most effective way of reaching desired objectives, and (3) prepares to overcome unexpected difficulties with adequate resources. Planning is the start of the process by which an individual or business may turn empty dreams into achievements. Planning enables one to avoid the trap of working extremely hard but achieving little.

Table 6-3 The Basic Functions of Management Function

Description

Planning

Planning consists of all those managerial activities related to preparing for the future, such as forecasting, establishing objectives, devising strategies, and developing policies. Organizing includes all those managerial activities that result in a structure of task and authority relationships, such as organizational design, job specialization, job descriptions, span of control, coordination, job design, and job analysis. Motivating involves efforts directed toward shaping human behavior. Specific topics include leadership, communication, work groups, behavior modification, delegation of authority, job enrichment, job satisfaction, needs fulfillment, organizational change, employee morale, and managerial morale. Staffing refers to human resource (HR) activities, such as wage and salary administration, employee benefits, interviewing, hiring, firing, training, management development, employee safety, equal employment opportunity, and union relations. Controlling refers to all those managerial activities directed toward ensuring that actual results are consistent with planned results. Key areas of concern include quality control, financial control, sales control, inventory control, expense control, analysis of variances, rewards, and sanctions.

Organizing

Motivating

Staffing

Controlling

Stage of Strategic-Management Process When Most Important Strategy Formulation

Strategy Implementation

Strategy Implementation

Strategy Implementation

Strategy Evaluation

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Planning is an up-front investment in success. It helps a firm achieve maximum effect from a given effort. It also enables a firm to take into account relevant factors and focus on the critical ones. Planning helps ensure that the firm can be prepared for all reasonable eventualities and for all changes that will be needed. The act of planning allows a firm to gather the resources needed and carry out tasks in the most efficient way possible. It also enables a firm to conserve its own resources, avoid wasting ecological resources, make a fair profit, and be seen as an effective, useful firm. Furthermore, planning enables a firm to identify precisely what is to be achieved and to detail precisely the who, what, when, where, why, and how needed to achieve desired objectives. It empowers a firm to assess whether the effort, costs, and implications associated with achieving desired objectives are warranted.7 Planning is the cornerstone of effective strategy formulation, and even though it is considered the foundation of management, it is commonly the task that managers neglect most. Planning is essential for successful strategy implementation and strategy evaluation, largely because organizing, motivating, staffing, and controlling activities depend on good planning. Planning can have a positive impact on organizational and individual performance. It allows an organization to identify and take advantage of external opportunities as well as minimize the impact of external threats. Planning is more than extrapolating from the past and present into the future (long-range planning). It also includes developing a mission, forecasting future events and trends, establishing objectives, and choosing strategies to pursue. An organization can develop synergy through planning. Synergy exists when everyone pulls together as a team that knows what it wants to achieve; synergy is the 2 + 2 = 5 effect. By establishing and communicating clear objectives, employees and managers can work together toward desired results. Synergy can result in powerful competitive advantages. The strategic-management process itself is aimed at creating synergy in an organization. In addition, planning allows a firm to adapt to changing markets and thus shape its destiny. It enables an organization to be proactive, to anticipate, and to influence, rather than being primarily reactive strategies. Successful organizations strive to control their own futures rather than merely react to external forces and events as they occur. Historically, organisms and organizations that have not adapted to changing conditions have become extinct.

Organizing The purpose of organizing is to achieve coordinated effort by defining task and authority relationships. Organizing means determining who does what and who reports to whom. There are countless examples in history of well-organized enterprises successfully competing against— and in some cases defeating—much stronger but less-organized firms. A well-organized firm generally has motivated managers and employees who are committed to seeing the organization succeed. Resources are allocated more effectively and used more efficiently in a well-organized firm than in a disorganized firm. The organizing function of management can be viewed as consisting of three sequential activities: breaking down tasks into jobs (work specialization), combining jobs to form departments (departmentalization), and delegating authority. Breaking down tasks into jobs requires the development of job descriptions and job specifications. These tools clarify for both managers and employees what particular jobs entail. In The Wealth of Nations, published in 1776, Adam Smith cited the advantages of work specialization in the manufacture of pins: One man draws the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head. Ten men working in this manner can produce 48,000 pins in a single day, but if they had all wrought separately and independently, each might at best produce twenty pins in a day.8 Combining jobs to form departments results in an organizational structure, span of control, and a chain of command. Changes in strategy often require changes in structure because positions may be created, deleted, or merged. Organizational structure dictates how resources are allocated and how objectives are established in a firm. Allocating resources and establishing objectives geographically, for example, is much different from doing so by product or customer. The most common types of structure are functional, divisional, strategic business unit, and matrix. These designs are discussed in Chapter 10.

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Delegating authority is an important organizing activity, as evidenced in the old saying, “You can tell how good a manager is by observing how his or her department functions when he or she isn’t there.” Employees today are more educated and more capable of participating in organizational decision making than ever before. In most cases, they expect to be delegated authority and responsibility and to be held accountable for results. Delegation of authority is embedded in the strategic-management process.

Motivating Motivating is the process of influencing people to accomplish specific objectives.9 Motivation explains why some people work hard and others do not. Objectives, strategies, and policies have little chance of succeeding if employees and managers are not motivated to implement strategies once they are formulated. The motivating function of management includes at least four major components: leadership, group dynamics, communication, and organizational change. When managers and employees of a firm strive to achieve high levels of productivity, this indicates that the firm’s strategists are good leaders. Good leaders establish rapport with subordinates, empathize with their needs and concerns, set a good example, and are trustworthy and fair. Leadership includes developing a vision of the firm’s future and inspiring people to work hard to achieve that vision. Kirkpatrick and Locke reported that certain traits also characterize effective leaders: knowledge of the business, cognitive ability, self-confidence, honesty, integrity, and drive.10 Stressing the importance of leadership, Sun Tzu stated, “Weak leadership can wreck the soundest strategy.” Research suggests that democratic behavior on the part of leaders results in more positive attitudes toward change and higher productivity than does autocratic behavior. According to Drucker: Leadership is not a magnetic personality. That can just as well be demagoguery. It is not “making friends and influencing people.” That is flattery. Leadership is the lifting of a person’s vision to higher sights, the raising of a person’s performance to a higher standard, the building of a person’s personality beyond its normal limitations.11 Because social media has come to dominate the conversation at all levels of personal and professional life, Frank Guglielmo in The Social Leader reports that the best leaders today do not function like generals. Rather, Guglielmo observes, “Leaders today need to be more concerned with their span of influence than their span of control; agendas are negotiated, not dictated; information is shaped, not controlled; and accountability is shared, not monitored.”12 Selladurai and Carraher in Servant Leadership: Research and Practice (2014) promote the idea that true leadership requires a dissolution of autocratic thinking in favor of leading by guiding and encouraging. An organization’s system of communication determines whether strategies can be implemented successfully. Good two-way communication is vital for gaining support for departmental and divisional objectives and policies. Top-down communication can encourage bottomup communication. The strategic-management process becomes a lot easier when subordinates are encouraged to discuss their concerns, reveal their problems, provide recommendations, and give suggestions. A primary reason for instituting strategic management is to build and support effective communication networks throughout the firm. The manager of tomorrow must be able to get his [or her] people to commit themselves to the business, whether they are machine operators or junior vice-presidents. The key issue will be empowerment, a term whose strength suggests the need to get beyond merely sharing a little information and a bit of decision making.13

Staffing The management function of staffing, or human resource (HR) management, includes activities such as recruiting, interviewing, testing, selecting, orienting, training, developing, caring for, evaluating, rewarding, disciplining, promoting, transferring, demoting, and dismissing employees, as well as managing union relations. Staffing activities play a major role in strategyimplementation efforts, and for this reason, HR managers are becoming more actively involved

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in the strategic-management process. It is important to identify strengths and weaknesses inthestaffing area. The complexity and importance of HR activities have increased to such a degree that all but the smallest organizations generally have a full-time human resource manager. Numerous court cases that directly affect staffing activities are decided each day. Organizations and individuals can be penalized severely for not following federal, state, and local laws and guidelines related to staffing. Line managers simply cannot stay abreast of all the legal developments and requirements regarding staffing. The HR department coordinates staffing decisions in the firm so that an organization as a whole meets legal requirements. This department also provides needed consistency in administering company rules, wages, policies, and employee benefits as well as collective bargaining with unions. Human resource management is particularly challenging for international companies. For example, the inability of spouses and children to adapt to new surroundings can be a staffing problem in overseas transfers. The problems include premature returns, job performance slumps, resignations, discharges, low morale, marital discord, and general discontent. Firms such as Ford Motors and ExxonMobil screen and interview spouses and children before assigning families to overseas positions. Similarly, 3M Corporation introduces children to peers in the target country and offers spouses educational benefits. Some companies, such as LRN Corporation and Ruppert Landscape, have recently dissolved their HR departments in order to flatten organizational structures, shift accountability for employees closer to managers, and to take advantage of outsourcing payroll, benefits, and other HR activities for greater efficiency and quality.14

Controlling The controlling function of management includes all of those activities undertaken to ensure that actual operations conform to planned operations. All managers in an organization have controlling responsibilities, such as conducting performance evaluations and taking necessary action to minimize inefficiencies. The controlling function of management is particularly important for effective strategy evaluation. Controlling consists of four basic steps: 1. 2. 3. 4.

Establishing performance standards Measuring individual and organizational performance Comparing actual performance to planned performance standards Taking corrective actions

Measuring individual performance is often conducted ineffectively or not at all in organizations. Some reasons for this shortcoming are that evaluations can create confrontations that most managers prefer to avoid, can take more time than most managers are willing to give, and can require skills that many managers lack. No single approach to measuring individual performance is without limitations. For this reason, an organization should examine various methods, such as the graphic rating scale, the behaviorally anchored rating scale, and the critical incident method, and then develop or select a performance-appraisal approach that best suits the firm’s needs. Increasingly, firms are striving to link organizational performance with managers’ and employees’ pay.

Management Audit Checklist of Questions The following checklist of questions can help determine specific strengths and weaknesses in the functional area of business. An answer of no to any question could indicate a potential weakness, although the strategic significance and implications of negative answers, of course, will vary by organization, industry, and severity of the weakness. Positive or yes answers to the checklist questions suggest potential areas of strength. 1. 2. 3. 4. 5.

Does the firm use strategic-management concepts? Are company objectives and goals measurable and well communicated? Do managers at all hierarchical levels plan effectively? Do managers delegate authority well? Is the organization’s structure appropriate?

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6. 7. 8. 9.

Are job descriptions and job specifications clear? Is employee morale high? Are employee turnover and absenteeism low? Are organizational reward and control mechanisms effective?

Marketing Marketing can be described as the process of defining, anticipating, creating, and fulfilling customers’ needs and wants for products and services. There are seven basic functions of marketing: (1) customer analysis, (2) selling products and services, (3) product and service planning, (4) pricing, (5) distribution, (6) marketing research, and (7) cost/benefit analysis.15 Understanding these functions helps strategists identify and evaluate marketing strengths and weaknesses—a vital strategy-formulation activity.

Customer Analysis Customer analysis—the examination and evaluation of consumer needs, desires, and wants— involves administering customer surveys, analyzing consumer information, evaluating market positioning strategies, developing customer profiles, and determining optimal market segmentation strategies. Customer profiles can reveal the demographic characteristics of an organization’s customers. Buyers, sellers, distributors, salespeople, managers, wholesalers, retailers, suppliers, and creditors can all participate in gathering information to successfully identify customers’ needs and wants. Successful organizations continually monitor present and potential customers’ buying patterns. Business analytics has become an integral part of customer analysis and strategic planning.

Selling Products and Services Successful strategy implementation generally rests on the ability of an organization to sell some product or service. Selling includes many marketing activities, such as advertising, sales promotion, publicity, personal selling, sales force management, customer relations, and dealer relations. The effectiveness of various selling tools for consumer and industrial products varies. Personal selling is most important for industrial goods companies, whereas advertising is most important for consumer goods companies. Determining organizational strengths and weaknesses in the selling function of marketing is an important part of performing an internal strategicmanagement audit. Advertising can be expensive, a primary reason marketing is a major business function to be studied carefully. Without marketing, even the best products and services have little chance of being successful. Companies paid in excess of $4 million per 30-second spots during the 2015 Super Bowl. Anheuser-Busch just tallied its 28th year as the exclusive beer advertiser at the Super Bowl, buying a whopping 3.5 minutes of advertising time for Budweiser and Bud Light. George Parker argues that there may be no relationship at all between ads and sales: If someone were to do a truly analytical study of the Super Bowls of the last 20 years, I guarantee there would be no correlation between the ads and increases or declines in sales. The only way you can directly measure the effect of advertising is in direct marketing, which is a targeted promotion that provides an immediate point of sale, like an email campaign that encourages recipients to make a direct purchase or inquiry.16 Recent research reveals that the most effective marketing methods for firms with fewer than 500 employees is the company website (50%), Facebook and/or other social media sites such as Twitter (27%), and yellow pages and other (23%).17 Nearly 2 million firms of all sizes now pay to advertise on Facebook, up from about 1 million 18 months ago. Spending on online advertisements globally is increasing about 25 percent annually, according to edMarketer, and represents about 39 percent of total advertising spending in the United States.18 Advertising on television is on a downward spiral, according to Time Warner, Discovery Communications, and Comcast. “Upfront” ads for the 2014–2015 TV season declined about 6 percent. Heavy marketers, such as Allstate and Mondelez International, now openly speak

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about shifting TV ad dollars to digital platforms. Allstate shifted 20 percent of its TV ad dollars to digital from 2013 to 2015 and that is typical. Ad giant Omnicom Group is advising its clients to shift 10 to 25 percent of their TV ad dollars to digital. Chief marketing officers (CMOs), such as Eduardo Conrado at Motorola, now spend more than 50 percent of their budget on technology to manage activities such as online marketing and social media.19 Marketing is becoming technical, with software to track and target customers and manage customer relationships, predict consumer behavior, run online storefronts, analyze social media, manage websites, and craft targeted advertisements. In response to this trend, IBM is shifting its attention from CIOs to chief marketing officers (CMOs) as their primary clients. The world’s largest social network, Facebook, may epitomize where the advertising industry is going. Facebook allows a company to “leverage the loyalty” of its best customers. If you have recently gotten engaged and updated your Facebook status, you may start seeing ads from local jewelers who have used Facebook’s automated ad system to target you. Facebook enables any firm today to effectively target its exact audience with perfect advertising.20 In performing a strategic-planning analysis, in addition to comparing rival firms’ websites, it is important to compare rival firms’ handling of social media issues. One of the last off-limit advertising outlets has historically been books, but with the proliferation of e-books, marketers are experimenting more and more with advertising to consumers as they read e-books. New ads are being targeted based on the book’s content and the demographic profile of the reader. Digital e-book companies such as Wowio and Amazon are trying to insert ads between chapters and along borders of digital pages. Random House says its e-books will soon include ads, but only with author approval.

Product and Service Planning Product and service planning includes activities such as test marketing; product and brand positioning; devising warranties; packaging; determining product options, features, style, and quality; deleting old products; and providing for customer service. Product and service planning is particularly important when a company is pursuing product development or diversification. One of the most effective product and service planning techniques is test marketing. Test markets allow an organization to test alternative marketing plans and to forecast future sales of new products. In conducting a test market project, an organization must decide how many cities to include, which cities to include, how long to run the test, what information to collect during the test, and what action to take after the test has been completed. Test marketing is used more frequently by consumer goods companies than industrial goods companies. The technique can enable an organization to avoid substantial losses by revealing weak products and ineffective marketing approaches before large-scale production begins.

Pricing Procter & Gamble is currently embroiled in a shampoo price war with Unilever PLC in the U.S. hair care industry. Unilever’s TRESemme, Alberto VO5, Clear, and Dove brands have been taking market share from P&G’s Pantene and Old Spice brands, but both firms are now simultaneously cutting prices and spending heavily on advertising to “cripple” the other. Five major stakeholders affect pricing decisions: consumers, governments, suppliers, distributors, and competitors. Sometimes an organization will pursue a forward integration strategy primarily to gain better control over prices charged to consumers. Governments can impose constraints on price fixing, price discrimination, minimum prices, unit pricing, price advertising, and price controls. For example, the Robinson-Patman Act prohibits manufacturers and wholesalers from discriminating in price among channel member purchasers (suppliers and distributors) if competition is injured. Competing organizations must be careful not to coordinate discounts, credit terms, or condition of sale; not to discuss prices, markups, and costs at trade association meetings; and not to arrange to issue new price lists on the same date, rotate low bids on contracts, or uniformly restrict production to maintain high prices. Strategists should view price from both a short-run and a long-run perspective because competitors can copy price changes with relative ease. Often a dominant firm will aggressively match all price cuts by competitors.

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Intense price competition, coupled with Internet price-comparative shopping, has reduced profit margins to bare minimum levels for most companies. Target recently joined Best Buy in offering to match online prices of rival retailers. Both companies are seeking to combat “showrooming” by shoppers who check out products in their stores but buy them on rival’s websites. Both Target and Best Buy are matching prices from Amazon.com, Walmart.com, and Toysrus.com. In contrast to popular opinion, online sales are more expensive for companies than brick-and-mortar sales, after factoring in the cost of shipping, handling, and the higher rates of returns.21 For example, Kohl’s Corporation reports that its profitability online is less than half of its store business, and even WalMart reports that it will lose money online at least through 2016. Primark, the European discount retailer, avoids online retailing “because it deems it to be unprofitable.” However, online sales exceeded $294 billion, or 9 percent of all retail sales, in the United States in 2014, but analysts expect those numbers to increase to $414 billion and 11percent by 2018. During the 2014 Christmas shopping season, Amazon changed prices on as many as 80 million products during a single day, creating havoc for companies such as Walmart, Best Buy, and Toys “R” Us that had already announced they will not be undersold and would match any competitors’ prices in a printed flyer or website. Because of pricing flexibility and variation, retail shopping has become much more challenging for savvy customers, and much more work for brick-and-mortar store managers empowered to meet all competitor prices.

Distribution Distribution includes warehousing, distribution channels, distribution coverage, retail site locations, sales territories, inventory levels and location, transportation carriers, wholesaling, and retailing. Most producers today do not sell their goods directly to consumers. Various marketing entities act as intermediaries; they bear a variety of names such as wholesalers, retailers, brokers, facilitators, agents, vendors—or simply distributors. Some of the most complex and challenging decisions facing a firm concern product distribution. Intermediaries flourish in our economy because many producers lack the financial resources and expertise to carry out direct marketing. Manufacturers who could afford to sell directly to the public often can gain greater returns by expanding and improving their manufacturing operations. Successful organizations identify and evaluate alternative ways to reach their ultimate market. Possible approaches vary from direct selling to using just one or many wholesalers and retailers. Strengths and weaknesses of each channel alternative should be determined according to economic, control, and adaptive criteria. Organizations should consider the costs and benefits of various wholesaling and retailing options. They must consider the need to motivate and control channel members and the need to adapt to changes in the future. Once a marketing channel is chosen, an organization usually must adhere to it for an extended period of time.

Marketing Research Marketing research is the systematic gathering, recording, and analyzing of data about problems relating to the marketing of goods and services. Marketing researchers employ numerous scales, instruments, procedures, concepts, and techniques to gather information; their research can uncover critical strengths and weaknesses. Marketing-research activities support all of the major business functions of an organization. Organizations that possess excellent marketing research skills have a competitive advantage. According to the president of PepsiCo, Looking at the competition is the company’s best form of market research. The majority of our strategic successes are ideas that we borrow from the marketplace, usually from a small regional or local competitor. In each case, we spot a promising new idea, improve on it, and then out-execute our competitor.22

Cost/Benefit Analysis The seventh function of marketing is cost/benefit analysis, which involves assessing the costs, benefits, and risks associated with marketing decisions. Three steps are required to perform a cost/benefit analysis: (1) compute the total costs associated with a decision, (2) estimate the total

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benefits from the decision, and (3) compare the total costs with the total benefits. When expected benefits exceed total costs, an opportunity becomes more attractive. Sometimes the variables included in a cost/benefit analysis cannot be quantified or even measured, but usually reasonable estimates can be made to allow the analysis to be performed. One key factor to be considered is risk. Cost/benefit analysis should also be performed when a company is evaluating alternative ways to be socially responsible. The practice of cost/benefit analysis differs among countries and industries. Some of the main differences include the types of impacts that are included as costs and benefits within appraisals, the extent to which impacts are expressed in monetary terms, and differences in the discount rate. Government agencies across the world rely on a basic set of key cost/benefit indicators, including the following: 1. 2. 3. 4. 5. 6.

Net present value (NPV) Present value of benefits (PVB) Present value of costs (PVC) Benefit cost ratio (BCR) = PVB/PVC Net benefit = PVB - PVC NPV/k (where k is the level of funds available)23

Marketing Audit Checklist of Questions The following questions about marketing must be examined in strategic planning: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

Are markets segmented effectively? Is the organization positioned well among competitors? Has the firm’s market share been increasing? Are present channels of distribution reliable and cost effective? Does the firm have an effective sales organization? Does the firm conduct market research? Are product quality and customer service good? Are the firm’s products and services priced appropriately? Does the firm have an effective promotion, advertising, and publicity strategy? Are marketing, planning, and budgeting effective? Do the firm’s marketing managers have adequate experience and training? Is the firm’s Internet presence excellent as compared to rivals?

Finance and Accounting Financial condition is often considered the single-best measure of a firm’s competitive position and overall attractiveness to investors. Determining an organization’s financial strengths and weaknesses is essential to effectively formulating strategies. A firm’s liquidity, leverage, working capital, profitability, asset utilization, cash flow, and equity can eliminate some strategies as being feasible alternatives. Financial factors often alter existing strategies and change implementation plans.

Finance/Accounting Functions According to James Van Horne, the functions of finance/accounting comprise three decisions: the investment decision, the financing decision, and the dividend decision.24 Financial ratio analysis is the most widely used method for determining an organization’s strengths and weaknesses in the investment, financing, and dividend areas. Because the functional areas of business are so closely related, financial ratios can signal strengths or weaknesses in management, marketing, production, R&D, and MIS activities. Financial ratios are equally applicable in for-profit and nonprofit organizations. Even though nonprofit organizations obviously would not have return-on-investment or earnings-per-share ratios, they would routinely monitor many other special ratios. For example, a church would monitor the ratio of dollar contributions to the number of members, whereas a zoo would monitor dollar food sales to number of visitors. A university would monitor number of students divided by number of professors. Therefore, be

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creative when performing ratio analysis for nonprofit organizations, for they strive to be financially sound justas for-profit firms do. Nonprofit organizations need strategic planning just as much as for-profit firms. The investment decision, also called capital budgeting, is the allocation and reallocation of capital and resources to projects, products, assets, and divisions of an organization. After strategies are formulated, capital budgeting decisions are required to successfully implement strategies. The financing decision determines the best capital structure for the firm and includes examining various methods by which the firm can raise capital (for example, by issuing stock, increasing debt, selling assets, or using a combination of these approaches). The financing decision must consider both short-term and long-term needs for working capital. Two key financial ratios that indicate whether a firm’s financing decisions have been effective are the debt-to-equity ratio and the debt-to-total-assets ratio. Dividend decisions concern issues such as the percentage of earnings paid to stockholders, the stability of dividends paid over time, and the repurchase or issuance of stock. Dividend decisions determine the amount of funds that are retained in a firm compared to the amount paid out to stockholders. Three financial ratios that are helpful in evaluating a firm’s dividend decisions are the earnings-per-share ratio, the dividends-per-share ratio, and the price-earnings ratio. The benefits of paying dividends to investors must be balanced against the benefits of internally retaining funds, and there is no set formula on how to balance this trade-off. In 2014–2016, companies are aggressively boosting their dividends paid to shareholders. Companies are also buying back their own stock (called Treasury stock) at record levels. For the reasons listed here, dividends are sometimes paid out even when the firm has incurred a negative annual net income, and/or even if the funds could be better reinvested in the business, and/or even if the firm has to obtain outside sources of capital to pay for the dividends: 1. Paying cash dividends is customary for some firms. Failure to do so could be thought of as a stigma. A dividend change is a signal about the future. 2. Dividends represent a sales point for investment bankers. Some institutional investors can buy only dividend-paying stocks. 3. Shareholders often demand dividends, even in companies with great opportunities for reinvesting all available funds. 4. A myth exists that paying dividends will result in a higher stock price.

Financial Ratios Financial ratios are computed from an organization’s income statement and balance sheet. Computing financial ratios is like taking a photograph—the results reflect a situation at just one point in time. Comparing ratios over time and to industry averages is more likely to result in meaningful statistics that can be used to identify and evaluate strengths and weaknesses. Trend analysis, illustrated in Figure 6-3, is a useful technique that incorporates both the time and industry average dimensions of financial ratios. Note that the dotted lines reveal projectedratios. Financial ratio analysis should be conducted on three separate fronts: 1. How has each ratio changed over time? This information provides a means of evaluating historical trends. Examine whether each ratio has been historically increasing, decreasing, or nearly constant. For example, a 10 percent profit margin could be bad if the trend has been down 20 percent each of the last three years. But a 10 percent profit margin could be excellent if the trend has been up, up, up. Analysts often calculate the percentage change in a ratio from one year to the next to assess historical financial performance on that dimension. Large percent changes can be especially relevant. 2. How does each ratio compare to industry norms? A firm’s inventory turnover ratio may appear impressive at first glance but may pale when compared to industry standards or norms. Industries can differ dramatically on certain ratios. For example, grocery companies have a high inventory turnover, whereas automobile dealerships have a lower turnover. Therefore, comparison of a firm’s ratios within its particular industry can be essential in determining strengths and weaknesses.

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Current ratio 5.0 4.0 3.0 2.0 1.0 0.0

Industry average

Company

2013

2014

2015

2016

2017

Profit margin (percent) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0 2013

Industry average Company

2014

2015

2016

2017

Figure 6-3 The Process of Gaining Competitive Advantage in a Firm 3. How does each ratio compare with key competitors? Oftentimes competition is more intense between several competitors in a given industry or location than across all rival firms in the industry. When this is true, financial ratio analysis should include comparison to those key competitors. For example, if a firm’s profitability ratio is trending up over time and compares favorably to the industry average, but it is trending down relative to its leading competitor, there may be reason for concern. Financial ratio analysis is not without some limitations. For example, financial ratios are based on accounting data, and firms differ in their treatment of such items as depreciation, inventory valuation, R&D expenditures, pension plan costs, mergers, and taxes. Also, seasonal factors can influence comparative ratios. Therefore, conformity to industry composite ratios does not establish with certainty that a firm is performing normally or that it is well managed. Likewise, departures from industry averages do not always indicate that a firm is doing especially well or badly. For example, a high inventory turnover ratio could indicate efficient inventory management and a strong working capital position, but it also could indicate a serious inventory shortage and a weak working capital position. Another limitation of financial ratios in terms of including them as key internal factors in the upcoming IFE Matrix is that financial ratios are not very “actionable” in terms of revealing potential strategies needed (i.e., because they generally are based on performance of the overall firm). For example, to include as a key internal factor that the firm’s “current ratio increased from 1.8 to 2.1” is not as “actionable” as “the firm’s fragrance division revenues increased 18 percent in Africa in 2015.” Recall from the prior chapter the importance of selecting “actionable responses” as key factors, both externally and internally, upon which to formulate strategies. Selecting “actionable” key factors is vital to successful strategic planning. Table 6-4 provides a summary of key financial ratios showing how each ratio is calculated and what each ratio measures. However, all the ratios are not significant for all industries and companies. For example, accounts receivable turnover and average collection period are not meaningful to a company that takes only cash receipts. As indicated in Table 6-4, key financial ratios can be classified into the following five types: liquidity, leverage, activity, profitability, and growth.

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Table 6-4 A Summary of Key Financial Ratios ratio

HowCalculated

What It Measures

i. liquidity ratios Current Ratio Quick Ratio

Current assets Current liabilities Current assets minus inventory Current liabilities

The extent to which a firm can meet its shortterm obligations The extent to which a firm can meet its shortterm obligations without relying on the sale of its inventories

ii. leverage ratios Debt-to-Total-Assets Ratio Debt-to-Equity Ratio Long-Term Debt-to-Equity Ratio Times-Interest-Earned Ratio

Total debt Total assets Total debt Total stockholders’ equity Long-term debt Total stockholders’ equity Profits before interest and taxes Total interest charges

The percentage of total funds provided by creditors The percentage of total funds provided by creditors versus by owners The balance between debt and equity in a firm’s long-term capital structure The extent to which earnings can decline without the firm becoming unable to meet its annual interest costs

Sales Inventory of finished goods

Whether a firm holds excessive stocks of inventories and whether a firm is slowly selling its inventories compared to the industry average Sales productivity and plant and equipment utilization Whether a firm is generating a sufficient volume of business for the size of its asset investment The average length of time it takes a firm to collect credit sales (in percentage terms) The average length of time it takes a firm to collect on credit sales (in days)

iii. activity ratios Inventory Turnover

Fixed Assets Turnover Total Assets Turnover

Accounts Receivable Turnover Average Collection Period

Sales Fixed assets Sales Total assets Annual credit sales Accounts receivable Accounts receivable Total credit sales/365 days

iV. Profitability ratios Gross Profit Margin Operating Profit Margin Net Profit Margin Return on Total Assets (ROA) Return on Stockholders’ Equity (ROE) Earnings Per Share (EPS) Price-Earnings Ratio

Sales minus cost of goods sold Sales Earnings before interest and taxes EBIT Sales Net income Sales Net income Total assets Net Income Total stockholders’ equity

The total margin available to cover operating expenses and yield a profit Profitability without concern for taxes and interest After-tax profits per dollar of sales

Net income Number of shares of common stock outstanding Market price per share Earnings per share

Earnings available to the owners of common stock Attractiveness of firm on equity markets

Annual percentage growth in total sales Annual percentage growth in profits Annual percentage growth in EPS Annual percentage growth in dividends per share

Firm’s growth rate in sales Firm’s growth rate in profits Firm’s growth rate in EPS Firm’s growth rate in dividends per share

After-tax profits per dollar of assets; this ratio is also called return on investment (ROI) After-tax profits per dollar of stockholders’ investment in the firm

V. growth ratios Sales Net Income Earnings Per Share Dividends Per Share

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Breakeven Analysis Because consumers remain price sensitive, many firms have lowered prices to compete. As a firm lowers prices, its breakeven (BE) point in terms of units sold increases, as illustrated in Figure 6-4. The breakeven point can be defined as the quantity of units that a firm must sell for its total revenues (TR) to equal its total costs (TC). Note that the before and after chart in Figure 6-4 reveals that the TR line rotates to the right with a decrease in price, thus increasing the quantity (Q) that must be sold just to break even. Increasing the breakeven point is thus a huge drawback of lowering prices. Of course when rivals are lowering prices, a firm may have to lower prices anyway to compete. However, the breakeven concept should be kept in mind because it is so important, especially in recessionary times. The before and after charts in Figure 6-5 show that increasing fixed costs (FC) raises a firm’s breakeven quantity. The figure also reveals that adding fixed costs such as more stores, or more plants, or even more advertising as part of a strategic plan also raises the TC line, which makes the intersection of the TC and TR lines at a point farther down the Quantity axis. Increasing a firm’s FC therefore significantly raises the quantity of goods that must be sold to break even. This is not just theory for the sake of theory. Firms with less fixed costs, such as Apple and Amazon.com, have lower breakeven points, which give them a decided competitive advantage in harsh economic times. Figure 6-5 reveals that adding fixed costs—such as plant, equipment, stores, advertising, and land—may be detrimental whenever there is doubt that significantly more units can be sold to offset those expenditures. Firms must be cognizant of the fact that lowering prices and adding fixed costs could be a catastrophic double whammy because the firm’s breakeven quantity needed to be sold is increased dramatically. Figure 6-6 illustrates this double whammy. Note how far the breakeven point shifts with both a price decrease and an increase in fixed costs. If a firm does not break even, then it will of course incur losses, and losses are not good, especially sustained losses.

TR Before

After

TR TC

$

VC

BE

BE

TC VC

$ FC

FC Q

Q

Figure 6-4 A Before and After Breakeven Chart When Prices Are Lowered

Before

After TR BE

TC

TR

$

BE

VC

$

TC

VC FC

FC Q

Q

Figure 6-5 A Before and After Breakeven Chart When Fixed Costs are Increased

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TR Before

After

TR

TC $

TC BE

BE VC

VC

$

FC FC Q

Q

Figure 6-6 A Before and After Breakeven Chart When Prices Are Lowered and Fixed Costs Are Increased Finally, note in Figures 6-4, 6-5, and 6-6 that variable costs (VC), such as labor and materials, when increased, have the effect of raising the breakeven point, too. Raising VC is reflected by the VC line shifting left or becoming steeper. When the TR line remains constant, the effect of increasing VC is to increase TC, which increases the point at which TR = TC = BE. The formula for calculating the breakeven point is BE Quantity = TFC divided by (price – VC). In other words, the quantity or units of product that need to be sold for a firm to break even given in Table 6-5. Suffice it to say here that various strategies can have dramatically beneficial or harmful effects on the firm’s financial condition because of the concept of breakeven analysis. There are some limitations of breakeven analysis, including the following points: 1. Breakeven analysis is only a supply side (i.e., costs only) analysis because it reveals nothing about what sales are likely to be for the product at various prices. 2. It assumes that fixed costs are constant. Although this is true in the short run, an increase in the scale of production will cause fixed costs to rise. 3. It assumes average variable costs are constant per unit of output, at least in the range of likely quantities of sales. Table 6-5 Applying Breakeven Analysis for Joy’s Day Care Seeing a need for childcare in her town, Joy is considering opening her own day-care service. Joy’s Day Care needs to be affordable, so Joy would like to care for each child for $12 a day. But Joy also wants to make money. She needs to know how many children she will have to watch per day to make money. Joy gathered the following information about her potential new business. • • •

The month of June has 20 workdays, Monday through Friday for 4 weeks. Insurance and rent on her business will be $200 and $400, respectively, per month. Expenses per student per day will be snacks (2 @ $1.00) + meals (2 @ $3.00).

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Joy’s Analysis Breakeven = Operating Expenses , ($12.00 - $8.00) Breakeven = $600 , $4.00 Breakeven = 150 units (children) in June. Because there are 20 days in June, Joy must watch 150 , 20 = 7.5 kids, or 8 children every day to make a profit. Joy’s Conclusion Thanks to breakeven analysis, Joy is pondering whether or not she can care for 8 children daily. Instead of abruptly opening the business, Joy is now considering adding a helper for $50 per day and charging $20 per student per day. How many students now would Joy have to care for to make a profit under this scenario? (Answer 6.6 = 7) What do you think would be an ideal scenario for Joy in planning for her new business?

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4. It assumes that the quantity of goods produced is equal to the quantity of goods sold (i.e., there is no change in beginning or ending inventory). 5. In multiproduct companies, it assumes that the relative proportions of each product sold and produced are constant (i.e., the sales mix is constant).25

Finance/Accounting Audit Checklist Some finance/accounting questions that should be examined in any strategic analysis of the firm are given here: 1. 2. 3. 4. 5. 6. 7. 8. 9.

Where is the firm financially strong and weak as indicated by financial ratio analyses? Can the firm raise needed short-term capital? Can the firm raise needed long-term capital through debt or equity? Does the firm have sufficient working capital? Are capital budgeting procedures effective? Are dividend payout policies reasonable? Does the firm have good relations with its investors and stockholders? Are the firm’s financial managers experienced and well trained? Is the firm’s debt situation excellent?

Production/Operations The production/operations function of a business consists of all those activities that transform inputs into goods and services. production/operations management deals with inputs, transformations, and outputs that vary across industries and markets. A manufacturing operation transforms or converts inputs such as raw materials, labor, capital, machines, and facilities into finished goods and services. The extent to which a manufacturing plant’s output reaches its potential output is called capacity utilization, a key strategic variable. The higher the capacity utilization, the better; otherwise, equipment may sit idle. As indicated in Table 6-6, Roger Schroeder suggests that production/operations management comprises five functions or decision areas: process, capacity, inventory, workforce, and quality. Production/operations activities often represent the largest part of an organization’s human and capital assets. In most industries, the major costs of producing a product or service are incurred within operations, so production/operations can have great value as a competitive weapon in a company’s overall strategy. Strengths and weaknesses in the five functions of production can mean the success or failure of an enterprise. Table 6-6 The Basic Functions (Decisions) within Production/Operations Decision areas 1. Process

2. Capacity

3. Inventory

4. Workforce

5. Quality

Exampledecisions These decisions include choice of technology, facility layout, process flow analysis, facility location, line balancing, process control, and transportation analysis. Distances from raw materials to production sites to customers are a major consideration. These decisions include forecasting, facilities planning, aggregate planning, scheduling, capacity planning, and queuing analysis. Capacity utilization is a major consideration. These decisions involve managing the level of raw materials, work-in-process, and finished goods, especially considering what to order, when to order, how much to order, and materials handling. These decisions involve managing the skilled, unskilled, clerical, and managerial employees by caring for job design, work measurement, job enrichment, work standards, and motivation techniques. These decisions are aimed at ensuring that high-quality goods and services are produced by caring for quality control, sampling, testing, quality assurance, and cost control.

Source: Based on R. Schroeder, Operations Management (New York: McGraw-Hill, 1981), p. 12.

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Increasingly in production settings, a new breed of robots called collaborative machines, are working alongside people. The robots, priced as low as $20,000 and becoming widely used even in small businesses, do not take lunch breaks or sick days or require health insurance, and they can work nonstop all night tirelessly if needed. Unlike larger robots that cost much more, collaborative machines are more flexible, oftentimes doing one task one day and a different task the next day. At Panek Precision Inc., an Northbrook, Illinois-based machine shop, Mr. Panek states, “Having robots has allowed us to move our existing workers into more useful tasks, such as monitoring more-advanced machines that require human tending.” Workers are generally quite receptive to collaborative machines, even giving them names, such as “Fred” at Stuller Inc., a jewelry factory in Lafayette, Louisiana, and “Baxter” at K’NEX Brands, a toy maker in Hatfield, Pennsylvania.26 Many production/operations managers are finding that cross-training of employees can help their firms respond faster to changing markets. Cross-training can increase efficiency, quality, productivity, and job satisfaction. For example, at General Motors’ Detroit gear and axle plant, costs related to product defects were reduced 400 percent in 2 years as a result of cross-training workers. As shown in Table 6-7, James Dilworth has outlined implications of several types of strategic decisions a company might make.

Production/Operations Audit Checklist Questions such as the following should be examined: 1. 2. 3. 4. 5. 6.

Are supplies of raw materials, parts, and subassemblies reliable and reasonable? Are facilities, equipment, machinery, and offices in good condition? Are inventory-control policies and procedures effective? Are quality-control policies and procedures effective? Are facilities, resources, and markets strategically located? Does the firm have technological competencies?

Table 6-7 Implications of Various Strategies on Production/Operations Various Strategies

Implications

1. Become a low-cost provider

Creates high barriers to entry Creates larger market Requires longer production runs and fewer product changes Requires more quality-assurance efforts Requires more expensive equipment Requires highly skilled workers and higher wages Requires more service people, service parts, and equipment Requires rapid response to customer needs or changes in customer tastes Requires a higher inventory investment Has higher research and development costs Has high retraining and tooling costs Requires high capital investment Reduces flexibility May affect labor relations Makes maintenance more crucial Serves the security needs of employees and may develop employee loyalty Helps attract and retain highly skilled employees

2. Become a high-quality provider

3. Provide great customer service

4. Be the first to introduce new products 5. Become highly automated

6. Minimize layoffs

Source: Based on J. Dilworth, Production/Operations Management: Manufacturing and Nonmanufacturing, 2nd ed. Copyright © 1983 by Random House, Inc.

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Research and Development The fifth major area of internal operations that should be examined for specific strengths and weaknesses as input into formulating strategies is research and development (R&D). Many firms today conduct no R&D, and yet many other companies depend on successful R&D activities for survival. Firms pursuing a product-development strategy especially need to have a strong R&D orientation. High-tech firms, such as Microsoft, spend a much larger proportion of their revenues on R&D. A key decision for many firms is whether to be a “first mover” or a “late follower” (i.e., spend heavily on R&D to be the first to develop radically new products, or spend less on R&D by imitating/duplicating/improving on products after rival firms develop them). Organizations invest in R&D because they believe that such an investment will lead to a superior product or service and will give them competitive advantages. Research and development expenditures are directed at developing new products before competitors do, at improving product quality, or at improving manufacturing processes to reduce costs. However, a recent study reported that the stock price appreciation of technology companies in the lowest third of R&D spending have consistently outperformed companies in the highest third over 1-, 3-, 5-, and 10-year periods since 1977, with a 5-year average outperformance of 8 percent.27 In the study, some big R&D underspenders whose stock price significantly outperformed were Micron Technology, Seagate Technology, Western Digital, and Apple. The study reported in Investor’s Business Daily accents the need to formulate and implement an effective R&D spending strategy consistent with overall corporate strategy and objectives. Effective management of the R&D function requires a strategic and operational partnership between R&D and the other vital business functions. A spirit of partnership and mutual trust between general and R&D managers is evident in the best-managed firms today. Managers in these firms jointly explore; assess; and decide the what, when, where, why, and how much of R&D. Priorities, costs, benefits, risks, and rewards associated with R&D activities are discussed openly and shared. The overall mission of R&D has thus become broad based, including supporting existing businesses, helping launch new businesses, developing new products, improving product quality, improving manufacturing efficiency, and deepening or broadening the company’s technological capabilities.28

Internal and External Research and Development Four approaches to determining research and development budget allocations commonly are used: (1) financing as many project proposals as possible, (2) using a percentage-of-sales method, (3) budgeting about the same amount that competitors spend for R&D, or (4) deciding how many successful new products are needed and working backward to estimate the required R&D investment. The strengths (capabilities) and weaknesses (limitations) of R&D play a major role in strategy formulation and strategy implementation. Most firms have no choice but to continually develop new and improved products because of changing consumer needs and tastes, new technologies, shortened product life cycles, and increased domestic and foreign competition. A shortage of ideas for new products, increased global competition, increased market segmentation, strong special-interest groups, and increased government regulations are several factors making the successful development of new products more and more difficult, costly, and risky. In the pharmaceutical industry, for example, only one of every few thousand drugs created in the laboratory ends up on pharmacists’ shelves.

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Research and Development Audit Questions such as the following should be asked in performing a research and development audit: 1. 2. 3. 4. 5. 6. 7.

Does the firm have R&D facilities? Are they adequate? If outside R&D firms are used, are they cost effective? Are the organization’s R&D personnel well qualified? Are R&D resources allocated effectively? Are management information and computer systems adequate? Is communication between R&D and other organizational units effective? Are present products technologically competitive?

Management Information Systems Billions of bits of information are now “in the cloud.” Information ties all business functions together and provides the basis for all managerial decisions. It is the cornerstone of all organizations. Information represents a major source of competitive management advantage or disadvantage. Assessing a firm’s internal strengths and weaknesses in information systems is a critical dimension of performing an internal audit. A purpose of a management information system is to improve the performance of an enterprise by improving the quality of managerial decisions. An effective information system thus collects, codes, stores, synthesizes, and presents information in such a manner that it answers important operating and strategic questions. The heart of an information system is a database containing the kinds of records and data important to managers. A management information system (MIS) receives raw material from both the external and internal evaluation of an organization. It gathers data about marketing, finance, production, and personnel matters internally, and social, cultural, demographic, environmental, economic, political, governmental, legal, technological, and competitive factors externally. Data are integrated in ways needed to support managerial decision making. Starbucks is an example firm with an outstanding management information system that begins with more than 7 million weekly transactions taking place at Starbucks registers, and 16percent of those are made from a mobile device. Surprisingly, Starbucks transactions comprise about 90 percent of all mobile pay transactions in the United States. And Starbucks is reportedly developing a stand-alone e-payment system that its customers may use anywhere, anytime, to buy anything. Such a system would compete with Apple Pay, Google’s Wallet, eBay’s PayPal, and CurrentC used by WalMart and CVS Health.

Managing Voluminous Consumer Data Recent research by the Pew Research Center reveals that more than 50 percent of all consumers are concerned about the volume of their personal data on the Internet.29 Basically, every time you get online and do anything at any website with any company or anybody, that information is dissected to determine your patterns of behavior; resultant information is disseminated to marketers. Every time you swipe a card, click, log in, text, tweet, email, or call, your behavior is being tracked. Consider a few facts: 1. The number of times the online activity of an average Internet user is tracked every day is estimated to be 2,000-plus. 2. Facebook and Twitter can track the activity of visitors at 1,205 and 868 of the most popular websites, respectively, on the Internet. 3. The estimated annual value to Facebook of a “very active” versus “relatively inactive” female user is $27.61 and $12.37, respectively, due to their dissemination of the information to marketers. 4. People are so worried about their privacy that 86 percent of them have taken steps to conceal their digital footprints. 5. More than 25 percent of Americans have downloaded advertisement-blocking tools so companies cannot so easily access data about the users.30

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New Trends in Managing Big Data Business analytics can identify and analyze patterns, but perhaps more importantly, they can reveal the likelihood of an event, and that information can be worth millions and even billions of dollars to companies, organizations, and governments. In analyzing big data, two trends in analysis have emerged. First, the typical statistical approach of relying on p values to establish the significance of a finding is becoming less trusted because, with extremely high sample sizes, “almost everything” becomes significant. In contrast, the focus of analysis is shifting more to the size and variance explained (i.e., examining for example R-squared). Stepwise regression and cluster analysis are becoming more widely used to supplement traditional p-value analyses. Second, in analyzing big data, there is a shift from focusing largely on aggregates or averages to focusing also on outliers, because outliers oftentimes reveal (predict) critical

innovations, trends, disruptions, and revolutions on the horizon. In essence, knowing more about “who is not your customer and why” may be as (or more) important than knowing about your customer. Perceptual mapping and multidimensional scaling are being more widely used to explore outlier patterns. By 2018, global data analytics software is expected to reach $21.7 billion, a 64 percent increase from 2012. Leading firms providing the software include IBM, SAP, Oracle, Microsoft, Qlik Technologies, Tibco Software, and Tableau Software. Source: Based on G. George, M. Haas, & A. Pentland, “Big Data and Management,” Academy of Management Journal 52, no. 2 (April 2014): 321–326. See also P. Barlas, “Data Analytics Gets in the Sports Game,” Investor’s Business Daily, July 11, 2014, A1.

Academic Research Capsule 6-2 reveals key trends in analyzing big data.

Management Information Systems Audit Questions such as the following should be asked when conducting this audit: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Do all managers in the firm use the information system to make decisions? Is there a chief information officer or director of information systems position in the firm? Are data in the information system updated regularly? Do managers from all functional areas of the firm contribute input to the information system? Are there effective passwords for entry into the firm’s information system? Are strategists of the firm familiar with the information systems of rival firms? Is the information system user-friendly? Do all users of the information system understand the competitive advantages that information can provide firms? Are computer training workshops provided for users of the information system? Is the firm’s information system continually being improved in content and user-friendliness?

Value Chain Analysis According to Porter, the business of a firm can best be described as a value chain, in which total revenues minus total costs of all activities undertaken to develop and market a product or service yields value.31 All firms in a given industry have a similar value chain, which includes activities such as obtaining raw materials, designing products, building manufacturing facilities, developing cooperative agreements, and providing customer service. A firm will be profitable so long as total revenues exceed the total costs incurred in creating and delivering the product or service. Firms should strive to understand not only their own value chain operations but also those of their competitors, suppliers, and distributors. Value chain analysis (VCA) refers to the process whereby a firm determines the costs associated with organizational activities from purchasing raw materials to manufacturing product(s) to marketing those products. Value chain analysis aims to identify where low-cost advantages or disadvantages exist anywhere along the value chain from raw material to customer service activities. The VCA process can enable a firm to better identify its own strengths and weaknesses, especially as compared to competitors’ value chain analyses and their own data examined over time. Substantial judgment may be required in performing a VCA because different items along the value chain may impact other items positively or negatively, at times creating complex

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interrelationships. For example, exceptional customer service may be especially expensive yet may reduce the costs of returns and increase revenues. Cost and price differences among rival firms can have their origins in activities performed by suppliers, distributors, creditors, or even shareholders. The initial step in implementing VCA is to divide a firm’s operations into specific activities or business processes. Then the analyst attempts to attach a cost to each discrete activity; the costs could be in terms of both time and money. Finally, the analyst converts the cost data into information by looking for competitive cost strengths and weaknesses that may yield competitive advantage or disadvantage. Conducting a value chain analysis is supportive of the research-based view’s examination of a firm’s assets and capabilities as sources of distinctive competence. When a major competitor or new market entrant offers products or services at low prices, this may be because that firm has substantially lower value chain costs or perhaps the rival firm is just waging a desperate attempt to gain sales or market share. Thus, VCA can be critically important for a firm in monitoring whether its prices and costs are competitive. An example value chain is illustrated in Figure 6-7. There can be more than a hundred particular value-creating activities associated with the business of producing and marketing a product or service, and each one of the activities can represent a competitive advantage or disadvantage for the firm. The combined costs of all the various activities in a company’s value chain define the firm’s cost of doing business. Firms should determine where cost advantages and disadvantages in their value chain occur relative to the value chain of rival firms. Value chains differ immensely across industries and firms. Whereas a paper products company, such as Stone Container, would include on its value chain timber farming, logging, pulp mills, and papermaking, a company such as Hewlett-Packard would include programming, peripherals, software, hardware, and laptops. A motel would include food, housekeeping, check-in and check-out operations, website, reservations system, and so on. However, all firms should use value chain analysis to develop and nurture a core competence and convert this competence into a distinctive competence. A core competence is a VCA that a firm performs especially well. When a core competence evolves into a major competitive advantage, then it is called a distinctive competence. Figure 6-8 illustrates this process. More and more companies are using VCA to gain and sustain competitive advantage by being especially efficient and effective along various parts of the value chain. For example, Walmart has built powerful value advantages by focusing on exceptionally tight inventory control and volume purchasing of products. In contrast, computer companies compete aggressively along the distribution end of the value chain. Price competitiveness is a key component of competitiveness for both mass retailers and computer firms.

Benchmarking Benchmarking is an analytical tool used to determine whether a firm’s value chain analysis is competitive compared to those of rivals and thus conducive to winning in the marketplace. Benchmarking entails measuring costs of value chain activities across an industry to determine “best practices” among competing firms for the purpose of duplicating or improving on those best practices. Benchmarking enables a firm to take action to improve its competitiveness by identifying (and improving on) value chain activities where rival firms have comparative advantages in cost, service, reputation, or operation. A comprehensive survey on benchmarking was recently commissioned by the Global Benchmarking Network, a network of benchmarking centers representing 22 countries. More than 450 organizations responded from over 40 countries. Here are two important results: 1. Mission and vision statements along with customer (client) surveys are the most used (77 percent of organizations) of 20 improvement tools, followed by SWOT (strengths, weaknesses, opportunities, threats) analysis (72 %), and informal benchmarking (68 %). Performance benchmarking was used by 49 percent and best practice benchmarking was used by 39 percent of respondents. 2. The tools that are likely to increase the most in popularity over the next 3 years are performance benchmarking, informal benchmarking, SWOT, and best practice benchmarking. More than 60 percent of organizations not currently using these tools indicated they are likely to use them in the next 3 years.32

CHAPTER6 • THEInTERnAlAudIT Supplier Costs Raw materials Fuel Energy Transportation Truck drivers Truck maintenance Component parts Inspection Storing Warehouse Production Costs Inventory system Receiving Plant layout Maintenance Plant location Computer R&D Cost accounting Distribution Costs Loading Shipping Budgeting Personnel Internet Trucking Railroads Fuel Maintenance Sales and Marketing Costs Salespersons Website Internet Publicity Promotion Advertising Transportation Food and lodging Customer Service Costs Postage Phone Internet Warranty Management Costs Human resources Administration Employee benefits Labor relations Managers Employees Finance and legal

Figure 6-7 An Example Value Chain for a Typical Manufacturing Firm

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Value Chain Activities Are Identified and Assessed

Core Competencies Arise in Some Activities

Some Core Competencies Evolve into Distinctive Competencies

Some Distinctive Competencies Yield Sustained Competitive Advantages

Figure 6-8 Transforming Value Chain Activities into Sustained Competitive Advantage

The hardest part of benchmarking can be gaining access to other firms’ value chain analyses with associated costs. Typical sources of benchmarking information, however, include published reports, trade publications, suppliers, distributors, customers, partners, creditors, shareholders, lobbyists, and willing rival firms. Some rival firms share benchmarking data. However, the International Benchmarking Clearinghouse provides guidelines to help ensure that restraint of trade, price fixing, bid rigging, bribery, and other improper business conduct do not arise between participating firms.

The Internal Factor Evaluation Matrix A summary step in conducting an internal strategic-management audit is to construct an Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among those areas. Intuitive judgments are required in developing an IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an all-powerful technique. A thorough understanding of the factors included is more important than the actual numbers. Similar to the EFE Matrix and the Competitive Profile Matrix (CPM) described in Chapter 7, an IFE Matrix can be developed in five steps: 1. List key internal factors as identified in the internal-audit process. Use a total of 20 internal factors, including both strengths and weaknesses. List strengths first and then weaknesses. Be as specific as possible, using percentages, ratios, and comparative numbers. Recall that Edward Deming said, “In God we trust. Everyone else bring data.” Include actionable factors that can provide insight regarding strategies to pursue. For example, the factor “Our Quick Ratio is 2.1 versus industry average of 1.8” is not actionable, whereas the factor “Our chocolate division’s ROI increased from 8 to 15 percent in South America” is actionable. Also, be as divisional as possible, because consolidated data oftentimes is not as revealing or useful in deciding among strategies as the underlying by-segment or division data. 2. Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor. The weight assigned to a given factor indicates the relative importance of the factor to being successful in the firm’s industry. Regardless of whether a key factor is an internal strength or weakness, factors considered to have the greatest effect on organizational performance should be assigned the highest weights. The sum of all weights must equal 1.0. 3. Assign a 1 to 4 rating to each factor to indicate whether that factor represents a major weakness (rating = 1), a minor weakness (rating = 2), a minor strength (rating = 3), or a major strength (rating = 4). Note that strengths must receive a 3 or 4 rating and weaknesses must receive a 1 or 2 rating. Ratings are thus company-based, whereas the weights in step 2 are industry-based. 4. Multiply each factor’s weight by its rating to determine a weighted score for each variable. 5. Sum the weighted scores for each variable to determine the total weighted score for the organization.

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Regardless of how many factors are included in an IFE Matrix, the total weighted score can range from a low of 1.0 to a high of 4.0, with the average score being 2.5. Total weighted scores well below 2.5 characterize organizations that are weak internally, whereas scores significantly above 2.5 indicate a strong internal position. Like the EFE Matrix, an IFE Matrix should include 20 key factors. The number of factors has no effect on the range of total weighted scores because the weights always sum to 1.0. When a key internal factor is both a strength and a weakness, the factor may be included twice in the IFE Matrix, and a weight and rating assigned to each statement. For example, the Playboy logo both helps and hurts Playboy Enterprises; the logo attracts customers to Playboy magazine, but it keeps the Playboy cable channel out of many markets. Be as quantitative as possible when stating factors. Use monetary amounts, percentages, numbers, and ratios to the extent possible. An example IFE Matrix is provided in Table 6-8 for a retail computer store. The table reveals that the two most important factors to be successful in the retail computer store business are “Revenues from repair/service in the store” and “Employee morale.” Note that the store is doing best on “Average customer purchase” amount and “In-store technical support.” The store is having major problems with its carpet, bathroom, paint, and checkout procedures. Note also that the matrix contains substantial quantitative data rather than vague statements; this is excellent. Overall, this store receives a 2.5 total weighted score, which on a 1 to 4 scale is exactly average/ halfway, indicating there is definitely room for improvement in store operations, strategies, policies, and procedures. The IFE Matrix provides important information for strategy formulation. For example, this retail computer store might want to hire another checkout person and repair its carpet, paint, and bathroom problems. Also, the store may want to increase advertising for its repair/services, because that is a really important (weight 0.15) factor to being successful in this business. An actual IFE Matrix for Forjas Taurus S.A. is provided in Table 6-9. Headquartered in Porto Alegre, Brazil, Taurus manufactures and sells military and civilian pistols, submachine guns, rifles, ammunition, bulletproof vests, motorbike helmets, and more. Note that the total weighted score of 2.53 is barely above the average of 2.50. Note, too, that the most important Table 6-8 Sample Internal Factor Evaluation Matrix for a Retail Computer Store KeyInternalFactors

Weight

rating WeightedScore

Strengths 1. 2. 3. 4. 5. 6. 7. 8. 9.

Inventory turnover increased from 5.8 to 6.7. Average customer purchase increased from $97 to $128. Employee morale is excellent. In-store promotions resulted in 20% increase in sales. Newspaper advertising expenditures increased 10%. Revenues from repair/service in the store up 16%. In-store technical support personnel have MIS college degrees. Store’s debt-to-total assets ratio declined to 34%. Revenues per employee up 19%.

0.05 0.07 0.10 0.05 0.02 0.15 0.05 0.03 0.02

3 4 3 3 3 3 4 3 3

0.15 0.28 0.30 0.15 0.06 0.45 0.20 0.09 0.06

0.10 0.15 0.02 0.02 0.04 0.05 0.03 0.05

2 2 1 1 1 2 1 1

0.20 0.30 0.02 0.02 0.04 0.10 0.03 0.05

Weaknesses 1. 2. 3. 4. 5. 6. 7. 8.

Revenues from software segment of store down 12%. Location of store negatively impacted by new Highway 34. Carpet and paint in store somewhat in disrepair. Bathroom in store needs refurbishing. Revenues from businesses down 8%. Store has no website. Supplier on-time delivery increased to 2.4 days. Often customers have to wait to check out

Total

1.00

2.50

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Table 6-9 An Actual IFE Matrix for Forjas Taurus S.A. Strengths

Weight

1. 2. 3. 4.

Taurus offers low prices for pistols and small arms in the USA. Taurus had a 15.7% increase in net revenue. Taurus has 51% market share in Brazil’s motorcycle helmet industry. Taurus has reduced the percentage of sales devoted to income tax from 3.11% to 2.82%. 5. Taurus produces a diverse range of products in different markets. 6. Taurus is a qualified supplier of products to Brazil’s armed forces. 7. Taurus and ammo-maker Companha Brasileira de Cartuchos dominate Brazil’s small arms industry. 8. Taurus provides weapons for Brazil’s military, state, and civil police. 9. Taurus has good brand recognition within the USA. 10. Taurus’s employee morale is good.

rating WeightedScore

0.09 0.07 0.06 0.06

4 4 3 3

0.36 0.28 0.18 0.18

0.05 0.05 0.04

3 4 4

0.15 0.20 0.16

0.03 0.03 0.02

4 4 4

0.12 0.12 0.08

0.08 0.08 0.07 0.07 0.04

1 2 1 1 2

0.08 0.16 0.07 0.07 0.08

0.04 0.04 0.03 0.03 0.02

2 2 1 1 1

0.08 0.08 0.03 0.03 0.02

Weaknesses 1. 2. 3. 4. 5.

Adjusted EBIT is down 23%. Total revenue in the domestic market is down 10.5%. Gross margin fell from 38.1% to 29.9%. Taurus’s stock price has plummeted to less than 1.0. Revenue from products in the metallurgy and plastics segment, excluding helmets, is down 7%. 6. Taurus has very little presence in Europe and Asia. 7. Taurus has a reputation for poor customer service. 8. There was a recent 23.6% increase in operating expenses. 9. Taurus reported a net income loss of over $32 million. 10. Taurus has poor quality control—a Taurus pistol discharged in Sao Paulo without pulling the trigger. TOTALS

1.00

2.53

factor in the industry (Weight = 0.09) is price, and Taurus does excellent (Rating = 4) in selling low-priced firearms. In multidivisional firms, each autonomous division or strategic business unit should construct an IFE Matrix. Divisional matrices then can be integrated to develop an overall corporate IFE Matrix. Be as divisional as possible when developing a corporate IFE Matrix. Also, in developing an IFE Matrix, do not allow more than 30 percent of the key factors to be financial ratios, because financial ratios are generally the result of many factors, so it is difficult to know what particular strategies should be considered based on financial ratios. For example, a firm would have no insight on whether to sell in Brazil or South Africa to take advantage of a high corporate ROI ratio.

impLicAtions for strAtegists Figure 6-9 illustrates that to gain and sustain competitive advantages, a firm must formulate strategies that capitalize on internal strengths across all its products, services, and regions, and continually improve on its internal weaknesses. This must be done in a cost-effective manner, even though large outlays of human and financial capital may be required for various strategies deemed best to pursue. Thus, long-term commitments often accompany a given strategic plan. Breakeven analysis, value chain analysis, and the IFE Matrix are especially useful strategic planning tools

in formulating strategies, especially in performing the internal assessment. Coupled with the vision/mission and external audit, the internal audit must be performed methodically and carefully because survival of the firm could hinge on an excellent strategic plan being created. Strategists should follow the guidelines presented in this chapter and throughout this book to help assure that their firm is heading in the right direction for the right reasons, and rewarding the right people, for doing the right things, in the right places.

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Establish A Clear Vision & Mission

Evaluate & Monitor Results: Take Corrective Actions; Adapt To Change

Gain & Sustain Competitive Advantages

Formulate Strategies: Collect, Analyze, & Prioritize Data Using Matrices; Establish A Clear Strategic Plan

Implement Strategies: Establish Structure; Allocate Resources; Motivate & Reward; Attract Customers; Manage Finances

Figure 6-9 How to Gain and Sustain Competitive Advantages Upstream versus Downstream Activities

know what they want.” Activities that attract customers by making it easier, compelling, and convenient for them to purchase the firm’s products and services in many ways are leading to sustained competitive advantage much more so than altering internal mechanisms. Figure 6-10 illustrates this shifting source of competitive advantage in most industries.

The primary means for gaining and sustaining competitive advantages for most companies are shifting downstream. Recent research by Dawar reveals that in most industries today, upstream activities—such as supply chain management, production, and logistics—are being commoditized or outsourced by firms, whereas downstream activities related to consumer behavior are becoming the primary means for gaining and sustaining competitive advantage.33 Dawar reports that the sources of competitive advanUpstream Activities Downstream Activities tage are shifting away from production processes inside the firm Factories, Suppliers, Customers, Distributors, Vendors, Logistics, Channels, Pricing, to customers and markets outside the firm. Businesses are increasFacilities, Operations Marketing, Positioning ingly gaining competitive advantage by proactively shaping customers’ point-of-purchase behavior, rather than firms using focus groups, surveys, and social media to determine what customers want. An early glimpse of this shift came a few years ago when Apple’s Steve Jobs was asked how much market research led to Figure 6-10 the iPad. Jobs responded, “None. It’s not the consumers’ job to The Shifting Source of Competitive Advantage

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impLicAtions for stuDents Gaining and sustaining competitive advantage is the essence or purpose of strategic planning. In the internal portion of your case analysis, emphasize how and why your internal strengths and weaknesses can both be leveraged to gain competitive advantage and overcome competitive disadvantage, in light of the direction you are taking the firm. Maintain your project’s upbeat, insightful, and forward-thinking demeanor during the internal assessment, rather than being mundane, descriptive, and vague. Focus on how your firm’s resources, capabilities, structure, and strategies, with your recommended improvements, can lead the firm to prosperity. Although the numbers must provide the basis for your analysis and must be accurate and reasonable, do not bore a live audience or class with overreliance on numbers. In contrast, throughout your presentation

or written analysis, refer to your recommendations, explaining how your plan of action will improve the firm’s weaknesses and capitalize on strengths in light of anticipated competitor countermoves. Keep your audience’s attention, interest, and suspense, rather than “reading” to them or “defining” ratios for them.

Special Resources Excellent free online and subscription (fee-based) resources for obtaining financial information about firms and industries are provided in Table 6-10. Some sources listed provide financial ratios. The free excel template at www.strategyclub.com calculates ratios and develops ratio trend lines, once students enter in relevant data.

Table 6-10 Excellent Websites to Obtain Information (Including Financial Ratios) on Companies and Industries 1. Online Free Resources a. http://finance.yahoo.com b. www.hoovers.com c. http://globaledge.msu.edu/industries/ 2. Online Subscription Resources (Likely Subscribed to by Your College Library) a. Mergent Online: www.mergentonline.com At the Mergent Online website, search for companies with the same SIC or NAICS code, and then create a comparison financial ratio report. A number of different ratios can be used as comparison criteria to create a tailored report that can then be exported into a Microsoft Excel format. Alternatively, you can use the Competitors Tab in Mergent to build a list of companies and compare their ratios. Your college library likely subscribes to this service. b. Factiva: http://new.dowjones.com/products/factiva/ At the Factiva website, first use the Companies & Markets tab to search for a company. Next, click “Reports” and choose the “Ratio Comparison Report” to get a company’s ratios compared to industry averages. Your college library likely subscribes to this service. c. S&P NetAdvantage: http://www.standardandpoors.com/products-services/industry_surveys/ en/us At the S&P NetAdvantage website, company and industry ratios are provided in two different sections of the database: (1) the Compustat Excel Analytics section of a particular company’s information page and (2) in the data from the S&P Industry Surveys. Your college library likely subscribes to this service. d. Onesource: www.avention.com/OneSource Onesource is a good source for financial ratio information. Search for a particular company and then click on the link for “Ratio Comparisons” on the left side of the company information page. The data in Onesource will compare your company against the industry, against the sector, and against the stock market as a whole. e. Yahoo Industry Center: http://biz.yahoo.com/ic/ The Yahoo Industry Center is an excellent free resource that allows you to browse industries by performance rankings, including ROE, P/E ratio, market cap, price change, profit margin, price-to-book value, long-term debt, and more. 3. Hardcopy Reference Books for Financial Ratios in Most Libraries a. Robert Morris Associate’s Annual Statement Studies: An excellent source of financial ratio information. b. Dun & Bradstreet’s Industry Norms & Key Business Ratios: An excellent source of financial ratio information. Source: Based on a variety of sources.

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Chapter Summary Management, marketing, finance/accounting, production/operations, R&D, and MIS represent the core operations of most businesses and the source of competitive advantages. A strategicmanagement audit of a firm’s internal operations is vital to organizational health. Many companies still prefer to be judged solely on their bottom-line performance. However, it is essential that strategists identify and evaluate internal strengths and weaknesses to effectively formulate and choose among alternative strategies. The Internal Factor Evaluation Matrix, coupled with the Competitive Profile Matrix, the External Factor Evaluation Matrix, and clear statements of vision and mission provide the basic information needed to successfully formulate competitive strategies. The process of performing an internal audit represents an opportunity for managers and employees throughout the organization to participate in determining the future of the firm. Involvement in the process can energize and mobilize managers and employees. Understanding both external and internal factors and relationships among them (see SWOT analysis in Chapter 8) is the key to effective strategy formulation. Because both external and internal factors continually change, strategists seek to identify and take advantage of positive changes and buffer against negative changes in a continuing effort to gain and sustain a firm’s competitive advantage. This is the essence and challenge of strategic management, and oftentimes survival of the firm hinges on this work.

MyManagementLab® To complete the problems with the

, go to EOC Discussion Questions in the MyLab.

Key Terms and Concepts activity ratios (p. 194) benchmarking (p. 202) breakeven (BE) point (p. 195) capacity utilization (p. 197) capital budgeting (p. 192) collaborative machines (p. 198) controlling (p. 187) core competence (p. 202) cost/benefit analysis (p. 190) cultural products (p. 182) customer analysis (p. 188) distinctive competencies (p. 180) distribution (p. 190) dividend decisions (p. 192) downstream activities (p. 207) empirical indicators (p. 181) financial ratio analysis (p. 191) financing decision (p. 192) fixed costs (FC) (p. 195) functions of finance/accounting (p. 191) functions of management (p. 184) functions of marketing (p. 188) growth ratios (p. 194) human resource (HR) management (p. 186)

internal audit (p. 180) Internal Factor Evaluation (IFE) Matrix (p. 204) investment decision (p. 192) leverage ratios (p. 194) liquidity ratios (p. 194) management information system (MIS) (p. 200) marketing research (p. 190) motivating (p. 186) organizational culture (p. 182) organizing (p. 185) planning (p. 184) pricing (p. 189) product and service planning (p. 189) production/operations function (p. 197) profitability ratios (p. 194) research and development (R&D) (p. 199) resource-based view (RBV) (p. 181) selling (p. 188) staffing (p. 186) synergy (p. 185) test marketing (p. 189) upstream activities (p. 207) value chain analysis (VCA) (p. 201) variable costs (VC) (p. 196)

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Issues for Review and Discussion 6-1. Volkswagen (VW) Group has been very successful in the last decade. Research VW and see if they have strategic planning. Create a report of your findings for your class. 6-2. Visit Volkswagen’s (VW) corporate website. See the list of top executives for VW and create an organizational chart for the company. 6-3. Given the 15 example (possible) aspects of an organization’s culture as presented in the chapter, rate a company you are very familiar with in terms of the extent to which each culture item exists. Explain. 6-4. Rank the seven functions of marketing in order of importance for a small hardware business. 6-5. Develop a quantitative problem to show your understanding of cost/benefit analysis. Students’ answers will vary depending on the quantitative problem they feature. 6-6. Develop a quantitative problem to show that you understand breakeven analysis. Students’ answers will vary depending on the quantitative problem they feature. 6-7. For Volkswagen’s (VW), determine their most recent dividend payout amount per share. How has that amount changed over the last 12 months? 6-8. List some advantages and disadvantages of a company paying dividends versus reinvesting that money in the company, and striving for stock price increase as the primary way to reward investors. 6-9. Illustrate a breakeven chart for Volkswagen (VW). Explain how it may work for the organization. 6-10. Volkswagen (VW) has historically spent more on R&D than almost any other automobile company in the world. What are the major advantages and disadvantages of this strategy? 6-11. Perform a value chain analysis for an organization of your choice. 6-12. Discuss the relationship between benchmarking and value chain analysis. 6-13. Explain why the ratings in an IFE Matrix should be 4 or 3 for strengths, and 1 or 2 for weaknesses as compared to the EFE Matrix, where the ratings should be 1, 2, 3, or 4 among both the opportunities and threats. 6-14. Compare the financial ratio analysis for Volkswagen (VW) on the four different websites identified in the chapter. Which site do you like best? Why? 6-15. Conduct a Google search for value chain analysis. In a two-page report, discuss the concepts presented in the chapter. 6-16. What competitive advantages would Amazon have over Wal-Mart stores in doing business outside the United States? 6-17. How could the “process of performing an internal audit” differ across countries, given varying global management styles? 6-18. Why is sole reliance on financial ratios an ineffective means of deriving internal strengths and weaknesses?

6-19. Give an example of two resources for a fast-food chain that you believe meet the three “empirical indicators” criteria. 6-20. Prepare a culture assessment table, as presented in the chapter, for a local business that you are familiar with. Rate the business on the 15 culture criteria presented in the chapter. What are the implications of your ratings on the strategic planning process within that firm? 6-21. Why is human resource management particularly challenging for international firms? 6-22. List some specific characteristics of advertisements, in the wake of a lingering recession in Europe. 6-23. How do changes in the value of the dollar affect pricing of products of global firms? 6-24. Historically, what has been the attitude of technology firms toward paying dividends? Give some examples. 6-25. Describe Singapore as a place to locate or start a business. 6-26. Visit the www.strategyclub website, and describe the strategic planning products offered. 6-27. Develop a value chain analysis for a large global firm and its primary rival firm. 6-28. Identify four major strengths and weaknesses each, of your college or university. Rank each factor in terms of importance. 6-29. Search the Internet for financial information on Volkswagen (VW). Identify three financial ratios where the firm is weak and three financial ratios the firm is strong. 6-30. What five cultural products do you feel are most important? Justify your selections. 6-31. Rate the company where you work, or would like to work, on the fifteen aspects of culture listed in the chapter. 6-32. Develop a breakeven chart for a company, which simultaneously lays off employees and closes facilities. 6-33. Financial ratio analysis should be conducted on three separate fronts. What are these fronts and which is most important? 6-34. Explain breakeven analysis using three graphs that show changes in breakeven given: 1) a change in price, 2) a change in advertising expenditures, and 3) a change in labor costs. 6-35. Why is breakeven analysis such an important strategic planning concept? 6-36. What are the basic functions of production/operations in a large manufacturing company? Why are these factors important in an internal strategic management audit? 6-37. Explain benchmarking 6-38. Go to the www.strategyclub.com website and review the benefits of using the free excel template. 6-39. For the Nestlé Cohesion Case, what do you consider as the company’s four major strengths and four major weaknesses? 6-40. Prepare a financial ratio analysis for Nestlé. Include comparative ratios for a rival and for the industry.

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6-41. Explain how Nestlé could utilize breakeven analysis. 6-42. Explain how top executives of Nestle could utilize Porter’s Five Forces Model to aid the firm in strategic planning. 6-43. Could Nestlé and Mars, Inc. being rival companies hinder the two firms from cooperating with each other on R&D or facilitate the gathering and assimilation of competitive intelligence of one or the other firm? 6-44. Since Nestlé is so divisional, how could the company best develop a corporate IFE Matrix for various Divisional IFE Matrices? 6-45. When is it more important to capitalize on strengths than improve on weaknesses in strategic planning?

211

6-46. Why is inclusion of about 20 factors recommended in the IFE Matrix, rather than about 10 factors or about 40 factors? 6-47. Do you think the RBV view or the I/O theorists view is more accurate in performing a strategic analysis? What would be the important implications for a business? 6-48. Does the RBV Theory help in determining diversification targets? 6-49. How does the cost of sales compare between online versus brick-and-mortar sales approaches? 6-50. Does spending more on research and development usually positively impact stock price appreciation?

MyManagementLab® Go to the Assignments section of your MyLab to complete these writing exercises. 6-51. List three ways that financial ratios should be compared 6-52. Would you ever pay out dividends when your firm’s or used. Which of the three comparisons do you feel is annual net profit is negative? Why or why not? What most important? Why? effect could this have on a firm’s strategies?

AssurAnce of LeArning exercises exercise 6A

Develop a Corporate IFE Matrix for Volkswagen Group Purpose Volkswagen (VW) Group is featured in the opening chapter case as a firm that engages in excellent strategic planning despite its recent legal/ethical pollution fiasco. VW has four major geographic business segments. Each of these divisions of VW would prepare their own IFE matrices, which would be assimilated to develop an overall corporate IFE matrix. This exercise gives you practice developing divisional IFE matrices and assimilating those into an overall corporate IFE matrix.

Instructions Step 1 Step 2 Step 3 Step 4

Review VW’s most recent Annual Report in regards to the company’s four geographic business segments, which are North America, South America, Asia-Pacific, and Europe. Review the latest S&P Industry Survey for companies that produce and market automobiles. Develop a divisional IFE matrix for each of VW’s business segments. Assimilate your divisional IFE matrices into an overall corporate IFE matrix for VW.

exercise 6B

Should Volkswagen Deploy More (or Less) Resources Outside of Europe? Purpose As indicated in the opening chapter boxed insert, Volkswagen (VW) receives more revenue from outside its home base of Europe than from inside Europe. This exercise gives you practice analyzing domestic versus global revenue base so that more effective strategies can be formulated and implemented.

Instructions Step 1

Go to the VW’s website and review the company’s most recent Annual Report. Be careful to note the financial, management, and marketing information available for each geographic

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Step 2 Step 3

region. Let all regions outside Europe, for purposes of this exercise, be referred to as Global, and Europe be referred to as domestic for VW. Go to www.finance.yahoo.com and review the last 45 days of Headlines for VW. Take note of public information related to VW as well as to General Motors (GM), Ford, Honda, and Toyota. Prepare a three-page executive summary to reveal whether you feel VW should be placing more or less emphasis on operations outside of Europe. Provide supporting tables, #’s, ratios, and narrative.

exercise 6c

Apply Breakeven Analysis Purpose Breakeven analysis is one of the simplest yet underused analytical tools in management. It helps provide a dynamic view of the relationships among sales, costs, and profits. A better understanding of breakeven analysis can enable an organization to formulate and implement strategies more effectively. This exercise will show you how to calculate breakeven points mathematically. The formula for calculating breakeven point is BE Quantity = TFC/P – VC. In other words, the quantity (Q) or units of product that need to be sold for a firm to break even is total fixed costs (TFC) divided by (Price per Unit – Variable Costs per Unit).

Instructions Step 1

Step 2 Step 3

Assume an airplane company has fixed costs of $100 million and variable costs per unit of $2 million. The planes sell for $3 million each. What is the company’s breakeven point in terms of the number of planes that need to be sold just to break even? If the airplane company wants to make a profit of $99 million annually, how many planes will it have to sell? If the company can sell 200 airplanes in a year, how much annual profit will the firm make?

exercise 6D

Perform a Financial Ratio Analysis for Nestlé Purpose Financial ratio analysis is one of the best techniques for identifying and evaluating internal strengths and weaknesses. Potential investors and current shareholders look closely at firms’ financial ratios, making detailed comparisons to industry averages and to previous periods of time. Financial ratio analysis provides vital information for developing an IFE Matrix.

Instructions Step 1 Step 2

On a separate sheet of paper, write down numbers 1 to 20. Referring to Nestlé’s income statement and balance sheet, calculate 20 financial ratios for 2015. In a second column, indicate whether you consider each ratio to be a strength, weakness, or neutral factor for Nestlé.

exercise 6e

Construct an IFE Matrix for Nestlé Purpose This exercise will give you experience developing an IFE matrix. Identifying and prioritizing factors to include in an IFE matrix fosters communication among functional and divisional managers. Preparing an IFE matrix allows human resources,’ marketing’s, production/operations,’ finance/ accounting’s, R&D’s, and management information systems’ managers to articulate their concerns and thoughts regarding the business condition of the firm. This results in an improved collective understanding of the business.

Instructions Step 1 Step 2 Step 3

Join with two other individuals to form a three-person team. Develop an IFE matrix for Nestlé. Compare your team’s IFE matrix with other teams’ IFE matrices. Discuss any major differences. What strategies do you think would allow Nestlé to capitalize on its major strengths? What strategies would allow Nestlé to improve upon its major weaknesses?

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exercise 6f

Analyze Your College or University’s Internal Strategic Situation Purpose This exercise is excellent for doing together as a class and will help in evaluating your university’s major strengths and weaknesses. An organization’s strategies are largely based on striving to take advantage of strengths and improving on weaknesses.

Instructions Step 1 Step 2 Step 3

As a class, determine your college or university’s major internal strengths and weaknesses. List 10 strengths and 10 weaknesses. Get everyone in class to rank their factors with 1 being most important and 10 being least important. Gather up everyone’s papers, count the numbers, and in that manner create a prioritized list of the key internal strengths and weaknesses facing your college.

mini-cAse on BAnk of chinA LimiteD (BAchf)

WHAT IS THE NATURE OF BANK OF CHINA’S GROWTH? Headquartered in Beijing, China, the Bank of China (BOC) is the oldest bank in the country. As China’s most international and diversified bank, BOC has offices in 37 countries, including Taiwan, Portugal, Canada, Singapore, Hong Kong, and London. During BOC’s first fiscal quarter of 2015, which ended June 30, BOC reported an estimated profit of RMB47.77 billion and a profit attributable to equity holders of RMB45.84 billion, an increase of 1.21 percent and 1.05 percent respectively compared to the prior year period. It is indicated in the investor section of the bank’s website that its financial performance at the end of 2014 was excellent. Due to slowing growth in China, the Shanghai stock market crashed in July–August, 2015, wiping out $5 trillion in value that had been accumulated earlier in the year. However, bank stocks, such as the stock of BOC, led a slight recovery in late August. The central bank of China cut interest rates and reduced the amount of required reserves for banks, aiding a slight recovery. Questions

1. Visit the About Us section of the bank’s website. Go through the information under Organization section and review BOC’s branch offices globally. How has the number of branches changed in the last six months, given that virtually all banks in the United States are closing branches rather than opening them, primarily due to the slow shift of banking to an online business model from a brick-and-mortar one? 2. Visit the investor section on the BOC website and review its financial condition. Compute three key ratios. Rate the bank’s financial condition on an A, B, C, D, or F grading system. 3. Describe BOC’s most recent financial performance? 4. Visit BOC’s investor relations section on its website and check the investor services. Click on 2015 interim results, available under the results presentation, and make a note the top six executives pictured at this website. Determine whether the top twenty executives of Bank of China include any females or minorities. Is this a problem for the company or it is typical of the bank hierarchy among firms in China? Source: Based on company documents; “Serving Society, Delivering Excellence,” Bank of China, 2015 Interim Results, August 28, 2015.

Source:©dangliu.Shutterstock

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Current Readings Acito, Frank, and Vijay Khatri. “Business Analytics: Why Now and What Next?” Business Horizons 57, no. 5 (2014): 565–570. Chen, Chien-Ming, Magali A. Delmas, and Marvin B. Lieberman. “Production Frontier Methodologies and Efficiency as a Performance Measure in Strategic Management Research.” Strategic Management Journal 36, no. 1 (January 2015): 19–36. Davenport, Thomas H. “What Businesses Can Learn from Sports Analytics.” MIT Sloan Management Review 55, no. 4 (2014): 10–13. George, Gerard, Martine R. Haas, and Alex Pentland. “Big Data and Management.” Academy of Management Journal (April 2014): 321–338. Hayashi, Alden M. “Thriving in a Big Data World.” MIT Sloan Management Review 55, no. 2 (2014): 35–39. Howard, Dana, W. Glynn Mangold, and Tim Johnston. “Managing Your Social Campaign Strategy Using Facebook, Twitter, Instagram, YouTube & Pinterest: An Interview with Dana Howard, Social Media Marketing Manager.” Business Horizons 57, no. 5 (2014): 657–665.

Kiron, David, Pamela Kirk Prentice, and Renee Boucher Ferguson. “Raising the Bar with Analytics.” MIT Sloan Management Review 55, no. 2 (2014): 29–33. Kuratko, Donald F., Jeffrey S. Hornsby, and Jeffrey G. Covin. “Diagnosing a Firm’s Internal Environment for Corporate Entrepreneurship.” Business Horizons 57, no.1 (2014): 37–47. Ross, Jeanne W., Cynthia M. Beath, and Anne Quaadgras. “You May Not Need Big Data After All.” Harvard Business Review 91, no.11 (2013). Sampler, Jeffrey L., and Michael J. Earl. “What’s Your Information Footprint?” MIT Sloan Management Review 55, no. 2 (2014): 96–97. Thomas, Roberta J., et al. “Developing Tomorrow’s Global Leaders.” MIT Sloan Management Review 55, no. 1 (2013): 12–13. Wuyts, Stefan, and Shantanu Dutta. “Benefiting from Alliance Portfolio Diversity: The Role of Past Internal Knowledge Creation Strategy.” Journal of Management 40 (2014).

Endnotes 1. Reprinted by permission of the publisher from “IntegratingStrength–Weakness Analysis into Strategic Planning,” by William King, Journal of Business Research 2, no. 4: 481. Copyright 1983 by Elsevier Science Publishing Co., Inc. 2. Robert Grant, “The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation,” California Management Review (Spring 1991): 116. 3. J. B. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17 (1991): 99–120; J. B. Barney, “The Resource-Based Theory of the Firm,”

Organizational Science 7 (1996): 469; J. B. Barney, “Is the Resource-Based ‘View’ a Useful Perspective for Strategic Management Research? Yes.” Academy of Management Review 26, no. 1 (2001): 41–56. 4. Edgar Schein, Organizational Culture and Leadership (San Francisco: Jossey-Bass, 1985), 9. 5. John Lorsch, “Managing Culture: The Invisible Barrier to Strategic Change,” California Management Review 28, no. 2 (1986): 95–109. 6. Y. Allarie and M. Firsirotu, “How to Implement Radical Strategies in Large Organizations,” Sloan Management Review (Spring 1985): 19.

7. www.mindtools.com/plfailpl.html 8. Adam Smith, The Wealth of Nations (New York: Modern Library, 1937), 3–4. 9. Richard Daft, Management, 3rd ed. (Orlando, FL: Dryden Press, 1993), 512. 10. Shelley Kirkpatrick and Edwin Locke, “Leadership: Do Traits Matter?” Academy of Management Executive 5, no. 2 (May 1991): 48. 11. Peter Drucker, Management Tasks, Responsibilities, and Practice (New York: Harper & Row, 1973), 463. 12. Michael Mink, “Stay Atop Social Media,” Investor’s Business Daily, October 7, 2014, A4. 13. Brain Dumaine, “What the Leaders of Tomorrow See,” Fortune, July 3, 1999, 51. 14. Lauren Weber and Rachael Feintzeig, “Is It a Dream or a Drag? Companies without HR,” Wall Street Journal, April 9, 2014, B1. 15. J. Evans, and B. Bergman, Marketing (New York: Macmillan, 1982), 17. 16. http://www.ibtimes.com/super-bowl-ads-2014-what-does4-million-really-buy-you-1551884 17. Sarah Needleman and Jack Marshall, “Small Businesses Grapple with Facebook,” Wall Street Journal, August 7, 2014, B5. 18. Jack Marshall, “Online Ads Lure Cash, But Losses Still Mount,” Wall Street Journal, August 18, 2014, B1. 19. Spencer Ante, “As Economy Cools, IBM Furthers Focus on Marketers,” Wall Street Journal, July 18, 2012, B3.

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20. Brad Stone, “See Your Friends,” Bloomberg Businessweek (September 27–October 3, 2010): 65–69. 21. Suzanne Kapner, “Higher Web Sales Drag on Retailers,” Wall Street Journal, December 2, 2014, B1. 22. Quoted in Robert Waterman, Jr., “The Renewal Factor,” BusinessWeek (September 14, 1987): 108. 23. http://en.wikipedia.org/wiki/Cost-benefit_analysis 24. J. Van Horne, Financial Management and Policy (Upper Saddle River, NJ: Prentice-Hall, 1974): 10. 25. http://en.wikipedia.org/wolo/Break-even_(economics) 26. Timothy Aeppel, “Robots Work Their Way into Small Factories,” Wall Street Journal, September 18, 2004, B1. 27. Patrick Seitz, “Largest Tech R&D Spenders Not Top Stock Performers,” Investor’s Business Daily, July 8, 2014, A5. 28. Philip Rousebi, Kamal Saad, and Tamara Erickson, “The Evolution of Third Generation R&D,” Planning Review 19, no. 2 (March–April 1991): 18–26. 29. Based on Elizabeth Dwoskin, “Big Data: Give Me Back My Privacy,” Wall Street Journal, March 24, 2014, R1–R4. 30. Ibid. 31. Michael Porter, Competition Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980), 34–44. 32. http://en.wikipedia.org/siki/Benchmarking 33. Niraj Dawar, “When Marketing Is Strategy,” Harvard Business Review (December 2013): 101–108.

Source: © industrieblick/Fotolia

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The External Audit LeArning oBjectives After studying this chapter, you should be able to do the following: 7-1. Describe the nature and purpose of an external assessment in formulating strategies. 7-2. Identify and discuss 10 external forces that must be examined in formulating strategies: economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive. 7-3. Explain Porter’s Five Forces Model and its relevance in formulating strategies. 7-4. Describe key sources of information used for locating vital external information. 7-5. Discuss forecasting tools and techniques. 7-6. Explain how to develop and use an External Factor Evaluation (EFE) Matrix. 7-7. Explain how to develop and use a Competitive Profile Matrix.

AssurAnce of LeArning exercises The following exercises are found at the end of this chapter: exercise 7A exercise 7B

exercise 7c exercise 7D exercise 7e exercise 7f exercise 7g exercise 7H

Michelin and Africa: An External Assessment Preparing a CPM for Michelin Based on Countries Rather Than Companies Develop Divisional Michelin EFE Matrices Developing an EFE Matrix for Nestlé S.A. The External Audit Develop a Competitive Profile Matrix for Michelin Develop a Competitive Profile Matrix for Nestlé Analyzing Your College or University’s External Strategic Situation

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his chapter examines the tools and concepts needed to conduct an external strategicmanagement audit (sometimes called environmental scanning or industry analysis). An external audit focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased foreign competition, population shifts to coastal areas of the United States, an aging society, and taxing Internet sales. An external audit reveals key opportunities and threats confronting an organization, so managers can formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats. This chapter presents a practical framework for gathering, assimilating, and analyzing external information. The Industrial Organization (I/O) view of strategic management is discussed. The company showcased here for practicing exemplary strategic management is Michelin Manufacturing Company. Michelin is a huge tire manufacturer rivaling Bridgestone, a world leader in aircraft and earthmover tires. Apart from establishing and following a strict code of ethics within the organization, Michelin is fundamentally opposed to child and forced labor, in full compliance with the principles of the International Labor Organization (ILO). This chapter addresses whether companies should take a stand on political and societal issues. Do you think companies should?

exempLAry compAny sHowcAseD

Michelin (MGDDF) Headquartered in Clemont-Ferrand in the Auvergne region of France, Michelin is a huge tire manufacturer rivaling Bridgestone, and is a leader in aircraft and earthmover tires. Michelin owns BFGoodrich, Kleber, Riken, Komoran, and the Uniroyal tire brands, as well as the Warrior brand in China. Over 175 million tires are produced by Michelin annually for various vehicles, while new and replacement tires are supplied to the passenger car and truck markets. Additionally, Michelin is also known in the culinary world for its Red Guide reference books and restaurant star awards, and about 10 million travel guides and maps are published by it every year. Michelin introduced two new Enduro bicycle tires, reentering the bike racing business. To provide mountain bike riders with high-performance tires, Michelin has partnered with two famous bikers: Fabien Barel, three-time world downhill champion, and Pierre Edouard Ferry, free ride champion. The new Michelin bike tires were developed by the Michelin Group engineers, aided by the two bikers, after working on it for two and a half years. Michelin’s new Pilot Sport Cup 2 is the only tire certified for two new high-powered sports carsthe Ferrari 458 Speciale and the Porsche 918 Spyder. Michelin’s Pilot Sport 3 tires equip the new Peugeot 308, making the car more energy efficient while delivering outstanding safety, handling, and longevity. For the Peugeot 208 HYbrid FE, Michelin developed a range of tall and narrow tires with a longer rim diameter and better performance. Michelin produces tires throughout Europe but also has manufacturing facilities in the USA, Canada, Brazil, Thailand, Japan, Italy,

and several other countries. Michelin has more than 65,000 people and has 40 production sites in Europe, which accounts for 40 percent of the company’s operations. In Europe, Michelin is consolidating its position on high addedvalue production by reorganizing its activities in the United Kingdom and Italy. In these two countries, Michelin, under its reorganization, will be spending 265 million euros to modernize manufacturing plants and facilities along with the logistics network. With more than 4,000 employees, 80 percent of whom work on production sites, the Italian branch oversees over 10 percent of the European processes. By 2020, Michelin will have invested around 180 million euros in its Italian manufacturing lines, strengthening the sites at Cuneo and Alessandria, to extensively develop the country’s automobile tire volumes. Source: Based on company documents.

CHAPTER7 • THEExTERnAlAudiT

The Purpose and Nature of an External Audit The purpose of an external audit is to develop a finite list of opportunities that could benefit a firm as well as threats that should be avoided. As the term finite suggests, the external audit is not aimed at developing an exhaustive list of every possible factor that could influence the business; rather, it is aimed at identifying key variables that offer actionable responses. Firms should be able to respond either offensively or defensively to the factors by formulating strategies that take advantage of external opportunities or that minimize the impact of potential threats. Figure 7-1 illustrates with white shading how the external audit fits into the strategic-management process.

Key External Forces External forces can be divided into five broad categories: (1) economic forces; (2) social, cultural, demographic, and natural environment forces; (3) political, governmental, and legal forces; (4) technological forces; and (5) competitive forces. Relationships among these forces and an

Chapter 2: Outside-USA Strategic Planning

The Internal Audit Chapter 6

Vision and Mission Analysis Chapter 5

Types of Strategies Chapter 4

Strategy Generation and Selection Chapter 8

Strategy Implementation Chapter 9

Strategy Execution Chapter 10

Strategy Monitoring Chapter 11

The External Audit Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 7-1 A Comprehensive Strategic-Management Model Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.

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Economic forces Social, cultural, demographic, and natural environment forces Political, legal, and governmental forces Technological forces Competitive forces

Competitors Suppliers Distributors Creditors Customers Employees Communities Managers Stockholders Labor unions Governments Trade associations Special interest groups Products Services Markets Natural environment

AN ORGANIZATION’S OPPORTUNITIES AND THREATS

Figure 7-2 Relationships Between Key External Forces and an Organization

organization are depicted in Figure 7-2. External trends and events, such as rising food prices and people in African countries learning about online services, significantly affect products, services, markets, and organizations worldwide. Important Note: When identifying and prioritizing key external factors in strategic planning, make sure the factors selected are (1) specific (i.e., quantified to the extent possible); (2) actionable (i.e., meaningful in terms of having strategic implications) and (3) stated as external trends, events, or facts rather than as strategies the firm could pursue. For example, regarding actionable, “the stock market is volatile” is not actionable because there is no apparent strategy that the firm could formulate to capitalize on that factor. In contrast, a factor such as “the GDP of Brazil is 6.8 percent” is actionable because the firm should perhaps open 100 new stores in Brazil. In other words, select factors that will be helpful in deciding what to recommend the firm should do, rather than selecting nebulous factors too vague for an actionable response. Similarly, “to expand into Europe” is not an appropriate opportunity, because it is both vague and is a strategy; the better opportunity statement would be “the value of the euro has increased 5 percent versus the U.S. dollar in the last twelve months.” Changes in external forces translate into changes in consumer demand for both industrial and consumer products and services. External forces affect the types of products developed, the nature of positioning and market segmentation strategies, the type of services offered, and the choice of businesses to acquire or sell. External forces have a direct impact on both suppliers and distributors. Identifying and evaluating external opportunities and threats enables organizations to develop a clear mission, to design strategies to achieve long-term objectives, and to develop policies to achieve annual objectives. The increasing complexity of business today is evidenced by more countries developing the capacity and will to compete aggressively in world markets. Foreign businesses and countries are willing to learn, adapt, innovate, and invent to compete successfully in the marketplace. Fast growth worldwide, recently reported by Alibaba and Samsung, are examples.

The Process of Performing an External Audit The process of performing an external audit must involve as many managers and employees as possible. As emphasized in previous chapters, involvement in the strategic-management process can lead to understanding and commitment from organizational members. Individuals appreciate having the opportunity to contribute ideas and to gain a better understanding of their firm’s industry, competitors, and markets. Key external factors can vary over time and by industry.

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To perform an external audit, a company first must gather competitive intelligence and information about economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends. Individuals can be asked to monitor various sources of information, such as key magazines, trade journals, and newspapers—and use online sources such as those listed later in this chapter in Table 7-8. These persons can submit periodic scanning reports to the person(s) who coordinate the external audit. This approach provides a continuous stream of timely strategic information and involves many individuals in the external-audit process. Suppliers, distributors, salespersons, customers, and competitors represent other sources of vital information. After information is gathered, it should be assimilated and evaluated. A meeting or series of meetings of managers is needed to collectively identify the most important opportunities and threats facing the firm. A prioritized list of these factors must be obtained by requesting that all managers individually rank the factors identified, from 1 (for the most important opportunity/ threat) to 20 (for the least important opportunity/threat). Instead of ranking factors, managers could simply place a checkmark by their most important “top 10 factors.” Then, by summing the rankings, or the number of checkmarks, a prioritized list of factors is revealed. Prioritization is absolutely essential in strategic planning because no organization can do everything that would benefit the firm; tough choices among good choices have to be made.

The Industrial Organization (I/O) View The Industrial Organization view of strategic planning advocates that external (industry) factors are more important than internal ones for gaining and sustaining competitive advantage. Proponents of the I/O view, such as Michael Porter, contend that organizational performance will be primarily determined by industry forces, such as falling gas prices that no single firm can control. Porter’s Five-Forces Model, presented later in this chapter, is an example of the I/O perspective, which focuses on analyzing external forces and industry variables as a basis for getting and keeping competitive advantage. Competitive advantage is determined largely by competitive positioning within an industry, according to I/O advocates. Managing strategically from the I/O perspective entails firms striving to compete in attractive industries, avoiding weak or faltering industries, and gaining a full understanding of key external factor relationships within that attractive industry. I/O theorists contend that external factors—such as economies of scale, barriers to market entry, product differentiation, the economy, and level of competitiveness—are more important than internal resources, capabilities, structure, and operations. The I/O view has enhanced the understanding of strategic management. However, the authors contend that it is not a question of whether external or internal factors are more important in gaining and maintaining competitive advantage. In contrast, effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage. In fact, as discussed in Chapter 8, matching key external opportunities and threats with key internal strengths and weaknesses provides the basis for successful strategy formulation.

Ten External Forces That Affect Organizations Economic Forces Economic factors have a direct impact on the potential attractiveness of various strategies. For example, high underemployment (minimum wage-type employment) in the United States bodes well for discount firms such as Dollar Tree, T.J. Maxx, Walmart, and Subway, but hurts thousands of traditional-priced retailers in many industries. Although the Dow Jones Industrial Average is high, corporate profits are high, dividend increases are up sharply, gas prices are low, and emerging markets are growing, millions of people work for minimum wages or are unemployed. As a result of droughts, commodity prices are up sharply, especially food, which is contributing to rising inflation fears. Many firms are switching to part-time rather than full-time employees to avoid having to pay health benefits. To take advantage of Canada’s robust economy and eager-to-spend people, many firms are adding facilities in Canada, including T.J. Maxx opening Marshalls stores and Tanger Outlet

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Table 7-1 Key Economic Variables to Be Monitored Shift to a service economy in the USA Availability of credit Level of disposable income Propensity of people to spend Interest rates Inflation rates Gross domestic product trends Consumption patterns Unemployment trends Value of the dollar in world markets Import/export factors

Demand shifts for different goods and services Income differences by region and consumer groups Price fluctuations Foreign countries’ economic conditions Monetary and fiscal policies Stock market trends Tax rate variation by country and state European Economic Community (EEC) policies Organization of Petroleum Exporting Countries (OPEC) policies

Factory Centers stores opening. Canada is one of the most economically prosperous countries in the world. Although interrelated, every country has its own economic situation, and those situations impact where companies choose to spend money and do business. Interest rates, stock prices, and discretionary income are slowly rising. As stock prices increase, the desirability of equity as a source of capital increases. When the market rises, consumer and business wealth expands. A few important economic variables that often represent opportunities and threats for organizations are provided in Table 7-1. Be mindful that in strategic planning and case analysis, relevant economic variables such as those listed must be quantified and actionable to be useful. An example of an economic variable is “value of the dollar” that recently hit a 7-year high compared to the yen, a 9-year high compared to the euro, a 5-year high compared to the Australian dollar, and an 11-year high to some other currencies. The high dollar makes it cheap for Americans to travel abroad, but expensive for foreigners to travel to the United States, thus hurting the U.S. tourism business. Trends in the dollar’s value have significant and unequal effects on companies in different industries and in different locations. Agricultural and petroleum industries are hurt by the dollar’s rise against the currencies of Mexico, Brazil, Venezuela, and Australia. Generally, a strong or high dollar makes U.S. goods more expensive in overseas markets. This worsens the U.S. trade deficit. Domestic firms with big overseas sales, such as McDonald’s, also are hurt by a strong dollar. Its revenue from abroad is lowered because, for example, 100 euros earned in Europe, when translated back to U.S. dollars for reporting purposes, is worth maybe $75. To combat this “loss,” some companies try to raise prices in their European or Mexican stores, but that carries a risk of alienating shoppers, angering retailers, and giving local competitors a price edge. Some advantages of a strong dollar, however, are that (1) companies with substantial outside U.S. operations see their overseas expenses, such as salaries paid in euros, become cheaper; (2) it gives U.S. companies greater firepower for international acquisitions; and (3) companies importing goods have greater buying power because their dollars now go further overseas. Table 7-2 lists 10advantages of a strong U.S. dollar for U.S. firms. Table 7-2 Ten Advantages of a Strong Dollar for Domestic Firms 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Leads to lower exports Leads to higher imports Makes U.S. goods expensive for foreign consumers Helps keep inflation low Allows U.S. firms to purchase raw materials cheaply from other countries Allows USA to service its debt better Spurs foreign investment Encourages Americans to travel abroad Leads to lower oil prices because oil globally is priced in U.S. dollars Encourages Americans to spend money because they can buy more for their money

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Social, Cultural, Demographic, and Natural Environment Forces Social, cultural, demographic, and environmental changes impact strategic decisions on virtually all products, services, markets, and customers. Small, large, for-profit, and nonprofit organizations in all industries are being staggered and challenged by the opportunities and threats arising from changes in social, cultural, demographic, and environmental variables. In every way, the United States is much different today than it was yesterday, and tomorrow promises even greaterchanges. The United States is becoming older and less white. The oldest among the 76 million baby boomers plan to retire soon, and this has lawmakers and younger taxpayers concerned about who will pay their Social Security, Medicare, and Medicaid. Individuals age 65 and older in the United States as a percentage of the population will rise to 18.5 percent by 2025. The oldest American as of January 1, 2015, is 116-year-old Gertrude Weaver of Little Rock, Arkansas. Weaver is the second-oldest person in the world, behind Misao Okawa of Japan, according to the Gerontology Research Group. The trend toward an older United States is good news for restaurants, hotels, airlines, cruise lines, tours, resorts, theme parks, luxury products and services, recreational vehicles, home builders, furniture producers, computer manufacturers, travel services, pharmaceutical firms, automakers, and funeral homes. Older Americans are especially interested in health care, financial services, travel, crime prevention, and leisure. The world’s longest-living people are the Japanese. By 2050, the Census Bureau projects that the number of Americans age 100 and older will increase to over 834,000 from just under 100,000 centenarians in the country in 2000. Americans age 65 and over will increase from 12.6 percent of the U.S. population in 2000 to 20.0 percent by the year 2050. The aging U.S. population affects the strategic orientation of nearly all organizations. Retail shoppers in the United States are increasingly buying online, resulting in a persistent 5 to 7 percent decline in store traffic among almost all retail stores, prompting chains to slow or cease store openings.1 Research reveals that growth in store counts at the 100 largest retailers by revenue slowed to 2 percent in 2014 from more than 12 percent in 2011. Consumer tastes and trends are changing as people wander through stores less, opting more and more to use their mobile phones and computers to research prices and cherry-pick promotions. Sales derived from online purchases are rapidly increasing. The historical trend of people moving from the Northeast and Midwest to the Sunbelt and West has slowed, but there remains a steady migration to coastal areas. Hard-number data related to this trend can represent key opportunities for many firms and thus can be essential for successful strategy formulation, including where to locate new plants and distribution centers and where to focus marketing efforts. Fortune recently ranked the largest 100 U.S. cities according to the best managed and worst managed.2 A variety of factors were included, such as the area’s economy, job market, crime level, and welfare of the population. The best-managed city is Irvine, California, followed by Fremont, California; Plano, Texas; Lincoln, Nebraska; Virginia Beach, Virginia; Scottsdale, Arizona; Seattle, Washington; Austin, Texas; Chesapeake, Virginia, and Raleigh, North Carolina. By 2075, the United States will have no racial or ethnic majority. This forecast is aggravating tensions over issues such as immigration and affirmative action. Hawaii, California, and New Mexico already have no majority race or ethnic group. The population of the world recently surpassed 7 billion; the United States has slightly more than 310 million people. That leaves literally billions of people outside the United States who may be interested in the products and services produced through domestic firms. Remaining solely domestic is an increasingly risky strategy, especially as the world population continues to grow to an estimated 8 billion in 2028 and 9 billion in 2054. Social, cultural, demographic, and environmental trends are shaping the way Americans live, work, produce, and consume. New trends are creating a different type of consumer and, consequently, a need for different products, new services, and updated strategies. One trend is that there are now more U.S. households with people living alone or with unrelated people than there are households consisting of married couples with children. Another is that U.S. households are making more and more purchases online. Some important social, cultural, demographic, and environmental variables that represent opportunities or threats for virtually all organizations is given in Table 7-3. Be mindful that in

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Table 7-3 Key Social, Cultural, Demographic, and Natural Environment Variables Population changes by race, age, and geographic area Regional changes in tastes and preferences Number of marriages Number of divorces Number of births Number of deaths Immigration and emigration rates Social Security programs Life expectancy rates Per capita income Social media pervasiveness

Attitudes toward retirement Energy conservation Attitudes toward product quality Attitudes toward customer service Pollution control Attitudes toward foreign peoples Energy conservation Social programs Number of churches Number of church members Social responsibility issues

strategic planning and case analysis, relevant social, cultural, demographic, and natural environment factors for a particular business must be quantified and actionable to be useful.

Political, Governmental, and Legal Forces Political issues and stances do matter for business and do impact strategic decisions, especially in today’s world of instant tweeting and emailing. Various industries, such as aerospace and their supplier firms, typically support and lobby for Republicans, whereas other industries, such as automotive and their supplier firms, generally support Democrats. National, state, and local elections impact businesses, with ongoing healthy debate concerning the pros and cons of each party’s agenda for business. For industries and firms that depend heavily on government contracts or subsidies, political forecasts can be the most important part of an external audit. Changes in patent laws, antitrust legislation, tax rates, and lobbying activities can affect firms significantly. The increasing global interdependence among economies, markets, governments, and organizations makes it imperative that firms consider the possible impact of political variables on the formulation and implementation of competitive strategies. Various countries worldwide are resorting to protectionism to safeguard their own industries. European Union (EU) nations, for example, have tightened their own trade rules and resumed subsidies for their own industries, while barring imports from certain other countries. The EU recently restricted imports of U.S. chicken and beef. India is increasing tariffs on foreign steel. Russia perhaps has instituted the most protectionist measures by raising tariffs on most imports and subsidizing its own exports. Despite these measures taken by other countries, the United States has largely refrained from “Buy American” policies and protectionist measures, although there are increased tariffs on French cheese and Italian water. Many economists say trade constraints will make it harder for global economic growth. Local, state, and federal laws, as well as regulatory agencies and special-interest groups, can have a major impact on the strategies of small, large, for-profit, and nonprofit organizations. Many companies have altered or abandoned strategies in the past because of political or governmental actions. In the academic world, as state budgets have dropped in recent years, so too has state support for colleges and universities. Resulting from the decline in funds received from the state, many institutions of higher learning are doing more fund-raising on their own—naming buildings and classrooms, for example, for donors. Some companies take public stands on political issues. For example, Starbucks’ recent support of same-sex marriage in its home state of Washington was praised by a number of prominent rights activists. Today, all states allow same-sex marriage. But the Seattle-based coffee chain’s outspoken opponents, such as the National Organization for Marriage (NOM), has vowed to make Starbucks (along with other companies that support same-sex marriage) pay a “price” for this stance. “Middle Eastern countries are hostile to lesbian, gay, bisexual, and transgender (LGBT) rights. So, for example, in Qatar, in the Middle East, we’ve begun working to

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make sure that there’s some price to be paid for this,” Brian Brown of the NOM said. “These are not countries that look kindly on same-sex marriage. And this is where Starbucks wants to expand, as well as India.” Recently, CVS Caremark stopped selling tobacco products at its 7,600 stores, becoming the first U.S. drugstore chain to remove cigarettes from the store—and at the same time changed its corporate name to CVS Health. Nontobacco consumers and the medical community in general applauded the CVS announcement. With the announcement, CVS said its tobacco ban will result in the firm losing about $4 billion in annual sales. Euromonitor International reports that cigarette sales in the United States declined 31.3 percent from 2003 to 2013. However, smoking is still cited as the leading cause of preventable death in the country, killing more than 480,000 Americans per year. Within weeks after the CVS announcement, 24 states, Washington DC, and three U.S. territories sent coordinated letters to the CEOs of Walmart, Rite-Aid, Safeway, Kroger, and Walgreens, asking them to stop selling tobacco products. In mid-2015, the United States normalized relations with Cuba, ending 54 years of hostility. This event represents an opportunity for numerous companies to do business with Cuba. On 7-20-15, Cuba raised its flag over its new embassy in Washington, D.C. For example, Carnival Corporation has won approval to begin cruising to Cuba and back, marking the first time in over 50 years that a cruise line can travel to and from Cuba. A political debate still rages in the United States regarding sales taxes on the Internet. Walmart, Target, and other large retailers are pressuring state governments to collect sales taxes from Amazon.com. Big brick-and-mortar retailers are backing a coalition called the Alliance for Main Street Fairness, which is leading political efforts to change sales-tax laws in more than a dozen states. According to Walmart’s executive Raul Vazquez, “The rules today don’t allow brick-and-mortar retailers to compete evenly with online retailers, and that needs to beaddressed.” Federal, state, local, and foreign governments are major regulators, deregulators, subsidizers, employers, and customers of organizations. Political, governmental, and legal factors, therefore, can represent major opportunities or threats for both small and large organizations. Politicians decide on tax rates. State and local income taxes and property taxes impact where companies locate facilities and where people desire to live. The five states, in rank order, with the lowest overall state taxes, and the five states with the highest state taxes, are shown here.3 lowestStateTaxes

HighestStateTaxes

1. Wyoming 2. Alaska 3. Nevada 4. Florida 5. South Dakota

1. New York 2. California 3. Nebraska 4. Connecticut 5. Illinois

Regarding only state income taxes (rather than property, local, and sales taxes, too), seven states have zero (0.00) state income taxes: Texas, Nevada, Alaska, Florida, South Dakota, Washington, and Wyoming. States with the highest income tax are California (13.3%), Hawaii (11%), Oregon (9.90%), Minnesota (9.85%), Iowa (8.98%), and New Jersey (8.97%). The extent that a state is unionized can be a significant political factor in strategic-planning decisions as related to manufacturing plant location and other operational matters. The size of U.S. labor unions has fallen sharply in the last decade as a result in large part of erosion of the U.S. manufacturing base. Organized public-sector labor issues are being debated in many state legislatures. Wisconsin, for example, recently passed a law eliminating most collectivebargaining rights for the state’s public-employee unions. That law sets a precedent that many other states may follow to curb union rights as a way to help state budgets become solvent. Ohio is close to passing a similar bill that will curb union rights for 400,000 public workers. Among states, New York continues to have the highest union membership rate (24.1%) and North Carolina has the lowest rate (2.9%). Some political, governmental, and legal variables that can represent key opportunities or threats to organizations are provided in Table 7-4, but in stating these for a particular company, the factors should be both quantitative and actionable.

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Table 7-4 Some Political, Governmental, and Legal Variables Environmental regulations Number of patents Changes in patent laws Equal employment laws Level of defense expenditures Unionization trends Antitrust legislation

USA vs. other country relationships Political conditions in foreign countries Global price of oil changes Local, state, and federal laws Import–export regulations Tariffs Local, state, and national elections

Technological Forces A variety of new technologies such as the Internet of Things, 3D printing, the cloud, mobile devices, biotech, analytics, autotech, robotics, and artificial intelligence are fueling innovation in many industries, and impacting strategic-planning decisions. Businesses are using mobile technologies and applications to better determine customer trends and employing advanced analytics data to make enhanced strategy decisions. The vast increase in the amount of data coming from mobile devices is driving the development of advanced analytics applications. In fact, by 2018, machine-to-machine devices ranging from wearable Web access devices and utility meters and sensors in cars will account for 35 percent of global Internet network-connected devices, up from 18.6 percent today.4 A primary reason that Cisco Systems has recently entered the data analytics business is that sales of hardware, software, and services connected to the Internet of Things is expected to increase to $7.1 billion by 2020 from about $2.0 billion in 2015. Rapid technological advances in mobile and electronic banking have led banks to close branch offices at dramatically increasing rates in the United States. The total number of branch locations has dropped below 90,000, the lowest total number in the United States in a decade. Too offset closing branch offices, U.S. banks are ramping up mobile and online services, such as allowing customers to make deposits simply by snapping photos of checks with smartphones and emailing them. Many banks now allow customers to transfer money to other customers via smartphones. At Bank of America, for example, nearly 15 percent of all checks deposited by customers come from snapping pictures on smartphones or tablet computers. Not a single state in the United States reported an increase in the number of branch bank locations in recent years.5 Florida leads all states in branch bank closures, followed by Pennsylvania. Technology is rapidly changing the competitive landscape in banking, and many other industries characterized by brick-and-mortar stores. Monitoring online reviews about your business, large or small, has become a burdensome but an essential task, especially given emergence of social-media channels, such as Twitter, that empowers opinionated customers. Research is clear that benign neglect of a company’s online reputation could quickly hurt sales, especially given the new normal behavior of customers consulting their smartphones for even the smallest of purchases.6 A number of organizations are establishing two positions in their firms: chief information officer (CIO) and chief technology officer (CTO), reflecting the growing importance of information technology (IT) in strategic management. A CIO and CTO work together to ensure that information needed to formulate, implement, and evaluate strategies is available where and when it is needed. These individuals are responsible for developing, maintaining, and updating a company’s information database. The CIO is more a manager, managing the firm’s relationship with stakeholders; the CTO is more a technician, focusing on technical issues such as data acquisition, data processing, decision-support systems, and software and hardware acquisition. Global cybersecurity spending by critical infrastructure industries exceeds $50 billion annually, and is rising more than 10 percent annually.7 Security is a major concern for all businesses, yet complete security is something most businesses cannot financially afford to install. Hackers recently stole 40 million of Target Corporation’s customers’ credit- and debit-card numbers, along with passcodes and passwords. Building firewalls and triplicate systems can be expensive. Similarly, J.P. Morgan reported that 76 million of their customers’ contact information was

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recently stolen in a cybersecurity breach. Sony, too, was recently a victim of a massive cyberattack. Even the federal government employee databanks were recently hacked, reportedly by some entities in China. Results of technological advancements are varied, as shown in the following list: 1. They represent major opportunities and threats that must be considered in formulating strategies. 2. They can dramatically affect organizations’ products, services, markets, suppliers, distributors, competitors, customers, manufacturing processes, marketing practices, and competitive position. 3. They can create new markets, result in a proliferation of new and improved products, change the relative competitive cost positions in an industry, and render existing products and services obsolete. 4. They can reduce or eliminate cost barriers between businesses, create shorter production runs, create shortages in technical skills, and result in changing values and expectations of employees, managers, and customers. 5. They can create new competitive advantages that are more powerful than existing advantages. No company or industry today is insulated against emerging technological developments. In high-tech industries, identification and evaluation of key technological opportunities and threats can be the most important part of the external strategic-management audit.

Competitive Forces An important part of an external audit is identifying rival firms and determining their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies. George Salk stated, “If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal.” Collecting and evaluating information on competitors is essential for successful strategy formulation. Identifying major competitors is not always easy because many firms have divisions that compete in different industries. Many multidivisional firms do not provide sales and profit information on a divisional basis for competitive reasons. Also, privately held firms do not publish any financial or marketing information. Addressing questions about competitors, such as those presented in Table 7-5, is important in performing an external audit. Competition in virtually all industries is intense—and sometimes cutthroat. For example, Walgreens and CVS pharmacies are located generally across the street from each other and battle Table 7-5 Key Questions About Competitors 1. 2. 3. 4.

5. 6. 7. 8. 9. 10. 11. 12.

What are the strengths of our major competitors? What are the weaknesses of our major competitors? What are the objectives and strategies of our major competitors? How will our major competitors most likely respond to current economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive trends affecting our industry? How vulnerable are the major competitors to our alternative company strategies? How vulnerable are our alternative strategies to successful counterattack by our major competitors? How are our products or services positioned relative to major competitors? To what extent are new firms entering and old firms leaving this industry? What key factors have resulted in our present competitive position in this industry? How have the sales and profit rankings of our major competitors in the industry changed over recent years? Why have these rankings changed that way? What is the nature of supplier and distributor relationships in this industry? To what extent could substitute products or services be a threat to our competitors?

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each other every day on price and customer service. Most automobile dealerships also are located close to each other. Dollar General, Dollar Tree, and Family Dollar compete intensely on price to attract customers away from each other and away from Walmart and Target. Seven characteristics describe the most competitive companies: 1. Strive to continually increase market share. 2. Use the vision/mission as a guide for all decisions. 3. Realize that the adage “If it’s not broke, don’t fix it” has been replaced by “Whether it’s broke or not, fix it;” in other words, continually strive to improve everything about the firm. 4. Continually adapt, innovate, improve—especially when the firm is successful. 5. Strive to grow through acquisition whenever possible. 6. Hire and retain the best employees and managers possible. 7. Strive to stay cost-competitive on a global basis.8 Competitive intelligence (CI), as formally defined by the Society of Competitive Intelligence Professionals (SCIP), is a systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’s own goals (SCIP website). Good competitive intelligence in business, as in the military, is one of the keys to success. The more information and knowledge a firm can obtain about its competitors, the more likely the firm can formulate and implement effective strategies. Major competitors’ weaknesses can represent external opportunities; major competitors’ strengths may represent key threats. Various legal and ethical ways to obtain competitive intelligence include the following: • • • • • • •

Hire top executives from rival firms. Reverse engineer rival firms’ products. Use surveys and interviews of customers, suppliers, and distributors. Conduct drive-by and on-site visits to rival firm operations. Search online databases. Contact government agencies for public information about rival firms. Systematically monitor relevant trade publications, magazines, and newspapers.

Information gathering from employees, managers, suppliers, distributors, customers, creditors, and consultants also can make the difference between having superior or just average intelligence and overall competitiveness. The Fuld website explains that competitive intelligence is not the following: Is not spying Is not a crystal ball Is not a simple Google search Is not one-size-fits-all Is not useful if no one is listening Is not a job for one, smart person Is not a fad Is not driven by software or technology Is not based on internal assumptions about the market Is not a spreadsheet.9 The three basic objectives of a CI program are (1) to provide a general understanding of an industry and its competitors, (2) to identify areas in which competitors are vulnerable and to assess the impact strategic actions would have on competitors, and (3) to identify potential moves that a competitor might make that would endanger a firm’s position in the market.10 Competitive information is equally applicable for strategy formulation, implementation, and evaluation decisions. An effective CI program allows all areas of a firm to access consistent and verifiable information in making decisions. All members of an organization—from the CEO to custodians—are valuable intelligence agents and should feel themselves to be a part of the CI

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process. Special characteristics of a successful CI program include flexibility, usefulness, timeliness, and cross-functional cooperation. Competitive intelligence is not corporate espionage; after all, 95 percent of the information a company needs to make strategic decisions is available and accessible to the public. Sources of competitive information include trade journals, want ads, newspaper articles, and government filings, as well as customers, suppliers, distributors, competitors themselves, and the Internet. Unethical tactics such as bribery, wiretapping, and computer hacking should never be used to obtain information. All the information a company needs can be collected without resorting to unethical tactics.

Porter’s Five-Forces Model Former chair and CEO of PepsiCo Wayne Calloway said, “Nothing focuses the mind better than the constant sight of a competitor that wants to wipe you off the map.” As illustrated in Figure7-3, Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing strategies in many industries. The intensity of competition among firms varies widely across industries. Table 7-6 reveals the average gross profit margin and earnings per share (EPS) for firms in different industries. Note the substantial variation among industries. For example, note that industry operating margins range from 4 to 34 percent, whereas industry

Potential development of substitute products

Rivalry among competing firms

Bargaining power of suppliers

Bargaining power of consumers

Potential entry of new competitors

Figure 7-3 The Five-Forces Model of Competition Table 7-6 Competitiveness Across a Few Industries (2015 data) Operating Margin (%) Pharmaceutical Telecommunications Fragrances/Cosmetics Banking Bookstores Food Manufacturers Oil and Gas Airlines Machinery/Construction Paper Products Source: Based on company data.

13.0 14.0 12.0 34.0 6.0 4.0 10.0 10.0 7.0 5.0

ePS ($) 0.61 1.25 2.23 1.58 0.16 0.63 2.03 0.09 0.96 0.27

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EPS values range from –16 to 2.23. Note that food manufacturers have the lowest average profit margin (2.3), which implies fierce competition in that industry. Intensity of competition is highest in lower-return industries. The collective impact of competitive forces is so brutal in some industries that the market is clearly “unattractive” from a profit-making standpoint. Rivalry among existing firms is severe, new rivals can enter the industry with relative ease, and both suppliers and customers can exercise considerable bargaining leverage. According to Porter, a Harvard Business School professor, the nature of competitiveness in a given industry can be viewed as a composite of five forces: 1. 2. 3. 4. 5.

Rivalry among competing firms Potential entry of new competitors Potential development of substitute products Bargaining power of suppliers Bargaining power of consumers

Rivalry Among Competing Firms Rivalry among competing firms is usually the most powerful of the five competitive forces. The strategies pursued by one firm can be successful only to the extent that they provide competitive advantage over the strategies pursued by rival firms. Changes in strategy by one firm may be met with retaliatory countermoves, such as lowering prices, enhancing quality, adding features, providing services, extending warranties, and increasing advertising. For example, Verizon recently acquired AOL for $4.4 billion and soon thereafter launched its own video streaming to mobile devices, in a direct attack on rivals Facebook, Google, Sony, Dish Network, and even Apple. With AOL onboard, Verizon also now derives millions of dollars of mobile advertising revenue. The intensity of rivalry among competing firms tends to increase as the number of competitors increases, as competitors become more equal in size and capability, as demand for the industry’s products declines, and as price cutting becomes common. Rivalry also increases when consumers can switch brands easily; when barriers to leaving the market are high; when fixed costs are high; when the product is perishable; when consumer demand is growing slowly or declines such that rivals have excess capacity or inventory; when the products being sold are commodities (not easily differentiated, such as gasoline); when rival firms are diverse in strategies, origins, and culture; and when mergers and acquisitions are common in the industry. As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive. When rival firms sense weakness, typically they will intensify both marketing and production efforts to capitalize on the “opportunity.” Table7-7 summarizes conditions that cause high rivalry among competing firms. Table 7-7 Conditions That Cause High Rivalry Among Competing Firms 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

When the number of competing firms is high When competing firms are of similar size When competing firms have similar capabilities When the demand for the industry’s products is falling When the product or service prices in the industry is falling When consumers can switch brands easily When barriers to leaving the market are high When barriers to entering the market are low When fixed costs are high among competing firms When the product is perishable When rivals have excess capacity When consumer demand is falling When rivals have excess inventory When rivals sell similar products/services When mergers are common in the industry

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Potential Entry of New Competitors Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms increases. Barriers to entry, however, can include the need to gain economies of scale quickly, the need to gain technology and specialized know-how, the lack of experience, strong customer loyalty, strong brand preferences, large capital requirements, lack of adequate distribution channels, government regulatory policies, tariffs, lack of access to raw materials, possession of patents, undesirable locations, counterattack by entrenched firms, and potential saturation of the market. Despite numerous barriers to entry, new firms sometimes enter industries with higher-quality products, lower prices, and substantial marketing resources. The strategist’s job, therefore, is to identify potential new firms entering the market, to monitor the new rival firms’ strategies, to counterattack as needed, and to capitalize on existing strengths and opportunities. When the threat of new firms entering the market is strong, incumbent firms generally fortify their positions and take actions to deter new entrants, such as lowering prices, extending warranties, adding features, or offering financing specials. The Walt Disney Company is nearing completion of its Shanghai Disneyland, a $4.4 billion complex set to open in China in 2016, complete with hotels, restaurants, retail shops, and other amenities. However, a rival firm, DreamWorks Animation SKG, is nearing completion of a $3.1 billion entertainment district named Dream Center in Shanghai right beside Disneyland and says its facility will also open in 2016. Although expensive to build, theme parks are becoming more popular globally. Time Warner’s Warner Brothers is building Harry Potter attractions around the world, including a converted movie studio outside London.

Potential Development of Substitute Products In many industries, firms are in close competition with producers of substitute products in other industries. Examples are plastic container producers competing with glass, paperboard, and aluminum can producers, and acetaminophen manufacturers competing with other manufacturers of pain and headache remedies. The presence of substitute products puts a ceiling on the price that can be charged before consumers will switch to the substitute product. Price ceilings equate to profit ceilings and more intense competition among rivals. Producers of eyeglasses and contact lenses, for example, face increasing competitive pressures from laser eye surgery. Producers of sugar face similar pressures from artificial sweeteners. Newspapers and magazines face substitute-product competitive pressures from the Internet and 24-hour cable television. The magnitude of competitive pressure derived from the development of substitute products is generally evidenced by rivals’ plans for expanding production capacity, as well as by their sales and profit growth numbers. Competitive pressures arising from substitute products increase as the relative price of substitute products declines and as consumers’ costs of switching decrease. The competitive strength of substitute products is best measured by the inroads into the market share those products obtain, as well as those firms’ plans for increased capacity and market penetration.

Bargaining Power of Suppliers The bargaining power of suppliers affects the intensity of competition in an industry, especially when there are few suppliers, when there are few good substitute raw materials, or when the cost of switching raw materials is especially high. It is often in the best interest of both suppliers and producers to assist each other with reasonable prices, improved quality, development of new services, just-in-time deliveries, and reduced inventory costs, thus enhancing long-term profitability for all concerned. Firms may pursue a backward integration strategy to gain control or ownership of suppliers. This strategy is especially effective when suppliers are unreliable, too costly, or not capable of meeting a firm’s needs on a consistent basis. Firms generally can negotiate more favorable terms with suppliers when backward integration is a commonly used strategy among rival firms in an industry. However, in many industries it is more economical to use outside suppliers of component parts than to self-manufacture the items. This is true, for example, in the outdoor power

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equipment industry, where producers (such as Murray) of lawn mowers, rotary tillers, leaf blowers, and edgers generally obtain their small engines from outside manufacturers (such as Briggs & Stratton) that specialize in such engines and have huge economies of scale. In more and more industries, sellers are forging strategic partnerships with select suppliers in an effort to (1) reduce inventory and logistics costs (e.g., through just-in-time deliveries), (2) accelerate the availability of next-generation components, (3) enhance the quality of the parts and components being supplied and reduce defect rates, and (4) squeeze out important cost savings for both themselves and their suppliers.11

Bargaining Power of Consumers When customers are concentrated or large in number or buy in volume, their bargaining power represents a major force affecting the intensity of competition in an industry. Rival firms may offer extended warranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial. Bargaining power of consumers also is higher when the products being purchased are standard or undifferentiated. When this is the case, consumers often can negotiate selling price, warranty coverage, and accessory packages to a greaterextent. The bargaining power of consumers can be the most important force affecting competitive advantage. Consumers gain increasing bargaining power under the following circumstances: 1. 2. 3. 4. 5.

If they can inexpensively switch to competing brands or substitutes If they are particularly important to the seller If sellers are struggling in the face of falling consumer demand If they are informed about sellers’ products, prices, and costs If they have discretion in whether and when they purchase the product12

Sources of External Information A wealth of strategic information is available to organizations from both published and unpublished sources. Unpublished sources include customer surveys, market research, speeches at professional and shareholders’ meetings, television programs, interviews, and conversations with stakeholders. Published sources of strategic information include periodicals, journals, reports, government documents, abstracts, books, directories, newspapers, and manuals. A company website is usually an excellent place to start to find information about a firm, particularly on the Investor Relations web pages. There are many excellent websites for gathering strategic information, but three that the authors use routinely are: 1. http://finance.yahoo.com 2. www.hoovers.com 3. http://globaledge.msu.edu/industries/ An excellent source of industry information is provided by Michigan State University at http://globaledge.msu.edu/industries/. Industry profiles provided at that site are an excellent source for information, news, events, and statistical data for any industry. In addition to a wealth of indices, risk assessments, and interactive trade information, a wide array of global resources are provided. Most college libraries subscribe to many excellent online business databases that can then be used free by students to gather information to perform a strategic management case analysis. Simply ask your reference librarian. Especially good sources of information are described in Table 7-8.

Forecasting Tools and Techniques Forecasts are educated assumptions about future trends and events. Forecasting is a complex activity because of factors such as technological innovation, cultural changes, new products, improved services, stronger competitors, shifts in government priorities, changing social values,

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Table 7-8 Great Online Sources of Company and Industry Information •

IBISWorld—Provides online USA Industry Reports (NAICS), U.S. Industry iExpert Summaries, and U.S. Business Environment Profiles. A global version of IBIS is also available. Lexis-Nexis Academic—Provides online access to newspaper articles (including New York Times and Washington Post) and business information (including SEC filings). Lexis-Nexis Company Dossier—Provides online access to extensive, current data on 13 million companies. It collects and compiles information into excellent documents. Mergent Online—Provides online access to Mergent’s (formerly Moody’s/FISOnline) Manuals, which include trend, descriptive, and statistical information on hundreds of public companies and industries. Company income statements and balance sheets are provided. Regional Business News—Provides comprehensive full-text coverage for regional business publications; incorporates coverage of more than 80 regional business publications covering all metropolitan and rural areas within the United States. Standard & Poor’s NetAdvantage—Provides online access to Standard & Poor’s Industry Surveys, stock reports, corporation records, The Outlook, mutual fund reports, and more. Value Line Investment Survey—Provides excellent online information and advice on approximately 1,700 stocks, more than 90 industries, the stock market, and the economy. Company income statements and balance sheets are provided.

Source: Based on information at www.fmarion.edu/library.

unstable economic conditions, and unforeseen events. Managers often must rely on published forecasts to effectively identify key external opportunities and threats. A sense of the future permeates all action and underlies every decision a person makes. People eat expecting to be satisfied and nourished in the future. People sleep assuming that in the future they will feel rested. They invest energy, money, and time because they believe their efforts will be rewarded in the future. They build highways assuming that automobiles and trucks will need them in the future. Parents educate children on the basis of forecasts that they will need certain skills, attitudes, and knowledge when they grow up. The truth is we all make implicit forecasts throughout our daily lives. The question, therefore, is not whether we should forecast but rather how we can best forecast to enable us to move beyond our ordinarily unarticulated assumptions about the future. Can we obtain information and then make educated assumptions (forecasts) to better guide our current decisions to achieve a more desirable future state of affairs? Assumptions must be made based on facts, figures, trends, and research. Strive for the firm’s assumptions to be more accurate than rival firm’s assumptions. Sometimes organizations must develop their own projections. Most organizations forecast (project) their own revenues and profits annually. Organizations sometimes forecast market share or customer loyalty in local areas. Because forecasting is so important in strategic management and because the ability to forecast (in contrast to the ability to use a forecast) is essential, selected forecasting tools are examined further here. No forecast is perfect—some are even wildly inaccurate. This fact accents the need for strategists to devote sufficient time and effort to study the underlying bases for published forecasts and to develop internal forecasts of their own. Key external opportunities and threats can be effectively identified only through good forecasts. Accurate forecasts can provide major competitive advantages for organizations. Accurate forecasts are vital to the strategic-management process and to the success of organizations.

Making Assumptions Planning would be impossible without assumptions. McConkey defines assumptions as the “best present estimates of the impact of major external factors, over which the manager has little if any control, but which may exert a significant impact on performance or the ability to achieve desired results.”13 Strategists are faced with countless variables and imponderables that can be neither controlled nor predicted with 100 percent accuracy. Wild guesses should never be made in formulating strategies, but reasonable assumptions based on available information must always be made.

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By identifying future occurrences that could have a major effect on the firm and by making reasonable assumptions about those factors, strategists can carry the strategic-management process forward. Assumptions are needed only for future trends and events that are most likely to have a significant effect on the company’s business. Based on the best information at the time, assumptions serve as checkpoints on the validity of strategies. If future occurrences deviate significantly from assumptions, strategists know that corrective actions may be needed. Without reasonable assumptions, the strategy-formulation process could not proceed effectively. Firms that have the best information generally make the most accurate assumptions, which can lead to major competitive advantages.

Business Analytics Business analytics is an MIS technique that involves using software to mine huge volumes of data to help executives make decisions. Sometimes called predictive analytics, machine learning, or data mining, this software enables a researcher to assess and use the aggregate experience of an organization, which is a priceless strategic asset for a firm. The history of a firm’s interaction with its customers, suppliers, distributors, employees, rival firms, and more can all be tapped with data mining to generate predictive models. Business analytics is similar to the actuarial methods used by insurance companies to rate customers by the chance of positive or negative outcomes. Every business is basically a risk management endeavor! Therefore, like insurance companies, all businesses can benefit from measuring, tracking, and computing the risk associated with hundreds of strategic and tactical decisions made every day. Business analytics enables a company to benefit from measuring and managing risk. As more and more products become commoditized (so similar as to be indistinguishable), competitive advantage more and more hinges on improvements to business processes. Business analytics can provide a firm with proprietary business intelligence regarding, for example, which segment(s) of customers choose your firm versus those who defer, delay, or defect to a competitor and why. Business analytics can reveal where competitors are weak so that marketing and sales activities can be directly targeted to take advantage of resultant opportunities (knowledge). In addition to understanding consumer behavior better, which yields more effective and efficient marketing, business analytics also is being used to slash expenses by, for example, withholding retention offers from customers who are going to stay with the firm anyway, or managing fraudulent transactions involving invoices, credit-card purchases, tax returns, insurance claims, mobile phone calls, online ad clicks, and more. A key distinguishing feature of business analytics is that it enables a firm to learn from experience and to make current and future decisions based on prior information. Deriving robust predictive models from data mining to support hundreds of commonly occurring business decisions is the essence of learning from experience. The mathematical models associated with business analytics can dramatically enhance decision making at all organizational levels and all stages of strategic management. In a sense, art becomes science with business analytics resulting from the mathematical generalization of thousands, millions, or even billions of prior data points to discover patterns of behavior for optimizing the deployment of resources. Netflix has used business analytics lately to mount a comeback in the industry and to grow dramatically its customer base. Netflix uses data analysis increasingly to refine its movie recommendations to particular customers as well as to identify which movies and television shows to license or develop. A recent article by Willhite defines business analytics as “the art and science of collecting and combing through vast amounts of information for insights that aren’t apparent on a smaller scale.”14 Data mining, and using an analytical approach to all phases of strategic management, is rapidly burgeoning into a necessary prerequisite for success in hundreds of firms globally. This book advocates a systematic, analytical approach to strategic planning because otherwise emotion, politics, “experience,” and subjectivity too often prevent identification and consideration of key facts, figures, and trends in choosing among numerous feasible alternative strategies, and implementing and monitoring the execution of those strategies. The big data analytics firm, Splunk, reports ever-increasing revenues and profits as it capitalizes on a growing market for helping companies find better ways to manage increasing amounts of data coming in from mobile phones, PCs, global positioning systems, and other

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electronic devices. Splunk CEO Godfrey Sullivan says companies have “a massive thirst to better understand their customers, as well as the data coming through the enterprise from a variety ofsources.” IBM’s annual business analytics revenues of about $40 billion are growing about 15 percent every quarter, compared to the industry growing about 15 percent annually. IBM’s acquisition of SPSS for $1.2 billion, among other recent acquisitions, launched the firm heavily into the business analytics consulting business. Other business analytics firms are Oracle, Tableau Software, Rocket Fuel, and Cisco Systems.

The External Factor Evaluation Matrix An External Factor Evaluation (EFE) Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information, illustrated earlier in Figure 7-2. The EFE Matrix can be developed in five steps: 1. List 20 key external factors as identified in the external-audit process, including both opportunities and threats that affect the firm and its industry. List the opportunities first and then the threats. Be as specific as possible, using percentages, ratios, and comparative numbers whenever possible. Recall that Edward Deming said, “In God we trust. Everyone else bring data.” In addition, utilize “actionable” factors as defined earlier in this chapter. 2. Assign to each factor a weight that ranges from 0.0 (not important) to 1.0 (very important). The weight indicates the relative importance of that factor to being successful in the firm’s industry. Opportunities often receive higher weights than threats, but threats can receive high weights if they are especially severe or threatening. Appropriate weights can be determined by comparing successful with unsuccessful competitors or by discussing the factor and reaching a group consensus. The sum of all weights assigned to the factors must equal1.0. 3. Assign a rating between 1 and 4 to each key external factor to indicate how effectively the firm’s current strategies respond to the factor, where 4 = the response is superior, 3 = the response is above average, 2 = the response is average, and 1 = the response is poor. Ratings are based on effectiveness of the firm’s strategies. Ratings are thus company-based, whereas the weights in Step 2 are industry-based. It is important to note that both threats and opportunities can receive a 1, 2, 3, or 4. 4. Multiply each factor’s weight by its rating to determine a weighted score. 5. Sum the weighted scores for each variable to determine the total weighted score for the organization. Regardless of the number of key opportunities and threats included in an EFE Matrix, the highest possible total weighted score for an organization is 4.0 and the lowest possible total weighted score is 1.0. The average total weighted score is 2.5. A total weighted score of 4.0 indicates that an organization is responding in an outstanding way to existing opportunities and threats in its industry. In other words, the firm’s strategies effectively take advantage of existing opportunities and minimize the potential adverse effects of external threats. A total score of 1.0 indicates that the firm’s strategies are not capitalizing on opportunities or avoiding externalthreats. An example of an EFE Matrix is provided in Table 7-9 for a local 10-theater cinema complex. Observe in the table that the most important factor to being successful in this business is “Trend toward healthy eating eroding concession sales,” as indicated by the 0.12 weight. Also note that the local cinema is doing excellent in regard to handling two factors, “TDB University is expanding 6 percent annually” and “Trend toward healthy eating eroding concession sales.” Perhaps the cinema is placing flyers on campus and also adding yogurt and healthy drinks to its concession menu. Note that you may have a 1, 2, 3, or 4 anywhere down the Rating column. Observe also that the factors are stated in quantitative terms to the extent possible, rather than being stated in vague terms. Quantify the factors as much as possible in constructing an EFE Matrix. Note also that all the factors are “actionable” instead of being something like “The economy is bad.” Finally, note that the total weighted score of 2.58 is above the average (midpoint) of 2.5, so this cinema business is doing pretty well, taking advantage of the external opportunities

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Table 7-9 EFE Matrix for a Local 10-Theater Cinema Complex KeyExternalFactors

Weight rating

Weighted Score

Opportunities 1. 2. 3. 4. 5. 6. 7.

Two new neighborhoods developing within 3 miles TDB University is expanding 6% annually Major competitor across town recently closed Demand for going to cinemas growing 10% Disposable income among citizens up 5% in prior year Rowan County is growing 8% annually in population Unemployment rate in county declined to 3.1%

0.09 0.08 0.08 0.07 0.06 0.05 0.03

1 4 3 2 3 3 2

0.09 0.32 0.24 0.14 0.18 0.15 0.06

0.12 0.06 0.06 0.04 0.08 0.04 0.08 0.06 1.00

4 2 3 3 2 3 2 1

0.48 0.12 0.18 0.12 0.16 0.12 0.16 0.06 2.58

threats 8. Trend toward healthy eating eroding concession sales 9. Demand for online movies and DVDs growing 10% 10. Commercial property adjacent to cinemas for sale 11. TDB University installing an on-campus movie theater 12. County and city property taxes increasing 25% 13. Local religious groups object to R-rated movies 14. Movies rented at local Red Box’s up 12% 15. Movies rented last quarter from Time Warner up 15% TOTAL

and avoiding the threats facing the firm. There is definitely room for improvement, though, because the highest total weighted score would be 4.0. As indicated by ratings of 1, this business needs to capitalize more on the “Two new neighborhoods developing [nearby]” opportunity and the “movies rented from … Time Warner” threat. Notice also that there are many percentagebased factors among the group. Be quantitative to the extent possible! Note, too, that the ratings range from 1 to 4 on both the opportunities and threats. An actual EFE Matrix for the largest U.S. homebuilder, D. R. Horton, is given in Table7-10. Note that the most important external threat facing the company, as indicated by a weight of 0.10, deals with labor and supplier costs. The key factors are listed in order beginning with the most important (highest weight). Notice how specific the factors are stated—specificity is essential. Also note that following DRH’s EFE Matrix, an “author commentary” is given in Table7-11, providing the rationale for each factor included. Author commentary on each factor in the D. R. Horton EFE Matrix is given in Table 7-11 to provide insight on the thinking that needs to support not only inclusion of respective factors but also various weights and ratings assigned. Recall that mathematically, 0.04 is 33 percent more important than 0.03, and a rating of 3 is 50 percent higher than a rating of 2. Small judgments are helpful in moving forward toward larger decisions related to deployment of resources and money across regions and products.

The Competitive Profile Matrix The Competitive Profile Matrix (CPM) identifies a firm’s major competitors and its particular strengths and weaknesses in relation to a sample firm’s strategic position. The weights and total weighted scores in both a CPM and an EFE have the same meaning. However, critical success factors in a CPM include both internal and external issues; therefore, the ratings refer to strengths and weaknesses, where 4 5 major strength, 3 5 minor strength, 2 5 minor weakness, and 1 5 major weakness. The critical success factors in a CPM are not grouped

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Table 7-10 An Actual EFE Matrix for the Homebuilder D. R. Horton Opportunities 1. The 10 fastest-growing states by population are SC, WA, AZ, FL, SD, NV, TX, CO, UT, and ND. 2. Most new technological advances in residential building have come in the form of green building. 3. New home sales are up over 40% (compared to 20% in resales) with the South being up 38% and the West being up 49%. 4. Lennar’s starting prices are about 10% more nationwide. 5. More than 80% of people over the age of 65 own a home. 6. Corporate social responsibility pays; 53% of consumers said they would pay up to 10% more for a product from a CSR firm. 7. It is more affordable to buy than it is to rent in 98 out of 100 U.S. metros. 8. Interest rates have fallen 0.25% in the last year. 9. The availability of credit has increased 16%. 10. The level of disposable income has increased 5%. threats 1. Framing lumber has increased 45%. YTD wages per hour are up 3.1%, cement costs are up 3.8%, and lumber costs are up 6.1%. 2. Lennar is growing faster than any other top-5 builder; Lennar has built 69% more homes, compared to DRH’s 44%. 3. Lennar operates using an “everything’s included” approach (supplying luxury items as standard features). 4. Lennar is building in just as many, if not more, communities in the South and Southwest (some of the fastest-growing areas). 5. USA has the lowest number of mortgage applications in 2 years. 6. 76% of the public are dissatisfied with the direction of the country, with 48% being very dissatisfied. 7. FHA mortgage insurance premiums increased 5 to 10 basis points and the time until termination significantly increased. 8. Lennar has a superior website (includes community involvement, how to take care of your home, why buy now). 9. Homeowner percentage fell from 69% to 65% between 2005 and 2015. 10. Personal savings rate is 5.7%, up from 4.9% 6 months ago. TOTALS

Weight

rating

Weighted Score

0.12

3

0.36

0.08

2

0.16

0.08

3

0.24

0.06 0.05 0.04

3 2 1

0.18 0.10 0.04

0.02 0.02 0.02 0.01

2 2 3 3

0.04 0.04 0.06 0.03

Weight

rating

Weighted Score

0.10

2

0.20

0.08

3

0.24

0.06

2

0.12

0.05

2

0.10

0.05 0.05

3 3

0.15 0.15

0.04

3

0.12

0.03

2

0.06

0.02 0.02 1.00

3 3

0.06 0.06 2.51

into opportunities and threats as they are in an EFE. In a CPM, the ratings and total weighted scores for rival firms can be compared to the sample firm. This comparative analysis provides important internal strategic information. Avoid assigning the same rating to firms included in your CPM analysis. A sample CPM is provided in Table 7-12. In this example, the two most important factors to being successful in the industry are “advertising” and “global expansion,” as indicated by weights of 0.20. If there were no weight column in this analysis, note that each factor then would be equally important. Thus, having a weight column makes for a more robust analysis because it enables the analyst to assign higher and lower numbers to capture perceived or actual levels of importance. Note in Table 7-12 that Company 1 is strongest on “product quality,” as indicated by a rating of 4, whereas Company 2 is strongest on “advertising.” Overall, Company 1 is strongest, as indicated by the total weighted score of 3.15 and Company 3 is weakest.

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Table 7-11 Author Commentary on Each Factor in the D. R. Horton EFE Matrix Opportunities 1. These states will need more new homes than average because the populations are the fastest growing. 2. Building using more green technologies could result in creating a preference and increased revenue/profit, because customers are increasingly make green requests. 3. Since new homes, especially in the South and the West, are on the rise, there is an opportunity to build more homes, increasing revenue/profit/market share. 4. Building and selling lower-priced homes is a competitive advantage for DRH because consumers are price conscious. 5. Many senior citizens look to downsize, so they could be specifically targeted to increase sales. 6. By increasing its corporate social responsibility position, DRH could build a preference for its homes. 7. If it is more affordable to buy than rent, people will want to build (or buy), and DRH is the largest homebuilder in the USA. 8. With low interest rates, a mortgage is more affordable; therefore, consumers are inclined to build (or buy)—a plus for DRH. 9. If it is easier than before to obtain a mortgage, more consumers will do so. This creates an opportunity for DRH. 10. If consumers have more money to spend, some will want to spend it on a home. This creates an opportunity for DRH. Threats 1. Increased costs of labor and supplies make new homes less affordable, so fewer people will want one. 2. Lennar is gaining economies of scale on DRH, enabling Lennar to price lower. 3. Lennar creates the perception that they have a higher quality, because they do not “nickel and dime” customers; this hurts DRH. 4. Lennar aims to take market share from DRH by building in more and more communities. 5. If consumers are seeking fewer mortgages, then fewer homes are being sought. 6. As consumers become worried about the country, they become more conservative and are less likely to buy a home. 7. As the FHA becomes less amenable to approving mortgages, this trend hurts DRH. 8. Because everybody does research online, Lennar’s superior website could hurt DRH. 9. If the percentage of people that own a home is decreasing, then fewer new homes would be needed. 10. If consumers are saving more, they are spending less, perhaps less even on housing.

Table 7-12 An Example Competitive Profile Matrix company 1 critical Success Factors Advertising Product Quality Price Competitiveness Management Financial Position Customer Loyalty Global Expansion Market Share Total

company 2

company 3

Weight

rating

Score

rating

Score

rating

Score

0.20 0.10 0.10 0.10 0.15 0.10 0.20 0.05 1.00

1 4 3 4 4 4 4 1

0.20 0.40 0.30 0.40 0.60 0.40 0.80 0.05 3.15

4 3 2 3 2 3 1 4

0.80 0.30 0.20 0.20 0.30 0.30 0.20 0.20 2.50

3 2 1 1 3 2 2 3

0.60 0.20 0.10 0.10 0.45 0.20 0.40 0.15 2.20

Note: The ratings values are as follows: 1 = major weakness, 2 = minor weakness, 3 = minor strength, 4 = major strength. As indicated by the total weighted score of 2.20, Company 3 is weakest overall. Only eight critical success factors are included for simplicity; in actuality, however, this is too few.

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Table 7-13 An Actual CPM for D. R. Horton d.R.Horton

lennar

Pultegroup

critical Success Factors

Weight

rating

Score

rating

Score

rating

Score

1. Price 2. Market Share 3. Geographical Coverage 4. Quality 5. Customer Service 6. Profitability 7. Financial Position 8. Energy Efficiencies 9. Growth 10. Website 11. Warranty Issues 12. Social Responsibility Totals

0.16 0.14 0.12 0.10 0.09 0.08 0.07 0.06 0.06 0.05 0.04 0.03 1.00

4 4 4 2 2 3 3 2 3 3 3 2

0.64 0.56 0.48 0.20 0.18 0.24 0.21 0.12 0.18 0.15 0.12 0.06 3.14

3 3 2 4 3 4 2 3 4 4 2 3

0.48 0.42 0.24 0.40 0.27 0.32 0.14 0.18 0.24 0.20 0.08 0.09 3.06

2 2 3 3 4 2 4 4 2 2 4 4

0.32 0.28 0.36 0.30 0.36 0.16 0.28 0.24 0.12 0.10 0.16 0.12 2.80

Other than the critical success factors listed in the sample CPM, factors often included in this analysis include breadth of product line, effectiveness of sales distribution, proprietary or patent advantages, location of facilities, production capacity and efficiency, experience, union relations, technological advantages, and e-commerce expertise. Just because one firm receives a 3.20 overall rating and another receives a 2.80 in a CPM, it does not necessarily follow that the first firm is precisely 14.3 percent better than the second, but it does suggest that the first firm is better in some areas. Regarding weights in a CPM or EFE Matrix, be mindful that 0.08 is mathematically 33 percent higher than 0.06, so even small differences can reveal important perceptions regarding the relative importance of various factors. The aim with numbers is to assimilate and evaluate information in a meaningful way that aids in decision making. An actual CPM is provided in Table 7-13, again for the largest homebuilder in the United States, D. R. Horton. Note that the two rival firms, Lennar and PulteGroup, receive higher ratings on “Quality” than D. R. Horton. Also note the factors are listed beginning with the most important (highest weight). D. R. Horton, Lennar, and PulteGroup are headquartered in Fort Worth, Texas; Miami, Florida; and Atlanta, Georgia; respectively.

impLicAtions for strAtegists Figure 7-4 reveals that to gain and sustain competitive advantages, strategists must collect, analyze, and prioritize information regarding the firm’s competitors, as well as identify and consider relevant social, demographic, economic, and technology trends and events impacting the firm and its industry. This engineering hunt for the facts is essential because expensive, and sometimes irreversible, strategies are ultimately formulated and implemented based on that information. This chapter reveals that quantified, organized,

prioritized, actionable external information is a key ingredient for making decisions that culminate in a winning strategic plan. Increasingly, business analytics is being used to identify key external trends that may otherwise go unnoticed from casual observation. The External Factor Evaluation Matrix and Competitive Profile Matrix presented in this chapter are excellent strategic-planning tools for assimilating and prioritizing information to enhance decision making.

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Establish A Clear Vision & Mission

Evaluate & Monitor Results: Take Corrective Actions; Adapt To Change

Gain & Sustain Competitive Advantages

Formulate Strategies: Collect, Analyze, & Prioritize Data Using Matrices; Establish A Clear Strategic Plan

Implement Strategies: Establish Structure; Allocate Resources; Motivate & Reward; Attract Customers; Manage Finances

Figure 7-4 How to Gain and Sustain Competitive Advantages

impLicAtions for stuDents In developing and presenting your external assessment for your firm, be mindful that gaining and sustaining competitive advantage is the overriding purpose of developing the EFE Matrix and CPM. During this section of your written or oral project, emphasize how and why particular factors can yield competitive advantage for the firm. In other words, instead of robotically going through the weights and ratings (which, by the way, are critically important), highlight various factors in light of where you are leading the firm. Make it abundantly clear in your discussion how your firm, with

your suggestions, can subdue rival firms or at least profitably compete with them. Showcase during this section of your project the key underlying reasons how and why your firm can prosper among rivals. Remember to be prescriptive, rather than descriptive, in the manner that you present your entire project. If presenting your project orally, be self-confident and passionate rather than timid and uninterested. Definitely “bring the data” throughout your project, because “vagueness” is the most common downfall of students in case analyses.

Chapter Summary Increasing turbulence in markets and industries around the world means the external audit has become an explicit and vital part of the strategic-management process. This chapter provided a framework for collecting and evaluating economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. Firms that do not mobilize and empower their managers and employees to identify, monitor, forecast, and evaluate key external forces may fail to anticipate emerging opportunities and threats and, consequently, may pursue ineffective strategies, miss opportunities, and invite organizational demise. Firms not taking advantage of e-commerce and social media networks are technologically falling behind.

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241

A major responsibility of strategists is to ensure development of an effective external-audit system. This includes using information technology to devise a competitive intelligence system that works. The external-audit approach described in this chapter can be used effectively by any size or type of organization. Typically, the external-audit process is more informal in small firms, but the need to understand key trends and events is no less important for these firms. The EFE Matrix and Porter’s Five-Forces Model can help strategists evaluate the market and industry, but these tools must be accompanied by good intuitive judgment. Multinational firms especially need a systematic and effective external-audit system because external forces among foreign countries vary so greatly.

MyManagementLab® To complete the problems with the

, go to EOC Discussion Questions in the MyLab.

Key Terms and Concepts actionable responses (p. 219) business analytics (p. 234) chief information officer (CIO) (p. 226) chief technology officer (CTO) (p. 226) competitive intelligence (CI) (p. 228) Competitive Profile Matrix (CPM) (p. 236) data mining (p. 234) environmental scanning (p. 218)

external audit (p. 218) External Factor Evaluation (EFE) Matrix (p. 235) external forces (p. 219) Industrial Organization (I/O) (p. 221) industry analysis (p. 218) information technology (IT) (p. 226) Porter’s Five-Forces Model (p. 229)

Issues for Review and Discussion 7-1. Michelin has been very successful in the last decade. In your opinion, what strategy changes would Michelin need in 2016? 7-2. Of the many competitors it has, which firm do you think worries Michelin most about? Why? Prepare a Competitive Profile Matrix (CPM) that includes Michelin and the rival firm you identified. 7-3. A political debate in the United States concerns sales taxes on the Internet. Most states do not collect a sales tax on online products. How does the situation in any country of Europe compare with the United States, in terms of sales tax on items purchased online? What is the strategic implication for companies? 7-4. The size of American labor unions have fallen sharply in the last decade, mostly due to the erosion of the U.S. manufacturing base. How does the situation in any country of Europe compare to the United States in this regard? What is the strategic implication for companies? 7-5. List four reasons why some countries in Europe are struggling economically in comparison to Asian countries. What is the strategic implication for companies? 7-6. Does the Arab Spring, in the Middle East, represent more of an opportunity or threat to companies? Explain. 7-7. Identify two companies that you think would have a 1.5 total weighted score on their EFE Matrix. Why? Identify two companies that would have a 3.5 total weighted score on their EFE Matrix. Why?

7-8. Read and summarize Chapter 10’s “Implications for Students,” which emphasizes on gaining and sustaining competitive advantage as the overriding purpose of developing the EFE Matrix and the CPM. 7-9. List the 10 key external forces that give rise to opportunities and threats. Give a specific example of each force, for your college or university. 7-10. Give four reasons why you agree or do not agree with I/O theorists. 7-11. Regarding economic variables, list in order of importance six specific factors that you feel greatly impact your college or university. 7-12. Explain why U.S.-based firms, such as McDonald’s, greatly benefit from a weak dollar. 7-13. Regarding social, cultural, demographic, and natural environment variables, list in order of importance six specific factors that you feel most greatly impact your college or university. 7-14. Regarding political, governmental, and legal variables, list in order of importance six specific factors that you feel most greatly impact your college or university. 7-15. Choose any four industries and explain how wireless technology is impacting four industries. 7-16. Discuss the pros and cons of gathering and assimilating competitive intelligence. 7-17. Using Porter’s Five-Forces Model, explain competitiveness for a local fast food restaurant.

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7-18. Identify an industry in which “bargaining power of suppliers” is the most important factor among Porter’s variables. 7-19. Develop an EFE Matrix for your college or university. 7-20. Distinguish between ratings and weights in an EFE Matrix. 7-21. List 10 external trends or facts pertaining specifically to your country that would impact companies in your city. 7-22. Develop a CPM for a company that you or your parents have been employed. 7-23. Discuss the ethics of gathering competitive intelligence. 7-24. Discuss the ethics of cooperating with rival firms. 7-25. Contact your college library. Ask if they have the S&P Industry Surveys in hardcopy (or online) in the library. If they do, print out the relevant report for a company that you are familiar with. 7-26. Your boss develops an EFE Matrix that includes 54 factors. How would you suggest reducing the number of factors to 20? 7-27. List the 10 external areas that give rise to opportunities and threats. Give an example of each for IBM. 7-28. Compare the ratings in an EFE Matrix with those in a CPM in terms of meaning and definition. 7-29. Discuss the I/O view or approach to strategic planning. 7-30. List in order of importance what you feel are the six major advantages of a weak dollar for a U.S.-based firm. 7-31. List in order of importance what you feel are the six major advantages of a weak euro for a Europe-based firm headquartered in a country that has the euro as its currency. 7-32. Cooperating with competitors is becoming more common. What are the advantages and disadvantages of this for a company?

7-33. Regarding sources of external information, visit the www.finance.yahoo.com website and enter IBM; click on Headlines, and identify three major new initiatives the company has undertaken. 7-34. Differentiate between making assumptions and making wild guesses about future opportunities, and threats facing business firms. 7-35. Explain how the external assessment would, or should be different for non-profit organizations versus corporations. 7-36. Apply Porter’s Five-Forces Model to IBM. What strategic implications arise in that analysis? 7-37. Compare and contrast competitive intelligence programs across several organizations that you are familiar with. 7-38. The value of the dollar was recently extremely high, a seven year high to the yen, a two-year high to the euro, and a five-year high to the Australian dollar. What impact does that have on Americans traveling abroad and foreigners traveling to the USA? Does the same analogous effect happen with your country’s currency? 7-39. Should a company take a political stand against smoking, potentially losing millions of customers that smoke? 7-40. Global cybersecurity spending by critical infrastructure industries exceeds $50 billion annually, and is rising above 10 percent annually. Security is major concern for all businesses, yet complete security is something most businesses cannot financially afford to install. Discuss.

MyManagementLab®

Go to the Assignments section of your MyLab to complete these writing exercises. 7-41. Describe the “process of performing an external audit” 7-42. Compare and contrast the duties and responsibilities in an organization doing strategic planning for the first of a Chief Information Officer (CIO) with a Chief time. Technology Officer (CTO) in a large firm.

AssurAnce of LeArning exercises exercise 7A

Michelin and Africa: An External Assessment Purpose Michelin is featured in the opening chapter case as a firm that engages in excellent strategic planning. This exercise gives you practice conducting an external strategic management audit to determine if Africa is the new, best place for Michelin to produce and market products and services. For example, considerable underground mining occurs in much of Africa. The new MICHELIN XTXL tire is available in 25-inch for underground mining vehicles. The new tires offer enhanced safety and productivity and are available in sizes 26.5R25 and 29.5R25. Tests indicate that the new tires offer increases of 10 percent in longevity, 20 percent in puncture resistance, and 30 percent in load capacity.

Instructions Step 1 Step 2

Research the business climate in 10 African countries. Prepare an EFE Matrix for Michelin based solely on the opportunities and threats that Michelin will face in doing business in the 10 African countries you have chosen.

Step 3

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Based on your research, list the 10 African countries you selected in rank order of attractiveness for Michelin to focus efforts upon. Give a one-sentence rationale for each country’s ranking.

exercise 7B

Preparing a CPM for Michelin Based on Countries Rather Than Companies Purpose Countries are similar to companies in that they compete with each other for investment dollars and economic development.

Instructions Step 1 Step 2

Revisit the research you collected and analyzed in the above exercise. Prepare a CPM that reveals your assessment of three African countries in terms of their relative strengths and weaknesses based on what you deem to be the most critical success factors.

exercise 7c

Develop Divisional Michelin EFE Matrices Purpose Michelin has five major geographic divisions: Europe, North America, Asia, South America, and Africa/India/Middle-East. The company faces fierce but different competitors in each segment. The external opportunities and threats that Michelin faces are different in each geographic segment, so each segment prepares its own list of key external success factors. This external analysis is critically important in strategic planning because a firm needs to exploit opportunities and avoid or, at least, mitigate threats. The purpose of this exercise is to develop divisional EFE matrices that Michelin could use in developing an overall corporate EFE Matrix.

Instructions Step 1 Step 2 Step 3

Step 4 Step 5 Step 6

Go to the http://www.michelinman.com/US/en/homepage.html website. Review the company’s most recent Annual Report. Determine and review Michelin’s major geographic segments. Conduct research to determine what you believe are the four major threats and the four major opportunities critical to strategic planning within Michelin’s geographic segments. Review the relevant Standard and Poor’s Industry Survey documents for each segment. Develop divisional EFE Matrices for Michelin. Work within a team of students if your instructor so requests but you will need an EFE Matrix for each segment. Prioritize the 20 threats and the 20 opportunities developed in the prior step so that corporate Michelin top executives can better develop a corporate EFE Matrix. Let’s say Michelin has their operations segmented by domestic versus global. Based on your research, prepare an EFE Matrix for Michelin’s domestic operations and another EFE Matrix for Michelin’s global Operations. Let Europe be domestic and all other regions be global.

exercise 7D

Developing an EFE Matrix for Nestlé S.A. Purpose This exercise will provide practice developing an EFE Matrix. An EFE Matrix summarizes the results of an external audit. This is an important tool widely used by strategists.

Instructions Step 1

Step 2 Step 3

Join with two other students in class and prepare an EFE Matrix for Nestlé. Refer back to the Cohesion Case and to Exercise 1B, if necessary, to identify external opportunities and threats. Use the information in the Standard and Poor’s Industry Surveys that you copied as part of Assurance of Learning Exercise 1B. Be sure not to include strategies as opportunities, but do include as many monetary amounts, percentages, numbers, and ratios as possible. All three-person teams participating in this exercise should record their EFE total weighted scores on the board. Put your initials after your score to identify it as your teams. Compare the total weighted scores. Which team’s score came closest to the instructor’s answer? Discuss reasons for variation in the scores reported on the board.

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exercise 7e

The External Audit Purpose This exercise will help you become familiar with important sources of external information available in your college or university library. A key part of preparing an external audit is searching the Internet and examining published sources of information for relevant economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive trends and events. External opportunities and threats must be identified and evaluated before strategies can be formulated effectively.

Instructions Step 1

Step 2 Step 3 Step 4

Select a company or business from a country other than your own. Conduct an external audit for this company. Find opportunities and threats in recent issues of newspapers and magazines. Search for information using the Internet. Use the following websites: http://marketwatch.multexinvestor.com; www.hoovers.com; http://moneycentral.msn.com; http://finance.yahoo.com; www.clearstation.com; and https://us.etrade.com/e/t/invest/markets On a separate sheet of paper, list 10 opportunities and 10 threats that face this company. Be specific in stating each factor. Include a bibliography to reveal where you found the information. Write a three-page summary of your findings, and submit it to your instructor.

exercise 7f

Develop a Competitive Profile Matrix for Michelin Purpose Monitoring competitors’ performance and strategies is a key aspect of an external audit. This exercise is designed to give you practice evaluating the competitive position of organizations in a given industry and assimilating that information in a CPM.

Instructions Step 1

Step 2 Step 3

Join with two other students in class and prepare an EFE Matrix for Nestlé. Refer back to the Cohesion Case and to Exercise 1B, if necessary, to identify external opportunities and threats. Use the information in the Standard and Poor’s Industry Surveys that you copied as part of Assurance of Learning Exercise 1B. Be sure not to include strategies as opportunities, but do include as many monetary amounts, percentages, numbers, and ratios as possible. On a separate sheet of paper, prepare a CPM that includes Michelin and its two leading competitors: Bridgestone Corporation and Goodyear Tire and Rubber Company. Turn in your CPM for a class work grade.

exercise 7g

Develop a Competitive Profile Matrix for Nestlé Purpose Monitoring competitors’ performance and strategies is a key aspect of an external audit. This exercise is designed to give you practice evaluating the competitive position of organizations in a given industry and assimilating that information in the form of a CPM.

Instructions Step 1 Step 2 Step 3

Gather information from Assurance of Learning Exercise 1B. Also, turn back to the Cohesion Case and review the section on competitors. On a separate sheet of paper, prepare a CPM that includes Mars and Mondelēz International Turn in your CPM for a class work grade.

exercise 7H

Analyzing Your College or University’s External Strategic Situation Purpose This exercise is excellent for doing together as a class.

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Instructions As a class, determine your college or university’s major external opportunities and threats. List 10 opportunities and 10 threats. Then, get everyone in class to rank their factors with 1 being most important and 10 being least important. Then, gather up everyone’s paper, count the numbers, and in that manner create a prioritized list of the key external opportunities and threats facing your college.

mini-cAse on wooLwortHs LimiteD (wow)

IS WOOLWORTHS LOSING ITS EDGE TO ALDI? Headquartered in Bella Vista, Australia, Woolworths Limited is the largest retail company in Australia and New Zealand, and the largest food retailer in both countries. The largest division is Woolworths Supermarkets (colloquially known as “Woolies”), a huge grocery store chain in Australia. Woolworths Supermarkets, and rival Coles, form a near duopoly of Australian supermarkets, together accounting for about 80 percent of the Australian market. However, the expansion of discount supermarket chain Aldi, headquartered in Essen, Germany is gaining market share in Australia. Woolworths currently operates 872 stores across Australia. Woolworth’s net profit for fiscal 2014 was $2.45 billion, and fiscal 2015 is to come in slightly lower than that number. However, Aldi has over 10,000 stores globally, including over 350 in Australia. Woolworth’s CEO, Grant O’Brien, announced his retirement in mid-2015, so a global search is underway to find a replacement.

Source:©ElenaEfimova. Shutterstock

Questions

1. Visit Woolworth’s company website (http://www.woolworths.com.au) and evaluate their commitment to the natural environment. 2. Visit Aldi’s website, www.aldi.com, and develop a competitive analysis for Woolworths as per what Aldi is doing and the extent to which Aldi is a threat in Australia. What can and should Woolworths do to combat the threat? Source: Based on company documents.

Current Readings Howard-Grenville, Jennifer, et al. “Climate Change and Management.” Academy of Management Journal (June 2014): 615–641. Kiron, David, et al. “How Serious Is Climate Change to Business?” MIT Sloan Management Review 55, no.1 (2013): 75–76.

Roberts, Carter. “Strategy Migration in a Changing Climate.” Harvard Business Review 92, no. 5 (2014): 42.

Endnotes 1. Shelly Banjo and Paul Ziobro, “Shoppers Flee Physical Stores,” Wall Street Journal, August 6, 2014, B1. 2. http://247wallst.com/special-report/2014/01/02/ the-best-and-worst-run-cities-in-america-2/ 3. http://wallethub.com/edu/best-worst-states-to-be-ataxpayer/2416/#complete-rankings 4. Pete Barlas, “Cisco Systems Dart into Data Analytics,” Wall Street Journal, December 11, 2014, A5. 5. Saabira Chaudhuri, “Banks Leave More Branches,” Wall Street Journal, January 28, 2014, C1. 6. Roger Yu, “Online Rep Crucial for Small Companies,” USA Today, October 30, 2012, 5B. 7. Danny Yadron, “Companies Wrestle with the Cost of Security,” Wall Street Journal, February 26, 2014, B3. 8. Bill Saporito, “Companies That Compete Best,” Fortune (May 22, 1989): 36.

9. http://www.fuld.com/what-is-competitive-intelligence 10. John Prescott and Daniel Smith, “The Largest Survey of ‘Leading-Edge’ Competitor Intelligence Managers,” Planning Review 17, no. 3 (May–June 1989): 6–13. 11. Arthur Thompson, Jr., A. J. Strickland III, and John Gamble, Crafting and Executing Strategy: Text and Readings (New York: McGraw-Hill/Irwin, 2005): 63. 12. Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: Free Press, 1980): 24–27. 13. Dale McConkey, “Planning in a Changing Environment,” Business Horizons 31, no. 5 (September–October 1988): 67. 14. James Willhite, “Getting Started in ‘Big Data,’” Wall Street Journal, February 4, 2014, B7.

Source: © motorlka/Fotolia

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Strategy Generation andSelection LeArning oBjectives After studying this chapter, you should be able to do the following: 8-1. Describe the strategy analysis and choice process. 8-2. Diagram and explain the three-stage strategy-formulation analytical framework. 8-3. Diagram and explain the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix. 8-4. Diagram and explain the Strategic Position and Action Evaluation (SPACE) Matrix. 8-5. Diagram and explain the Boston Consulting Group (BCG) Matrix. 8-6. Diagram and explain the Internal-External (IE) Matrix. 8-7. Diagram and explain the Grand Strategy Matrix. 8-8. Diagram and explain the Quantitative Strategic Planning Matrix (QSPM). 8-9. Discuss the role of organizational culture in strategic analysis and choice. 8-10. Identify and discuss important political considerations in strategy analysis and choice. 8-11. Discuss the role of a board of directors (governance) in strategic planning.

AssurAnce of LeArning exercises The following exercises are found at the end of this chapter: exercise 8A exercise 8B exercise 8c exercise 8D exercise 8e exercise 8f exercise 8g exercise 8H exercise 8i exercise 8j exercise 8k

Should Unilever Penetrate Southeast Asia Further? Perform a SWOT Analysis for Unilever’s Global Operations Prepare a BCG Matrix for Unilever Develop a SWOT Matrix for Nestlé S.A. Develop a SPACE Matrix for Nestlé S.A. Develop a BCG Matrix for Nestlé S.A. Develop a QSPM for Nestlé S.A. Develop a SPACE Matrix for Unilever Develop a BCG Matrix for Your College or University Develop a QSPM for a Company That You Are Familiar With Formulate Individual Strategies

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S

trategy analysis and choice largely involve making subjective decisions based on objective information. This chapter introduces important concepts that can help strategists generate feasible alternatives, evaluate those alternatives, and choose a specific course of action. Behavioral aspects of strategy formulation are featured, including politics, culture, ethics, and social responsibility considerations. Modern tools for formulating strategies are described, and the appropriate role of a board of directors is discussed. As showcased next, Unilever Plc launched the Unilever Sustainable Living Plan, a part of the company’s larger goal to double the size of its business while reducing our environmental footprint, and increasing its positive social impact.

The Strategy Analysis and Choice Process As indicated by Figure 8-1 with white shading, this chapter focuses on generating and evaluating alternative strategies, as well as selecting strategies to pursue. Strategy analysis and choice seek to determine alternative courses of action that could best enable the firm to achieve its mission and objectives. The firm’s present strategies, objectives, vision, and mission, coupled with the external and internal audit information, provide a basis for generating and evaluating feasible alternative strategies. This systematic approach is the best way to avoid an organizational crisis. Rudin’s Law states, “When a crisis forces choosing among alternatives, most people choose the worst possible one.” Unless a desperate situation confronts the firm, alternative strategies will likely represent incremental steps that move the firm from its present position to a desired future position. Alternative strategies do not come out of the wild blue yonder; they are derived from the firm’s vision, mission, objectives, external audit, and internal audit; they are consistent with, or build on, past strategies that have worked well.

The Process of Generating and Selecting Strategies Strategists never consider all feasible alternatives that could benefit the firm because there are an infinite number of possible actions and an infinite number of ways to implement those actions. Therefore, a manageable set of the most attractive alternative strategies must be developed, examined, prioritized, and selected. The advantages, disadvantages, trade-offs, costs, and benefits of these strategies should be determined. This section discusses the process that many

exempLAry compAny sHowcAseD

Unilever Plc (UL) The Anglo–Dutch Unilever is the world’s third-largest consumer goods company behind Procter & Gamble and Nestlé, offering a product portfolio that ranges from food and beverages to personal care products. While operating as a single business entity and under the same directors, Unilever is a dual listed company comprising Unilever N.V. based in Rotterdam, Netherlands, and Unilever Plc, London. Of its 450 brands, some of Unilever’s best selling products include Aviance, Ben & Jerry’s, Dove, Knorr, Lipton, Heartbrand ice creams, Hellmann’s, Sunsilk, and PG Tips. In an effort to help the marine environment, the use of microplastics in all personal care products was phased out by Unilever. Their strategies focus on sustainable and ethical activities. After selling selling its Slim-Fast brand to Kainos Capital, Unilever recently acquired Talenti Gelato & Sorbetto, a Minneapolis-based packaged gelato company in the United States. Unilever acquired Procter & Gamble’s Zest brand outside of North America and the Caribbean, and it also acquired Camay and its global operations, which resulted in $225 million turnover for Unilever in the most recent fiscal year. For the fourth year in a row, Unilever received an ‘A’ for Performance by global NGO CDP (formally the Carbon Disclosure Project) and was

included in ‘The A List: The CDP Climate Performance Leadership Index 2015’ (CPLI). The company also achieved the maximum disclosure score of 100, up from 99 in 2014 and 85 in 2013. Only 11 companies received an ‘A’ in the Consumer Staples sector, and only 113 (5%) participating companies have ever been awarded an ‘A’ Performance Band rating. Also, Unilever was recently included among CDP’s elite UK FTSE 350 Climate Performance Leadership companies. Unilever’s Chief Sustainability Officer, Jeff Seabright, was featured in a short film marking the release of the CDP Climate 2015 results. Source: Based on company documents.

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Chapter 2: Outside-USA Strategic Planning

The Internal Audit Chapter 6

Vision and Mission Analysis Chapter 5

Types of Strategies Chapter 4

Strategy Generation and Selection Chapter 8

Strategy Implementation Chapter 9

Strategy Execution Chapter 10

Strategy Monitoring Chapter 11

The External Audit Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 8-1 A Comprehensive Strategic-Management Model Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.

firms use to determine an appropriate set of alternative strategies. Recommendations (strategies selected to pursue) come from alternative strategies formulated. Identifying and evaluating alternative strategies should involve many of the managers and employees who previously assembled the organizational vision and mission statements, performed the external audit, and conducted the internal audit. Representatives from each department and division of the firm should be included in this process, as was the case in previous strategy-formulation activities. Involvement provides the best opportunity for managers and employees to gain an understanding of what the firm is doing and why and to become committed to helping the firm accomplish its objectives. All participants in the strategy analysis and choice activity should have the firm’s external and internal audit information available. This information, coupled with the firm’s vision and mission statements, will help participants crystallize in their own minds particular strategies that they believe could benefit the firm most. Creativity should be encouraged in this thought process. Alternative strategies proposed by participants should be considered and discussed in a meeting or series of meetings. Proposed strategies should be listed in writing. When all feasible strategies identified by participants are given and understood, the strategies should be individually ranked in order of attractiveness by each participant, with 1 = should not be implemented,

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2 = possibly should be implemented, 3 = probably should be implemented, and 4 = definitely should be implemented. Then, collect the participants’ ranking sheets and sum the ratings given for each strategy. Strategies with the highest sums are deemed the best, so this process results in a prioritized list of best strategies that reflects the collective wisdom of the group.

The Strategy-Formulation Analytical Framework Important strategy-formulation techniques can be integrated into a three-stage decision-making framework, as shown in Figure 8-2. The tools presented in this framework are applicable to all sizes and types of organizations and can help strategists identify, evaluate, and select strategies. Stage 1 of the strategy-formulation analytical framework consists of the External Factor Evaluation (EFE) Matrix, the Internal Factor Evaluation (IFE) Matrix, and the Competitive Profile Matrix (CPM). Called the input stage, Stage 1 summarizes the basic input information needed to formulate strategies. Stage 2, called the matching stage, focuses on generating feasible alternative strategies by aligning key external and internal factors. Stage 2 techniques include the Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix. Stage 3, called the decision stage, involves a single technique, the Quantitative Strategic Planning Matrix (QSPM). A QSPM uses input information from Stage 1 to objectively evaluate feasible alternative strategies identified in Stage 2. It reveals the relative attractiveness of alternative strategies and thus provides an objective basis for selecting specific strategies. The QSPM is a more robust way to determine the relative attractiveness of strategies than the 1) summed ranking method described above, or the 2) individual vs group ranking method described on pages 394–395 in Appendix). All nine techniques included in the strategy-formulation analytical framework require the integration of intuition and analysis. Autonomous divisions in an organization commonly use strategy-formulation techniques to develop strategies and objectives. Divisional analyses provide a basis for identifying, evaluating, and selecting among alternative corporate-level strategies. Strategists themselves, not analytic tools, are always responsible and accountable for strategic decisions. Lenz emphasized that the shift from a words-oriented to a numbers-oriented planning process can give rise to a false sense of certainty; it can reduce dialogue, discussion, and argument as a means for exploring understandings, testing assumptions, and fostering organizational learning.1 Strategists, therefore, must be wary of this possibility and use analytical tools to facilitate, rather than to diminish, communication. Without objective information and analysis, personal biases, politics, prejudices, emotions, personalities, and halo error (the tendency to put too much weight on a single factor) oftentimes play a dominant role in the strategy-formulation process, undermining effectiveness. Thus, an analytical approach is essential for achieving maximum effectiveness in strategic planning.

STAGE 1: THE INPUT STAGE External Factor Evaluation (EFE) Matrix

Competitive Profile Matrix (CPM)

Internal Factor Evaluation (IFE) Matrix

STAGE 2: THE MATCHING STAGE Strengths-Weaknesses- Strategic Position and Opportunities-Threats Action Evaluation (SWOT) Matrix (SPACE) Matrix

Boston Consulting Group (BCG) Matrix

Internal-External (IE) Matrix

STAGE 3: THE DECISION STAGE Quantitative Strategic Planning Matrix (QSPM)

Figure 8-2 The Strategy-Formulation Analytical Framework

Grand Strategy Matrix

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The Input Stage Procedures for developing an EFE Matrix, an IFE Matrix, and a CPM were presented in Chapters 6 and 7. Information derived from the EFE Matrix, IFE Matrix, and CPM provides basic input information for the matching and decision stage matrices described in this chapter. The input tools require strategists to quantify subjectivity during early stages of the strategyformulation process. Making small decisions in the input matrices regarding the relative importance of external and internal factors allows strategists to more effectively generate, prioritize, evaluate, and select among alternative strategies. Good intuitive judgment is always needed in determining appropriate weights and ratings, but keep in mind that a rating of 3, for example, is mathematically 50 percent more important than with a rating of 2, so small differences matter.

The Matching Stage Strategy is sometimes defined as the match an organization makes between its internal resources and skills and the opportunities and risks created by its external factors.2 The matching stage of the strategy-formulation framework consists of five techniques that can be used in any sequence: the SWOT Matrix, the SPACE Matrix, the BCG Matrix, the IE Matrix, and the Grand Strategy Matrix. These tools rely on information derived from the input stage to match external opportunities and threats with internal strengths and weaknesses. Matching external and internal key factors is the essential for effectively generating feasible alternative strategies. For example, a firm with excess working capital (an internal strength) could take advantage of the cell phone industry’s 20 percent annual growth rate (an external opportunity) by acquiring Cellfone, Inc. This example portrays simple one-to-one matching. In most situations, external and internal relationships are more complex, and the matching requires multiple alignments for each strategy generated. Successful matching of key external and internal factors depends on those underlying key factors being specific, actionable, and divisional to the extent possible. The basic concept of matching is illustrated in Table 8-1.

The Decision Stage As indicated above, participants could individually rate strategies on a 1-to-4 scale as to desirability, and then sum the ratings from all participants, so that a prioritized list of the best strategies could be achieved. However, the QSPM, described later in this chapter, offers a more robust procedure to determine the relative attractiveness of alternative strategies.

The SWOT Matrix The Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix is an important matching tool that helps managers develop four types of strategies: SO (strengths-opportunities) strategies, WO (weaknesses-opportunities) strategies, ST (strengths-threats) strategies, and WT (weaknessesthreats) strategies.3 Matching key external and internal factors is the most difficult part of developing a SWOT Matrix, as it requires good judgment—and there is no one best set of matches. Note in Table 8-1 that the first, second, third, and fourth strategies are SO, WO, ST, and WT strategies, respectively. SO strategies use a firm’s internal strengths to take advantage of external opportunities. All managers would like their organization to be in a position in which internal strengths can be used to take advantage of external trends and events. Organizations generally will pursue WO, ST, Table 8-1 Matching Key External and Internal Factors to Formulate Alternative Strategies Key internal Factor

Key external Factor

resultant Strategy

Excess working capital (an internal strength) Insufficient capacity (an internal weakness) Strong research and development expertise (an internal strength) Poor employee morale (an internal weakness)

+ Annual growth of 20 percent in the cell phone industry (an external opportunity) + Exit of two major foreign competitors from the industry (an external opportunity) + Decreasing numbers of younger adults (an external threat) + Rising health-care costs (an external threat)

= Acquire Cellfone, Inc. = Pursue horizontal integration by buying competitors’ facilities = Develop new products for older adults = Develop a new wellness program

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or WT strategies to get into a situation in which they can apply SO strategies. When a firm has major weaknesses, it will strive to overcome them and make them strengths. When an organization faces major threats, it will seek to avoid them to concentrate on opportunities. WO strategies aim at improving internal weaknesses by taking advantage of external opportunities. Sometimes key external opportunities exist, but a firm has internal weaknesses that prevent it from exploiting those opportunities. For example, there may be a high demand for electronic devices to control the amount and timing of fuel injection in automobile engines (opportunity), but a certain auto parts manufacturer may lack the technology required for producing these devices (weakness). One possible WO strategy would be to acquire this technology by forming a joint venture with a firm having competency in this area. An alternative WO strategy would be to hire and train people with the required technical capabilities. ST strategies use a firm’s strengths to avoid or reduce the impact of external threats. This does not mean that a strong organization should always meet threats in the external environment head-on. An example ST strategy occurred when Texas Instruments used an excellent legal department (a strength) to collect nearly $700 million in damages and royalties from nine Japanese and Korean firms that infringed on patents for semiconductor memory chips (threat). Rival firms that copy ideas, innovations, and patented products are a threat in many industries. WT strategies are defensive tactics directed at reducing internal weakness and avoiding external threats. An organization faced with numerous external threats and internal weaknesses may indeed be in a precarious position. In fact, such a firm may have to fight for its survival, merge, retrench, declare bankruptcy, or choose liquidation. A schematic representation of the SWOT Matrix is provided in Figure 8-3. Note that a SWOT Matrix is composed of nine cells. As shown, there are four key factor cells, four strategy cells, and one cell that is always left blank (the upper-left cell). The four strategy cells, labeled SO, WO, ST, and WT, are developed after completing four key factor cells, labeled S, W, O, and T. The process of constructing a SWOT Matrix can be summarized in eight steps, as follows: 1. 2. 3. 4. 5.

List the firm’s key external opportunities. List the firm’s key external threats. List the firm’s key internal strengths. List the firm’s key internal weaknesses. Match internal strengths with external opportunities, and record the resultant SO strategies in the appropriate cell. 6. Match internal weaknesses with external opportunities, and record the resultant WO strategies. 7. Match internal strengths with external threats, and record the resultant ST strategies. 8. Match internal weaknesses with external threats, and record the resultant WT strategies. Some important aspects of a SWOT Matrix are evidenced in Figure 8-3. For example, note that both the internal and external factors and the SO, ST, WO, and WT strategies are stated in quantitative terms. This is important! For example, regarding the second SO number 2 and ST number 1 strategies, if the analyst just said, “Add new repair and service persons,” the reader might think that 20 new repair and service persons are needed. Actually only 2 are needed. So, with strategies, as with the underlying key external and internal factors, be specific, actionable, and divisional to the extent possible. It is also important to include the “S1, O2” type notation after each strategy in a SWOT Matrix. This notation reveals the rationale for each alternative strategy. Strategies do not appear out of the blue. Note in Figure 8-3 how this notation reveals the internal and external factors that were matched to formulate desirable strategies. For example, note that this retail computer store business may need to “purchase land to build new store” because a new Highway 34 will make its location less desirable. The notation (W2, O2) and (S8, T3) in Figure 8-3 exemplifies this matching process. The purpose of SWOT analysis and each Stage 2 matching tool is to generate feasible alternative strategies, not to select or determine which strategies are best. Not all of the strategies developed in the SWOT Matrix will be selected for implementation. No firm has sufficient capital or resources to implement every strategy formulated. The strategy-formulation guidelines provided in Chapter 4 can enhance the process of matching key external and internal factors. For example, when an organization has both the capital and human resources needed to distribute its own products (internal strength) and distributors are unreliable, costly, or incapable of meeting the firm’s needs (external threat), forward integration can be an attractive ST strategy. When a firm has excess production capacity (internal weakness)

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Strengths 1. Inventory turnover up 5.8 to 6.7 2. Average customer purchase up $97 to $128 3. Employee morale is excellent 4. In-store promotions = 20 percent increase in sales 5. Newspaper advertising expenditures down 10 percent 6. Revenues from repair and service in store up 16 percent 7. In-store technical support persons have MIS degrees 8. Store’s debt-to-total-assets ratio down 34 percent Opportunities 1. Population of city growing 10 percent 2. Rival computer store opening one mile away 3. Vehicle traffic passing store up 12percent 4. Vendors average six new products ayear 5. Senior citizen use of computers up 8percent 6. Small business growth in area up 10percent 7. Desire for websites up 18 percent byrealtors 8. Desire for websites up 12 percent bysmall firms Threats 1. Best Buy opening new store in one year nearby 2. Local university offers computer repair 3. New bypass Hwy 34 in 1 year will divert traffic 4. New mall being built nearby 5. Gas prices up 14 percent 6. Vendors raising prices 8 percent

WO Strategies 1. Add four new in-store promotions monthly (S4, O3) 2. Add two new repair and service persons (S6, O5) 3. Send flyer to all seniors over age 55 (S5, O5)

ST Strategies 1. Hire two more repair persons and market these new services (S6, S7, T1) 2. Purchase land to build new store (S8,T3) 3. Raise out-of-store service calls from $60 to $80 (S6, T5)

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Weaknesses 1. Software revenues in store down 12percent 2. Location of store hurt by new Hwy 34 3. Carpet and paint in store in disrepair 4. Bathroom in store needs refurbishing 5. Total store revenues down 8 percent 6. Store has no website 7. Supplier on-time-delivery up to 2.4 days 8. Customer checkout process too slow 9. Revenues per employee up 19 percent

WO Strategies 1. Purchase land to build new store (W2,O2) 2. Install new carpet, paint, and bath (W3, W4, O1) 3. Up website services by 50 percent (W6, O7, O8) 4. Launch mailout to all realtors in city (W5, O7)

WT Strategies 1. Hire two new cashiers (W8, T1, T4) 2. Install new carpet, paint, and bath (W3, W4, T1)

Figure 8-3 A SWOT Matrix for a Retail Computer Store and its basic industry is experiencing declining annual sales and profits (external threat), related diversification can be an effective WT strategy. Although the SWOT Matrix is widely used in strategic planning, the analysis does have some limitations.4 First, SWOT does not show how to achieve a competitive advantage, so it must not be an end in itself. The matrix should be the starting point for a discussion on how proposed strategies could be implemented as well as cost/benefit considerations that ultimately could lead to competitive advantage. Second, SWOT is a static assessment (or snapshot) in time. A SWOT Matrix can be like studying a single frame of a motion picture where you see the lead characters and the setting but have no clue as to the plot. As circumstances, capabilities, threats, and strategies change, the dynamics of a competitive environment may not be revealed in a single matrix. Third, SWOT analysis

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may lead the firm to overemphasize a single internal or external factor in formulating strategies. There are interrelationships among the key internal and external factors that SWOT does not reveal that may be important in devising strategies. Fourth, there are no weights, ratings, or numbers in a SWOT analysis. Finally, the relative attractiveness of alternative strategies is not provided.

The Strategic Position and Action Evaluation (SPACE) Matrix The Strategic Position and Action Evaluation (SPACE) Matrix, another important Stage 2 matching tool, is illustrated in Figure 8-4. Its four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are most appropriate for a given organization. The axes of the SPACE Matrix represent two internal dimensions (financial position [FP] and competitive position [CP]) and two external dimensions (stability position [SP] and industry position [IP]). These four factors are perhaps the most important determinants of an organization’s overall strategic position.5 It is helpful here to elaborate on the difference between the SP and IP axes. The term SP refers to the volatility of profits and revenues for firms in a given industry. Thus, SP volatility (stability) is based on the expected impact of changes in core external factors such as technology, economy, demographic, seasonality, and so on. The higher the frequency and magnitude of changes in a given industry, the more unstable the SP becomes. An industry can be stable or unstable on SP, yet high or low on IP. The smartphone industry, for instance, would be unstable (–6 or –7) on SP yet high growth on IP, whereas the canned food industry would be stable (–1 or –2) on SP yet low growth on IP. Depending on the type of organization, numerous variables could make up each of the dimensions represented on the axes of the SPACE Matrix. Factors that were included in the firm’s EFE FP • • • •

+7

Conservative Market penetration Market development Product development Related diversification

Aggressive Backward, forward, horizontal integration • Market penetration • Market development • Product development • Diversification (related or unrelated)

+6

+5 +4 +3 +2 +1 0

CP

IP –7

–6

–5

–4

–3

–2

–1

+1

+2

+3

+4

+5

+6

+7

–1

• • •

Defensive Retrenchment Divestiture Liquidation

–2

Competitive Backward, forward, horizontal integration • Market penetration • Market development • Product development •

–3 –4 –5 –6 –7 SP

Figure 8-4 The SpACE Matrix Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155.

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and IFE Matrices should be considered in developing a SPACE Matrix. Other variables commonly included are given in Table 8-2. For example, return on investment, leverage, liquidity, working capital, and cash flow are commonly considered to be determining factors of an organization’s financial position (FP). Like the SWOT Matrix, the SPACE Matrix should be both tailored to the particular organization being studied and based on factual information to the extent possible. The process of developing a SPACE Matrix can be summarized in six steps, as follows: 1. Select a set of variables to define financial position (FP), competitive position (CP), stability position (SP), and industry position (IP). 2. Assign a numerical value ranging from +1 (worst) to +7 (best) to each of the variables that make up the FP and IP dimensions. Assign a numerical value ranging from –1 (best) to –7 (worst) to each of the variables that make up the SP and CP dimensions. On the FP and CP axes, make comparisons to competitors. On the IP and SP axes, make comparisons to other industries. On the SP axis, know that a –7 denotes highly unstable industry conditions, whereas –1 denotes highly stable. 3. Compute an average score for FP, CP, IP, and SP by summing the values given to the variables of each dimension and then by dividing by the number of variables included in the respective dimension. 4. Plot the average scores for FP, IP, SP, and CP on the appropriate axis in the SPACE Matrix. 5. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new (x, y) coordinate. 6. Draw a directional vector from the origin of the SPACE Matrix (0,0) through the new (x, y) coordinate. That vector, being located in a particular quadrant, reveals particular strategies the organization should consider. Some example strategy profiles that can emerge from SPACE analysis are shown in Figure 8-5. The directional vector associated with each profile suggests the type of strategies to pursue: aggressive, conservative, defensive, or competitive. Specifically, when a firm’s directional vector is located in the Aggressive Quadrant (upper right) of the SPACE Matrix, an organization is in an excellent position to use its internal strengths to (1) take advantage of external opportunities, (2) overcome internal weaknesses, and (3) avoid external threats. Therefore, market penetration, market Table 8-2 Example Factors That Make Up the SpACE Matrix Axes internal Strategic Position

external Strategic Position

Financial Position (FP)

Stability Position (SP)

Return on investment Leverage Liquidity Working capital Cash flow Inventory turnover Earnings per share Price earnings ratio

Technological changes Rate of inflation Demand variability Price range of competing products Barriers to entry into market Competitive pressure Ease of exit from market Risk involved in business

Competitive Position (CP)

Industry Position (IP)

Market share Product quality Product life cycle Customer loyalty Capacity utilization Technological know-how Control over suppliers and distributors

Growth potential Profit potential Financial stability Extent leveraged Resource utilization Ease of entry into market Productivity, capacity utilization

Source: Based on H. Rowe, R. Mason, & K. Dickel, Strategic Management and Business Policy: A Methodological Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155–156.

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development, product development, backward integration, forward integration, horizontal integration, or diversification, can be feasible, depending on the specific circumstances that face the firm. When a particular company is known, the analyst must be much more specific in terms of recommended strategies. For example, instead of saying market penetration is a recommended Aggressive Profiles

FP

FP

(+1,+5)

(+4,+4)

CP

IP

CP

IP

SP

SP

A financially strong firm that has achieved major competitive advantages in a growing and stable industry FP

A firm whose financial strength is a dominating factor in the industry Conservative Profiles

FP

(–2,+4) (–5,+2) CP

CP

IP

IP

SP

SP

A firm that has achieved financial strength in a stable industry that is not growing; the firm has few competitive advantages Competitive Profiles

FP

CP

A firm that suffers from major competitive disadvantages in an industry that is technologically stable but declining in sales

IP

FP

CP

IP

(+5,–1) (+1,–4) SP

SP

An organization that is competing fairly well in an unstable industry

A firm with major competitive advantages in a high-growth industry Defensive Profiles

FP

CP

IP

FP

CP

IP

(–5,–1)

SP

A firm that has a very weak competitive position in a negative growth, stable industry

(–1,–5)

SP

A financially troubled firm in a very unstable industry

Figure 8-5 Example Strategy profiles Source: Based on H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological Approach (Reading, MA: Addison-Wesley Publishing Co. Inc., © 1982), 155.

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strategy when your vector is located in the Conservative Quadrant, say that adding 34 new stores in India is a recommended strategy. This is an important point for students doing case analyses because whenever a particular company is known, then terms such as market development are too vague to use. That term could refer to adding a manufacturing plant in Thailand or Mexico or South Africa. Thus, be specific to the extent possible regarding implications of all the matrices presented herein this chapter. Vagueness can be disastrous in strategic management. Avoid terms such as expand, increase, decrease, and grow—be more specific than that! Reveal how your proposed strategies could enable your company to rotate/shift its SPACE vector more toward the Aggressive Quadrant. The directional vector may appear in the Conservative Quadrant (upper left) of the SPACE Matrix, which implies staying close to the firm’s basic competencies and not taking excessive risks. Conservative strategies most often include market penetration, market development, product development, and related diversification. The directional vector may be located in the Defensive Quadrant (lower left) of the SPACE Matrix, which suggests the firm should focus on improving internal weaknesses and avoiding external threats. Defensive strategies include retrenchment, divestiture, liquidation, and related diversification. Finally, the directional vector may be located in the Competitive Quadrant (lower right) of the SPACE Matrix, indicating competitive strategies. Competitive strategies include backward, forward, and horizontal integration; market penetration; market development; and product development. Note that a SPACE Matrix has some limitations: 1. It is a snapshot in time. 2. There are more than four dimensions that firms could/should be rated on. 3. The directional vector could fall directly on an axis, or could even go nowhere if the coordinate is (0,0). 4. Implications of the exact angle of the vector within a quadrant are unclear. 5. The relative attractiveness of alternative strategies generated is unclear. 6. Key underlying internal and external factors are not explicitly considered. A SPACE Matrix for Domino’s Pizza, Inc. is provided in Figure 8-6. Note the SPACE vector for Domino’s is located in the Competitive Quadrant (lower right), based primarily on x-axis = –1.2, y-axis = –2.4 FP +7 Conservative Aggressive +6 +5 +4 +3 +2 +1 CP

0 –7 –6 –5 –4 –3 –2 –1

+1 +2 +3 +4 +5 +6 +7

0 –1

Defensive

–2

Competitive

–3 –4 –5 –6 –7 SP

Figure 8-6 A SpACE Matrix for Domino's pizza

IP

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three factors: (1) the company’s $1.5 billion in long-term debt, (2) intense competition within the fast-food industry, and (3) offering products that are generally not a healthy food choice. Domino’s should consider adding a line of salads to their menu to shift the SPACE vector into the Aggressive Quadrant (upper right); adding salads would likely benefit Domino’s financially, thus moving the SPACE point on the vertical (y-axis) up. In performing strategic-management case analysis, prepare the SPACE Matrix (and all matrices) based on the point in time of your analysis rather than a desired future point in time. However, in your discussion of implications, be sure to comment on what you recommend the firm should do to improve its situation. Focus more on implications of matrices than on “number crunching” in your actual oral delivery of a case analysis.

The Boston Consulting Group (BCG) Matrix Based in Boston and having 6,200 consultants worldwide, the Boston Consulting Group (BCG) has 87 offices in 45 countries, and annually ranks in the top five of Fortune’s list of the “100 Best Companies to Work For.” The Boston Consulting Group is a private management consulting firm that specializes in strategic planning. Autonomous divisions (also called segments or profit centers) of an organization make up what is called a business portfolio. When a firm’s divisions compete in different industries, a separate strategy often must be developed for each business. The Boston Consulting Group (BCG) Matrix and the Internal-External (IE) Matrix are designed specifically to enhance a multidivisional firm’s efforts to formulate strategies. Allocating resources across divisions is arguably the most important strategic decision facing multidivisional firms. Multidivisional firms range in size from small, three-restaurant, mom-and-pop firms, to huge conglomerates such as Walt Disney Company, to universities that have various schools or colleges—and they all need to use portfolio analysis. In a Form 10K or Annual Report, some companies do not disclose financial information by segment, in which case a BCG portfolio analysis may not be possible by persons external to the firm. However, reasons to disclose by segment financial information in a Form 10K more than offset the reasons not to disclose, as indicated in Table 8-3. The BCG Matrix graphically portrays differences among divisions based on two dimensions: (1) relative market share position on the x-axis and (2) industry growth rate on the y-axis. The BCG Matrix allows a multidivisional organization to manage its portfolio of businesses by examining these two dimensions for each division relative to other divisions in the organization. Relative market share position (RMSP) is defined as the ratio of a division’s own market share (or revenues) in a particular industry to the market share (or revenues) held by the largest rival firm in that industry. Other variables can be used in this analysis besides revenues. For example, number of stores, or number of restaurants, or, in the airline industry, number of airplanes could

Table 8-3 Reasons to (or Not to) Disclose Financial Information by Segment (by Division) Reasonstodisclose 1. Transparency is a good thing in today’s world of Sarbanes-Oxley Act of 2002. 2. Investors will better understand the firm, which can lead to greater support. 3. Managers and employees will better understand the firm, which should lead to greater commitment. 4. Disclosure enhances the communication process both within the firm and with outsiders.

Reasonsnottodisclose 1. Rival firms can obtain free competitive information. 2. Performance failures can be hidden. 3. Rivalry among segments can be reduced.

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Table 8-4 Current Market Share Data for Cigarette and Beer Brands What Percentage of People Smoke What cigarette Brands in the USa?

What Beer Brands annually Sell the Most Million Barrels in the USa?

Marlboro Newport Pall Mall Camel Winston Pyramid Doral USA Gold Kool Other Total

Bud Light Coors Light Budweiser Miller Lite Corona Extra Samuel Adams Sierra Nevada New Belgium

40.2 % 12.2 8.1 8.1 2.4 2.3 2.0 1.9 1.8 21.0 100.0

381 182 160 137 74 23 10 8

Source: Based on M. Esterl & P. Evans, “Reynolds, Lorillard Strike a Match,” Wall Street Journal, July 6, 2014, B4. See also M. Esterl & T. Mickle, “Beer Conglomerates Cultivate Their Crafty Side,” Wall Street Journal, December 29, 2014, B1.

be used for comparative purposes to determine relative market share position. In the cigarette industry, for example, Newport’s relative market share position is 12.2/40.2 = 0.303, and Miller Lite’s relative market share position is 137/381 = 0.359 (see Table 8-4). Relative market share position is given on the x-axis of the BCG Matrix. The midpoint on the x-axis usually is set at 0.50, corresponding to a division that has half the market share of the leading firm in the industry. The y-axis represents the industry growth rate (IGR) in sales, measured in percentage terms—that is, the average annual increase in revenue for all firms in an industry. The growth rate percentages on the y-axis could range from −20 to +20 percent, with 0.0 being the midpoint. The average annual increase in revenues for several leading firms in the industry would be a good estimate of the value. Also, various sources such as the S&P Industry Surveys and www.finance.yahoo.com (click on Competitors) would provide this value. These numerical ranges on the x- and y-axes are often used, but other numerical values could be established as deemed appropriate for particular organizations, such as –10 to +10 percent on the y-axis. Based on each division’s respective (x, y) coordinate, each segment can be properly positioned (centered) in a BCG Matrix. Divisions located in Quadrant I (upper right) of the BCG Matrix are called “Question Marks,” those located in Quadrant II (upper left) are called “Stars,” those located in Quadrant III (lower left) are called “Cash Cows,” and those divisions located in Quadrant IV (lower right) are called “Dogs.” The following list describes the four BCG quadrants. •

Question Marks—Divisions in Quadrant I (upper right) have a low relative market share position, yet they compete in a high-growth industry. Generally these firms’ cash needs are high and their cash generation is low. These businesses are called question marks because the organization must decide whether to strengthen them by pursuing an intensive strategy (market penetration, market development, or product development) or to sell them. Stars—Divisions in Quadrant II (upper left) represent the organizations’ best long-run opportunities for growth and profitability, and are therefore called stars. Divisions with a high relative market share and a high industry growth rate should receive substantial investment to maintain or strengthen their dominant positions. Forward, backward, and horizontal integration; market penetration; market development; and product development are appropriate strategies for these divisions to consider, as indicated in Figure 8-7. Cash Cows—Divisions in Quadrant III (lower left) have a high relative market share position but compete in a low-growth industry. Called cash cows because they generate cash in excess of their needs, they are often milked. Many of today’s cash cows were

259

Strategic ManageMent RELATIVE MARKET SHARE POSITION High

Medium

1.0 High INDUSTRY SALES GROWTH RATE (Percentage)

260

Medium

Low

+20

–20

Low

.50

• Backward, Forward, or Horizontal Integration • Market Penetration • Market Development • Product Development

Stars II • Product Development • Diversification • Retrenchment • Divestiture

Cash Cows III

0.0 • Market Penetration • Market Development • Product Development • Divestiture

Question Marks I • Retrenchment • Divestiture • Liquidation

Dogs IV

Figure 8-7 The BCG Matrix Source: Based on the BCG Portfolio Matrix from the Product Portfolio Matrix, © 1970, The Boston Consulting Group.

yesterday’s stars. Cash cow divisions should be managed to maintain their strong position for as long as possible. Product development or diversification may be attractive strategies for strong cash cows. However, as a cash cow division becomes weak, retrenchment or divestiture can become more appropriate. Dogs—Divisions in Quadrant IV (lower right) have a low relative market share position and compete in a slow- or no-market-growth industry; they are dogs in the firm’s portfolio. Because of their weak internal and external position, these businesses are often liquidated, divested, or trimmed down through retrenchment. When a division first becomes a dog, retrenchment can be the best strategy to pursue because many dogs have bounced back, after strenuous asset and cost reduction, to become viable, profitable divisions.

The basic BCG Matrix appears in Figure 8-7. Each circle represents a separate division. The size of the circle corresponds to the proportion of corporate revenue generated by that business unit, and the pie slice indicates the proportion of corporate profits generated by that division. The major benefit of the BCG Matrix is that it draws attention to the cash flow, investment characteristics, and needs of an organization’s various divisions. The divisions of many firms evolve over time: dogs become question marks, question marks become stars, stars become cash cows, and cash cows become dogs in an ongoing counterclockwise motion. Less frequently, stars become question marks, question marks become dogs, dogs become cash cows, and cash cows become stars (in a clockwise motion). In some organizations, no cyclical motion is apparent. Over time, organizations should strive to achieve a portfolio of divisions that are stars. An example of a BCG Matrix is provided in Figure 8-8, which illustrates an organization composed of five divisions with annual sales ranging from $5,000 to $60,000. Division 1 has the greatest sales volume, so the circle representing that division is the largest one in the matrix. The circle corresponding to Division 5 is the smallest because its sales volume ($5,000) is least among all the divisions. The pie slices within the circles reveal the percent of corporate profits contributed by each division. As shown, Division 1 contributes the highest profit percentage, 39 percent, as indicated by 39 percent of the area within circle 1 being shaded. Notice in the diagram that Division 1 is considered a star, Division 2 is a question mark, Division 3 is also a question mark, Division 4 is a cash cow, and Division 5 is a dog. The BCG Matrix, like all analytical techniques, has some limitations. For example, viewing every business as a star, cash cow, dog, or question mark is an oversimplification; many businesses

CHAPTER8 • STRATEgygEnERATionAndSElECTion

RELATIVE MARKET SHARE POSITION IN THE INDUSTRY

High

+20

Medium .50

High 1.0 1

INDUSTRY SALES GROWTH RATE (Percentage)

Low 0.0

39%

20% 2

Medium

8% 3

5 4 Low

2%

31%

–20

Division

Revenues

Percent Revenues

Profits

Percent Profits

Relative Market Share

Industry Growth Rate (%)

1 2 3 4 5 Total

$60,000 40,000 40,000 20,000 5,000 $165,000

37 24 24 12 3 100

$10,000 5,000 2,000 8,000 –500 $25,500

39 20 8 31 2 100

.80 .40 .10 .60 .05 —

+15 +10 +1 –20 –10 —

Figure 8-8 An Example BCG Matrix

fall right in the middle of the BCG Matrix and thus are not easily classified. Furthermore, the BCG Matrix does not reflect if various divisions or their industries are growing over time; that is, the matrix has no temporal qualities, but rather it is a snapshot of an organization at a given point in time. Finally, other variables besides relative market share position and industry growth rate in sales, such as size of the market and competitive advantages, are important in making strategic decisions about various divisions. Another example BCG Matrix is provided in Figure 8-9. As you can see, Division 5 had an operating loss of $188 million.

The Internal-External (IE) Matrix The Internal-External (IE) Matrix positions an organization’s various divisions (segments) in a nine-cell display, illustrated in Figure 8-10. The IE Matrix is similar to the BCG Matrix in that both tools involve plotting a firm’s divisions in a schematic diagram; this is why they are both called portfolio matrices. Also, in both the BCG and IE Matrices, the size of each circle represents the percentage of sales contribution of each division, and pie slices reveal the percentage of profit contribution of each division. But there are four important differences between the BCG Matrix and the IE Matrix, as follows: 1. 2. 3. 4.

The x and y axes are different. The IE Matrix requires more information about the divisions than does the BCG Matrix. The strategic implications of each matrix are different. For these reasons, The IE Matrix has nine quadrants versus four in a BCG Matrix.

For the previous four reasons, strategists in multidivisional firms often develop both the BCG Matrix and the IE Matrix in formulating alternative strategies. A common practice is to develop a BCG Matrix and an IE Matrix for the present, and then develop projected matrices to reflect expectations of the future. This before-and-after analysis can be very effective in an oral presentation, enabling students (or strategists) to pave the way for (justify or give some rationale for) their recommendations across divisions of the firm.

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RELATIVE MARKET SHARE POSITION (RMSP) 1.0

0.9

0.8

0.7

0.6

0.5

0.4

0.3

0.2

0.0

0.1

+20 +15

1

+10

INDUSTRY SALES GROWTH RATE %

68%

+5

2 4

–5

1.2%

3

39.0%

0 0.1%

18.3%

–10

5

–15 –20 Division 1 2 3 4 5 Total

$ Sales (millions)

% Sales

$ Profits (millions)

% Profits

RMSP

IG Rate %

$5,139 2,556 1,749 493 42 $9,979

51.5 25.6 17.5 4.9 0.5 100.0

$ 799 400 12 4 –188 $1,027

68.0 39.0 1.2 0.1 (18.3) 100.0

0.8 0.4 0.2 0.5 .02

10 05 00 –05 –10

Figure 8-9 An Example BCG Matrix

• • • •

Backward, Forward, or Horizontal Integration Market Penetration Strong Market Development 3.0 to 4.0 Product Development Grow and Build 4.0 High 3.0 to 4.0

THE EFE TOTAL WEIGHTED SCORES

I

THE IFE TOTAL WEIGHTED SCORES Average 2.0 to 2.99 3.0

Weak 1.0 to 1.99 2.0

II

1.0 III

3.0 Medium 2.0 to 2.99

IV

V

VI

2.0 Low 1.0 to 1.99

VII

VIII

IX

1.0

• •

Hold and Maintain Market Penetration Product Development

Harvest or Divest • Retrenchment • Divestiture

Figure 8-10 The Internal-External (IE) Matrix Source: The IE Matrix was developed from the General Electric (GE) Business Screen Matrix. For a description of the GE Matrix, see Michael Allen, “Diagramming GE’s Planning for What’s WATT,” in R. Allio and M. Pennington, eds., Corporate Planning: Techniques and Applications l par; New York: AMACOM, 1979.

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The IE Matrix is based on two key dimensions: (1) the IFE total weighted scores on the x-axis and (2) the EFE total weighted scores on the y-axis. Recall that each division of an organization should construct an IFE Matrix and an EFE Matrix for its part of the organization, but oftentimes in performing case analysis, strategic-management students are asked to simply estimate divisional IFE and EFE scores, rather than prepare those underlying matrices for every division. Anyway, the total weighted scores derived from the divisions allow construction of the corporate-level IE Matrix. On the x-axis of the IE Matrix, an IFE total weighted score of 1.0 to 1.99 represents a weak internal position; a score of 2.0 to 2.99 is considered average; and a score of 3.0 to 4.0 is strong. Similarly, on the y-axis, an EFE total weighted score of 1.0 to 1.99 is considered low; a score of 2.0 to 2.99 is medium; and a score of 3.0 to 4.0 is high. Circles, representing divisions, are positioned in an IE Matrix based on their (x, y) coordinate. Despite having nine cells (or quadrants), the IE Matrix has three major regions that have different strategy implications, as follows: •

Region 1—The prescription for divisions that fall into cells I, II, or IV can be described as grow and build. Intensive (market penetration, market development, and product development) or integrative (backward integration, forward integration, and horizontal integration) strategies can be most appropriate for these divisions. This is the best region for divisions, given their high IFE and EFE scores. Successful organizations are able to achieve a portfolio of businesses positioned in Region 1. Region 2—The prescription for divisions that fall into cells III, V, or VII can be described as hold and maintain strategies; market penetration and product development are two commonly employed strategies for these types of divisions. Region 3—The prescription for divisions that fall into cells VI, VIII, or IX can be described as harvest or divest.

An example of a four-division IE Matrix is given in Figure 8-11. As indicated by the positioning of the four circles, grow and build strategies are appropriate for Divisions 1, 2, and 3. But Division 4 is a candidate for harvest or divest. Division 2 contributes the greatest percentage of company sales and thus is represented by the largest circle. Division 1 contributes the greatest proportion of total profits; it has the largest-percentage pie slice. THE IFE TOTAL WEIGHTED SCORES Average 2.0 to 2.99

Strong 3.0 to 4.0 4.0 High 3.0 to 4.0 THE EFE TOTAL WEIGHTED SCORES

Weak 1.0 to 1.99

3.0

2.0

1

2

1.0 25%

50% 3.0

Medium 2.0 to 2.99

4

3

20%

5%

2.0 Low 1.0 to 1.99 1.0

Figure 8-11 An Example IE Matrix

Division

Sales

1 2 3 4 Total

$100 200 50 50 $400

Percent Sales 25.0 50.0 12.5 12.5 100.0

Profits

Percent Profits

IFE Scores

EFE Scores

$10 5 4 1 $20

50 25 20 5 100

3.6 2.1 3.1 1.8

3.2 3.5 2.1 2.5

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THE IFE TOTAL WEIGHTED SCORES Average 2.0 to 2.99

Strong 3.0 to 4.0 4.0

2.0

3.0 I

High 3.0 to 4.0 THE EFE TOTAL WEIGHTED SCORES

Weak 1.0 to 1.99

II

III

16%

5

3.0 IV Medium 2.0 to 2.99

1.0

4%

V 4

3 59%

VI 2% 2

1

2.0 VII

VIII

Low 1.0 to 1.99

19%

IX

1.0 Grow and Build Division 1 2 3 4 5 Total

$ Revenue

% Revenue

$ Profit

% Profit

$7,868 1,241 1,578 90 223 $11,000

71.5% 11.3% 14.3% 0.8% 2.1% 100%

$3,000 1,000 800 100 200 $5,100

59% 19% 16% 2% 4% 100%

EFE Scores

IFE Scores

2.5 2 3 2.5 3 —

3 2 3 2.5 2 —

Figure 8-12 The IE Matrix

An example five-division IE Matrix is given in Figure 8-12. Note that Division 1 has the largest revenues (as indicated by the largest circle) and the largest profits (as indicated by the largest pie slice) in the matrix. It is common for organizations to develop both geographic and product-based IE Matrices to more effectively formulate strategies and allocate resources among divisions. Firms often prepare a “before and after” IE (or BCG) Matrix to reveal the situation at present versus the expected situation after one year. This latter idea minimizes the limitation of these matrices being a “snapshot in time.” The Academic Research Capsule 8-1 discusses some thoughts on a new IE Matrix.

AcADemic reseArcH cApsuLe 8-1

A New IE Matrix Portfolio analysis is critically significant in strategic planning because allocation of resources across divisions is arguably the most important strategic decision facing multidivisional firms each year. Two recent journal articles merged the EFE and IFE Matrices with the CPM to propose a new External Competitive Profile Matrix (ECPM) and an Internal Competitive Profile Matrix (ICPM). In their articles cited in the source, Cassidy, Glissmeyer, and Capps present a revised IE Matrix developed based on the new ECPM and ICPM scores. Cassidy, Glissmeyer, and Capps contend that the new nine-cell

matrix improves on Fred David’s original IE Matrix, first offered in 1987 and based on the General Electric (GE) Business Screen. Source: Based on C. Cassidy, M. Glissmeyer, & C. Capps III, “Mapping an Internal-External (IE) Matrix Using Tradition and Extended Matrix Concepts,” Journal of Applied Business Research, 29, no. 5 (September/ October 2013): 1523–1528. See also C. Capps III and M. Glissmeyer, “Extending the Competitive Profile Matrix Using Internal Factor Evaluation and External Factor Evaluation Matrix Concepts,” Journal of Applied Business Research, 28, no. 5 (2012): 1062

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265

The Grand Strategy Matrix In addition to the SWOT Matrix, SPACE Matrix, BCG Matrix, and IE Matrix, the Grand Strategy Matrix has become a popular tool for formulating alternative strategies. All organizations can be positioned in one of the Grand Strategy Matrix’s four strategy quadrants. A firm’s divisions likewise could be positioned. As illustrated in Figure 8-13, the Grand Strategy Matrix is based on two evaluative dimensions: (1) competitive position on the x-axis and (2)market (industry) growth on the y-axis. Any industry whose annual growth in sales exceeds 5 percent could be considered to have rapid growth. Appropriate strategies for an organization to consider are listed in sequential order of attractiveness in each quadrant of the Grand Strategy Matrix. Firms located in Quadrant I of the Grand Strategy Matrix are in an excellent strategic position. For these companies, continued concentration on current markets (market penetration and market development) and products (product development) is an appropriate strategy. It is unwise for a Quadrant I firm to shift notably from its established competitive advantages. When a Quadrant I organization has excessive resources, then backward, forward, or horizontal integration may be effective strategies. When a Quadrant I firm is too heavily committed to a single product, then related diversification may reduce the risks associated with a narrow product line. Quadrant I firms can afford to take advantage of external opportunities in several areas. They can take risks aggressively when necessary. Firms positioned in Quadrant II need to evaluate their present approach to the marketplace seriously. Although their industry is growing, they are unable to compete effectively; they need to determine why the firm’s current approach is ineffective and how the company can best change to improve its competitiveness. Because Quadrant II organizations are in a rapid market growth industry, an intensive strategy (as opposed to integrative or diversification) is usually the first option that should be considered. However, if the firm is lacking a distinctive competence

RAPID MARKET GROWTH Quadrant II 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divestiture 6. Liquidation

Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Related diversification

WEAK COMPETITIVE POSITION

STRONG COMPETITIVE POSITION Quadrant III 1. Retrenchment 2. Related diversification 3. Unrelated diversification 4. Divestiture 5. Liquidation

Quadrant IV 1. Related diversification 2. Unrelated diversification 3. Joint ventures

SLOW MARKET GROWTH

Figure 8-13 The Grand Strategy Matrix Source: Based on Roland Christensen, Norman Berg, and Malcolm Salter, Policy Formulation and Administration (Homewood, IL: Richard D. Irwin, 1976), 16–18.

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or competitive advantage, then horizontal integration is often a desirable alternative. As a last resort, divestiture or liquidation should be considered. Divestiture can provide funds needed to acquire other businesses or buy back shares of stock. Quadrant III organizations compete in slow-growth industries and have weak competitive positions. These firms must make some drastic changes quickly to avoid further decline and possible liquidation. Extensive cost and asset reduction (retrenchment) should be pursued first. An alternative strategy is to shift resources away from the current business into different areas (diversify). If all else fails, the final options for Quadrant III businesses are divestiture or liquidation. Finally, Quadrant IV businesses have a strong competitive position but are in a slow-growth industry. These firms have the strength to launch diversified programs into more promising growth areas: Quadrant IV businesses have characteristically high cash-flow levels and limited internal growth needs and often can pursue related or unrelated diversification successfully. Quadrant IV firms also may pursue joint ventures. Even with the Grand Strategy Matrix, be certain that you always, whenever possible, state your alternative strategies in specific, actionable, and divisional terms to the extent possible. When you know the particular firm, such as in strategic-management case analysis, avoid using terms such as divestiture, for example. Rather, specify the exact division to be sold. Also, be sure to use the free Excel student template at www.strategyclub.com that facilitates construction of all strategic planning matrices.

The Decision Stage: The Quantitative Strategic Planning Matrix (QSPM) Other than ranking strategies to achieve the prioritized list, there is only one analytical technique in the literature designed to determine the relative attractiveness of feasible alternative actions. The Quantitative Strategic Planning Matrix (QSPM), which comprises Stage 3 of the strategy-formulation analytical framework, objectively indicates which alternative strategies are best.6 The QSPM uses input from Stage 1 analyses and matching results from Stage 2 analyses to decide objectively among alternative strategies. That is, the EFE Matrix, IFE Matrix, and CPM that comprise Stage 1, coupled with the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix that comprise Stage 2, provide the needed information for setting up the QSPM (Stage 3). The QSPM is a tool that allows strategists to evaluate alternative strategies objectively, based on previously identified external and internal key success factors. Like other strategy-formulation analytical tools, the QSPM requires assignment of ratings (called attractiveness scores), but making “small” rating decisions enables strategists to make effective “big” decisions, such as which country to spend a billion dollars in to sell a product. The basic format of the QSPM is illustrated in Table 8-5. Note that the left column of a QSPM consists of key external and internal factors (from Stage 1), and the top row consists of feasible alternative strategies (from Stage 2). Specifically, the left column of a QSPM consists of information obtained directly from the EFE Matrix and IFE Matrix. In a column adjacent to the key success factors, the respective weights received by each factor in the EFE Matrix and the IFE Matrix are recorded. The top row of a QSPM consists of alternative strategies derived from the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix. These matching tools usually generate similar feasible alternatives. However, not every strategy suggested by the matching techniques has to be evaluated in a QSPM. Strategists should compare several viable alternative strategies in a QSPM. Make sure your strategies are stated in specific terms, such as “Open 275 new stores in Indonesia” rather than “Expand globally” or “Open new stores in Africa.” Ultimately, a dollar value must be established for each recommended strategy; it would be impossible to establish a dollar value for “expand globally.” Conceptually, the QSPM determines the relative attractiveness of various strategies based on the extent that key external and internal factors are capitalized on or improved. The relative attractiveness of each strategy within a set of alternatives is computed by determining the cumulative impact of each external and internal factor. Any number of sets of alternative strategies can

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Table 8-5 The Quantitative Strategic planning Matrix (QSpM) Strategic alternatives Key Factors

Weight

Strategy 1

Strategy 2

Strategy 3

Key External Factors Economy Political/Legal/Governmental Social/Cultural/Demographic/ Environmental Technological Competitive Key Internal Factors Management Marketing Finance/Accounting Production/Operations Research and Development Management Information Systems

be included in the QSPM, and any number of strategies can make up a given set, but only strategies within a given set are evaluated relative to each other. For example, one set of strategies may include diversification, whereas another set may include issuing stock and selling a division to raise needed capital. These two sets of strategies are totally different, and the QSPM evaluates strategies only within sets. Note in Table 8-5 that three strategies are included, and they make up just one set. A Quantitative Strategic Planning Matrix for a retail computer store is provided in Table8-6. This example illustrates all the components of the QSPM: strategic alternatives, key factors, weights, attractiveness scores (AS), total attractiveness scores (TAS), and the sum total attractiveness score. The three new terms just introduced—(1) attractiveness scores, (2) total attractiveness scores, and (3) the sum total attractiveness score—are defined and explained as the six steps required to develop a QSPM are discussed: Step 1: Make a list of the firm’s key external opportunities and threats and internal strengths and weaknesses in the left column of the QSPM. This information should be taken directly from the EFE Matrix and IFE Matrix. (The Excel template at www.strategyclub.com can facilitate this process.) Step 2: Assign weights to each key external and internal factor. These weights are identical to those in the EFE Matrix and IFE Matrix. The weights are presented in a straight column just to the right of the external and internal factors. Step 3: Examine the Stage 2 (matching) matrices, and identify alternative strategies that the organization should consider implementing. Record these strategies in the top row of the QSPM. Group the strategies into mutually exclusive sets if possible. Step 4: Determine the Attractiveness Scores (AS), defined as numerical values that indicate the relative attractiveness of each strategy considering a single external or internal factor. Attractiveness Scores (AS) are determined by examining each key external or internal factor, one at a time, and asking the question, “Does this factor affect the choice of strategies being made?” If the answer to this question is yes, then the strategies should be compared relative to that key factor. Specifically, AS should be assigned to each strategy to indicate the relative attractiveness of one strategy over others, considering the particular factor. The range for AS is 1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive. By “attractive,” we mean the extent

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Table 8-6 A QSpM for a Retail Computer Store STRATEgiCAlTERnATiVES

Key Factors

1

2

Buynewlandand BuildnewlargerStore

Fully renovate existing Store

Weight

AS

TAS

AS

TAS

1. Population of city growing 10%

0.10

4

0.40

2

0.20

2. Rival computer store opening one mile away

0.10

2

0.20

4

0.40

3. Vehicle traffic passing store up 12%

0.08

1

0.08

4

0.32

4. Vendors average six new products/year

0.05

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5. Senior citizen use of computers up 8%

0.05

6. Small business growth in area up 10%

0.05

7. Desire for websites up 18% by realtors

0.04

8. Desire for websites up 12% by small firms

0.03

1. Best Buy opening new store nearby in one year

0.15

4

2. Local university offers computer repair

0.08

3. New bypass for Hwy 34 in one year will divert traffic

0.12

4

0.48

4. New mall being built nearby

0.08

2

0.16

5. Gas prices up 14%

0.04

6. Vendors raising prices 8%

0.03

Opportunities

Threats

Total

0.60

3

0.45

— 1

0.12

4

0.32

1.00

Strengths 1. Inventory turnover increased from 5.8 to 6.7

0.05

2. Average customer purchase increased from $97 to $128

0.07

2

3. Employee morale is excellent

0.10

4. In-store promotions resulted in 20% increase in sales

0.05

5. Newspaper advertising expenditures increased 10%

0.02

6. Revenues from repair/service segment of store up 16%

0.15

4

7. In-store technical support personnel have MIS college degrees

0.05

8. Store’s debt-to-total-assets ratio declined to 34%

0.03

4

9. Revenues per employee up 19%

0.02

1. Revenues from software segment of store down 12%

0.10

2. Location of store negatively impacted by new Highway 34

0.15

4

0.60

1

0.15

3. Carpet and paint in store somewhat in disrepair

0.02

1

0.02

4

0.08

4. Bathroom in store needs refurbishing

0.02

1

0.02

4

0.08

5. Revenues from businesses down 8%

0.04

3

0.12

4

0.16

6. Store has no website

0.05

7. Supplier on-time delivery increased to 2.4 days

0.03

8. Often customers have to wait to check out

0.05

2

0.14

4

0.28

— 0.60

3

0.45

— 0.12

2

0.06

Weaknesses

Total

1.00

0.10 3.64

4

0.20 3.27

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that one strategy, compared to others, enables the firm to either capitalize on the strength, improve on the weakness, exploit the opportunity, or avoid the threat. Work row by row in developing a QSPM. If the answer to the previous question is no, indicating that the respective key factor has no effect on the specific choice being made, then do not assign AS to the strategies in that set. Use a dash to indicate that the key factor does not affect the choice being made. Note: If you assign an AS score to one strategy, then assign an AS score(s) to the other—in other words, if one strategy receives a dash—then all others must receive a dash in a given row. Also, in the Excel template provided at www. strategyclub.com, zeros are used instead of dashes. Step 5: Compute the Total Attractiveness Scores. Total Attractiveness Scores (TAS) are defined as the product of multiplying the weights (Step 2) by the AS (Step 4) in each row. The TAS indicate the relative attractiveness of each alternative strategy, considering only the impact of the adjacent external or internal critical success factor. The higher the TAS, the more attractive the strategic alternative (considering only the adjacent critical success factor). Step 6: Compute the Sum Total Attractiveness Score. Add TAS in each strategy column of the QSPM. The Sum Total Attractiveness Scores (STAS) reveal which strategy is most attractive in each set of alternatives. Higher scores indicate more attractive strategies, considering all the relevant external and internal factors that could affect the strategic decisions. The magnitude of the difference between the STAS in a given set of strategic alternatives indicates the relative desirability of one strategy over another. In Table 8-6, two alternative strategies—(1) buy new land and build new larger store and (2) fully renovate existing store—are being considered by a computer retail store. Note by the Sum Total Attractiveness Scores of 3.64 versus 3.27 that the analysis indicates the business should buy new land and build a new larger store. Note the use of dashes to indicate which factors do not affect the strategy choice being considered. If a particular factor affects one strategy, but not the other, it affects the choice being made, so AS should be recorded for both strategies. Never rate one strategy and not the other. Note also in Table 8-6 that there are no consecutive 1s, 2s, 3s, or 4s across any row in a QSPM; never assign the same AS score across a row. Always prepare a QSPM working row by row. Also, if you have more than one strategy in the QSPM, then let the AS scores range from 1 to “the number of strategies being evaluated.” This will enable you to have a different AS score for each strategy. These are all important guidelines to follow in developing a QSPM. In actual practice, the store did purchase the new land and build a new store; the business also did some minor refurbishing until the new store was operational. There should be a rationale for each AS score assigned. Note in the first row of Table 8-6 that the “Population of city growing 10 percent” opportunity could be capitalized on best by Strategy 1, “Buy New Land and Build New, Larger Store,” so an AS score of 4 was assigned to Strategy 1. Attractiveness Scores, therefore, are not mere guesses; they should be rational, defensible, and reasonable. Mathematically, the AS score of 4 in row 1 suggests Strategy 1 is 100 percent more attractive than Strategy 2, whose AS score was 2 (since 4 – 2 = 2 and 2 divided by 2 = 100 percent).

Positive Features and Limitations of the QSPM A positive feature of the QSPM is that sets of strategies can be examined sequentially or simultaneously. For example, corporate-level strategies could be evaluated first, followed by division-level strategies, and then function-level strategies. There is no limit to the number of strategies that can be evaluated or the number of sets of strategies that can be examined at once using the QSPM. Another positive feature of the QSPM is that it requires strategists to integrate pertinent external and internal factors into the decision process. Developing a Quantitative Strategic Planning Matrix makes it less likely that key factors will be overlooked or weighted inappropriately. It

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draws attention to important relationships that affect strategy decisions. Although developing a QSPM requires Attractiveness Scores (AS) decisions, those small decisions enhance the probability that the final strategic decisions will be best for the organization. A QSPM can be used by small and large, for-profit and nonprofit organizations.7 The Quantitative Strategic Planning Matrix has two limitations. First, it always requires informed judgments regarding AS scores, but quantification is helpful throughout the strategicplanning process to minimize halo error and various biases. Attractiveness Scores are not mere guesses. Be reminded that a 4 is 33 percent more important than a 3; making good small decisions is important for making good big decisions, such as deciding among various strategies to implement. Second, a limitation of the QSPM is that it can be only as good as the prerequisite information and matching analyses on which it is based.

Cultural Aspects of Strategy Analysis and Choice As defined in Chapter 6, organizational culture includes the set of shared values, beliefs, attitudes, customs, norms, rites, rituals, personalities, heroes, and heroines that describe a firm. Culture is the unique way an organization does business. It is the human dimension that creates solidarity and meaning, and it inspires commitment and productivity in an organization when strategy changes are made. All human beings have a basic need to make sense of the world, to feel in control, and to make meaning. When events threaten meaning, individuals react defensively. Managers and employees may even sabotage new strategies in an effort to recapture the status quo. For these reasons, it is beneficial to view strategy analysis and choice from a cultural perspective, because success often rests on the degree of support that strategies receive from a firm’s culture. If a firm’s strategies are supported by an organization’s culture, then managers often can implement changes swiftly and easily. However, if a supportive culture does not exist and is not cultivated, then strategy changes may be ineffective or even counterproductive. A firm’s culture can become antagonistic to new strategies, and the result of that antagonism may be confusion and disarray. Strategies that require fewer cultural changes may be more attractive because extensive changes can take considerable time and effort. Whenever two firms merge, it becomes especially important to evaluate and consider culture-strategy linkages. Organizational culture can be the primary reason for difficulties a firm encounters when it attempts to shift its strategic direction, as the following statement explains: Not only has the “right” corporate culture become the essence and foundation of corporate excellence, but success or failure of needed corporate reforms hinges on management’s sagacity and ability to change the firm’s driving culture in time and in tune with required changes in strategies.8

The Politics of Strategy Analysis and Choice All organizations are political. Unless managed, political maneuvering consumes valuable time, subverts organizational objectives, diverts human energy, and results in the loss of some valuable employees. Sometimes political biases and personal preferences get unduly embedded in strategy choice decisions. Internal politics affect the choice of strategies in all organizations. The hierarchy of command in an organization, combined with the career aspirations of different people and the need to allocate scarce resources, guarantees the formation of coalitions of individuals who strive to take care of themselves first and the organization second, third, or fourth. Coalitions of individuals often form around key strategy issues that face an enterprise. A major responsibility of strategists is to guide the development of coalitions, to nurture an overall team concept, and to gain the support of key individuals and groups of individuals. In the absence of objective analyses, strategy decisions too often are based on the politics of the moment. With development of improved strategy-formation analytical tools, political factors become less important in making strategic decisions. In the absence of objectivity, political

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factors sometimes dictate strategies, and this is unfortunate. Managing political relationships is an integral part of building enthusiasm and esprit de corps in an organization. A classic study of strategic management in nine large corporations examined the political tactics of successful strategists.9 Successful strategists were found to let weakly supported ideas and proposals die through inaction and to establish additional hurdles or tests for strongly supported ideas considered unacceptable but not openly opposed. Successful strategists kept a low political profile on unacceptable proposals and strived to let most negative decisions come from subordinates or a group consensus, thereby reserving their personal vetoes for big issues and crucial moments. Successful strategists did a lot of chatting and informal questioning to stay abreast of how things were progressing and to know when to intervene. They led strategy but did not dictate it. They gave few orders, announced few decisions, depended heavily on informal questioning, and sought to probe and clarify until a consensus emerged. Successful strategists generously and visibly rewarded key thrusts that succeeded. They assigned responsibility for major new thrusts to champions, the individuals most strongly identified with the idea or product and whose futures were linked to its success. They stayed alert to the symbolic impact of their own actions and statements so as not to send false signals that could stimulate movements in unwanted directions. Successful strategists ensured that all major power bases within an organization were represented in, or had access to, top management. They interjected new faces and new views into considerations of major changes. This is important because new employees and managers generally have more enthusiasm and drive than employees who have been with the firm a long time. New employees do not see the world the same old way; nor do they act as screens against changes. Successful strategists minimized their own political exposure on highly controversial issues and in circumstances in which major opposition from key power centers was likely. In combination, these findings provide a basis for managing political relationships in an organization. Because strategies must be effective in the marketplace and capable of gaining internal commitment, the following tactics used by politicians for centuries can aid strategists: 1. Achieving desired results is more important that imposing a particular method; therefore, consider various methods and choose, whenever possible, the one(s) that will afford the greatest commitment from employees/managers. 2. Achieving satisfactory results with a popular strategy is generally better than trying to achieve optimal results with an unpopular strategy. 3. Often, an effective way to gain commitment and achieve desired results is to shift from specific to general issues and concerns. 4. Often, an effective way to gain commitment and achieve desired results is to shift from short-term to long-term issues and concerns. 5. Middle-level managers must be genuinely involved in and supportive of strategic decisions, because successful implementation will hinge on their support.10

Boards of Directors: Governance Issues A board of directors is a group of individuals elected by the ownership of a corporation to have oversight and guidance over management and to look out for shareholders’ interests. The act of oversight and direction is referred to as governance. The National Association of Corporate Directors defines governance as “the characteristic of ensuring that long-term strategic objectives and plans are established and that the proper management structure is in place to achieve those objectives, while at the same time making sure that the structure functions to maintain the corporation’s integrity, reputation, and responsibility to its various constituencies.” Boards are held accountable for the entire performance of an organization. Boards of directors are increasingly sued by shareholders for mismanaging their interests. New accounting rules in the United States and Europe now enhance corporate-governance codes and require much more extensive financial disclosure among publicly held firms. The roles and duties of a board of directors can be divided into four broad categories, as indicated in Table 8-7. Shareholders are increasingly wary of boards of directors. Most directors globally have ended their image as rubber-stamping friends of CEOs. Boards are more autonomous than

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Table 8-7 Board of Director Duties and Responsibilities 1. CONTROL AND OVERSIGHT OVER MANAGEMENT a. Select the Chief Executive Officer (CEO). b. Sanction the CEO’s team. c. Provide the CEO with a forum. d. Ensure managerial competency. e. Evaluate management’s performance. f. Set management’s salary levels, including fringe benefits. g. Guarantee managerial integrity through continuous auditing. h. Chart the corporate course. i. Devise and revise policies to be implemented by management. 2. ADHERENCE TO LEGAL PRESCRIPTIONS a. Keep abreast of new laws. b. Ensure the entire organization fulfils legal prescriptions. c. Pass bylaws and related resolutions. d. Select new directors. e. Approve capital budgets. f. Authorize borrowing, new stock issues, bonds, and so on. 3. CONSIDERATION OF STAKEHOLDERS’ INTERESTS a. Monitor product quality. b. Facilitate upward progression in employee quality of work life. c. Review labor policies and practices. d. Improve the customer climate. e. Keep community relations at the highest level. f. Use influence to better governmental, professional association, and educational contacts. g. Maintain good public image. 4. ADVANCEMENT OF STOCKHOLDERS’ RIGHTS a. Preserve stockholders’ equity. b. Stimulate corporate growth so that the firm will survive and flourish. c. Guard against equity dilution. d. Ensure equitable stockholder representation. e. Inform stockholders through letters, reports, and meetings. f. Declare proper dividends. g. Guarantee corporate survival.

ever and continually mindful of and responsive to legal and institutional-investor scrutiny. Boards are more cognizant of auditing and compliance issues and more reluctant to approve excessive compensation and perks. Boards stay much more abreast today of public scandals that attract shareholder and media attention. Increasingly, boards of directors monitor and review executive performance carefully without favoritism to executives, representing shareholders rather than the CEO. Boards are more proactive today, whereas in years past they were often merely reactive. These are all reasons why the chair of the board of directors should not also serve as the firm’s CEO. In North America, the number of new incoming CEOs that also serve as Chair of the Board has declined to about 10 percent today from about 50 percent in 2001. Academic Research Capsule 8-2 reveals “how many” board of director members are ideal. Until recently, individuals serving on boards of directors did most of their work sitting around polished mahogany tables. However, Hewlett-Packard’s directors, among many others, now log on to their own special board website twice a week and conduct business based on

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AcADemic reseArcH cApsuLe 8-2

How Many Board of Directors Members Are Ideal? Recent research reveals that companies with fewer board members outperform larger boards, largely because having fewer directors facilitates deeper debates, more nimble decision making, and greater accountability. For example, there are only 8 members on Apple’s board, and Apple is doing great. Recent research reveals that among companies with a market capitalization of at least $10 billion, smaller boards produced substantially higher shareholder returns between 2011 and 2014. Research also shows that 9-person boards perform much better, for example, than 14to 15-member boards. As a result of this recent research, many companies are reducing their number of board members. Another benefit of fewer board members is that CEOs are more often reprimanded (or dismissed) if needed. Dr. David Yermack, a finance professor at New York University’s business school, reports that smaller boards are generally more decisive, more cohesive, more hands-on, and have more informal meetings and fewer committees. Netflix is another example of a company with a small board,

only 7 members, who debate extensively before approving important management moves. Netflix is doing great. In contrast, Eli Lilly & Co. has 14 board members who find it “too big to encourage the kinds of discussions you want, because drilling down on different issues simply takes too long; members feel constrained even asking a second or third question.” Bank of America has 15 directors—too many to be efficient. In addition, the chair of the board should rarely, if ever, be the same person as the CEO, as discussed. In summary, companies should seek to reduce their board of directors to fewer than 10 persons, whenever possible—and strategy students should examine this issue in their assigned case companies. Source: Based on Joann Lublin, “Are Smaller Boards Better for Investors?” Wall Street Journal, August 27, 2014. Also based on Den Favaro, Per-Ola Karlsson, and Gary Neilson, “The $112 Billion CEO Succession Problem,” Strategy + Business, PwC Strategy (May 4, 2015).

extensive confidential briefing information posted there by the firm’s top management team. Then the board members meet face-to-face fully informed every two months to discuss the biggest issues facing the firm. New board involvement policies are aimed at curtailing lawsuits against board members. Today, boards of directors are composed mostly of outsiders who are becoming more involved in organizations’ strategic management. The trend in the United States is toward much greater board member accountability with smaller boards, now averaging 12 members rather than 18 as they did a few years ago. BusinessWeek recently evaluated the boards of most large U.S. companies and provided the following “principles of good governance”: 1. Never have more than two of the firm’s executives (current or past) on the board. 2. Never allow a firm’s executives to serve on the board’s audit, compensation, or nominating committee. 3. Require all board members to own a large amount of the firm’s equity. 4. Require all board members to attend at least 75 percent of all meetings. 5. Require the board to meet annually to evaluate its own performance, without the CEO, COO, or top management in attendance. 6. Never allow the CEO to be chairperson of the board. 7. Never allow interlocking directorships (where a director or CEO sits on another director’s board).11 Jeff Sonnerfeld, associate dean of the Yale School of Management, comments, “Boards of directors are now rolling up their sleeves and becoming much more closely involved with management decision making.” Company CEOs and boards are required to personally certify financial statements; company loans to company executives and directors are illegal; and there is faster reporting of insider stock transactions. Just as directors place more emphasis on staying informed about an organization’s health and operations, they are also taking a more active role in ensuring that publicly issued documents are accurate representations of a firm’s status. Failure to accept responsibility for auditing or evaluating a firm’s strategy is considered a serious breach of a director’s duties. Legal suits are becoming more common against directors for fraud, omissions, inaccurate disclosures, lack of due diligence, and culpable ignorance about a firm’s operations.

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impLicAtions for strAtegists This chapter has revealed six new matrices widely used by strategists to gain and sustain a firm’s competitive advantages, the core purpose of strategic planning, as illustrated in Figure 8-14. Five of the six are matching tools, SWOT, SPACE, BCG, IE, and GRAND, coupled with the single decision-making tool, QSPM. Whereas some consulting firms and some textbooks advocate using only one or two matrices in strategic planning, our experience is that all six tools introduced in this chapter are uniquely valuable. Coupled with the External Factor Evaluation Matrix, the Competitive Profile Matrix, and the Internal Factor Evaluation Matrix from earlier

chapters, the nine tools together give strategists the best means for leading a firm down the narrow path to success. Rarely is the path to success wide or easy, due to parity, commoditization, imitation, duplication, substitute products, global competitors, and the willingness and ability of consumers to switch allegiances and loyalties. Employees expect strategists to formulate a superior “game plan,” so their hard work implementing the strategic plan will yield job security, good compensation, and ultimately happiness for employees.

Establish A Clear Vision & Mission

Evaluate & Monitor Results: Take Corrective Actions; Adapt To Change

Gain & Sustain Competitive Advantages

Formulate Strategies: Collect, Analyze, & Prioritize Data Using Matrices; Establish A Clear Strategic Plan

Implement Strategies: Establish Structure; Allocate Resources; Motivate & Reward; Attract Customers; Manage Finances

Figure 8-14 How to Gain and Sustain Competitive Advantages

impLicAtions for stuDents In preparing the strategy-formulation matrices presented in this chapter, it is important to avoid “wild guesses,” but at the same time to become comfortable with “excellent estimates,” as needed, based on research, to move forward with appropriate matrices. Sometimes students are so accustomed (due to their accounting and finance classes especially) to being counted wrong if their answer is

off at the third decimal place, that it takes a while in a strategic management class to realize that businesses make “excellent estimates based on research” all the time, because no one is sure what tomorrow will bring. So, if you can make reasonable estimates, move forward with particular matrices. For example, with the BCG Matrix, if segment information is not provided, enter only a single circle in the

CHAPTER8 • STRATEgygEnERATionAndSElECTion

matrix for the overall firm, rather than two or more circles for the divisions. But be mindful that multiple circles could be included based on the number of stores, or the number of customers, rather than traditional dollar revenue numbers, so do not rush to the conclusion that portfolio information is not available. To generate and decide on alternative strategies that will best gain and sustain competitive advantages, your SWOT, SPACE, BCG, IE, Grand, and QSPM need to be developed accurately. However, in covering those matrices in an oral presentation, focus more on the implications of those analyses than the nuts-and-bolts calculations. In other words, as you go through those matrices in a presentation, your goal is not to prove to the class that you did the calculations correctly. They expect accuracy and clarity and certainly you should

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have that covered. It is the implications of each matrix that your audience will be most interested in, so use these matrices to pave the way for your recommendations with costs, which generally come just a page or two deeper into the project. A good rule of thumb is to spend at least an equal amount of time on the implications as the actual calculations of each matrix when presented. This approach will improve the delivery aspect of your presentation or paper by maintaining the high interest level of your audience. Focusing on implications rather than calculations will also encourage questions from the audience when you finish. Silence from an audience is a bad sign because silence could mean your audience was asleep, disinterested, or did not feel you did a good job. Also, utilize the free Excel student template at www.strategyclub.com as needed.

The Sarbanes-Oxley Act resulted in scores of boardroom overhauls among publicly traded companies. Board audit committees must now have at least one financial expert as a member, and meet 10 or more times per year, rather than 3 of 4 times as they did prior to the act. The act put an end to the “country club” atmosphere of most boards and shifted power from CEOs to directors. Although aimed at public companies, the act has also had a similar impact on privately owned companies. A board of directors should conduct an annual strategy audit in much the same fashion that it reviews the annual financial audit. Recent research reveals that about 31 percent of boards of directors have served a decade or longer, and there is a movement nationwide to replace highly tenured board members with fresh, new talent.12 Many companies have a mandatory retirement age of 75 for board members, but analysts expect that age limit to drop due to new technological prowess and the tendency to investigate new ideas. Women make up only 19.2 percent of board members at companies in the S&P 500, but in 2014, 29 percent of new board members appointed were women, and the number of companies with no women on the board dropped to 18 from 25 the prior year.13 Analysts say it is no longer acceptable for a company to have zero board members who are women. For example, Twitter’s board was all men at the time of its initial public offering (IPO) and this fact drew widespread criticism, and makes a firm more vulnerable to discrimination lawsuits.

Chapter Summary The essence of strategy formulation is an assessment of whether an organization is doing the right things and how it can be more effective in what it does. Every organization should be wary of becoming a prisoner of its own strategy, for even the best strategies become obsolete sooner or later. Regular reappraisal of strategy helps management avoid complacency. Objectives and strategies should be consciously developed and coordinated and should not merely evolve out of day-to-day operating decisions. An organization with no sense of direction and no coherent strategy precipitates its own demise. When an organization does not know where it wants to go, it usually ends up some place it does not want to be. Every organization needs to consciously establish and communicate clear objectives and strategies. Any organization, whether military, product-oriented, serviceoriented, governmental, or even athletic, must develop and execute good strategies to win. A good offense without a good defense, or vice versa, usually leads to defeat. Developing strategies that use strengths to capitalize on opportunities could be considered an offense, whereas strategies designed to improve on weaknesses while avoiding threats could be termed defensive. Every organization has some external opportunities and threats and internal strengths and weaknesses that can be aligned to formulate feasible alternative strategies.

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Modern strategy-formulation tools and concepts described in this chapter are integrated into a practical three-stage framework. Tools such as the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and QSPM can significantly enhance the quality of strategic decisions, but they should never be used to dictate the choice of strategies. Behavioral, cultural, and political aspects of strategy generation and selection are always important to consider and manage. Because of increased legal pressure from outside groups, boards of directors are assuming a more active role in strategy analysis and choice. This is a positive trend for organizations.

MyManagementLab® To complete the problems with the

, go to EOC Discussion Questions in the MyLab.

Key Terms and Concepts Aggressive Quadrant (p. 255) Attractiveness Scores (AS) (p. 267) board of directors (p. 271) Boston Consulting Group (BCG) Matrix (p. 258) business portfolio (p. 258) cash cows (p. 259) champions (p. 271) competitive position (CP) (p. 254) Competitive Quadrant (p. 257) Conservative Quadrant (p. 257) decision stage (p. 250) Defensive Quadrant (p. 257) directional vector (p. 255) dogs (p. 260) financial position (FP) (p. 254) governance (p. 271) Grand Strategy Matrix (p. 265) halo error (p. 250) industry growth rate (p. 259) industry position (IP) (p. 254)

input stage (p. 250) Internal-External (IE) Matrix (p. 261) matching (p. 251) matching stage (p. 250) Quantitative Strategic Planning Matrix (QSPM) (p. 266) question marks (p. 259) relative market share position (RMSP) (p. 258) SO strategies (p. 251) stability position (SP) (p. 254) stars (p. 259) Strategic Position and Action Evaluation (SPACE) Matrix (p. 254) strategy-formulation analytical framework (p. 250) Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix (p. 251) ST strategies (p. 252) Sum Total Attractiveness Scores (STAS) (p. 269) Total Attractiveness Scores (TAS) (p. 269) WO strategies (p. 252) WT strategies (p. 252)

Issues for Review and Discussion 8-1. Unilever has done really well for decades. How does Unilever do so well? How can they continue to prosper? 8-2. Give an internal and external strength of Unilever. Show how those two factors are related to reveal a feasible alternative strategy. 8-3. What do you believe are the three major external opportunities that Unilever faces?

8-4. Develop a SPACE Matrix for Unilever. Explain the implications of your Matrix. 8-5. Develop a BCG Matrix for Unilever. Explain the implications of your Matrix. 8-6. Develop a QSPM for Unilever that includes two strategies, six internal factors, and six external factors. What strategy appears to be best for Unilever to pursue?

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8-7. Do a Google search using the key terms “boards of directors.” What new information did you learn that was not given in the chapter? 8-8. In preparing a SPACE Matrix, which axis would the European political and economic unrest fall under? 8-9. In preparing a BCG Matrix, what would be the best range for the IGR axis as applied to the beverage industry? 8-10. List four reasons why the IE Matrix is widely considered to be superior to the BCG Matrix. 8-11. Is there a limit to the number of strategies that could be examined in a QSPM? Why? 8-12. Go to Adidas’ website and examine what you can find about the company’s board of directors. Evaluate Adidas’ board based on guidelines presented in the chapter. 8-13. Explain why the CEO of a firm should not also be chairperson of the board of directors. 8-14. In preparing a QSPM, what should be done if the TAS for each strategy are identical? 8-15. Understand the “Implications for Students” section and discuss what is to be in mind while preparing strategyformulation matrices. 8-16. Develop a Grand Strategy Matrix for Unilever and include one rival firm. 8-17. Explain what should be done if the SPACE vector coordinate point is (0,0). 8-18. Why is it important to work row by row instead of column by column in preparing a QSPM? 8-19. When constructing a SPACE Matrix, would it be appropriate to use a 1 to 10 scale for all axes? 8-20. If Unilever has the leading market share in Russia, where along the top axis of a BCG Matrix would their Russia Operations be plotted? 8-21. Develop a SWOT Matrix for yourself. 8-22. Why is “matching” internal with external factors such an important strategic management activity? 8-23. Illustrate the strategy formulation framework that includes three stages and nine analytical tools. Which stage and tool do you feel is most important? Why? 8-24. Develop an example SWOT Matrix for your college or university with two items in each quadrant. Make sure your strategies clearly exemplify “matching” and show this with (S1, T2) type notation. 8-25. Develop an example SPACE Matrix for a global company that you are familiar with. Include two factors for each of the four axes (SP, IP, SP, and CP). 8-26. What would be an appropriate SP rating for Unilever? 8-27. Discuss the pros and cons of divulging divisional information to stakeholders. 8-28. Develop an example BCG Matrix for a company that has three divisions with revenues of 4, 8, and 12 and profits of 5, 3, and 2, respectively.

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8-29. Develop a SPACE Matrix for a firm that is a weak competitor competing in a slow growing and unstable industry. Label axes and quadrants clearly. 8-30. Discuss the limitations of a BCG analysis and the limitations of a SPACE analysis. 8-31. Prepare an IE Matrix for a company with two divisions that have 30 and 60 in revenues to go with 10 and 15 in profits. 8-32. Develop a Grand Strategy Matrix with two example companies in each quadrant, i.e., companies that you know something about and that you would place in those quadrants. 8-33. Develop a QSPM for yourself—given two strategies: 1) go to graduate school or 2) begin working full-time. 8-34. Would a QSPM analysis be useful without the weight column? Why or why not? 8-35. Discuss the characteristics of successful strategists in terms of political factions within the firm. 8-36. In order of attractiveness to you, rank the political Tactics presented in Chapter 9. 8-37. For a business in your city, list in order of importance the top eight board-of-director duties and responsibilities listed in the chapter. 8-38. Discuss the pros and cons of Sweden’s new board-of director rule regarding women. 8-39. Develop a SPACE Matrix for your college or university. 8-40. Develop a BCG Matrix for your college or university. 8-41. Explain the limitations of the BCG, SPACE, and SWOT. 8-42. Develop a QSPM for a local company that you are familiar with. 8-43. Write a short essay that reveals your recommendations to firms, regarding disclosure of financial information. 8-44. Explain why a before and after BCG and IE analysis can be useful in presenting a strategic plan for consideration. 8-45. Find an example of a company, on the Internet, which has both a Cash Cow and a Question Mark division. 8-46. Regarding a Grand Strategy Matrix, identify two companies that would be located in your judgment in each quadrant—identify eight firms total. 8-47. For a non-profit company, list in order of importance the top 10 board-of-director duties and responsibilities. 8-48. Regarding the principles of good governance in the chapter, list in order of importance the top seven guidelines. 8-49. List some limitations of the SPACE Matrix. 8-50. Since 40.2 percent of all cigarettes sold are Marlboro, followed by 12.2 percent for Newport, what is Newport’s relative market share position in a BCG Matrix sense? 8-51. How many board of directors members are ideal?

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MyManagementLab® Go to the Assignments section of your MyLab to complete these writing exercises. 8-52. Explain the steps involved in developing a QSPM. 8-53. How are the SWOT Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix similar? How are they different?

AssurAnce of LeArning exercises exercise 8A

Should Unilever Penetrate Southeast Asia Further? Purpose Unilever is featured in the opening chapter case as a firm that engages in excellent strategic planning. Unilever is the world’s third-largest consumer goods company (behind Procter & Gamble and Nestlé). Some of Unilever’s best selling brands are Aviance, Ben & Jerry’s, Dove, Flora/Becel, Hellmann’s, Knorr, Lipton, Lux/Radox, Omo/Surf, Sunsilk, Toni & Guy, VO5, Wall’s, and PG Tips. The purpose of this exercise is to give you experience investigating a particular region of the world to determine whether a firm should expand more into that region of the world. Unilever has recently begun construction of a new factory in Yangon, Myanmar, and by 2015 expects to provide direct and indirect employment for over 2,000 people in Myanmar. The company currently employs close to 200 Myanmar employees at its factory in Thailand, of which a number are being moved back to Myanmar to help kick-start its operations in the country.

Instructions Step 1 Step 2 Step 3

Go to the Unilever website and download the company’s most recent Annual Report. Examine the narrative and tables related to their operations in Southeast Asia. Research the competitive climate and business culture of Myanmar and two other countries in Southeast Asia as well as the operations of rival Nestlé. Develop six recommendations for Unilever based on your assessment of their present and potential operations in Southeast Asia.

exercise 8B

Perform a SWOT Analysis for Unilever’s Global Operations Purpose Unilever’s global and domestic business segments could be required to submit a SWOT analysis annually to corporate top executives who merge divisional analyses into an overall corporate analysis. This exercise will give you practice performing a SWOT analysis.

Instructions Step 1 Step 2 Step 3

Step 4

Review Unilever’s global operations as described in the company’s most recent Annual Report. Unilever recently acquired 82 percent of the Russia-based beauty company Kalina. Review industry and competitive information pertaining to Unilever’s global operations, especially as compared to rival Procter & Gamble. Join with two other students in class. Together, develop a global SWOT Matrix for Unilever’s global business segment. Follow all the SWOT guidelines provided in the chapter, including (S4, T3)-type notation at the end of each strategy. Include three strategies in each of the four (SO, ST, WT, WO) quadrants. Avoid generic strategy terms such as Forward Integration. Turn in your team-developed SWOT Matrix to your professor for a class work grade.

exercise 8c

Prepare a BCG Matrix for Unilever Purpose This exercise will give you practice preparing both a by-product and a by-region-based BCG Matrix. Unilever has four major product segments of the company: Personal Care, Food, Refreshment, and

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Home Care. The company also has three major geographic segments: Europe, The Americas, and Asia/AMET/RUB.

Instructions Step 1 Step 2 Step 3

Review Unilever’s global operations as described in the company’s most recent Annual Report and Form 10K. Prepare a up-to-date BCG matrices for Unilever’s 1) four product categories and 2) three geographic divisions. Write a two-page executive summary to reveal the strategic implications of your analyses.

exercise 8D

Develop a SWOT Matrix for Nestlé S.A. Purpose The most widely used strategy formulation technique among firms worldwide is the SWOT Matrix. This exercise requires development of a SWOT Matrix for Nestlé. Matching key external and internal factors in a SWOT Matrix requires good intuitive and conceptual skills. You will improve with practice in developing a SWOT Matrix.

Instructions Recall from Exercise 7B that you already may have determined Nestlé’s external opportunities/threats and internal strengths/weaknesses. This information could be used to complete this exercise. Follow the steps outlined as follows: Step 1 Step 2 Step 3

Step 4

On a separate sheet of paper, construct a large nine-cell diagram that will represent your SWOT Matrix. Appropriately label the cells. Record Nestlé’s opportunities/threats and strengths/weaknesses in your diagram. Match key external and internal factors to generate feasible alternative strategies for Nestlé. Record SO, WO, ST, and WT strategies in appropriate cells of the SWOT Matrix. Use the proper notation to indicate the rationale for the strategies. Try to include four strategies in each of the four strategy cells. Compare your SWOT Matrix to other students’ SWOT Matrices. Discuss any major differences.

exercise 8e

Develop a SPACE Matrix for Nestlé S.A. Purpose Should Nestlé pursue aggressive, conservative, competitive, or defensive strategies? Develop a SPACE Matrix for Nestlé to answer this question. Elaborate on the strategic implications of your directional vector. Be specific in terms of strategies that could benefit Nestlé.

Instructions Step 1 Step 2 Step 3

Join with two other persons in your class and develop a joint SPACE Matrix for Nestlé. Diagram your SPACE Matrix on the board. Compare your matrix with other teams’ matrices. Discuss the implications of your SPACE Matrix.

exercise 8f

Develop a BCG Matrix for Nestlé S.A. Purpose Portfolio matrices are widely used by multidivisional organizations to help identify and select strategies to pursue. A BCG analysis identifies particular divisions that should receive fewer resources than others. It may identify some divisions to be divested. This exercise can give you practice developing a BCG Matrix.

Instructions Step 1

Place the following five column headings at the top of a separate sheet of paper: Divisions, Revenues, Profits, Relative Market Share Position, and Industry Growth Rate. Down the far

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Step 2 Step 3

left of your page, list Nestlé’s by-product segments. Turn back to the Cohesion Case and find information to fill in all the cells in your data table. Complete 1) a BCG and 2) an IE Matrix for Nestlé. Compare your BCG Matrix to other students’ matrices. Discuss any major differences.

exercise 8g

Develop a QSPM for Nestlé S.A. Purpose This exercise can give you practice developing a Quantitative Strategic Planning Matrix (QSPM) to determine the relative attractiveness of various strategic alternatives.

Instructions Step 1 Step 2

Step 3

Join with two other students in class to develop a joint QSPM for Nestlé. Go to the board and record your strategies and their Sum Total Attractiveness Scores. Compare your team’s strategies and sum total attractiveness scores to those of other teams. Be sure not to assign the same AS score in a given row. Recall that dashes should be inserted all the way across a given row when used. Discuss any major differences.

exercise 8H

Develop a SPACE Matrix for Unilever Purpose Should Unilever pursue aggressive, conservative, competitive, or defensive strategies? Develop a SPACE Matrix for Unilever to answer this question. Elaborate on the strategic implications of your directional vector. Be specific in terms of strategies that could benefit Unilever.

Instructions Step 1 Step 2 Step 3

Join with two other persons in class and develop a joint SPACE Matrix for Unilever. Diagram your SPACE Matrix on the board. Compare your matrix with other teams’ matrices. Discuss the implications of your SPACE Matrix.

exercise 8i

Develop a BCG Matrix for Your College or University Purpose Developing a BCG Matrix for many nonprofit organizations, including colleges and universities, is a useful exercise. Of course, there are no profits for each division or department—and in some cases no revenues. However, be creative in performing a BCG Matrix. For example, the pie slice in the circles can represent the number of majors receiving jobs on graduation, the number of faculty teaching in that area, or some other variable that you believe is important to consider. The size of the circles can represent the number of students majoring in particular departments or areas.

Instructions Step 1 Step 2 Step 3

Develop a BCG Matrix for your university. Include all academic schools, departments, or colleges. Diagram your BCG Matrix on the blackboard. Discuss differences among the BCG Matrices on the board.

exercise 8j

Develop a QSPM for a Company That You Are Familiar with Purpose This exercise can give you practice developing a Quantitative Strategic Planning Matrix (QSPM) to determine the relative attractiveness of various strategic alternatives.

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Instructions Step 1 Step 2

Step 3

Join with two other students in class to develop a joint QSPM for a company that all of you are familiar with. Record your strategies and their Sum Total Attractiveness Scores. Compare your team’s strategies and sum total attractiveness scores to those of other teams. Be sure not to assign the same AS score in a given row. Recall that dashes should be inserted all the way across a given row when used. Discuss any major differences.

exercise 8k

Formulate Individual Strategies Purpose Individuals and organizations are alike in many ways. Each has competitors, and each should plan for the future. Every individual and organization faces some external opportunities and threats and has some internal strengths and weaknesses. Both individuals and organizations establish objectives and allocate resources. These and other similarities make it possible for individuals to use many strategic management concepts and tools. This exercise is designed to demonstrate how the SWOT Matrix can be used by an individual to plan his or her future. As one nears completion of a college degree and begins interviewing for jobs, planning can be particularly important.

Instructions Construct a SWOT Matrix. Include what you consider to be your major external opportunities, your major external threats, your major strengths, and your major weaknesses. An internal weakness may be a low grade point average. An external opportunity may be that your university offers a graduate program that interests you. Match key external and internal factors by recording in the appropriate cell of the matrix alternative strategies or actions that would allow you to capitalize on your strengths, overcome your weaknesses, take advantage of your external opportunities, and minimize the impact of external threats. Be sure to use the appropriate matching notation in the strategy cells of the matrix. Because every individual (and organization) is unique, there is no one right answer to this exercise.

mini-cAse on HyunDAi motor compAny (Hymtf)

HOW WOULD A BCG FOR HYUNDAI LOOK LIKE? Hyundai Motor Company is a large multinational automotive manufacturer based in Seoul, South Korea, that also owns a 32.8 percent of Kia Motors. Currently the fourth largest vehicle manufacturer in the world, Hyundai operates the world’s largest integrated automobile manufacturing facility in Ulsan, South Korea. With around 75,000 employees globally, Hyundai sells automobiles across 193 countries with the help of around 6,000 dealerships and showrooms. In August 2015, the five largest auto brands in China are Volkswagen, General Motors, Nissan Motor, Hyundai Motor, and Toyota Motor. Among these five companies, only Toyota is on track to meet its full-year 2015 target, while Hyundai is performing the worst. Specifically, in the first-half of 2015, Toyota’s China sales rose 10 percent, on track to meet their 20 percent full-year’s growth target. In contrast, Hyundai’s China sales fell 8 percent although the company has a 3 percent full-year growth target. Hyundai recently posted its lowest monthly China sales figure in four years, selling

Source: © ronfromyork. Shutterstock

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54,160 cars in July, 2015, down 32 percent from a year ago. Hyundai Motor stock price dropped 4.1 percent in Seoul in one day due to weak China data and strong Korean won. Currency movements of the won versus the Japanese yen and the Chinese yuan heavily impact automobile sales. Questions

1. On a BCG Matrix for Hyundai, what would be the RMSP value for company’s operations in South Korea? 2. On a BCG Matrix for Hyundai, what would be an appropriate IGR value for the company’s operations in China? 3. HYMTF stock sold for $39 on 21 August, 2015. If the stock price rises 39 percent as expected, what would the price become? Source: Based on company documents from automobile companies.

Current Readings Barton, Dominic, and Mark Wiseman. “Where Boards Fall Short.” Harvard Business Review (January–February 2015). Beckman, Christine M., et al. “Relational Pluralism in De Novo Organizations: Boards of Directors as Bridges or Barriers to Diverse Alliance Portfolios?” Academy of Management Journal 57, no. 2 (2014): 460–483. Donaldson, Lex, Steven D. Charlier, and Jane X. J. Qiu. “Corrigendum to Organizational Portfolio Analysis: Focusing on Risk Inside the Corporation.” Long Range Planning 45, no. 4 (2012): 235–257. Hacklin, F., B. Battistini, and G. Von Krogh. “Strategic Choices in Converging Industries.” MIT Sloan Management Review 55, no. 1 (2013): 65–73. Joseph, John, William Ocasio, and Mary-Hunter McDonnell. “The Structural Elaboration of Board Independence: Executive Power, Institutional Logics, and the Adoption of CEO-Only Board Structures in U.S. Corporate

Governance.” Academy of Management Journal 57 (December 2014): 1834–1858. Misangyi, Vilmos F., and Abhijith G. Acharya. “Substitutes or Complements? A Configurational Examination of Corporate Governance Mechanisms.” Academy of Management Journal 57 (December 2014): 1681–1705. Reuer, J. J., E. Klijn, and C. S. Lioukas.“Board Involvement in International Joint Ventures.” Strategic Management Journal, 35, no. 11 (November 2014): 1626–1644. Tihanyi, Laszio, Scott Graffin, and Gerard George. “Rethinking Governance in Management Research.” Academy of Management Journal 57 (December 2014): 1535–1543. Zhu, David H., and James D Westphal. “How Directors’ Prior Experience with Other Demographically Similar CEOs Affects Their Appointments onto Corporate Boards and the Consequences for CEO Compensation.” Academy of Management Journal 57, no. 3 (2014): 791–813.

Endnotes 1. R. T. Lenz, “Managing the Evolution of the Strategic Planning Process,” Business Horizons 30, no. 1 (January– February 1987): 37. 2. Robert Grant, “The Resource-Based Theory of Competitive Advantage: Implications for Strategy Formulation,” California Management Review (Spring 1991): 114. 3. Heinz Weihrich, “The TOWS Matrix: A Tool for Situational Analysis,” Long Range Planning 15, no. 2 (April 1982): 61. Note: Although Dr. Weihrich first modified SWOT analysis to form the TOWS matrix, the acronym SWOT is much more widely used than TOWS in practice. See also Marilyn Helms and Judy Nixon, “Exploring SWOT Analysis—Where Are We Now?”

Journal of Strategy and Management 3, no. 3 (2010): 215–251. 4. Greg Dess, G. T. Lumpkin, and Alan Eisner, Strategic Management: Text and Cases (New York: McGraw-Hill/ Irwin, 2006), 72. 5. Adapted from H. Rowe, R. Mason, and K. Dickel, Strategic Management and Business Policy: A Methodological Approach (Reading, MA: AddisonWesley, 1982), 155–156. 6. Fred David, “The Strategic Planning Matrix—A Quantitative Approach,” Long Range Planning 19, no. 5 (October 1986): 102; Andre Gib and Robert Margulies, “Making Competitive Intelligence Relevant to the User,” Planning Review 19, no. 3 (May–June 1991): 21.

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7. Meredith E. David, Forest R. David, and Fred R. David, “The QSPM: A New Marketing Tool,” Presented at the International Academy of Business and Public Administration Disciplines (IABPAD) Meeting in Dallas, Texas, April 2015. 8. Y. Allarie and M. Firsirotu, “How to Implement Radical Strategies in Large Organizations,” Sloan Management Review 26, no. 3 (Spring 1985): 19. Another excellent article is P. Shrivastava, “Integrating Strategy Formulation with Organizational Culture,” Journal of Business Stratgegy 5, no. 3 (Winter 1985): 103–111. 9. James Brian Quinn, Strategies for Changes: Logical Incrementalism (Homewood, IL: Irwin, 1980), 128–145.

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11. 12. 13.

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These political tactics are listed in A. Thompson and A. Strickland, Strategic Management: Concepts and Cases (Plano, TX: Business Publications, 1984), 261. William Guth and Ian Macmillan, “Strategy Implementation versus Middle Management SelfInterest,” Strategic Management Journal 7, no. 4 (July– August 1986): 321. Louis Lavelle, “The Best and Worst Boards,” BusinessWeek, October 7, 2002, 104–110. Joann Lublin, “Boards’ Longtimers Face Pressure to Move On,” Wall Street Journal, December 24, 2014, B6. Rachel Feintzeig, “Changes Ahead for Women on Boards,” Wall Street Journal, January 13, 2015, B1.

Source: © hansenn/Fotolia

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Strategy Implementation LeArning oBjectives After studying this chapter, you should be able to do the following: 9-1. 9-2. 9-3. 9-4. 9-5. 9-6. 9-7. 9-8. 9-9. 9-10. 9-11.

Identify and describe strategic marketing issues vital for strategy implementation. Explain why social media marketing is an important strategy-implementation tool. Explain why market segmentation is an important strategy-implementation tool. Explain how to use product positioning (perceptual mapping) as a strategyimplementation tool. Identify and describe strategic finance/accounting issues vital for strategy implementation. Perform EPS/EBIT analysis to evaluate the attractiveness of debt versus stock as a source of capital to implement strategies. Develop projected financial statements to reveal the impact of strategy recommendations. Determine the cash value of any business using four corporate evaluation methods. Discuss IPOs, keeping cash offshore, and issuing corporate bonds as strategic decisions that face many firms. Discuss the nature and role of research and development (R&D) in strategy implementation. Explain how management information systems (MISs) impact strategy-implementation efforts.

AssurAnce of LeArning exercises The following exercises are found at the end of this chapter: exercise 9A exercise 9B exercise 9c exercise 9D exercise 9e exercise 9f exercise 9g

Prepare an EPS/EBIT Analysis for Royal Dutch Shell Plc Develop a Product-Positioning Map for Nestlé S.A. Perform an EPS/EBIT Analysis for Nestlé S.A. Prepare Projected Financial Statements for Nestlé S.A. Determine the Cash Value of Nestlé S.A. Develop a Product-Positioning Map for Your College Do Banks Require Projected Financial Statements?

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S

trategies can be implemented successfully only when an organization markets its goods and services effectively and raises needed working capital. This chapter examines marketing, finance/accounting, research and development (R&D), and management information systems (MIS) issues that are central to effective strategy implementation. Special topics include market segmentation, market positioning, evaluating the worth of a business, determining to what extent debt or stock should be used as a source of capital, developing projected financial statements, contracting R&D outside the firm, and creating an information support system. Manager and employee involvement and participation are essential for success in marketing, finance and accounting, R&D, and MIS activities. A football quarterback can call the best play possible in the huddle, but that does not mean the play will go for a touchdown. The team may even lose yardage unless the play is executed (implemented) well. Royal Dutch Shell (Shell) is implementing strategies especially well, as described below. Strategy implementation generally impacts the lives of everyone in an organization. In some situations, individuals may not have participated in the strategy-formulation process at all and may not appreciate or understand the thought that went into strategy formulation, nor accept the work required for strategy implementation. There may even be foot dragging or resistance on their part. Managers and employees who do not understand the business and are not committed to the business may attempt to sabotage strategy-implementation efforts in hopes that the organization will return to its old ways. The strategy-implementation stage of the strategic-management process is highlighted in Figure 9-1 as illustrated with white shading.

Strategic Marketing Issues Countless marketing variables affect the success or failure of strategy implementation efforts. Some strategic marketing issues or decisions are as follows: 1. How to make advertisements more interactive to be more effective 2. How to take advantage of Facebook and Twitter conservations about the company and industry

exempLAry compAny showcAseD

Royal Dutch Shell Plc (RDS.A) On September 2015, Royal Dutch Shell (Shell) announced the termination of its oil drilling activities in the Arctic offshore of Alaska. Incorporated in the United Kingdom but headquartered in the Netherlands, Shell ranks second globally among the largest oil and gas companies. It has worldwide reserves of the equivalent of 14.2 billion barrels of oil. Oman, Nigeria, and the United Kingdom account for most of Shell’s crude oil production, but the company is also spending a lot on converting oil sands in Alberta to synthetic oil through its Athabasca Oil Sands Project. With operations across 90 countries and in 44,000 gas stations, Shell is regarded as the world’s largest retail fuel network. Vertically integrated, Shell explores, produces, refines, transports, and sells oil related products and chemicals. Upstream, Downstream, and Corporate are the three primary segments that the company has. Exploring for and retrieving crude oil and natural gas constitutes Shell’s Upstream segment along with the liquefaction and transportation of gas, producing wind energy, and using oil sands to extract bitumen. The production, supply, and distribution and marketing activities for

Shell’s oil products and chemicals are taken care of by its Downstream segment. The Corporate segment includes all support functions, such as operations, legal, accounting, and maintenance. For the second quarter of 2015, Shell’s revenues were USD 70,969.53 million and the firm reported earnings of USD 3,907.14 million, and an EPS of USD 1.22. All of these numbers represented a significant drop from the prior year period, as oil and gas prices globally dropped significantly due to rising levels of supply coupled with lower demand. Source: Based on company documents.

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Chapter 2: Outside-USA Strategic Planning

The Internal Audit Chapter 6

Vision and Mission Analysis Chapter 5

Types of Strategies Chapter 4

Strategy Generation and Selection Chapter 8

Strategy Implementation Chapter 9

Strategy Execution Chapter 10

Strategy Monitoring Chapter 11

The External Audit Chapter 7

Chapter 3: Ethics, Social Responsibility, and Sustainability

Strategy Formulation

Strategy Implementation

Strategy Evaluation

Figure 9-1 A Comprehensive Strategic-Management Model Source: Fred R. David, adapted from “How Companies Define Their Mission,” Long Range Planning 22, no. 3 (June 1988): 40, © Fred R. David.

3. 4. 5. 6. 7. 8.

To use exclusive dealerships or multiple channels of distribution To use heavy, light, or no TV advertising versus online advertising To limit (or not) the share of business done with a single customer To be a price leader or a price follower To offer a complete or limited warranty To reward salespeople based on straight salary, commission, or a combination salary and commission

Three marketing activities especially important in strategy implementation are listed below and then discussed: 1. Engage customers in social media. 2. Segment markets effectively. 3. Develop and use product-positioning/perceptual maps.

Social Media Marketing Social media marketing has become an important strategic issue. Marketing has evolved to be more about building a two-way relationship with consumers than just informing consumers about a product or service. Marketers increasingly must get customers involved in the company

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website and solicit suggestions in terms of product development, customer service, and ideas. The company website should enable customers to interact with the firm on the following social media networks (listed along with the estimated number of current users in millions): Facebook (1,200), Google Plus (500), Twitter (400), LinkedIn (300), Instagram (200), Pinterest (100), and Foursquare (50). To manage this process, larger companies have hired a social media manager(s) to be the voice of the company on social and digital media sites. The manager(s) responds to comments and problems, track negative or misleading statements, manage the online discussion about a firm, and gather valuable information about opinions and desires—all of which can be vital for monitoring strategy implementation progress and making appropriate changes. The online community of customers increasingly mirrors the offline community but is much quicker, cheaper, and effective to reach than traditional focus groups and surveys. Successful strategy implementation requires a firm to know what people are saying about it and its products. Customers are talking about and creating valuable content around every brand through blog posts, tweets, e-mails, and conversations with family and friends. Instead of ignoring or trying to quash “amateur content,” or trying to drown it out with “professional advertisements,” the best firms today embrace amateurs’ opinions, desires, and feelings—because they are the firms’ customers. They learn from and leverage amateur content to improve the authenticity of their marketing communication. Four example companies that do an excellent job of social media marketing are as follows: 1. SpaceX (https://www.facebook.com/SpaceX); (https://twitter.com/SpaceX) • Includes live broadcasts of rocket launches and pictures from space. 2. Zappos (https://www.facebook.com/zappos) • Does a great job of engaging its audience on social media. 3. Starbucks (https://twitter.com/Starbucks) • Launched “Tweet a Coffee” to engage customers and build awareness of brand. 4. JetBlue (https://twitter.com/JetBlue/) • Questions and concerns are answered promptly, and the account is used to keep customers up-to-date, especially when travel conditions get complicated. Companies and organizations should encourage their employees to create wikis—websites that allow users to add, delete, and edit content regarding frequently asked questions and information across the firm’s whole value chain of activities. The most common wiki is Wikipedia, but wikis are user-generated content. Anyone can change the content in a wiki but the group and other editors can change the content submitted. Firms benefit immensely by providing incentives to customers to share their thoughts, opinions, and experiences on the company website. Encourage customers to network among themselves on topics of their choosing on the company website. The company website must not be just about the company—it must be all about the customer too. Perhaps offer points, discounts, or coupons on the website for customers who provide ideas, suggestions, or feedback. Drive traffic to the company website, and then keep customers at the website for as long as possible with daily new material, updates, excitement, and offers. Encourage and promote customer participation and interaction. Customers trust other customers’ opinions more than a company’s marketing pitch, and the more they talk freely, the more the firm can learn how to improve its product, service, and marketing. Marketers should monitor blogs daily to determine, evaluate, and influence opinions being formed by customers. Customers must not feel like they are a captive audience for advertising at a firm’s website. Table 9-1 provides new principles of marketing according to Parise, Guinan, and Weinberg.1 Wells Fargo and Bank of America tweet (Twitter.com) customers to describe features of bank products. Some banks are placing marketing videos on YouTube. UMB Financial of Kansas City, Missouri, tweets about everything from the bank’s financial stability to the industry’s prospects. Steve Furman, Discover’s director of e-commerce, says the appeal of social networking is that it provides “pure, instant” communication with customers.2 Although the exponential increase in social networking has created huge opportunities for marketers, it also has produced some severe threats. Perhaps the greatest threat is that any kind of negative publicity travels fast online. Seemingly minor ethical and questionable actions can catapult these days into huge public relations problems for companies as a result of the monumental online social and business communications.

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Table 9-1 The New Principles of Marketing 1. 2. 3. 4. 5. 6.

Do not just talk at consumers—work with them throughout the marketing process. Give consumers a reason to participate. Listen to—and join—the conversation outside your company’s website. Resist the temptation to sell, sell, sell. Instead attract, attract, attract. Do not control online conversations; let it flow freely. Find a “marketing technologist,” a person who has three excellent skill sets (marketing, technology, and social interaction). 7. Embrace instant messaging and chatting. Source: Based on Salvatore Parise, Patricia Guinan, and Bruce Weinberg, “The Secrets of Marketing in a Web 2.0 World,” Wall Street Journal, December 15, 2008, R1.

Increasingly, people living in underdeveloped and poor nations around the world have smartphones, but oftentimes no computers. This is opening up even larger markets to online marketing. People in remote parts of Indonesia, Egypt, and Africa represent the fastest-growing customer base for many companies, including Opera Software ASA, a Norwegian maker of Internet browsers for mobile devices. People ages 18 to 27 spend more time weekly on the Internet than watching television, listening to the radio, and watching DVDs combined. Most companies have come to the realization that social networking and video sites are better means of reaching customers than spending so many marketing dollars on traditional yellow pages, television, magazine, radio, or newspaper ads. New companies such as Autonet Mobile based in San Francisco are selling new technology equipment for cars so that everyone in the vehicle can be online except, of course, the driver. This technology is accelerating the movement from hard media to web-based media. With this technology, when the vehicle drives into a new location, information on shows, museums, hotels, and other attractions in the location can be instantly downloaded. Digital advertising spending on social media and mobile devices increased nearly 17 percent to $50 billion in the United States in 2014, comprising 28 percent of total ad spending in the nation; however, about 36 percent of all traffic on the Internet is fake, being the result of bogus computers programmed to visit websites to take advantage of marketers who typically pay for ads whenever they are loaded when a user visits a webpage, regardless if the user is an actual person.3 Criminals can erect websites and deliver phony traffic and collect payments from advertisers through middlemen, oftentimes in third-world countries. This fraud problem is becoming so severe that Bob Liodice, CEO of the Association of National Advertisers, observes, “The total digital-media ad budget is being questioned and totally challenged; marketers want to spend more money in digital, but until there is more transparency on how their money is being spent, many hold back.”4 The ad-fraud detection firm White Ops reports that more than $6 billion of online ads in the United States annually are paid to “fraudsters.” Digital advertising is here to stay, no doubt, but there is a need to be increasingly careful of automated (fake) systems/websites/individuals securing your ad monies.

Market Segmentation Market segmentation and product positioning rank as marketing’s most important contributions to strategic management. Market segmentation can be defined as the subdividing of a market into distinct subsets of customers according to needs and buying habits. For example, eBay recently initiated a new market segmentation strategy to target consumers under 18 years old. “We’re definitely looking at ways to legitimately bring younger people in,” said Devin Wenig at eBay. “We won’t allow a 15-year-old unfettered access to the site. We would want a parent, an adult, as a ride-along. But the age 18 and up group [is] an increasingly savvy and desirable consumer segment for us.” Market segmentation is important in strategy implementation for at least three major reasons. First, strategies such as market development, product development, market penetration,

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Table 9-2 The Marketing Mix Component Variables Product

Place

Promotion

Price

Quality Features and options Style Brand name Packaging Product line Warranty Service level Other services

Distribution channels Distribution coverage Outlet location Sales territories Inventory levels and locations Transportation carriers

Advertising Personal selling Sales promotion Publicity

Level Discounts and allowances Payment terms

Source: Based on E. Jerome McCarthy, Basic Marketing: A Managerial Approach, 9th ed. (Homewood, IL: Richard D. Irwin, Inc., 1987), 37–44. Used with permission.

and diversification require increased sales through new markets and products. To implement these strategies successfully, new or improved market-segmentation approaches are required. Second, market segmentation allows a firm to operate with limited resources because mass production, mass distribution, and mass advertising are not required. Market segmentation enables a small firm to compete successfully with a large firm by maximizing per-unit profits and per-segment sales. And third, market segmentation decisions directly affect marketing mix variables: product, place, promotion, and price, as indicated in Table 9-2. Geographic and demographic bases for segmenting markets are the most commonly employed, as illustrated in Table 9-3. Evaluating potential market segments requires strategists to determine the characteristics and needs of consumers, to analyze consumer similarities and differences, and to develop consumer group profiles. Segmenting consumer markets is generally much simpler and easier than segmenting industrial markets, because industrial products, such as electronic circuits and forklifts, have multiple applications and appeal to diverse customer groups. Segmentation is a key to matching supply and demand, which is one of the thorniest problems in customer service. Segmentation often reveals that large, random fluctuations in demand actually consist of several small, predictable, and manageable patterns. Matching supply and demand allows factories to produce desirable levels without extra shifts, overtime, and subcontracting. Matching supply and demand also minimizes the number and severity of stock-outs. The demand for hotel rooms, for example, can be dependent on foreign tourists, businesspersons, and vacationers. Focusing separately on these three market segments, however, can allow hotel firms to more effectively predict overall supply and demand. Banks now are segmenting markets to increase effectiveness. “You’re dead in the water if you aren’t segmenting the market,” observes Anne Moore, president of a bank consulting firm in Atlanta. The Internet makes market segmentation easier today because consumers naturally form “communities” on the Web. To aid in segmenting markets and targeting specific groups of customers, companies commonly tag each of their active customers with three “retention” values: •

Tag 1: Is this customer at high risk of canceling the company’s service? One of the most common indicators of high-risk customers is a drop off in usage of the company’s service. For example, in the credit card industry this could be signaled through a customer’s decline in spending on his or her card. Tag 2: Is this customer worth retaining? This determination boils down to whether the postretention profit generated from the customer is predicted to be greater than the cost incurred to retain the customer. Customers need to be managed as investments. Tag 3: What retention tactics should be used to retain this customer? For customers who are deemed “save-worthy,” it is essential for the company to know which save tactics are most likely to be successful. Tactics commonly used range from providing “special” customer discounts to sending customers communications that reinforce the value proposition of the given service.5

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Table 9-3 Alternative Bases for Market Segmentation Variable

typical Breakdowns

Geographic Region County Size City Size

Density Climate

Pacific, Mountain, West North Central, West South Central, East North Central, East South Central, South Atlantic, Middle Atlantic, New England A, B, C, D Under 5,000; 5,000–20,000; 20,001–50,000; 50,001–100,000; 100,001– 250,000; 250,001–500,000; 500,001–1,000,000; 1,000,001–4,000,000; 4,000,001 or over Urban, suburban, rural Northern, southern

Demographic Age Gender Family Size Family Life Cycle

Income Occupation

Education Religion Race Nationality

Under 6, 6–11, 12–19, 20–34, 35–49, 50–64, 65+ Male, female 1–2, 3–4, 5+ Young, single; young, married, no children; young, married, youngest child under 6; young, married, youngest child 6 or over; older, married, with children; older, married, no children under 18; older, single; other Under $10,000; $10,001–$15,000; $15,001–$20,000; $20,001–$30,000; $30,001–$50,000; $50,001–$70,000; $70,001–$100,000; over $100,000 Professional and technical; managers, officials, and proprietors; clerical and sales; craftspeople; foremen; operatives; farmers; retirees; students; housewives; unemployed Grade school or less; some high school; high school graduate; some college; college graduate Catholic, Protestant, Jewish, Islamic, other White, Asian, Hispanic, African American American, British, French, German, Scandinavian, Italian, Latin American, Middle Eastern, Japanese

Psychographic Social Class Personality

Lower lowers, upper lowers, lower middles, upper middles, lower uppers, upper uppers Compulsive, gregarious, authoritarian, ambitious

Behavioral Use Occasion Benefits Sought User Status Usage Rate Loyalty Status Readiness Stage Attitude toward Product

Regular occasion, special occasion Quality, service, economy Nonuser, ex-user, potential user, first-time user, regular user Light user, medium user, heavy user None, medium, strong, absolute Unaware, aware, informed, interested, desirous, intending to buy Enthusiastic, positive, indifferent, negative, hostile

Source: Adapted from Philip Kotler, Marketing Management: Analysis, Planning and Control, © 1984: 256. Adapted by permission of Prentice-Hall, Inc., Upper Saddle River, New Jersey.

The idea with retention-based segmentation is to examine and compare the attributes of active customers with the attributes of prior customers in order to better target potential customers with similar attributes. Using the theory that “birds of a feather flock together,” the approach is based on the assumption that active customers will have similar retention outcomes as those of their comparable predecessor. This whole process is possible through business analytics or data mining. People all over the world are congregating into virtual communities on the web by becoming members, customers, and visitors of websites that focus on an endless range of topics. People

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essentially segment themselves by nature of the websites that comprise their “favorite places,” and many of these websites sell information regarding their “visitors.” Businesses and groups of individuals all over the world pool their purchasing power in websites to get volume discounts. Through its Connect feature, Facebook uses a type of mobile advertising that targets consumers based on the apps they use from their phones. Connect lets users log into millions of websites and apps with their Facebook identity, so the company then targets ads based on that data. Facebook can also track what people do on their apps. Google uses similar means to gather (and sell) market segmentation data.

Product Positioning and Perceptual Mapping After markets have been segmented so that the firm can target particular customer groups, the next step is to find out what customers want and expect. This takes analysis and research. A severe mistake is to assume the firm knows what customers want and expect. Countless research studies reveal large differences between how customers define service and rank the importance of different service activities versus how companies view services. Many firms have become successful by filling the gap between what customers versus companies see as good service. What the customer believes is good service is paramount, not what the producer believes service should be. Product positioning (sometimes called perceptual mapping) entails developing schematic representations that reflect how products or services compare to those of the competitors on dimensions most important to success in the industry. Product positioning is widely used for deciding how to meet the needs and wants of particular consumer groups. The technique can be summarized in five steps: 1. 2. 3. 4.

Select key criteria that effectively differentiate products or services in the industry. Diagram a two-dimensional product-positioning map with specified criteria on each axis. Plot major competitors’ products or services in the resultant four-quadrant matrix. Identify areas in the positioning map where the company’s products or services could be most competitive in the given target market. Look for vacant areas (niches). 5. Develop a marketing plan to position the company’s products or services appropriately. Because just two criteria can be examined on a single product-positioning (perceptual) map, multiple maps are often developed to assess various approaches to strategy implementation. Multidimensional scaling could be used to examine three or more criteria simultaneously, but this technique is beyond the scope of this text. Some rules for using product positioning as a strategy-implementation tool are the following: 1. Look for the hole or vacant niche, which is a segment of the market currently not being served. 2. Do not serve two segments with the same strategy. Usually, a strategy successful with one segment cannot be directly transferred to another segment. 3. Do not position yourself in the middle of the map. The middle usually indicates a strategy that is not clearly perceived to have any distinguishing characteristics. This rule can vary with the number of competitors. For example, when there are only two competitors, as in U.S. presidential elections, the middle becomes the preferred strategic position.6 An effective product-positioning strategy meets two criteria: (1) it uniquely distinguishes a company from the competition and (2) it leads customers to expect slightly less service than a company can deliver. Network Equipment Technology is an example of a company that keeps customer expectations slightly below perceived performance. This is a constant challenge for marketers. Firms need to inform customers about what to expect and then exceed the promise. Underpromise and overdeliver! That is a key for excellent strategy implementation. The product positioning map, or perceptual map, in Figure 9-2 shows consumer perceptions of various automobiles on the two dimensions of sporty and conservative and classy and affordable. This sample of consumers felt Porsche was the sportiest and classiest of the cars in the study (top right corner) and Plymouth was the most practical and conservative (bottom left corner). Car manufacturers focus their marketing efforts on various target groups, or design features in their vehicles, based on research and survey information illustrated in perceptual maps. Perceptual maps can aid marketers in being more effective in spending money to promote products. Products, brands, or companies positioned close to one another are perceived as similar

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Classy Distinctive

Lincoln Mercedes Cadillac

BMW

Porsche

Chrysler Oldsmobile Buick

Pontiac

Conservative

Sporty Ford

Chevy

Toyota

Dodge Plymouth

Nissan

VW

Practical Affordable

Figure 9-2 A Perceptual Map for the Automobile industry Source: Based on info at http://en.wikipedia.org/wiki/Perceptual_mapping.

on the relevant dimensions. For example, in Figure 9-2, consumers see Lincoln, Mercedes, and Cadillac as similar. They are close competitors and form a competitive grouping. A company considering the introduction of a new or improved model may look for a vacant niche on a perceptual map. Some perceptual maps use different size circles to indicate the sales volume or market share of the various competing products. Perceptual maps may also display consumers’ ideal points. These points reflect ideal combinations of the two dimensions as seen by a consumer. Dots are often used to represent one respondent’s ideal combination of the two dimensions. Areas where there is a cluster of ideal points indicates a market segment. Areas without ideal points are sometimes referred to as demand voids. A company considering introducing a new product will look for areas with a high density of ideal points. They will also look for areas without competitive rivals (a vacant niche), perhaps best done by placing both the (1) ideal points and (2) competing products on the same map. Companies commonly develop several perceptual maps to better understand competitive advantages and disadvantages versus rival companies. For example, the largest homebuilder in the United States, D. R. Horton (DRH), competes with Pulte, Lennar, KB Home, and other homebuilders. Figures 9-3, 9-4, and 9-5 reveal recently developed D. R. Horton perceptual maps. Note the author commentary provided for each illustration.

Author Commentary AuThor CoMMeNTAry oN Figure 9-3 Price versus Quality is used in a perceptual map because these two factors are often viewed as the most important considerations when purchasing a home. The average sale price per DRH home is lower than any other major homebuilders in the United States, which is why they are the lowest on the perceptual map. Oftentimes, however, being the low-cost provider can mean actual, or perceived, low quality. The map reveals that DRH is above only KB Home in quality. Quality was determined through interpreting online ratings of the companies, as well as reviewing all of the competitor’s websites for proof that quality was being provided. Note that Lennar is the closet to DRH on the Price versus Quality perceptual map. AuThor CoMMeNTAry oN Figure 9-4 When buying or building a new home, consumers not only want to make sure it can be built where they want it but also with the layout or options they desire. By comparing coverage maps of the largest homebuilders in the United States, it was concluded that DRH has the highest geographical coverage of all the competitors. Additionally,

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High Price NVR Inc.

Pulte Low Quality

High Quality

KB home Lennar

DR Horton

Low Price

Figure 9-3 A Drh Perceptual Map—Price versus Quality through a review of the homebuilder’s websites, it was determined that DRH has the largest quantity of options and layouts for new homes. Neither of these facts should come as a surprise, as DRH does hold the title of “Largest Home Builder in the USA.” Rival firms are placed accordingly on the perceptual map. Note that Lennar is the closest to DRH on the Number of Options and Layouts versus Geographical Coverage perceptual map.

High number of options and layout DR Horton

Lennar Low geographical availability

High geographical availability NVR Inc.

KB home

Pulte

Low number of options and layout

Figure 9-4 A Drh Perceptual Map—Number of options/Layouts versus geographical Availability

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High quality of customer service Pulte

Lennar Not green conscientious

NVR Inc. Green conscientious

DR Horton

KB home

Low quality of customer service

Figure 9-5 A Drh Perceptual Map—Quality of Customer Service versus extent the Firm is green Conscientious

AuThor CoMMeNTAry oN Figure 9-5 Consumers increasingly are concerned with what and from whom they are purchasing. Thus, customer service and green conscientiousness are often key factors considered by consumers. After examining online ratings of the largest homebuilders and reviewing competitor’s websites, it was determined that DRH has, at best, average customer service. There were numerous complaints at several websites, and not very many resolutions, or ways to find resolutions. Furthermore, through a review of the competitors’ websites, it appears that DRH is the least green conscientious builder among the major players. It had very little, if any, mention of green considerations, whereas some firms had very involved and detailed sections on their web pages about green building. Note that Lennar is the closest to DRH on the Quality of Customer Service versus Extent the Firm is Green Conscientious perceptual map.

Strategic Finance/Accounting Issues Several finance/accounting concepts central to strategy implementation are acquiring needed capital, developing projected financial statements, preparing financial budgets, and evaluating the worth of a business. Some examples of decisions that may require finance and accounting policies are: 1. 2. 3. 4.

To raise capital with short-term debt, long-term debt, preferred stock, or common stock To lease or buy fixed assets To determine an appropriate dividend payout ratio To use last-in, first-out (LIFO), first-in, first-out (FIFO), or a market-value accounting approach 5. To extend the time of accounts receivable 6. To establish a certain percentage discount on accounts within a specified period of time 7. To determine the amount of cash that should be kept on hand Five especially important finance/accounting activities central to strategy implementation are listed below and then discussed: 1. Acquire needed capital to implement strategies; perform EPS/EBIT analysis 2. Develop projected financial statements to show expected impact of strategies implemented

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3. Determine the firm’s value (corporate valuation) in the event an offer is received 4. Decide whether to go public with an Initial Public Offering (IPO) 5. Decide whether to keep cash offshore that was earned offshore

EPS/EBIT Analysis: Acquire Needed Capital When students complete their recommendations page with expected costs summed as part of a case analysis, or in actual practice when a firm decides what strategies to pursue at what cost, it is necessary to address the following questions: 1. Can the company obtain the needed capital via stock or debt? 2. Would common stock, bank debt, corporate bonds, or some combination be better to raise needed capital? 3. What would the firm’s projected EPS values be, given securement of the capital and implementation of the strategies? Successful strategy implementation often requires additional capital beyond net profit from operations or the sale of assets. Two primary sources of capital are debt and equity. Determining an appropriate mix of debt and equity in a firm’s capital structure is an important strategyimplementation decision. Earnings per share/earnings before interest and taxes (EPS/EBIT) analysis is the most widely used technique for determining whether debt, stock, or a combination of the two is the best alternative for raising capital to implement strategies. This technique involves an examination of the impact that debt versus stock financing has on earnings per share (EPS) under various expectations for EBIT, given specific recommendations (strategies to be implemented). Theoretically, an enterprise should have enough debt in its capital structure to boost its return on investment by applying debt to products and projects earning more than the cost of the debt. In low-earning periods, too much debt in the capital structure of an organization can endanger stockholders’ returns and jeopardize company survival. Fixed debt obligations generally must be met, regardless of circumstances. This does not mean that stock issuances are always better than debt for raising capital. When the cost of capital (interest rates) is low, debt may be better than stock to obtain capital, but the analysis still must be performed because high stock prices usually accompany low interest rates, making stock issuances attractive for obtaining capital. Some special concerns with stock issuances are dilution of ownership, effect on stock price, and the need to share future earnings with all new shareholders. Another popular way for a company to raise capital is to issue corporate bonds, which is analogous to going to the bank and borrowing money, except that with bonds, the company obtains the funds from investors rather than banks. Especially when a company’s balance sheet is strong and its credit rating excellent, issuing bonds can be an effective, and certainly an alternative way to raise needed capital. In 2014, companies around the world issued more than $1 trillion in corporate bonds, more than 4 percent higher than the prior year. Thus, even with high stock prices, the low interest rate environment enticed companies to increasingly use debt to (1) finance growth, (2) pay dividends, and (3) buy back their own stock (called treasury stock). In fact, in 2014, companies sold corporate bonds at the fastest pace ever, led by Apple, Numericable Group (a French firm), Oracle, Petrobras, Cisco, and Bank of America. Twitter recently raised $1.5 billion by offering convertible bonds in two chunks of $650 million. The word convertible means the bonds can be converted into shares of stock in some cases. Companies lately have been flocking to the convertible bond market to raise cash, as many investors look for less volatility in their investments. Medtronic, the Minneapolis medical-device-maker, recently eclipsed even Apple’s $12 billion bond sale and Alibaba’s $8 billion bond sale. Medtronic raised $17 billion selling bonds, enabling the company to finance its $43 billion purchase of Ireland’s Covidien PLC. Companies are selling bonds at a hectic rate in order to finance strategies at low interest rates, since rates are expected to climb in 2016–2017. Before explaining EPS/EBIT analysis, it is important to know that EPS is earnings per share, which is net income divided by number of shares outstanding. Another term for shares outstanding is shares issued. In addition, know that the denominator of EPS is reduced when a firm buys its own stock (treasury stock), thus increasing the overall EPS value. Also know that EBIT is earnings before interest and taxes, or as it is sometimes called, operating income. EBT is earnings before tax. EAT is earnings after tax.

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The purpose of EPS/EBIT analysis is to determine whether all debt, all stock, or some combination of debt and stock yields the highest EPS values for the firm. Earnings per share is perhaps the best measure of success of a company, so it is widely used in making the capital acquisition decision. It reflects the common “maximizing shareholders’ wealth” overarching corporate objective. By chance if profit maximization is the company’s goal, then in performing an EPS/EBIT analysis, you may focus more on the EAT row than the EPS row. Large companies may have millions of shares outstanding, so even small differences in EPS across different financing options can equate to large sums of money saved by using that highest EPS value alternative. Any number of combination debt/stock (D/S) scenarios, such as 70/30 D/S or 30/70 D/S, may be examined in an EPS/EBIT analysis. The free Excel template at www.strategyclub.com can enable easy calculation of various scenarios of financing options. Perhaps the best way to explain EPS/EBIT analysis is by working through an example for the XYZ Company, as provided in Table 9-4. Note that 100 percent stock is the best financing alternative as indicated by the EPS values of 0.0279 and 0.056. An EPS/EBIT chart can be constructed to determine the breakeven point, where one financing alternative becomes more attractive than another. Figure 9-4 reveals that issuing common stock is the best financing alternative for the XYZ Company. As noted in Figure 9-6, the top row (EBIT) on the x-axis is graphed with the bottom row (EPS) on the y-axis, and the highest plotted line reveals the best method. Sometimes the plotted lines will interact, so a graph is especially helpful in making the capital acquisition decision, rather than solely relying on a table of numbers. All analytical tools have limitations and EPS/EBIT analysis is no exception. But unless you have a comp