Description
notes of 12-edition by fred r david
CHAPTER 1
THE NATURE OF STRATEGIC MANAGEMENT
CHAPTER OUTLINE
? What is Strategic Management?
? Key Terms in Strategic Management
? The Strategic-Management Model
? Benefits of Strategic Management
? Why Some Firms Do No Strategic Planning
? Pitfalls in Strategic Planning
? Guidelines for ffecti!e Strategic Management
? Business thics and Strategic Management
? "om#aring Business and Military Strategy
? The Nature of Glo$al "om#etition
? The "ohesion "ase% Disney
CHAPTER OBJECTIVES
&fter studying this cha#ter' you should $e a$le to do the follo(ing%
)* Descri$e the strategic-management #rocess*
+* ,#lain the need for integrating analysis and intuition in strategic management*
-* Define and gi!e e,am#les of .ey terms in strategic management*
/* Discuss the nature of strategy formulation' im#lementation' and e!aluation
acti!ities*
0* Descri$e the $enefits of good strategic management*
1* ,#lain (hy good ethics is good $usiness in strategic management*
2* ,#lain the ad!antages and disad!antages of entering glo$al mar.ets*
3* Discuss the rele!ance of Sun T4u5s The Art of War to strategic management*
6* Discuss ho( a firm may achie!e sustained com#etiti!e ad!antage*
)7* ,#lain 8S9 )/777 and )/77)
CHAPTER OVERVIEW
"ha#ter ) #ro!ides an o!er!ie( of strategic management* & #ractical' integrati!e model of the
strategic-management #rocess is introduced* Basic acti!ities and terms in strategic management
are defined* The $enefits of strategic management are #resented* 8m#ortant relationshi#s $et(een
$usiness ethics and strategic management are discussed* 8n addition' the cha#ter initiates
discussion of t(o themes that are #resent throughout the te,t% glo$al considerations and the
strategic im#lications of the natural en!ironment*
)- | P a g e
VTN (Visit the Net): The website www.strategyclub.com, designed by Dr. Daid, !roides
strategic !lanning tools, tem!lates, lin"s, and information to hel! strategic management students
analy#e cases.
The first theme is that glo$al considerations im#act !irtually all strategic decisions* The
$oundaries of countries can no longer $e the $oundary of our minds* 8t has $ecome a matter of
sur!i!al for $usinesses to see and a##reciate the (orld from the #ers#ecti!e of others* The
under#innings of strategic management hinge on managers gaining an understanding of
com#etitors' mar.ets' #rices' su##liers' distri$utors' go!ernments' creditors' shareholders' and
customers (orld(ide* The #rice and :uality of a firm5s #roducts and ser!ices must $e
com#etiti!e on a (orld $asis' not ;ust a local $asis* & Glo$al Pers#ecti!e illustration is #ro!ided
in all cha#ters of this te,t to em#hasi4e the im#ortance of glo$al factors in strategic management*
& second theme e!idenced throughout this te,t is that the natural en!ironment is an im#ortant
strategic issue* Perha#s no greater threat e,ists to $usiness and society than the continuous
decimation and degradation of our natural en!ironment* This is a strategic issue that needs
immediate and su$stanti!e attention $y all $usinesses and managers* & Natural n!ironment
Pers#ecti!e is #ro!ided in all cha#ters* MS D9 N9 ST>&TG8" P8ST8"S 9F & M8SS89N ST&TMNT
&* & Declaration of &ttitude
)* & mission statement is a declaration of attitude and outloo. more than a statement
of s#ecific details* 8t is usually $road in sco#e for at least t(o reasons%
a* First' a good mission statement allo(s for the generation and consideration of
a range of feasi$le alternati!e o$;ecti!es and strategies (ithout unduly stifling
management creati!ity*
-/ | P a g e
$* Second' a mission statement needs to $e $road to effecti!ely reconcile
differences among and a##eal to an organi4ation5s di!erse sta.eholders' the
indi!iduals and grou#s of #ersons (ho ha!e a s#ecial sta.e or claim on the
com#any*
+* &n effecti!e mission statement arouses #ositi!e feelings and emotions a$out an
organi4ation? it is ins#iring in the sense that it moti!ates readers to action*
-* 8t should $e short M less than +07 (ords*
B* & "ustomer 9rientation
)* & good mission statement reflects the antici#ation of customers* >ather than
de!elo#ing a #roduct and then trying to find a mar.et' the o#erating #hiloso#hy of
organi4ations should $e to identify customers5 needs and then to #ro!ide a #roduct
or ser!ice to fulfill those needs*
+* &ccording to Gern McGinnis' mission statements should )K define (hat the
organi4ation is and (hat it as#ires to $e' +K $e limited enough to e,clude some
!entures and $road enough to allo( for creati!e gro(th' -K distinguish a gi!en
organi4ation from all others' /K ser!e as a frame(or. for e!aluating $oth current
and #ros#ecti!e acti!ities' and 0K $e stated in terms sufficiently clear to $e (idely
understood throughout the organi4ation*
-* Good mission statements identify the utility of a firm5s #roducts to its customers*
"* & Declaration of Social Policy
)* The (ords social !olicy em$race managerial #hiloso#hy and thin.ing at the
highest le!els of an organi4ation* For this reason' social #olicy affects the
de!elo#ment of a $usiness mission statement*
+* Des#ite differences in a##roaches' most &merican com#anies try to assure
outsiders that they conduct $usiness in a socially res#onsi$le (ay* The mission
statement is an effecti!e instrument for con!eying this message*
-* Ta$le +-- identifies characteristics of mission statements*
Global Perspective: Social Policies on >etirement' Ia#an Gersus the World* This $o, highlights
the challenge that many countries face as their #o#ulation ages* Some countries li.e Germany
encourage immigration to $olster their (or.forces' $ut Ia#an has offered incenti!es for its
elderly to (or. until a later age*
Teaching Tip% Four students may find it interesting to .no( that not only cor#orations find
mission statement useful* Ste!en "o!ey' the author of the highly successful $oo.' The %een
/abits of /ighly %uccessful &eo!le' has (ritten t(o $oo.s that e,#lain ho( indi!iduals and
families can use mission statements to hel# them determine (ho they are and (hat they (ant to
-0 | P a g e
accom#lish* The first $oo.' /ow to Deelo! and 'se a &ersonal 8ission %tatement' e,#lains
(hy indi!iduals should (rite mission statements to #ro!ide a sense of direction and #ur#ose for
their li!es* The second $oo.' /ow to Deelo! a >amily 8ission %tatement' a##lies the same
#rinci#les in a family conce#t* e#ort Ser!ice at Chtt#%DD(((*#rars*comE* This
ser!ice #ro!ides free access to the annual re#orts of o!er -'177 #u$lic com#anies*
G8* W>8T8NG &ND G&elations among these forces and an organi4ation are de#icted in Figure --+* ,ternal
trends and e!ents significantly affect all #roducts' ser!ices' mar.ets' and organi4ations
in the (orld*
-* "hanges in e,ternal forces translate into changes in consumer demand for $oth
industrial and consumer #roducts and ser!ices*
B* The Process of Performing an ,ternal &udit
)* The #rocess of #erforming an e,ternal audit must in!ol!e as many managers and
em#loyees as #ossi$le* &s em#hasi4ed in earlier cha#ters' in!ol!ement in the strategic-
management #rocess can lead to understanding and commitment from organi4ational
mem$ers*
+* To #erform an e,ternal audit' a com#any first must gather com#etiti!e intelligence and
information a$out social' cultural' demogra#hic' en!ironmental' economic' #olitical'
legal' go!ernmental' and technological trends*
/+ | P a g e
a* 8ndi!iduals can $e as.ed to monitor !arious sources of information such as .ey
maga4ines' trade ;ournals' and ne(s#a#ers*
$* The 8nternet is another source for gathering strategic information' as are cor#orate'
uni!ersity' and #u$lic li$raries*
c* Su##liers' distri$utors' sales#ersons' customers' and com#etitors re#resent other
sources of !ital information*
-* 9nce information is gathered' it should $e assimilated' e!aluated' and #rioriti4ed*
/* Key e,ternal factors should $e im#ortant to achie!ing long term and annual
o$;ecti!es' measura$le' a##lica$le to all com#eting firms' and hierarchical in the sense
that some (ill #ertain to the o!erall com#any (hile others (ill $e more narro(ly
focused*
Teaching Tip% Many organi4ations are scram$ling to collect information a$out ho( to conduct
$usiness on the 8nternet* The follo(ing is a list of the #remier maga4ines that are a!aila$le online that
focus on e-commerce and the 8nternet*
• Money Maga4ineChtt#%DDmoney*cnn*comDmaga4inesDmoneymagDE
• The 8ndustry Standard Chtt#%DD(((*thestandard*comDE
• >ed =erring Chtt#%DD(((*redherring*comDE
Teaching Tip% There are a num$er of 8nternet sites that #ro!ide a (ealth of information on #u$licly
traded cor#orations' including DG&> filings' com#any #ress releases' ne(s#a#er articles' and
analysts5 estimates* The follo(ing is a sam#le of the sites that are #articularly useful*
• =oo!ers 9nline Chtt#%DD(((*hoo!ers*comDE
• "BS Mar.et(atch Chtt#%DDc$s*mar.et(atch*comDE
• Morningstar*com Chtt#%DD(((*morningstar*comDE
• Motley Fool Chtt#%DD(((*fool*comDE
• FahooQ "om#any 8nformation Chtt#%DDfinance*yahoo*comDE
88* T= 8NDHST>8&< 9>G&N8R&T89N J8D9K G8W
&* ,ternal Factors !ersus 8nternal Factors
/- | P a g e
)* ,ternal factors are more im#ortant than internal factors in a firm achie!ing
com#etiti!e ad!antage* 9rgani4ational #erformance is #rimarily determined $y
industry forces*
+* Managing strategically from the 8D9 #ers#ecti!e entails firms stri!ing to com#ete in
attracti!e industries' a!oiding (ea. or faltering industries' and gaining a full
understanding of .ey e,ternal factor relationshi#s*
B* Factors &ffecting Firm Performance
)* Firm #erformance is #rimarily $ased on industry #ro#erties such as economies of
scale' $arriers to mar.et entry' #roduct differentiation' and le!el of com#etiti!eness*
+* &##ro,imately +7S of a firm5s #rofita$ility can $e e,#lained $y industry factors (hile
a$out -1S of the !ariance is attri$uted to a firm5s internal factors*
888* "9N9M8" F9>"S
&* conomic Factors =a!e a Direct 8m#act
)* conomic factors ha!e a direct im#act on the #otential attracti!eness of !arious
strategies* For e,am#le' if interest rates rise' then funds needed for ca#ital e,#ansion
$ecome more costly or una!aila$le*
+* The .ey economic !aria$les that a firm should monitor are listed in Ta$le --)* The list
includes J)K shifts to a ser!ice economy in the Hnited States? J+K a!aila$ility of credit?
J-K le!el of dis#osa$le income? J/K #ro#ensity of #eo#le to s#end? J0K interest rates? J1K
inflation rate? J2K unem#loyment trends? and so on*
-* The economic standard of li!ing !aries considera$ly across cities and countries* Ta$le
--+ illustrates the cost of li!ing in !arious cities (orld(ide* For e,am#le' a cu# of
coffee is T/*21 in To.yo $ut ;ust 6/ cents in >io de Ianeiro*
VTN (Visit the Net): htt!:$$www.h4.nasa.go$office$ns!$toc.htm e-!lains NA%A=s strategic
management !rocess and !roides NA%A=s entire strategic !lan.
/* >ussia5s conomy
a* Political $ureaucracy in >ussia se!erely limits its a$ility to de!elo# its economy*
$* Business #eo#le (ho do not cater to the go!ernment5s interests are targeted (ith
#uniti!e interference li.e audits' fines' and ins#ections*
// | P a g e
Teaching Tip% The 2conomist is a high-:uality British maga4ine that is a!aila$le online* The
maga4ine #u$lishes insightful articles on economic and #olitical issues that are of interest to $usiness
strategists Chtt#%DD(((*economist*comE*
888* S9"8&&P=8"' &ND NG8>9NMNT&< F9>"S
&* Social' "ultural' Demogra#hic' and n!ironmental 8m#act
)* Social' cultural' demogra#hic' and en!ironmental changes ha!e a ma;or im#act on
!irtually all #roducts' ser!ices' mar.ets' and customers*
+* Social' cultural' demogra#hic' and en!ironmental trends are sha#ing the (ay
&mericans li!e' (or.' #roduce' and consume* Ne( trends are creating a different ty#e
of consumer and' conse:uently' a need for different #roducts' ser!ices' and strategies*
-* Significant trends for the future include consumers $ecoming more educated' the
#o#ulation aging' minorities $ecoming more influential' #eo#le loo.ing for local
rather than federal solutions to #ro$lems' and fi,ation on youth decreasing*
/* Ta$le --+ identifies states (ith the oldest and youngest #o#ulations* Ta$le --- lists .ey
social' cultural' demogra#hic' and en!ironmental !aria$les*
Natural Environment Perspective: &merian Business ole* The 8nternet is changing the !ery nature of
o##ortunities and threats $y altering the life cycles of #roducts' increasing the s#eed of
distri$ution' creating ne( #roducts and ser!ices' erasing limitations of traditional
geogra#hic mar.ets' and changing the historical trade-off $et(een #roduction
standardi4ation and fle,i$ility*
B* To effecti!ely ca#itali4e on information technology' a num$er of organi4ations are
esta$lishing t(o ne( #ositions in their firms% chief information officer J"89K and chief
technology officer J"T9K*
Teaching Tips% There are a num$er of on-line #eriodicals that focus s#ecifically on technology related
$usiness issues* & sam#le of these maga4ines' (hich #ro!ides information to strategists in terms of
monitoring changes in their $usiness5s technological en!ironments' are as follo(s%
• "89 Chtt#%DD(((*cio*comD"89DE
• "om#uterWorld Chtt#%DD(((*com#uter(orld*comDE
• 8ntranet Iournal Chtt#%DD(((*intranet;ournal*comDE
• M8T Tech>e!ie( Chtt#%DD(((*techre!ie(*comDE
• Wired Chtt#%DD(((*(ired*comE
G8* "9MPT8T8G F9>"S
&* &n &(areness of "om#etiti!e Forces is ssential for Success
)* The to# fi!e H*S* com#etitors in four different industries are identified in Ta$le --0*
&n im#ortant #art of an e,ternal audit is identifying ri!al firms and determining their
strengths' (ea.nesses' ca#a$ilities' o##ortunities' threats' o$;ecti!es' and strategies*
/1 | P a g e
+* "ollecting and e!aluating information on com#etitors are essential for successful
strategy formulation*
-* Ta$le --1 #ro!ides .ey :uestions a$out com#etitors*
VTN (Visit the Net): www.fuld.com !roides information on the im!ortance of gathering com!etitie
information. Bt offers an audio fre4uently as"ed 4uestions section on intelligence systems.
B* "om#etiti!e 8ntelligence J"8K Programs
)* Good "8 in $usiness' as in the military' is one of the .eys to success* The more
information and .no(ledge a firm can o$tain a$out com#etitors' the more li.ely it can
formulate and im#lement effecti!e strategies*
a* What is "8? "8' as formally defined $y the Society of "om#etiti!e 8ntelligence
Professionals JS"8PK' is a systematic and ethical #rocess of gathering and
analy4ing information a$out the com#etition5s acti!ities and general $usiness
trends to further a $usiness5s o(n goals JS"8P (e$siteK*
+* Firms need an effecti!e com#etiti!e intelligence #rogram* The three $asic missions of
a "8 #rogram are J)K to #ro!ide a general understanding of an industry and its
com#etitors' J+K to identify areas in (hich com#etitors are !ulnera$le and to assesses
the im#act strategic actions (ould ha!e on com#etitors' and J-K to identify #otential
mo!es that a com#etitor might ma.e that (ould endanger a firm5s #osition in the
mar.et*
-* Hnethical tactics such as $ri$ery' (ireta##ing' and com#uter $rea.-ins should ne!er $e
used to o$tain information*
VTN (Visit the Net): www.non!rofits.org$n!ofa4$)+$,,.html describes the nature and role of strategic
!lanning in a firm.
Teaching Tip% Whis#er Num$er is an e,am#le of a (e$-$ased firm that conducts com#etiti!e
intelligence for $usiness organi4ations Chtt#%DD(((*(his#ernum$er*comE* The (e$site is interesting
and #ro!ides the most #o#ular com#anies according to indi!idual in!estors as (ell as the most
#essimistic and o#timistic e,#ectations*
"* "oo#eration &mong "om#etitors
)* Strategies that stress coo#eration among com#etitors are $eing used more* For
e,am#le' esource similarity is the e,tent to (hich the ty#e and amount of a firm5s internal
resources arecom#ara$le to a ri!al*
VTN (Visit the Net): htt!:$$www.!lanware.org$strategy.htm gies +)C !ages of e-cellent detail on
DDeelo!ing a 1usiness %trategy.E
G88* "9MPT8T8G &N&T>5S F8G-F9>"S M9D<
&* Porter5s Fi!e-Forces Model
)* Figure --- illustrates Porter5s Fi!e-Forces Model* The intensity of com#etition among
firms !aries (idely from industry to industry* Ta$le --2 re!eals the a!erage >98 for
firms in different industries*
+* &ccording to Porter' the nature of com#etiti!eness in a gi!en industry can $e !ie(ed
as a com#osite of fi!e forces*
a* >i!alry among com#etiti!e firms*
$* Potential entry of ne( com#etitors*
c* Potential de!elo#ment of su$stitute #roducts*
d* Bargaining #o(er of su##liers*
e* Bargaining #o(er of consumers*
-* These three ste#s can re!eal (hether com#etition in a gi!en industry is such that a
firm can ma.e an acce#ta$le #rofit%
a* 8dentify .ey as#ects or elements of each com#etiti!e force that im#act the firm*
$* !aluate ho( strong and im#ortant each element is for the firm*
c* Decide (hether the collecti!e strength of the elements is (orth the firm entering
or staying in the industry*
/* >i!alry among com#eting firms* 8s usually the most #o(erful of the fi!e com#etiti!e
forces* The strategies #ursued $y one firm can $e successful only to the e,tent that
they #ro!ide com#etiti!e ad!antage o!er the strategies #ursued $y ri!al firms*
0* Potential entry of ne( com#etitors* Whene!er ne( firms can easily enter a #articular
industry' the intensity of com#etiti!eness among firms increases*
/3 | P a g e
1* Potential de!elo#ment of su$stitute #roducts* 8n many industries' firms are in close
com#etition (ith #roducers of su$stitute #roducts in other industries*
2* Bargaining #o(er of su##liers* The $argaining #o(er of su##liers affects the intensity
of com#etition in an industry' es#ecially (hen there are a large num$er of su##liers'
(hen there are only a fe( good su$stitute ra( materials' or (hen the cost of s(itching
ra( materials is es#ecially costly*
3* Bargaining #o(er of consumers* When customers are concentrated' large' or $uy in
!olume' their $argaining #o(er re#resents a ma;or force affecting intensity of
com#etition in an industry* 8n #articular' consumers gain increasing $argaining #o(er
under the follo(ing circumstances%
a* 8f they can ine,#ensi!e s(itch to com#eting $rands or su$stitutes'
$* 8f they are #articularly im#ortant to the seller'
c* 8f sellers are struggling in the face of falling consumer demand'
d* 8f they are (ell informed a$out sellers5 #roducts' #rices' and costs' and
e* 8f they ha!e discretion in (hether and (hen they #urchase the #roduct*
VTN (Visit the Net): The 8ind Tools website (www.mindtools.com) gies good information about why
em!loyees may resist change.
G888* S9H>"S 9F LT>N&< 8NF9>M&T89N
&* 8nformation is &!aila$le from Both Pu$lished and Hn#u$lished Sources
)* Hn#u$lished sources include customer sur!eys' mar.et research' s#eeches at
#rofessional and shareholders5 meetings' tele!ision #rograms' inter!ie(s' and
con!ersations (ith sta.eholders*
+* Pu$lished sources of strategic information include #eriodicals' ;ournals' re#orts'
go!ernment documents' a$stracts' $oo.s' directories' ne(s#a#ers' and manuals*
B* 8nternet
)* Millions of #eo#le today use on-line ser!ices for $oth $usiness and #ersonal #ur#oses*
+* The 8nternet offers consumers and $usinesses a (idening range of ser!ices and
information resources from all o!er the (orld*
VTN (Visit the Net): htt!:$$www.csuchico.edu$mgmt$strategy gies an e-tensie slide show
!resentation about strategic management, from beginning to the end of the !rocess.
8L* F9>"&ST8NG T999F8< M&T>8L J"PMK
&* The "PM Matri,
)* The "PM' illustrated in Ta$le --6' identifies a firm5s ma;or com#etitors and their
#articular strengths and (ea.nesses in relation to a sam#le firm5s strategic #osition*
+* Ta$le --)7 #ro!ides a "om#etiti!e Profile Matri, e,am#le*
-* There are some im#ortant differences $et(een the F and "PM* First' the critical
success factors in a "PM are $roader* These factors are also not grou#ed into
o##ortunities and threats as in the F* 8n a "PM' the ratings and (eighted scores can
$e com#ared to ri!al firms*
0) | P a g e
VTN (Visit the Net): Visit the te-t=s website, www.!renhall.com$daid, for this cha!ter=s WWW
e-ercises.
0+ | P a g e
ISSUES FOR REVIEW AND DISCUSSION
1. Expla! #+" %+ )+!.0)% a! 'x%'&!al -%&a%'()7*a!a('*'!% a0.%.
&ns(er% &n effecti!e a##roach for conducting an e,ternal strategic-management audit
consists of four $asic ste#s% J)K select .ey !aria$les' J+K select .ey sources of information' J-K
use forecasting tools and techni:ues' and J/K construct an F Matri,*
2. I.'!%,$ a &')'!% ')+!+*)> -+)al> p+l%)al> +& %')#!+l+()al %&'!. %#a% -(!,)a!%l$ a,,')%-
,!a!)al !-%%0%+!-.
&ns(er%
conomicV8nterest rates remain lo(*
SocialVMany states are #assing no smo.ing ordinances*
PoliticalVastern uro#ean countries are e,#eriencing #olitical insta$ility*
TechnologicalVHse of the 8nternet is dou$ling e!ery )77 days*
6. D-)0-- %#' ,+ll+"!( -%a%'*'!%: Ma=+& +pp+&%0!%'- a!. %#&'a%- 0-0all$ &'-0l% ,&+* a!
!%'&a)%+! a*+!( 3'$ '!:&+!*'!%al %&'!.- &a%#'& %#a! ,&+* a -!(l' 'x%'&!al ':'!% +&
,a)%+&.
&ns(er% This statement is accurate* 8t re!eals ho( com#le, the e,ternal audit #art of strategy
formulation can $e* There are an infinite num$er of interactions among .ey e,ternal factors*
8. I.'!%,$ %"+ !.0-%&'- 'xp'&'!)!( &ap. %')#!+l+()al )#a!('- a!. %#&'' !.0-%&'- %#a%
a&' 'xp'&'!)!( l%%l' %')#!+l+()al )#a!('. H+" .+'- %#' !''. ,+& %')#!+l+()al ,+&')a-%!(
.,,'& ! %#'-' !.0-%&'-5 W#$5
&ns(er% The com#uter industry' communications industry' and aeros#ace industry are
e,#eriencing ra#id technological change* Three industries that are e,#eriencing little technological
change are the forest #roducts industry' the shi##ing industry' and the dairy industry*
9. U-' P+&%'&F- ,:'7,+&)'- *+.'l %+ ':al0a%' )+*p'%%:'!'-- "%#! %#' U.S. atings in the 8F indicate (hether the factor is a ma;or or
minor (ea.ness or strength* esearch and De!elo#ment
?
Management 8nformation Systems
?
Galue "hain &nalysis
?
The 8nternal Factor !aluation J8FK Matri,
CHAPTER OBJECTIVES
&fter studying this cha#ter' you should $e a$le to do the follo(ing%
)* Descri$e ho( to #erform an internal strategic-management audit*
+* Discuss the >esource-Based Gie( J>BGK in strategic management*
-* Discuss .ey interrelationshi#s among the functional areas of $usiness*
/* "om#are and contrast culture in the Hnited States !ersus other countries*
0* 8dentify the $asic functions or acti!ities that ma.e u# management' mar.eting' financeD accounting'
#roductionDo#erations' research and de!elo#ment' and management information systems*
1* ,#lain ho( to determine and #rioriti4e a firm5s internal strengths and (ea.nesses*
2* ,#lain the im#ortance of financial ratio analysis*
3* Discuss the nature and role of management information systems in strategic management*
6* De!elo# an 8F Matri,*
)7* ,#lain $enchmar.ing as a strategic management tool*
CHAPTER OVERVIEW
"ha#ter / focuses on identifying and e!aluating a firm5s strengths and (ea.nesses in the functional areas of $usiness'
including management' mar.eting' financeDaccounting' #roductionDo#erations' research and de!elo#ment' and management
information systems* >elationshi#s among these areas of $usiness and the strategic im#lications of im#ortant functional area
conce#ts are e,amined* The #rocess of #erforming an internal audit is descri$ed* Strategies are formulated that ta.e
ad!antage of an organi4ation5s internal strengths and im#ro!e u#on (ea.nesses* The >esource-Based Gie( J>BGK of
strategic management is introduced as (ell as the Galue "hain &nalysis JG"&K conce#t*
EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS
8* T= N&TH> 9F &N 8NT>N&< &HD8T
&* Strengths and Wea.nesses
06 | P a g e
)* &ll organi4ations ha!e strengths and (ea.nesses in the functional areas of $usiness* No enter#rise is
e:ually strong or (ea. in all areas* 8nternal strengthsD(ea.nesses' cou#led (ith e,ternal
o##ortunitiesDthreats and a clear statement of mission' #ro!ide the $asis for esta$lishing o$;ecti!es and
strategies*
+* The internal-audit #art of the strategic-management #rocess is illustrated in Figure /-)*
VTN (Visit the Net): htt!:$$www.!lanware.org$4uotes.htm.+ !roides 4uotes on strategic !lanning.
B* Key 8nternal Forces
)* & firm5s strengths that cannot $e easily matched or imitated $y com#etitors are called distincti!e
com#etencies* Building com#etiti!e ad!antages in!ol!es ta.ing ad!antage of distincti!e com#etencies*
+* Strategies are designed in #art to im#ro!e on a firm5s (ea.nesses' turning them into strengths' and
may$e e!en into distincti!e com#etencies*
"* The Process of Performing an 8nternal &udit
)* The #rocess of #erforming an internal audit closely #arallels the #rocess of #erforming an e,ternal audit*
>e#resentati!e managers and em#loyees from throughout the firm need to $e in!ol!ed in determining a
firm5s strengths and (ea.nesses*
+* Performing an internal audit re:uires gathering' assimilating' and e!aluating information a$out the firm5s
o#erations*
-* "om#ared to the e,ternal audit' the #rocess of #erforming an internal audit #ro!ides more o##ortunity
for #artici#ants to understand ho( their ;o$s' de#artments' and di!isions fit into the (hole organi4ation*
/* Financial ratio analysis e,em#lifies the com#le,ity of relationshi#s among the functional areas of
$usiness*
VTN (Visit the Net): htt!:$$www.state.wy.us$state$strategy$insurance.html !roides the com!lete strategic !lan for the
Wyoming Bnsurance De!artment Agency.
88* T= >S9H>"-B&SD G8W J>BGK
&* 8nternal Factors !ersus ,ternal Factors
)* The >BG ta.es the o##osing !ie( to that of the 8D9 theorists discussed in "ha#ter -* The >BG a##roach to
com#etiti!e ad!antage contends that internal resources are more im#ortant than e,ternal factors for a
firm in achie!ing and sustaining com#etiti!e ad!antage*
+* 8nternal resources come from three categories*
a* Physical resources% #lant' e:ui#ment' location' technology' ra( materials' machines' etc*
$* =uman resources% em#loyees' training' e,#erience' intelligence' .no(ledge' s.ills' a$ilities' etc*
c* 9rgani4ational resources% firm structure' #lanning #rocesses' information systems' #atents' trademar.s'
co#yrights' data$ases' etc*
B* The Basic Premise
)* The mi,' ty#e' amount' and nature of a firm5s internal resources should $e considered first and foremost
in de!ising strategies that can lead to sustaina$le com#etiti!e ad!antage*
+* Firms should #ursue strategies that are not currently $eing im#lemented $y any com#eting firm*
17 | P a g e
"* Galua$le >esources
)* >esources are only !alua$le if they ha!e one or more of the follo(ing characteristics%
a* rare
$* hard to imitate
c* not easily su$stituta$le
888* 8NTG>&T8NG ST>&TGF &ND "H[TH]
&* Strategy and "ulture
)* >elationshi#s among a firm5s functional $usiness acti!ities #erha#s can $e e,em#lified $y focusing on
organi4ational culture' an internal #henomenon that #ermeates through all de#artments and di!isions of
an organi4ation*
+* 9rgani4ational culture can $e defined as a #attern of $eha!ior de!elo#ed $y an organi4ation as it learns
to co#e (ith its #ro$lem of e,ternal ada#tation and internal integration that has (or.ed (ell enough to
$e considered !alid and to $e taught to ne( mem$ers as the correct (ay to #ercei!e' thin.' and feel*
>emar.a$ly resistant to change' culture can re#resent a ma;or strength or (ea.ness for the firm*
-* Defined in Ta$le /-)' cultural #roducts include !alues' $eliefs' rites' rituals' ceremonies' myths' stories'
legends' sagas' language' meta#hors' sym$ols' heroes' and heroines*
/* 9rgani4ational culture significantly affects $usiness decisions and thus' must $e e!aluated during an
internal strategic-management audit*
B* Hnited States !ersus Foreign "ultures
)* To successfully com#ete in (orld mar.ets' H*S* managers must o$tain a $etter .no(ledge of historical'
cultural' and religious forces that moti!ate and dri!e #eo#le in other countries*
a* 8n Ia#an' for e,am#le' $usiness relations o#erate (ithin the conte,t of wa' (hich stresses grou#
harmony and social cohesion* 8n "hina' $usiness $eha!ior re!ol!es around guian-i' or #ersonal
relations* 8n Korea' acti!ities in!ol!e concern for inhwa' or harmony $ased on res#ect of
hierarchical relationshi#s' including o$edience to authority*
$* H*S* managers ha!e a lo( tolerance for silence' (hereas &sian managers !ie( e,tended #eriods of
silence as im#ortant for organi4ing and e!aluating one5s thoughts* The $oo. lists other im#ortant
differences $et(een H*S* and foreign managers*
+* Ta$le /-+ contains an e,cellent list of cultural #itfalls that indi!iduals need to .no( (hen tra!eling in
foreign countries*
-* Pro$a$ly the $iggest o$stacle to the effecti!eness of H*S* managers' or managers from any country
(or.ing in another' is the fact that it is almost im#ossi$le to change the attitude of a foreign (or.#lace*
@The system dri!es you? you cannot fight the system or culture'A says Bill Par.er' #resident of Philli#s
Petroleum in Nor(ay*
8G* M&N&GMNT
1) | P a g e
&* The Functions of Management
)* The functions of management consist of fi!e $asic acti!ities% #lanning' organi4ing' moti!ating' staffing'
and controlling* &n o!er!ie( of these acti!ities is #ro!ided in Ta$le /--*
a* PlanningVPlanning consists of all those managerial acti!ities related to #re#aring for the future*
S#ecific tas.s include forecasting' esta$lishing o$;ecti!es' de!ising strategies' de!elo#ing #olicies'
and setting goals* Planning is most im#ortant in the strategy-formulation stage of the strategic-
management #rocess*
$* 9rgani4ingV9rgani4ing includes all those managerial acti!ities that result in a structure of tas. and
authority relationshi#s* S#ecific areas include organi4ational design? ;o$ s#eciali4ation'
descri#tions' s#ecifications' design' and analysis? s#an of the control? unity of command? and
coordination* 9rgani4ing is most im#ortant in the strategy im#lementation stage of the strategic-
management #rocess*
c* Moti!atingVMoti!ating in!ol!es efforts directed to(ard sha#ing human $eha!ior* S#ecific to#ics
include leadershi#' communication' (or. grou#s' $eha!ior modification' delegation of authority' ;o$
enrichment' and so on* Moti!ating is most im#ortant in the strategy-im#lementation stage of the
strategic-management #rocess*
d* StaffingVStaffing acti!ities are centered on #ersonnel or human resource management* 8ncluded
are (age and salary administration' em#loyee $enefits' inter!ie(ing' hiring' firing' training'
em#loyee safety' and so on* Staffing is most im#ortant in the strategy-im#lementation stage of the
strategic-management #rocess*
e* "ontrollingV"ontrolling refers to all those managerial acti!ities directed to(ard ensuring that
actual results are consistent (ith #lanned results* Key areas of concern include :uality' financial'
sales' in!entory' and e,#ense control? analysis of !ariances? re(ards? and sanctions* "ontrolling is
most im#ortant in the strategy-e!aluation stage of the strategic-management #rocess* 8t consists of
four $asic ste#s% )K esta$lishing #erformance standards' +K measuring indi!idual and organi4ational
#erformance' -K com#aring actual #erformance to #lanned #erformance standards' and /K ta.ing
correcti!e actions*
Teaching Tip% Se!eral :ui44es are a!aila$le on-line from the "enter for "oaching B Mentoring that hel# students access
their management' leadershi#' and coaching s.ills* The :ui44es' (hich are fun and insightful' are a!aila$le at the "oaching
B Mentoring (e$site at Chtt#%DD(((*coachingandmentoring*comD:ui44es*htmE*
B* Management &udit "hec.list of Nuestions
This chec.list can hel# determine s#ecific strengths and (ea.nesses* @NoA ans(ers indicate #otential
(ea.nesses' (hile @FesA ans(ers indicate areas of strength*
)* Does the firm use strategic-management conce#ts?
+* &re com#any o$;ecti!es and goals measura$le and (ell communicated?
-* Do managers at all hierarchical le!els #lan effecti!ely?
/* Do managers delegate authority (ell?
0* 8s the organi4ation5s structure a##ro#riate?
1* &re ;o$ descri#tions and s#ecifications clear?
2* 8s em#loyee morale high?
3* &re em#loyee turno!er and a$senteeism lo(?
6* &re organi4ational re(ard and control mechanisms effecti!e?
G* M&>KT8NG
&* Mar.eting
1+ | P a g e
)* Mar.eting* Mar.eting can $e descri$ed as the #rocess of defining' antici#ating' creating' and fulfilling
customers5 needs and (ants for #roducts and ser!ices* There are se!en $asic functions of mar.eting% J)K
customer analysis' J+K selling #roductsDser!ices' J-K #roduct and ser!ice #lanning' J/K #ricing' J0K
distri$ution' J1K mar.eting research' and J2K o##ortunity analysis*
+* "ustomer &nalysis* "ustomer analysisVthe e,amination and e!aluation of consumer needs' desires' and
(antsVin!ol!es administering customer sur!eys' analy4ing consumer information' e!aluating mar.et
#ositioning strategies' de!elo#ing customer #rofiles' and determining o#timal mar.et segmentation
strategies*
a* The information generated $y customer analysis can $e essential in de!elo#ing an effecti!e mission
statement*
$* Successful organi4ations continually monitor #resent and #otential customers5 $uying #atterns*
-* Selling ProductsDSer!ices* Successful strategy im#lementation generally rests on the a$ility of an
organi4ation to sell some #roduct or ser!ice* Selling includes many mar.eting acti!ities such as
ad!ertising' sales #romotion' #u$licity' and so on* Ta$le /*/ lists the firms (hich s#end the most on
ad!ertising*
/* Product and Ser!ice Planning* Product and ser!ice #lanning include acti!ities such as test mar.eting?
#roduct and $rand #ositioning? de!ising (arranties? #ac.aging? determining #roduct o#tions' #roduct
features' #roduct style' and #roduct :uality? deleting old #roducts? and #ro!iding for customer ser!ice*
a* 9ne of the most effecti!e #roduct and ser!ice #lanning techni:ues is test mar.eting*
$* "onsumer goods com#anies use test mar.eting more fre:uently than industrial goods com#anies* 8t
can allo( com#anies to a!oid su$stantial losses $y re!ealing (ea. #roducts and ineffecti!e
mar.eting a##roaches $efore large-scale #roduction $egins*
0* Pricing* Fi!e ma;or sta.eholders affect #ricing decisions% consumers' go!ernments' su##liers'
distri$utors' and com#etitors*
a* Sometimes an organi4ation (ill #ursue a for(ard integration strategy #rimarily to gain $etter control
o!er #rices charged to consumers*
$* Go!ernments can im#ose constraints on #rice fi,ing' #rice discrimination' minimum #rices' unit
#ricing' #rice ad!ertising' and #rice controls*
1* Distri$ution* Distri$ution includes (arehousing' distri$ution channels and co!erage' retail site locations'
sales territories' in!entory le!els and location' trans#ortation carriers' (holesaling' and retailing*
a* Distri$ution $ecomes es#ecially im#ortant (hen a firm is stri!ing to im#lement a mar.et
de!elo#ment or for(ard integration strategy*
$* Successful organi4ations identify and e!aluate alternati!e (ays to reach their ultimate mar.et*
2* Mar.eting >esearch* Mar.eting research is the systematic gathering' recording' and analy4ing of data
a$out #ro$lems relating to the mar.eting of goods and ser!ices*
a* Mar.eting research can unco!er critical strengths and (ea.nesses' and mar.eting researchers can
em#loy numerous scales' instruments' #rocedures' conce#ts' and techni:ues to gather information*
$* Mar.eting research acti!ities su##ort all ma;or $usiness functions*
1- | P a g e
3* 9##ortunity &nalysis* The ne,t function of mar.eting is o##ortunity analysis' (hich in!ol!es assessing
the costs' $enefits' and ris.s associated (ith mar.eting decisions*
a* Three ste#s are re:uired to #erform a costD$enefit analysis% J)K com#ute the total costs associated
(ith a decision' J+K estimate the total $enefits from the decision' and J-K com#are the total costs (ith
the total $enefits*
$* &s e,#ected $enefits e,ceed total costs' an o##ortunity $ecomes more attracti!e*
B* Mar.eting &udit "hec.list of Nuestions
)* &re mar.ets segmented effecti!ely?
+* 8s the organi4ation #ositioned (ell among com#etitors?
-* =as the firm5s mar.et share $een increasing?
/* &re #resent channels of distri$ution relia$le and cost-effecti!e?
0* Does the firm ha!e an effecti!e sales organi4ation?
1* Does the firm conduct mar.et research?
2* &re #roduct :uality and customer ser!ice good?
3* &re the firm5s #roducts and ser!ices #riced a##ro#riately?
6* Does the firm ha!e an effecti!e #romotion' ad!ertising' and #u$licity strategy?
)7* &re mar.eting #lanning and $udgeting effecti!e?
))* Do the firm5s mar.eting managers ha!e ade:uate e,#erience and training?
G8* F8N&N"D&""9HNT8NG
&* 8m#ortance of Finance and &ccounting
)* Financial condition is often considered the single $est measure of a firm5s com#etiti!e #osition and
o!erall attracti!eness to in!estors* Determining an organi4ation5s financial strengths and (ea.nesses is
essential to formulating strategies effecti!ely*
+* & firm5s li:uidity' le!erage' (or.ing ca#ital' #rofita$ility' asset utili4ation' cash flo(' and e:uity can
eliminate some strategies as $eing feasi$le alternati!es*
B* FinanceD&ccounting Functions
)* &ccording to Iames Gan =orne' the functions of financeDaccounting com#rise three decisions% the
in!estment decision' the financing decision' and the di!idend decision*
+* Basic Ty#es of Financial >atios* Financial ratios are com#uted from an organi4ation5s income statement
and $alance sheet* Trend analysis' illustrated in Figure /-+' is an e,am#le of a techni:ue that incor#orates
$oth the time and industry a!erage dimensions of financial ratios* Four ma;or sources of industry-
a!erage financial ratios are%
a* Dun B Bradstreet5s Bndustry Norms and Fey 1usiness 6atios
$* >o$ert Morris &ssociates5 Annual %tatement %tudies
c* Almanac of 1usiness G Bndustrial >inancial 6atios
d* Federal Trade "ommission >e#orts
VTN (Visit the Net): ?ahooH >inance offers financial com!any news at htt!:$$finance.yahoo.com.
-* Key Financial >atiosVTa$le /-0 lists good (e$sites for getting financial information* Ta$le /-1 #ro!ides
a summary of .ey financial ratios sho(ing ho( each ratio is calculated and (hat each ratio measures*
They can $e classified into fi!e ty#es*
1/ | P a g e
a* "= &ND DGBDK
&* 8m#ortance of >BD
)* The fifth ma;or area of internal o#erations that should $e e,amined for s#ecific strengths and (ea.nesses
is >BD* Many firms today do not conduct >BD' and yet many other com#anies de#end on successful
>BD acti!ities for sur!i!al* Firms #ursuing a #roduct de!elo#ment strategy es#ecially need to ha!e a
strong >BD orientation*
B* 8nternal and ,ternal >BD
)* >BD in organi4ations can ta.e t(o $asic forms% J)K internal >BD' in (hich an organi4ation o#erates its
o(n >BD de#artment' andDor J+K contract >BD' in (hich a firm hires inde#endent researchers or
inde#endent agencies to de!elo# s#ecific #roducts* Many com#anies use $oth a##roaches to de!elo#
ne( #roducts* & (idely used a##roach for o$taining outside >BD assistance is to #ursue a ;oint !enture
(ith another firm*
+* Most firms ha!e no choice $ut to continually de!elo# ne( and im#ro!ed #roducts $ecause of changing
consumer needs and tastes' ne( technologies' shortened #roduct life cycles' and increased domestic and
foreign com#etition*
"* >BD &udit "hec.list of Nuestions
)* Does the firm ha!e >BD facilities? &re they ade:uate?
+* 8f outside >BD firms are used' are they cost effecti!e?
-* &re the organi4ation5s >BD #ersonnel (ell :ualified?
/* &re >BD resources allocated effecti!ely?
0* &re management information and com#uter systems ade:uate?
1* 8s communication $et(een >BD and other organi4ational units effecti!e?
2* &re #resent #roducts technologically com#etiti!e?
Teaching Tip% &n e,am#le of the >BD acti!ities that ta.e #lace at a large firm is #ro!ided $y G at
Chtt#%DD(((*crd*ge*comE*
8L* M&N&GMNT 8NF9>M&T89N SFSTMS
&* 8m#ortance of 8nformation
)* 8nformation ties all $usiness functions together and #ro!ides the $asis for all managerial decisions*
+* & management information system recei!es ra( material from $oth the e,ternal and internal e!aluation
of an organi4ation* 8t gathers data a$out mar.eting' finance' #roduction' and #ersonnel matters
internally? and social' cultural' demogra#hic' en!ironmental' economic' #olitical' go!ernment' legal'
technological' and com#etiti!e factors e,ternally* Data is integrated in (ays needed to su##ort
managerial decision ma.ing*
-* Because organi4ations are $ecoming more com#le,' decentrali4ed' and glo$ally dis#ersed' the function
of information systems is gro(ing in im#ortance*
B* Strategic Planning Soft(are
)* Strategic #lanning soft(are can allo( firms to ta# the .no(ledge $ase of e!eryone in the firm* There are
a num$er of commercially a!aila$le soft(are #roducts designed to train and assist managers in strategic
#lanning*
+* "hec.M&T is one such ty#e of soft(are* 8t is an e,#ert system that carries a firm through strategy
formulation and im#lementation*
12 | P a g e
"* Management 8nformation Systems &udit "hec.list of Nuestions
)* Do all managers in the firm use the information system to ma.e decisions?
+* 8s there a chief information officer or director of information systems #osition in the firm?
-* &re data in the information system u#dated regularly?
/* Do managers from all functional areas of the firm contri$ute in#ut to the information system?
0* &re there effecti!e #ass(ords for entry into the firm5s information system?
1* &re strategists of the firm familiar (ith the information systems of ri!al firms?
2* 8s the information system user friendly?
3* Do all users of the information system understand the com#etiti!e ad!antages that information can
#ro!ide firms?
6* &re com#uter training (or.sho#s #ro!ided for users of the information system?
)7* 8s the firm5s information system continually $eing im#ro!ed in content and user-friendliness?
Teaching Tip% There are a num$er of com#anies that sell strategic #lanning soft(are* ,am#les of the com#anies include%
• Guru Soft(are% Chtt#%DD(((*gurusoft(are*comDDou$le8tSummary*htmE
• "hec.M&T Strategic Planning Soft(are% Chtt#%DD(((*chec.mate#lan*comDE
L* G& G&8L
&* The 8F Matri,
)* & summary ste# in conducting an internal strategic-management audit is to construct an 8F Matri,* This
strategy-formulation tool summari4es and e!aluates the ma;or strengths and (ea.nesses in the functional
areas of a $usiness' and it also #ro!ides a $asis for identifying and e!aluating relationshi#s among these
areas*
+* 8ntuiti!e ;udgments are re:uired in de!elo#ing an 8F Matri,' so the a##earance of a scientific a##roach
should not $e inter#reted to mean this is an all-#o(erful techni:ue*
B* &n 8F Matri, is de!elo#ed in fi!e ste#s* &n e,am#le 8F Matri, is #ro!ided in Ta$le /-6*
)* ,+0& *..l' *a!a('&-> a!. 1@ l+"'&7l':'l *a!a('&-. N+"> .a(&a* %#&''
+:'&lapp!( a!. #$p+%#'%)al !,+&*a%+! (&+0p -%&0)%0&'-. H+" )a! %#- !,+&*a%+! BD e,#enditures (ill li.ely increase $ecause technological
ad!ancements are shortening the #roduct life cycle in nearly all industries*
Products of all ty#es are $ecoming o$solete more :uic.ly than e!er $efore'
thus re:uiring greater >BD e,#enditures to gain com#etiti!e ad!antages in
the mar.et#lace*
;. Expla! #+" $+0 "+0l. *+%:a%' *a!a('&- a!. '*pl+$''- %+ *pl'*'!% a *a=+& !'"
-%&a%'($.
&ns(er% There is a need to demonstrate clearly ho( the ne( strategy (ill $enefit managers and em#loyees of the
organi4ation* &rticulate effecti!ely (hy the ne( strategy is needed' gi!en com#etitors5 strategies' #roducts' and
ser!ices* Stri!e to mo$ili4e the firm5s cultural #roducts to su##ort the ne( strategy* 8n!ol!e as many managers as
#ossi$le in discussions a$out ho( to effecti!ely im#lement the strategy* The #rocess is more im#ortant than the #lan*
?. W#$ .+ $+0 %#!3 p&+.0)%+!G+p'&a%+!- *a!a('&- a&' +,%'! !+% .&')%l$ !:+l:'. !
-%&a%'($7,+&*0la%+! a)%:%'-5 W#$ )a! %#- - %#a% al"a$- a! +&(a!Ca%+!al -%&'!(%#5
W#$ +& "#$ !+%5
&ns(er% Whene!er an organi4ation5s return on in!estment or #rofit margin e,ceeds the cost of de$t' it may $e
ad!isa$le to use de$t to finance the firm5s strategies* Thus' it is not al(ays an organi4ational strength to ha!e 4ero de$t
in a firm5s ca#ital structure* &s an indi!idual' if you (ere sure you could ma.e )0 #ercent on monies in!ested' then you
(ould #ro$a$ly o$tain a su$stantial amount of de$t at )7 #ercent to in!est at that higher le!el*
11. D'-)&S8F8"&T89N ST>&TG8S
&* >elated Di!ersification
)* Businesses are said $e related (hen their !alue chains #ossess com#etiti!ely !alua$le
cross-$usiness strategic fits*
26 | P a g e
+* >elated di!ersification strategies ena$le $usinesses to ca#itali4e on synergies such as%
a* transferring com#etiti!ely !alua$le e,#ertise'
$* com$ining the related acti!ities of se#arate $usinesses into a single o#eration to
achie!e lo(er costs'
c* e,#loiting common use of a (ell-.no(n $rand name' and
d* colla$orating across $usinesses to create !alua$le resource strengths and
ca#acities*
-* Si, guidelines for (hen related di!ersification may $e effecti!e are identified $elo(%
a* When an organi4ation com#etes in a no-gro(th or slo( gro(th industry*
$* When adding ne(' $ut related #roducts (ould enhance sales of current #roducts*
c* When ne(' $ut related #roducts could $e offered at com#etiti!e #rices*
d* When ne(' $ut related #roducts ha!e seasonal sales le!els that counter$alance
e,isting #ea.s and !alleys*
e* When an organi4ation5s #roducts are in the decline stage of the life cycle*
f* When an organi4ation has a strong management team*
B* Hnrelated Di!ersification
)* Businesses are said to $e unrelated (hen their !alue chains are so dissimilar that no
com#etiti!ely !alua$le cross-$usiness relationshi#s e,ist*
+* &n unrelated di!ersification strategy fa!ors ca#itali4ing u#on a #ortfolio of $usinesses
that are ca#a$le of deli!ering e,cellent financial #erformance in their res#ecti!e
industries*
-* Ten guidelines for (hen unrelated di!ersification may $e effecti!e are identified
$elo(%
a* When re!enues deri!ed from an organi4ation5s current #roducts or ser!ices
(ould increase significantly $y adding the ne(' unrelated #roducts*
$* When an organi4ation com#etes in a highly com#etiti!e andDor no-gro(th
industry*
c* When an organi4ation5s #resent channels of distri$ution can $e used to mar.et
the ne( #roducts to current customers*
d* When the ne( #roducts ha!e countercyclical sales #atterns com#ared to an
organi4ation5s #resent #roducts*
e* When an organi4ation5s $asic industry is e,#eriencing declining annual sales
and #rofits*
f* When an organi4ation has the ca#ital and managerial talent needed to
com#ete*
g* When an organi4ation has the o##ortunity to #urchase an unrelated $usiness
that is an attracti!e in!estment*
37 | P a g e
h* When financial synergy e,ists $et(een the ac:uired and ac:uiring firms*
i* When e,isting mar.ets for an organi4ation5s #resent #roducts are saturated*
;* When antitrust action could $e charged against an organi4ation that
historically has concentrated on a single industry*
Teaching Tip% The %trategic 8anagement 7ournal JSMIK is the #remier academic ;ournal for strategic
management* The ;ournal co!ers di!ersification e,tensi!ely* The Strategic Management Society at
Chtt#%DD(((*sms(e$*orgDE s#onsors SMI*
Teaching Tip% ¬her strategic-management ;ournal that may $e of interest to your students is the
7ournal of 1usiness %trategies*
G88* DFNS8G ST>&TG8S
&* >etrenchment
)* >etrenchment occurs (hen an organi4ation regrou#s through cost and asset reduction
to re!erse declining sales and #rofits*
+* Sometimes called a turnaround or reorgani4ational strategy' retrenchment is designed
to fortify an organi4ation5s $asic distincti!e com#etence*
-* Ban.ru#tcy can $e an effecti!e retrenchment strategy*
a* "ha#ter 2 $an.ru#tcy is a li:uidation #rocedure used only (hen a cor#oration
sees no ho#e of $eing a$le to o#erate successfully or to o$tain the necessary
creditor agreements*
$* "ha#ter 6 $an.ru#tcy a##lies to munici#alities*
c* "ha#ter )) $an.ru#tcy allo(s organi4ations to reorgani4e and come $ac. after
filing*
d* "ha#ter )+ $an.ru#tcy #ro!ides s#ecial relief to family farmers (ith de$t e:ual to
or less than T)*0 million*
e* "ha#ter )- $an.ru#tcy is similar to "ha#ter )) $ut a!aila$le only to small
$usinesses o(ned $y indi!iduals (ith unsecured de$ts of less than T)77'777 and
secured de$ts of less than T-07'777*
/* Fi!e guidelines identify (hen retrenchment may $e an es#ecially effecti!e strategy to
#ursue%
a* When an organi4ation has a clearly distincti!e com#etence $ut has failed to
meet o$;ecti!es consistently*
$* When an organi4ation is one of the (ea.er com#etitors in a gi!en industry*
3) | P a g e
c* When an organi4ation is #lagued $y inefficiency' lo( #rofita$ility' #oor em#loyee
morale' and #ressure from stoc.holders to im#ro!e #erformance*
d* When an organi4ation has failed to ca#itali4e on e,ternal o##ortunities' minimi4e
e,ternal threats' ta.e ad!antage of internal strengths' and o!ercome internal
(ea.nesses o!er time*
e* When an organi4ation has gro(n so large so :uic.ly that ma;or internal
reorgani4ation is needed*
B* Di!estiture
)* Selling a di!ision or #art of an organi4ation is called di!estiture* Di!estiture often is
used to raise ca#ital for further strategic ac:uisitions or in!estments*
+* Di!estiture has $ecome a !ery #o#ular strategy as firms try to focus on their core
strengths' lessening their le!el of di!ersification* & fe( di!estitures consummated
recently are gi!en in Ta$le 0-/*
-* Si, guidelines for (hen to use di!estiture%
a* When an organi4ation has #ursued a retrenchment strategy and it failed to
accom#lish needed im#ro!ement*
$* When a di!ision needs more resources to $e com#etiti!e than the com#any
can #ro!ide*
c* When a di!ision is res#onsi$le for an organi4ation5s o!erall #oor #erformance*
d* When a di!ision is a misfit (ith the rest of an organi4ation*
e* When a large amount of cash is needed :uic.ly and cannot $e o$tained*
f* When go!ernment antitrust action threatens an organi4ation*
"* &TG8S
&ccording to Porter' strategies allo( organi4ations to gain com#etiti!e ad!antage from three
different $ases% cost leadershi#' differentiation' and focus* "ost leadershi# and focus strategies
can $e further segmented $y (hether the a##roach is lo(-cost or $est-!alue* Thus' there are
fi!e generic strategies% cost leadershi#-lo( cost' cost leadershi#-$est !alue' differentiation'
focus-lo( cost' and focus-$est !alue* These are illustrated in Figure 0--*
&* "ost BD and mar.eting functions and su$stantial
amenities to attract scientists and creati!e #eo#le*
"* Focus
)* Focus means #roducing #roducts and ser!ices that fulfill the needs of small grou#s of
consumers*
+* There are t(o ty#es of focus strategies*
a* & lo(-cost focus strategy offers #roducts or ser!ices to a small range JnicheK of
customers at the lo(est #rice a!aila$le on the mar.et*
$* & $est-!alue focus strategy offers #roducts to a small range of customers at the $est
#rice-!alue a!aila$le on the mar.et* This is sometimes called focused
differentiation*
-* Focus strategies are most effecti!e (hen the niche is #rofita$le and gro(ing' (hen
industry leaders are uninterested in the niche' (hen industry leaders feel #ursuing the
niche is too costly or difficult' (hen the industry offers se!eral niches' and (hen there
is little com#etition in the niche segment*
D* Strategies for "om#eting in Tur$ulent' =igh-Gelocity Mar.ets
)* Some industries change so fast that they are called tur$ulent' high-!elocity mar.ets*
,am#les include telecommunications' $iotechnology' and com#uter-related
industries*
+* Figure 0-/ illustrates ho( firms can meet the challenges #resented (ith this ty#e of
mar.et $y reacting' antici#ating' or leading the mar.et (ith its strategies*
Teaching Tip% & $i$liogra#hy of Michael Porter is a!aila$le through the =ar!ard Business School
(e$site at Chtt#%DDdrfd*h$s*eduDfitD#u$licDfaculty8nfo*do?fac8nfoU$ioBfacm8dUm#orterBlocUe,tnE*
8L* M&NS F9> &"=8G8NG ST>&TG8S
&* Ioint Genture
)* Ioint !enture is a #o#ular strategy that occurs (hen t(o or more com#anies form a
tem#orary #artnershi# or consortium for the #ur#ose of ca#itali4ing on some
o##ortunity*
3/ | P a g e
+* 9ther ty#es of coo#erati!e arrangements include >BD #artnershi#s' cross-distri$ution
agreements' cross-licensing agreements' cross-manufacturing agreements' and ;oint-
$idding consortia*
-* Ioint !entures and coo#erati!e arrangements are $eing used increasingly $ecause they
allo( com#anies to im#ro!e communications and net(or.ing' to glo$ali4e o#erations
and minimi4e ris.*
/* Many' if not most' organi4ations #ursue a com$ination of t(o or more strategies
simultaneously' $ut a com$ination strategy can $e e,ce#tionally ris.y if carried too
far* No organi4ation can afford to #ursue all the strategies that might $enefit the firm*
Difficult decisions must $e made* Priorities must $e esta$lished* 9rgani4ations' li.e
indi!iduals' ha!e limited resources* Both organi4ations and indi!iduals must choose
among alternati!e strategies and a!oid e,cess inde$tedness*
0* Ioint !entures may fail (hen%
a* Managers (ho must colla$orate regularly are not in!ol!ed in the !enture*
$* The !enture may $enefit #artnering com#anies $ut not the customers*
c* Both #artners may not su##ort the !enture e:ually*
d* The !enture com#etes (ith one of the #artners*
1* Ioint !entures are es#ecially effecti!e (hen%
a* & #ri!ately o(ned organi4ation forms one (ith a #u$lic organi4ation*
$* & domestic organi4ation (or.s (ith a foeign com#any*
c* The distinct com#etencies of the firms com#lement each other es#ecially (ell*
d* Some #ro;ect is #otentially #rofita$le $ut re:uires much ris.*
e* T(o or more smaller firms (ish to com#ete against a larger firm*
f* There is a need to introduce a ne( technology :uic.ly*
B* Mergers and ac:uisitions
Mergers and ac:uisitions are t(o commonly used (ays to #ursue strategies*
)* & merger occurs (hen t(o organi4ations of a$out e:ual si4e unite to form one
enter#rise*
+* &n ac:uisition occurs (hen a large organi4ation #urchases Jac:uiresK a smaller firm
or !ice !ersa*
-* Ta$le 0-/ sho(s some mergers and ac:uisitions com#leted in +772* There are many
reasons for mergers and ac:uisitions' including the follo(ing%
a* To #ro!ide im#ro!ed ca#acity utili4ation
$* To ma.e $etter use of an e,isting sales force*
c* To reduce managerial staff*
d* To gain economies of scale*
e* To smooth out seasonal trends in sales*
30 | P a g e
f* To gain access to ne( su##liers' distri$utors' customers' #roducts' and creditors*
g* To gain ne( technology*
h* To reduce ta, o$ligations*
/* Mergers and ac:uisitions may fail due to the follo(ing reasons%
a* 8ntegration difficulties
$* 8nade:uate e!aluation of target
c* educed em#loyee morale due to layoffs and relocations
"* esearch also indicates that strategic management in small firms is more informal than in
large firms' $ut small firms that engage in strategic management out#erform those that do not*
32 | P a g e
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Teaching Tip% For small $usinesses that are unsure of ho( to organi4e' the Ser!ice "or#s of >etired
,ecuti!es JS"9>K is an e,cellent resource to o$tain management ad!ice from* S"9> maintains
a (e$site at Chtt#%DD(((*score*orgDE* The (e$site #ro!ides information a$out S"9> and a toll free
num$er J)-377-1-/-7+/0K that hel#s an indi!idual locate the closest S"9> cha#ter to his or her
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WWW e,ercises*
ISSUES FOR REVIEW AND DISCUSSION
1. H+" .+'- -%&a%'($ ,+&*0la%+! .,,'& ,+& a -*all :'&-0- la&(' +&(a!Ca%+!5 F+& a ,+&7p&+,%
:'&-0- a !+!p&+,% +&(a!Ca%+!5
&ns(er% Strategy formulation is conce#tually the same for $oth small and large organi4ations*
=o(e!er' for large firms' there are more !aria$les to include in $oth the e,ternal and internal
audits* The #rocess is usually more formal in a large firm*
2. G:' &')'!% 'xa*pl'- +, *a&3'% p'!'%&a%+!> *a&3'% .':'l+p*'!%> a!. p&+.0)%
.':'l+p*'!%.
&ns(er% Mar.et #enetration means selling more #roducts to e,isting mar.ets* The class (ill
li.ely thin. of se!eral e,am#les $ut some #ossi$ilities include Sony lo(ering the #rice on its
Game$oy in order to increase selling* Mar.et de!elo#ment means selling an e,isting #roduct to a
ne( mar.et* Sony has de!elo#ed se!eral ro$ots for its Ia#anese mar.et* 8t is no( see.ing to
de!elo# a mar.et for ro$otics in H*S* households* Product de!elo#ment means selling a ne(
#roduct to an e,isting mar.et* &n e,am#le of this is S(iffer S(ee#er de!elo#ing the mo##ing
!ersion of its s(ee#er*
6. G:' &')'!% 'xa*pl'- +, ,+&"a&. !%'(&a%+!> .:'-%%0&'> a!. l40.a%+!.
&ns(er% Students (ill ha!e a !ariety of ans(ers' $ut here are some e,am#les* Mo!ielin. is a
;oint !enture $y fi!e ma;or mo!ie studios aimed at creating an 8nternet !ideo-on-demand
ser!ice* &rthur &nderson is currently undergoing a retrenchment strategy' as are many
airlines*
CMO> HRM> RHD> a!. %"+ .:-+! p&'-.'!%-. H!%: D:-+! p&'-.'!%- &'p+&% %+ %#'
COO.
&ns(er%
1;. H+" .+ %#' l':'l- +, -%&a%'($ .,,'& ! a la&(' ,&* :'&-0- a -*all ,&*5
&ns(er% 8n large firms' the #ersons #rimarily res#onsi$le for ha!ing effecti!e strategies at the
!arious le!els include the "9 at the cor#orate le!el' the #resident or e,ecuti!e !ice #resident at
the di!isional le!el' the res#ecti!e "F9' "89' =>M' "M9' at the functional le!el and the #lant
manager' regional sales manager at the o#erational le!el* 8n small firms' the #ersons #rimarily
res#onsi$le for ha!ing effecti!e strategies at the !arious le!els include the $usiness o(ner or
#resident at the com#any le!el and then the same range of #ersons at the lo(er t(o le!els as (ith
a large firm*
1?. L-% %#' %$p'- +, -%&a%'('-. G:' a #$p+%#'%)al 'xa*pl' +, 'a)# -%&a%'($ l-%'..
6+ | P a g e
&ns(er%
• For(ard integration% Widgets' 8nc* o#ens retail stores to sell its (idgets*
• Bac.(ard integration% Widgets' 8nc* #urchases a steel mill to control its su##ly of steel at a
reasona$le #rice*
• =ori4ontal integration% Widgets' 8nc* #urchases We > Widgets' a com#eting (idget
manufacturer*
• Mar.et Penetration% Widgets' 8nc* launches a (idget loyalty #rogram to re(ard hea!y
$uyers of (idgets*
• Mar.et De!elo#ment% Widgets' 8nc* $egins to offer (idgets in 8ndia' a ne( geogra#hic
mar.et area for the com#any*
• Product De!elo#ment% Widgets' 8nc* de!elo#s a s#ecial (idgets drill*
• >elated Di!ersification% Widgets' 8nc* (ill no( manufacture and sell fasteners*
• Hnrelated Di!ersification% Widgets' 8nc* (ill offer a credit card for its customers*
• >etrenchment% Widgets' 8nc* is cutting ;o$s in +7 mar.ets in the South(est*
• Di!estiture% Widgets' 8nc* is selling off its #lastics di!ision*
• e#ort? Some go!ernments mandate that
$usinesses #u$licly re#ort on the #ollutants and (astes #roduced $y their facilities* The re#orts on
social res#onsi$ility #ractices are called sustaina$ility re#orts* The Glo$al >e#orting 8nitiati!e has
issues a detailed re#ort of guidelines s#ecifying (hat information should go in sustaina$ility re#orts*
61 | P a g e
888* T= 8NPHT ST&G
&* The 8n#ut Stage includes the ,ternal Factor !aluation JFK Matri,' the "om#etiti!e
Profile Matri, J"PMK' and the 8nternal Factor !aluation J8FK Matri,*
B* Procedures for de!elo#ing an F Matri,' an 8F Matri,' and a "PM (ere #resented
earlier*
"* The in#ut tools re:uire strategists to :uantify su$;ecti!ely during early stages of the
strategy-formulation #rocess* Ma.ing small decisions in the in#ut matrices regarding the
relati!e im#ortance of e,ternal and internal factors allo(s strategists to generate and
e!aluate alternati!e strategies more effecti!ely*
8G* T= M&T"=8NG ST&G
&* The Matching Stage
)* The Matching Stage includes the Strengths-Wea.nesses-9##ortunities-Threats
JSW9TK Matri,' the Strategic Position and &ction !aluation JSP&"K Matri,' the
Boston "onsulting Grou# JB"GK Matri,' the 8nternal-,ternal J8K Matri,' and the
Grand Strategy Matri,*
+* &ny organi4ation' (hether military' #roduct-oriented' ser!ice-oriented' go!ernmental'
or e!en athletic must de!elo# and e,ecute good strategies to (in*
-* Ta$le 1-) #ro!ides the $asic conce#t of matching*
VTN (Visit the Net): htt!:$$www.csuchico.edu$mgmt$strategy$module($sld),*.htm gies e-am!le
ob3ecties.
B* The SW9T Matri,
)* The SW9T Matri, is an im#ortant matching tool that hel#s managers de!elo# four
ty#es of strategies%
a* S9 strategiesVuse a firm5s internal strengths to ta.e ad!antage of e,ternal
o##ortunities*
$* W9 strategiesVare aimed at im#ro!ing internal (ea.nesses $y ta.ing ad!antage
of e,ternal o##ortunities*
c* ST strategiesVuse a firm5s strengths to a!oid or reduce the im#act of e,ternal
threats*
d* WT strategiesVare defensi!e tactics directed at reducing internal (ea.nesses and
a!oiding e,ternal threats*
62 | P a g e
+* & schematic re#resentation of the SW9T Matri, is #ro!ided in Figure 1-- in the
te,t$oo.*
-* There are eight ste#s to construct a T9WS Matri,%
a* ates World(ide M uro#e is ate Jro(sKD
>elati!e Mar.et Share JcolumnsK
=igh J)*7K Medium J*07K O2B> a!. O8B ! &':'!0'-> a!. O2> O8> a!.
O1 ! p&+,%-. S%a%' +%#'& a--0*p%+!- a- !''.'.. Lae!enue
JTK
>e!enue
JSK
Profit JTK Profit JSK F 8F
) )7 )/ + +6 + +
+ +7 +6 / 02 / /
- /7 02 ) )/ ) +
8n this e,am#le' Di!ision ) falls in :uadrant G' Di!ision + falls in :uadrant 8' and Di!ision - falls
in :uadrant G888*
8 88 888
8G G G8
G88 G888 8L
19. W#a% p&+)'.0&'- )+0l. esource "oncerns When 8m#lementing Strategies
CHAPTER OBJECTIVES
&fter studying this cha#ter' you should $e a$le to do the follo(ing%
)* ,#lain (hy strategy im#lementation is more difficult than strategy formulation*
+* Discuss the im#ortance of annual o$;ecti!es and #olicies in achie!ing organi4ational
commitment for strategies to $e im#lemented*
-* ,#lain (hy organi4ational structure is so im#ortant in strategy im#lementation*
/* "om#are and contrast restructuring and reengineering*
0* Descri$e the relationshi#s $et(een #roductionDo#erations and strategy im#lementation*
1* ,#lain ho( a firm can effecti!ely lin. #erformance and #ay to strategies*
2* Discuss em#loyee stoc. o(nershi# #lans JS9PsK as a strategic-management conce#t*
3* Descri$e ho( to modify an organi4ational culture to su##ort ne( strategies*
6* Discuss the culture in Me,ico and Ia#an*
)7* Descri$e the glass ceiling in the Hnited States*
))+ | P a g e
CHAPTER OVERVIEW
The strategic-management #rocess does not end (hen the firm decides (hich strategy or
strategies to #ursue* There must $e a translation of strategic thought into strategic action* This
translation is much easier if managers and em#loyees of the firm understand the $usiness' feel a
#art of the com#any' and' through in!ol!ement in strategy-formulation acti!ities' ha!e $ecome
committed to hel#ing the organi4ation succeed* Without understanding and commitment'
strategy-im#lementation efforts face ma;or #ro$lems*
EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS
8* T= N&TH> 9F ST>&TGF 8MPe#resent the $asis for allocating resources*
$* &re a #rimary mechanism for e!aluating managers*
c* &re the ma;or instrument for monitoring #rogress to(ards achie!ing long-term
o$;ecti!es*
d* sta$lish organi4ational' di!isional' and de#artmental #riorities*
-* "learly stated and communicated o$;ecti!es are critical to success in all ty#es and
si4es of firms*
a* &nnual o$;ecti!es should $e measura$le' consistent' reasona$le' challenging'
clear' communicated throughout the organi4ation' characteri4ed $y an a##ro#riate
time dimension' and accom#anied $y commensurate re(ards and sanctions*
$* Too often' o$;ecti!es are stated in generalities' (ith little o#erational usefulness*
/* &nnual o$;ecti!es should $e com#ati$le (ith em#loyees5 and managers5 !alues and
should $e su##orted $y clearly stated #olicies*
0* Figure 2-+ illustrates ho( the Statmus "om#any could esta$lish annual o$;ecti!es
$ased on long-term o$;ecti!es* Ta$le 2-) re!eals associated re!enue figures that
corres#ond to the o$;ecti!es in Figure 2-+*
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(or.#lace !iolence* 8t is a!aila$le at htt#%DD(((*hr*ucda!is*eduDlrDrDGiolenceDBrochure*
G8* M&T"=8NG ST>&TGF W8T= ST>H"TH>
&* "hanges in Strategy 9ften >e:uire "hanges in Structure
)* "hanges in strategy often re:uire changes in the (ay an organi4ation is structured for
t(o ma;or reasons*
a* First' structure largely dictates ho( o$;ecti!es and #olicies (ill $e esta$lished*
For e,am#le' o$;ecti!es and #olicies esta$lished under a geogra#hic
organi4ational structure are couched in geogra#hic terms* 9$;ecti!es and #olicies
are stated largely in terms of #roducts in an organi4ation (hose structure is $ased
on #roduct grou#s* The structural formula for de!elo#ing o$;ecti!es and #olicies
can significantly im#act all other strategy-im#lementation issues*
$* The second ma;or reason (hy changes in strategy often re:uire changes in
structure is that structure dictates ho( resources (ill $e allocated*
+* "hanges in strategy lead to changes in organi4ational structure* Structure should $e
designed to facilitate the strategic #ursuit of a firm and' therefore' follo( strategy*
Figure 2-- illustrates a structure se:uence re#eated as organi4ations gro( and change
o!er time*
-* There is not ;ust one o#timal organi4ational design or structure for a gi!en strategy or
ty#e of organi4ation*
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B* The Functional Structure
)* The most (idely used structure is the functional or centrali4ed ty#e $ecause this
structure is the sim#lest and least e,#ensi!e of the se!en alternati!es*
+* & functional structure grou#s tas.s and acti!ities $y $usiness function such as
#roductDo#erations' mar.eting' financeDaccounting' >BD' and com#uter information
systems*
a* &d!antages% Besides $eing sim#le and ine,#ensi!e' a functional structure also
#romotes s#eciali4ation of la$or' encourages efficiency' minimi4es the need for an
ela$orate control system' and allo(s ra#id decision-ma.ing*
))1 | P a g e
$* Disad!antages% Some disad!antages of a functional structure are that it forces
accounta$ility to the to#' minimi4es career de!elo#ment o##ortunities' and is
sometimes characteri4ed $y lo( em#loyee morale*
"* The Di!isional Structure
)* The di!isional or decentrali4ed structure is the second most common ty#e used $y
&merican $usinesses*
+* The di!isional structure can $e organi4ed in one of four (ays% $y geogra#hic area'
#roduct or ser!ice' customer' or #rocess* With a di!isional structure' functional
acti!ities are #erformed $oth centrally and in each se#arate di!ision*
a* &d!antages% & di!isional structure has some clear ad!antages* First' and #erha#s
foremost' is accounta$ility* 9ther ad!antages of the di!isional structure are that it
creates career de!elo#ment o##ortunities for managers' allo(s local control of
local situations' leads to a com#etiti!e climate (ithin an organi4ation' and allo(s
ne( $usinesses and #roducts to $e added easily*
$* Disad!antages% Perha#s the most im#ortant limitation is that a di!isional structure
is costly*
-* & di!isional structure $y geogra#hic area is a##ro#riate for organi4ations (hose
strategies need to $e tailored to fit the #articular needs and characteristics of customers
in different geogra#hic regions*
/* & di!ision structure $y #roduct is most effecti!e for im#lementing strategies (hen
s#ecific #roducts or ser!ices need s#ecial em#hasis*
0* & di!ision structure $y #rocess is similar to a functional structure' $ecause acti!ities
are organi4ed according to the (ay (or. is actually #erformed*
D* The Strategic Business Hnit JSBHK Structure
)* The SBH structure grou#s similar di!isions into strategic $usiness units and delegates
authority and res#onsi$ility for each unit to a senior e,ecuti!e (ho re#orts directly to
the "9*
+* &d!antages% This change in structure can facilitate strategy im#lementation $y
im#ro!ing coordination $et(een similar di!isions and channeling accounta$ility to
distinct $usiness units* 8t also ma.es the tas. of #lanning and control $y the cor#orate
office more managea$le*
-* Disad!antages% T(o disad!antages of an SBH structure are that it re:uires an
additional layer of management' (hich increases salary e,#enses' and the role of the
grou# !ice #resident is often am$iguous*
))2 | P a g e
/* Figure 2-/ illustrates the SBH Structure used $y Sonoco*
* The Matri, Structure
)* 8t is the most com#le, of all designs $ecause it de#ends u#on $oth !ertical and
hori4ontal flo(s of authority and communication*
+* 8t can result in higher o!erhead $ecause it creates more managerial #ositions*
-* 8t also creates dual lines of $udget authority' dual sources of re(ard and #unishment'
shared authority' and dual re#orting channels*
/* 8ts ad!antages are that #ro;ect o$;ecti!es are clear' there are many channels of
communication' (or.ers can see !isi$le results of (or.' and #ro;ects can $e shut
do(n easily*
0* Figure 2-0 illustrates the matri, structure*
F* Some Do5s and Don5ts in De!elo#ing 9rgani4ational "harts
)* >eser!e the title of "9 for the to# #erson in the organi4ation and use the term
President for di!ision to# managers' if there are di!isions in the firm*
+* Functional $usiness e,ecuti!es should ha!e titles li.e "hief' Gice President' Manager'
or 9fficer*
-* 8t is $est to ha!e a "99 re#orting to the "9 and all di!isional #residents (ill re#ort
to the "99*
/* Figure 2-1 illustrates an organi4ational chart for to# managers of a large firm*
G88* >ST>H"TH>8NG' >NG8N>8NG' &ND -NG8N>8NG
&* >esha#ing "or#orate estructuring' also called do(nsi4ing' rightsi4ing' or delayering' in!ol!es reducing the
si4e of the firm in terms of num$er of em#loyees' di!isions or units' and hierarchical
le!els in the firm5s organi4ational structure*
+* The 8nternet is ushering in a ne( (a!e of $usiness transformations*
-* >eengineering is concerned more (ith em#loyee and customer (ell-$eing than (ith
shareholder (ell-$eing*
/* >eengineering' also called #rocess management' #rocess inno!ation' or #rocess
redesign' in!ol!es reconfiguring or redesigning (or.' ;o$s' and #rocesses for the
#ur#ose of im#ro!ing cost' :uality' ser!ice' and s#eed*
))3 | P a g e
B* >estructuring
)* Firms often em#loy restructuring (hen !arious ratios a##ear out of line (ith
com#etitors' as determined through $enchmar.ing e,ercises*
+* The #rimary $enefit sought from restructuring is cost reduction* The do(nside of
restructuring can $e reduced em#loyee commitment' creati!ity' and inno!ation that
accom#anies the uncertainty and trauma associated (ith #ending and actual em#loyee
layoffs*
G888* F9>M&N" &ND P&F T9 ST>&TG8S
&* Pay-for-Performance
)* Profit sharing is a (idely used form of incenti!e com#ensation*
+* Gain sharing re:uires em#loyees or de#artments to esta$lish #erformance targets? if
actual results e,ceed o$;ecti!es' all mem$ers get $onuses*
-* "riteria such as sales' #rofit' #roduction efficiency' :uality' and safety could also ser!e
as $ases for an effecti!e $onus system*
B* Fi!e tests are often used to determine (hether a #erformance-#ay #lan (ill $enefit an
organi4ation%
)* Does the #lan ca#ture attention?
+* Do em#loyees understand the #lan?
-* 8s the #lan im#ro!ing communication?
/* Does the #lan #ay out (hen it should?
0* 8s the com#any or unit #erforming $etter?
8L* M&N&G8NG >S8ST&N" T9 "=&NG
&* >esistance to "hange
)* >esistance to change can $e considered the single greatest threat to successful strategy
im#lementation*
+* 8t may ta.e on such forms as sa$otaging #roduction machines' a$senteeism' filing
unfounded grie!ances' and an un(illingness to coo#erate*
-* >esistance to change can emerge at any stage or le!el of the strategy-im#lementation
#rocess*
/* There are three commonly used strategies for im#lementing change%
))6 | P a g e
a* Force change strategy
$* ducati!e change strategy
c* Self-interest change strategy
Teaching Tip% The 7ournal of Krgani#ational orce
>ield Analysis to a!!roach change.
L* M&N&G8NG T= N&TH>&< NG8>9NMNT
&* &ll $usiness functions are affected $y natural en!ironment considerations or stri!ing to
ma.e a #rofit* =o(e!er' $oth em#loyees and consumers are es#ecially resentful of firms
that ta.e more than they gi!e to the natural en!ironment? li.e(ise' #eo#le today are
es#ecially a##reciati!e of firms that conduct o#erations in a (ay that mends rather than
harms the en!ironment*
B* The ecological challenge facing all organi4ations re:uires managers to formulate
strategies that #reser!e and conser!e natural resources and control #ollution*
"* Managing as if the earth matters re:uires an understanding of ho( international trade'
com#etiti!eness' and glo$al resources are connected*
D* Firms should formulate and im#lement strategies from an en!ironmental #ers#ecti!e*
Natural Environment Perspective% 8n =iring' Do "om#anies "onsider n!ironmental Training of
Students? & recent study re#orted that 22S of cor#orate recruiters said that students should ha!e some
a(areness of social and en!ironmental res#onsi$ility* >esearch suggests that $usiness schools do a
#oor ;o$ of educating students on en!ironmental issues at the undergraduate le!el* "om#anies fa!or
hiring students from schools (ith the $est en!ironmental #rograms* To fill the !oid in education' the
World >esource 8nstitute JW>8K created the BT8G "H[TH]
&* Strategists should stri!e to #reser!e' em#hasi4e' and $uild on as#ects of an e,isting culture
that su##ort #ro#osed ne( strategies*
B* Iac. Duncan descri$ed triangulation as an effecti!e' multimethod techni:ue for studying
and altering a firm5s culture*
)* Triangulation includes the com$ined use of o$trusi!e o$ser!ation' self-administered
:uestionnaires' and #ersonal inter!ie(s to determine the nature of a firm5s culture*
)+7 | P a g e
+* The #rocess of triangulation re!eals needed changes in a firm5s culture that could
$enefit strategy*
B* The Me,ican "ulture
)* Me,ico al(ays has $een and still is an authoritarian society in terms of schools'
churches' $usinesses' and families* m#loyers see. (or.ers (ho are agreea$le'
res#ectful' and o$edient' rather than inno!ati!e' creati!e' and inde#endent* Me,ican
(or.ers tend to $e acti!ity oriented rather than #ro$lem sol!ers*
+* Me,ican em#loyers are #aternalistic' #ro!iding (or.ers (ith more than a #aychec.'
$ut in return' they e,#ect allegiance*
VTN (Visit the Net): htt!:$$www.managementhel!.org$orgNthry$culture$culture.htm !roides an
oeriew on culture and lin"s to other culture sites.
"* The Ia#anese "ulture
)* The Ia#anese #lace great im#ortance on grou# loyalty and consensus' a conce#t called
wa* Nearly all cor#orate acti!ities in Ia#an encourage (a among managers and
em#loyees* Wa re:uires that all mem$ers of a grou# agree and coo#erate? this results
in constant discussion and com#romise*
+* Most Ia#anese managers are reser!ed' :uiet' distant' intros#ecti!e' and other oriented'
(hereas most H*S* managers are tal.ati!e' insensiti!e' im#ulsi!e' direct' and
indi!idual oriented*
Global Perspective: &merican !ersus Foreign "ommunication Differences* This $o, #ro!ides hints
for good communications in different cultures. When negotiating orally (ith Ia#anese e,ecuti!es'
#eriodically allo( for a time of silence and do not as. @=o( (as your (ee.end?A (hich could $e
!ie(ed as intrusi!e*
L88* P>9DH"T89ND9P>&T89NS "9N">NS W=N 8MP&TG8S
&* ProductionDo#erations ca#a$ilities' limitations' and #olicies can significantly enhance or
inhi$it attainment of o$;ecti!es* Production #rocesses ty#ically constitute more than 27
#ercent of a firm5s total assets*
B* ,am#les of ad;ustments in #roduction systems that could $e re:uired to im#lement
!arious strategies are #ro!ided in Ta$le 2-/ for $oth for-#rofit and non#rofit organi4ations*
L888* =HM&N >S9H>" "9N">NS W=N 8MP&TG8S
&* =uman >esource #ro$lems that arise (hen $usinesses im#lement strategies can usually $e
traced to one of three causes%
)+) | P a g e
)* Disru#tion of social and #olitical structures
+* Failure to match indi!iduals5 a#titudes (ith im#lementation tas.s
-* 8nade:uate to# management su##ort for im#lementation acti!ities
B* m#loyee Stoc. 9(nershi# Plans JS9PsK
)* &n S9P is a ta,-:ualified' defined-contri$ution' em#loyee $enefit #lan (here$y
em#loyees #urchase stoc. of the com#any through $orro(ed money or cash
contri$utions*
+* S9Ps reduce (or.er alienation' stimulate #roducti!ity' and allo( su$stantial ta,
sa!ings for the firm*
-* Ta$le 2-/ lists the eight largest S9P firms*
"* Balancing Wor. BD' and management information systems acti!ities*
)+6 | P a g e
EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS
8* T= N&TH> 9F ST>&TGF 8MPeflect the >etained arnings total
on $oth the income statement and $alance sheet $ecause this item is the .ey lin.
$et(een the t(o #ro;ected statements* Bring this retained earnings amount for that
)-- | P a g e
year JN8-D8G U >K o!er to the $alance sheet $y adding it to the #rior year5s >
sho(n on the $alance sheet* The > on the $alance sheet is a cumulati!e num$er
rather than money a!aila$le for strategy im#lementation*
e* Pro;ect the $alance sheet items' $eginning (ith retained earnings and then
forecasting stoc.holder5s e:uity' long-term lia$ilities' current lia$ilities' total
lia$ilities' total assets' fi,ed assets' and current assets Jin that orderK* Hse the cash
account as the #lug figure? that is use the cash account to ma.e the assets total the
lia$ilities and net (orth* Then' ma.e a##ro#riate ad;ustments*
f* e!lon*
F* Deciding Whether to Go Pu$lic
)* Going #u$lic means selling off a #ercentage of your com#any to others in order to
raise ca#ital? conse:uently' it dilutes the o(ners5 control of the firm*
+* Before going #u$lic' a firm must ha!e :uality management (ith a #ro!en trac. record
for achie!ing :uality earnings and a #ositi!e cash flo(*
Global Perspective% Standardi4ing &ccounting Standards Glo$ally* The Financial &ccounting
Standards Board JF&SBK in the H*S* and its counter#art' the 8nternational &ccounting Standards
Board J8&SBK' are each modifying its @rulesA in an effort to con!erge accounting standards
glo$ally* The con!ergency of accounting systems (ill ma.e glo$al $usiness much easier*
8G* >S&>"= &ND DGBDK 8SSHS
&* >BD
)* >BD #ersonnel can #lay an integral #art in strategy im#lementation*
+* Sur!eys suggest that the most successful organi4ations use an >BD strategy that ties
e,ternal o##ortunities to internal strengths and is lin.ed (ith o$;ecti!es*
-* >BD #olicies can enhance strategy-im#lementation efforts to%
a* m#hasi4e #roduct or #rocess im#ro!ements*
$* Stress $asic or a##lied research*
c* Be leaders or follo(ers in >BD*
d* De!elo# ro$otics or manual-ty#e #rocesses*
e* S#end a high' a!erage' or lo( amount of money on >BD*
f* Perform >BD (ithin the firm or contract >BD to outside firms*
g* Hse uni!ersity researchers or #ri!ate sector researchers*
/* Ta$le 3-6 #resents research and de!elo#ment in!ol!ement in selected strategy-
im#lementation situations*
B* >BD &##roaches for 8m#lementing Strategy
)-0 | P a g e
)* There are at least three ma;or >BD a##roaches for im#lementing strategies*
a* The first strategy is to $e the first firm to mar.et ne( technological #roducts*
$* The second >BD a##roach is to $e an inno!ati!e imitator of successful #roducts'
thus minimi4ing the ris.s and costs of start-u#*
c* & third >BD strategy is to $e a lo(-cost #roducer $y mass-#roducing #roducts
similar to' $ut less e,#ensi!e than #roducts recently introduced*
+* >BD acti!ities among &merican firms need to $e more closely aligned to $usiness
o$;ecti!es*
-* Perha#s the most current trend in >BD management has $een lifting the !eil of
secrecy (here$y firms' e!en ma;or com#etitors' are ;oining forces to de!elo# ne(
#roducts*
Natural Environment Perspective: Should Fou Put & Solar Panel 9n To# of Four =ome and
Business? Solar electricity is gro(ing in #o#ularity* Many states #ro!ide incenti!es for the costs of
installation* Solar energy is @greenA energy and is increasingly cost effecti!e*
G* M&N&GMNT 8NF9>M&T89N SFSTMS JM8SK 8SSHS
&* M8S
)* <hough no firm (ould use the same mar.eting or management a##roach for +7
years' many com#anies ha!e +7-year-old com#uter information systems that threaten
their !ery e,istence*
+* Firms that gather' assimilate' and e!aluate e,ternal and internal information most
effecti!ely are gaining com#etiti!e ad!antages o!er other firms*
-* 8nformation collection' retrie!al' and storage can $e used to create com#etiti!e
ad!antages in (ays such as cross-selling to customers' monitoring su##liers' .ee#ing
managers and em#loyees informed' coordinating acti!ities among di!isions' and
managing funds*
Teaching Tip% "89 J"hief 8nformation 9fficerK 9nline is an a(ard-(inning (e$site that contains a
!ast array of information #ertaining to the role of com#uters and information technology in the
(or.#lace* The (e$site' (hich includes an on-line maga4ine' is a!aila$le at
Chtt#%DD(((*cio*comD"89DE*
Teaching Tip: Gisit the te,t5s (e$site at (((*#renhall*comDda!id for this cha#ter5s (e$ e,ercises*
)-1 | P a g e
ISSUES FOR REVIEW AND DISCUSSION
1. S0pp+-' $+0& )+*pa!$ #a- =0-% a)40&'. a ,&* %#a% p&+.0)'- a!. -%&a%'(-%- "a!% %+ *pl'*'!% a *a&3'%7p'!'%&a%+! -%&a%'($. H+" "+0l. $+0
-'(*'!% %#' *a&3'% ,+& %#- p&+.0)%5 J0-%,$ $+0& a!-"'&.
&ns(er% Se!eral segmentation $ases can $e used in this case* First' segmentation $y geogra#hic
location may $e useful* Battery-o#erated la(n mo(ers may not $e a##ro#riate for large yards*
Therefore' segmentation $ased on (hether families li!e in cities or su$ur$s may $e useful*
Second' families (ho are concerned a$out the en!ironment may $e more li.ely to #urchase a
$attery-o#erated la(n mo(er* 8n this case' #sychogra#hic segmentation (ill $e useful* 8n addition'
$ecause it is an inno!ati!e #roduct' families (ith a higher socioeconomic status may $e more
li.ely to #urchase a $attery-o#erated la(n mo(er* Furthermore' men tend to ma.e decisions a$out
la(n e:ui#ment* 8n this case' demogra#hic segmentation (ill $e useful* 9ften times' segmentation
is accom#lished using se!eral $ases*
2. Expla! #+" $+0 "+0l. '-%*a%' %#' %+%al "+&%# +, a RHD> a!. )+*p0%'& !,+&*a%+! -$-%'*-
*a!a('&-F !:+l:'*'!% ! -%&a%'($ ,+&*0la%+! )a! '!#a!)' -%&a%'($ *pl'*'!%a%+!.
&ns(er% Mar.eting' financeDaccounting' >BD' and com#uter information systems managers #lay
a !ital role in im#lementing strategies' so their acti!e in!ol!ement in formulating strategies is
needed to gain su##ort and commitment for actions to come* Perha#s' more im#ortantly' their
e,#ertise should (eigh hea!ily in #rioriti4ing internal strengthsD(ea.nesses' e,ternal
o##ortunitiesDthreats' and in generating and selecting from among alternati!e strategies*
@. C+!-.'& %#' ,+ll+"!( -%a%'*'!%: /R'%a!'. 'a&!!(- +! %#' etained earnings on the $alance sheet re#resent historical
earnings that ha!e $een rein!ested in the firm in the form of #lants' e:ui#ment' in!entory' and the
li.e*
A. Expla! "#$ p&+=')%'. ,!a!)al -%a%'*'!% a!al$-- - )+!-.'&'. ,!a!)'Ga))+0!%!(> RHD> a!. *a!a('*'!% !,+&*a%+! -$-%'*-
a)%:%'- %#a% a -*all &'-%a0&a!% )#a! *(#% 0!.'&%a3' %+ 'xpa!. !%+ a !'(# R +, -#a&'- +0%-%a!.!( - 9BB *ll+!> a!. EBIT &a!('
- O1BB D"a- 9BBE %+ O6BB *ll+! D"a- O1 &TGF-G&&MW9>K
Ta$le 6-- summari4es the strategy-e!aluation acti!ities in terms of .ey :uestions that should
$e addressed' alternati!e ans(ers to those :uestions' and a##ro#riate actions for an
organi4ation to ta.e* Figure 6-+ illustrates the strategy e!aluation frame(or.*
&* >e!ie(ing Bases of Strategy
)/0 | P a g e
)* &s sho(n in Figure 6-+' $y de!elo#ing a re!ised F Matri, and 8F Matri,' the
underlying $ases of an organi4ation5s strategy can $e a##roached and re!ie(ed*
a* & re!ised 8F Matri, should focus on changes in the organi4ation5s management'
mar.eting' financeDaccounting' #roductionDo#erations' >BD' and M8S strengths
and (ea.nesses*
$* & re!ised F Matri, should indicate ho( effecti!ely a firm5s strategies ha!e
$een in res#onse to .ey o##ortunities and threats*
VTN (Visit the Net): www.sba.go$startingNbusiness$!lanning$basic.html !roides a business !lan
outline.
B* Measuring 9rgani4ational Performance
)* ¬her im#ortant strategy-e!aluation acti!ity is measuring organi4ational
#erformance* This acti!ity includes com#aring e,#ected results to actual results'
in!estigating de!iations from #lans' e!aluating indi!idual #erformance' and
e,amining #rogress $eing made to(ard meeting stated o$;ecti!es* Both long-term
and annual o$;ecti!es are commonly used in this #rocess*
+* Failure to ma.e satisfactory #rogress to(ard accom#lishing long-term or annual
o$;ecti!es signals a need for correcti!e action*
-* Nuantitati!e criteria commonly used to e!aluate strategies are financial ratios' (hich
strategists use to ma.e three critical com#arisons%
a* com#aring the firm5s #erformance o!er different time #eriods'
$* com#aring the firm5s #erformance to com#etitors' and
c* com#aring the firm5s #erformance to industry a!erages*
/* Key financial ratios for measuring organi4ational #erformance%
a* return on in!estment
$* return on e:uity
c* #rofit margin
d* mar.et share
e* de$t to e:uity
f* earnings #er share
g* sales gro(th
h* asset gro(th
)/1 | P a g e
0* There are si, :ualitati!e :uestions useful for e!aluating strategies%
a* 8s the strategy internally consistent?
$* 8s it consistent (ith the en!ironment?
c* 8s the strategy a##ro#riate in !ie( of a!aila$le resources?
d* Does the strategy in!ol!e an acce#ta$le degree of ris.?
e* Does the strategy ha!e an a##ro#riate time frame(or.?
f* 8s the strategy (or.a$le?
"* Ta.ing "orrecti!e &ction
)* The final strategy-e!aluation acti!ity' ta.ing correcti!e action' re:uires ma.ing
changes to re#osition a firm com#etiti!ely for the future*
+* ,am#les of changes that may $e needed are altering an organi4ation5s structure'
re#lacing one or more .ey indi!iduals' selling a di!ision' or re!ising a $usiness
mission*
-* Ta.ing correcti!e action raises em#loyees5 and managers5 an,ieties* >esearch
suggests that #artici#ation in strategy-e!aluation acti!ities is one of the $est (ays to
o!ercome indi!iduals5 resistance to change*
888* T= B&"&>D
&* Nuestions to "onsider
)* =o( (ell is the firm continually im#ro!ing and creating !alue along measures such as
inno!ation' technological leadershi#' #roduct :uality' o#erational #rocess efficiencies'
etc*?
+* =o( (ell is the firm sustaining and e!en im#ro!ing u#on its core com#etencies and
com#etiti!e ad!antages?
-* =o( satisfied are the firm5s customers?
B* Fi!e Key 8ssues
)* "ustomers
+* ManagersDm#loyees
-* 9#erationsDProcesses
/* Business thicsDNatural n!ironment
0* Financial
"* Ta$le 6-/ #ro!ides an e,am#le of a $alanced scorecard*
8G* PHB"S 9F ST>&TGF-G&M&T89N
)/2 | P a g e
&* ,am#les of =el#ful Pu$lications
)* & num$er of #u$lications are hel#ful in e!aluating a firm5s strategies* For e,am#le'
>ortune annually identifies and e!aluates the >ortune )'777 Jthe largest
manufacturersK and the >ortune 07 Jthe largest retailers' trans#ortation com#anies'
utilities' $an.s' insurance com#anies' and di!ersified financial cor#orations in the
Hnited StatesK*
+* ¬her e,cellent e!aluation of cor#orations in &merica' @The &nnual >e#ort on
&merican 8ndustry'A is #u$lished annually in the Ianuary issue of >orbes* 1usiness
Wee"' Bndustry Wee"' and Dun=s 1usiness 8onth also #eriodically #u$lish detailed
e!aluations of &merican $usinesses and industries*
Teaching Tip: The follo(ing are the (e$site addresses of #u$lications that fre:uently re#ort on the
strategies of &merican firms*
? 1usiness Wee" Chtt#%DD(((*$usiness(ee.*comDE
? >ast ortune Chtt#%DDmoney*cnn*comDmaga4inesDfortuneDE
? >orbes Chtt#%DD(((*for$es*comDE
? Bndustry Wee" Chtt#%DD(((*industry(ee.*comDE
? 6ed /erring Chtt#%DD(((*redherring*comDE
G* "=&>&"T>8ST8"S 9F &N FF"T8G G&F "=& 'xpla! #+" $+0 "+0l. ':al0a%' %#' ,&*F-
-%&a%'($.
&ns(er% For small $usinesses such as a local su#ermar.et' strategy e!aluation is less formal than
in large organi4ations* =o(e!er' $oth :ualitati!e and :uantitati!e criteria should $e used to
e!aluate the small su#ermar.et5s strategies' $ecause large su#ermar.et stores that offer one-sto#
sho##ing for !irtually e!erything are #roliferating across the country*
9. U!.'& "#a% )+!.%+!- a&' )+&&')%:' a)%+!- !+% &'40&'. ! %#' -%&a%'($7':al0a%+!
p&+)'--5
&ns(er% The only time correcti!e actions (ould not $e re:uired in strategy e!aluation is (hen
ma;or changes ha!e not occurred in the firm5s internal or e,ternal strategic #osition and the firm is
#rogressing satisfactorily to(ards achie!ing its stated o$;ecti!es*
)0+ | P a g e
;. I.'!%,$ %#' %$p'- +, +&(a!Ca%+!- %#a% *a$ !''. %+ ':al0a%' -%&a%'($ *+&' ,&'40'!%l$ %#a!
+%#'&-. J0-%,$ $+0& )#+)'-.
&ns(er% 9rgani4ations that com#ete in more tur$ulent industries may need to e!aluate strategies
more often than others* Se!eral e,am#les of tur$ulent industries are the com#uter industry' the
communications industry' and the aeros#ace industry*
?. A- 'x')0%:' .&')%+& +, %#' -%a%' ,+&'-%&$ )+**--+!> ! "#a% "a$ a!. #+" ,&'40'!%l$
"+0l. $+0 ':al0a%' %#' +&(a!Ca%+!F- -%&a%'('-5
&ns(er% Strategy e!aluation should $e an ongoing' continuous #rocess rather than conducted at
the end of a s#ecified #eriod of time' such as at the end of each year or at the end of e!ery three
years* The need e,ists to continually re-e!aluate the forestry commission5s strategies as legislati!e
actions e!ol!e and as constituency grou#s align for or against im#ortant issues facing the state*
@. I.'!%,$ -+*' 3'$ ,!a!)al &a%+- %#a% "+0l.
notes of 12-edition by fred r david
CHAPTER 1
THE NATURE OF STRATEGIC MANAGEMENT
CHAPTER OUTLINE
? What is Strategic Management?
? Key Terms in Strategic Management
? The Strategic-Management Model
? Benefits of Strategic Management
? Why Some Firms Do No Strategic Planning
? Pitfalls in Strategic Planning
? Guidelines for ffecti!e Strategic Management
? Business thics and Strategic Management
? "om#aring Business and Military Strategy
? The Nature of Glo$al "om#etition
? The "ohesion "ase% Disney
CHAPTER OBJECTIVES
&fter studying this cha#ter' you should $e a$le to do the follo(ing%
)* Descri$e the strategic-management #rocess*
+* ,#lain the need for integrating analysis and intuition in strategic management*
-* Define and gi!e e,am#les of .ey terms in strategic management*
/* Discuss the nature of strategy formulation' im#lementation' and e!aluation
acti!ities*
0* Descri$e the $enefits of good strategic management*
1* ,#lain (hy good ethics is good $usiness in strategic management*
2* ,#lain the ad!antages and disad!antages of entering glo$al mar.ets*
3* Discuss the rele!ance of Sun T4u5s The Art of War to strategic management*
6* Discuss ho( a firm may achie!e sustained com#etiti!e ad!antage*
)7* ,#lain 8S9 )/777 and )/77)
CHAPTER OVERVIEW
"ha#ter ) #ro!ides an o!er!ie( of strategic management* & #ractical' integrati!e model of the
strategic-management #rocess is introduced* Basic acti!ities and terms in strategic management
are defined* The $enefits of strategic management are #resented* 8m#ortant relationshi#s $et(een
$usiness ethics and strategic management are discussed* 8n addition' the cha#ter initiates
discussion of t(o themes that are #resent throughout the te,t% glo$al considerations and the
strategic im#lications of the natural en!ironment*
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VTN (Visit the Net): The website www.strategyclub.com, designed by Dr. Daid, !roides
strategic !lanning tools, tem!lates, lin"s, and information to hel! strategic management students
analy#e cases.
The first theme is that glo$al considerations im#act !irtually all strategic decisions* The
$oundaries of countries can no longer $e the $oundary of our minds* 8t has $ecome a matter of
sur!i!al for $usinesses to see and a##reciate the (orld from the #ers#ecti!e of others* The
under#innings of strategic management hinge on managers gaining an understanding of
com#etitors' mar.ets' #rices' su##liers' distri$utors' go!ernments' creditors' shareholders' and
customers (orld(ide* The #rice and :uality of a firm5s #roducts and ser!ices must $e
com#etiti!e on a (orld $asis' not ;ust a local $asis* & Glo$al Pers#ecti!e illustration is #ro!ided
in all cha#ters of this te,t to em#hasi4e the im#ortance of glo$al factors in strategic management*
& second theme e!idenced throughout this te,t is that the natural en!ironment is an im#ortant
strategic issue* Perha#s no greater threat e,ists to $usiness and society than the continuous
decimation and degradation of our natural en!ironment* This is a strategic issue that needs
immediate and su$stanti!e attention $y all $usinesses and managers* & Natural n!ironment
Pers#ecti!e is #ro!ided in all cha#ters* MS D9 N9 ST>&TG8" P8ST8"S 9F & M8SS89N ST&TMNT
&* & Declaration of &ttitude
)* & mission statement is a declaration of attitude and outloo. more than a statement
of s#ecific details* 8t is usually $road in sco#e for at least t(o reasons%
a* First' a good mission statement allo(s for the generation and consideration of
a range of feasi$le alternati!e o$;ecti!es and strategies (ithout unduly stifling
management creati!ity*
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$* Second' a mission statement needs to $e $road to effecti!ely reconcile
differences among and a##eal to an organi4ation5s di!erse sta.eholders' the
indi!iduals and grou#s of #ersons (ho ha!e a s#ecial sta.e or claim on the
com#any*
+* &n effecti!e mission statement arouses #ositi!e feelings and emotions a$out an
organi4ation? it is ins#iring in the sense that it moti!ates readers to action*
-* 8t should $e short M less than +07 (ords*
B* & "ustomer 9rientation
)* & good mission statement reflects the antici#ation of customers* >ather than
de!elo#ing a #roduct and then trying to find a mar.et' the o#erating #hiloso#hy of
organi4ations should $e to identify customers5 needs and then to #ro!ide a #roduct
or ser!ice to fulfill those needs*
+* &ccording to Gern McGinnis' mission statements should )K define (hat the
organi4ation is and (hat it as#ires to $e' +K $e limited enough to e,clude some
!entures and $road enough to allo( for creati!e gro(th' -K distinguish a gi!en
organi4ation from all others' /K ser!e as a frame(or. for e!aluating $oth current
and #ros#ecti!e acti!ities' and 0K $e stated in terms sufficiently clear to $e (idely
understood throughout the organi4ation*
-* Good mission statements identify the utility of a firm5s #roducts to its customers*
"* & Declaration of Social Policy
)* The (ords social !olicy em$race managerial #hiloso#hy and thin.ing at the
highest le!els of an organi4ation* For this reason' social #olicy affects the
de!elo#ment of a $usiness mission statement*
+* Des#ite differences in a##roaches' most &merican com#anies try to assure
outsiders that they conduct $usiness in a socially res#onsi$le (ay* The mission
statement is an effecti!e instrument for con!eying this message*
-* Ta$le +-- identifies characteristics of mission statements*
Global Perspective: Social Policies on >etirement' Ia#an Gersus the World* This $o, highlights
the challenge that many countries face as their #o#ulation ages* Some countries li.e Germany
encourage immigration to $olster their (or.forces' $ut Ia#an has offered incenti!es for its
elderly to (or. until a later age*
Teaching Tip% Four students may find it interesting to .no( that not only cor#orations find
mission statement useful* Ste!en "o!ey' the author of the highly successful $oo.' The %een
/abits of /ighly %uccessful &eo!le' has (ritten t(o $oo.s that e,#lain ho( indi!iduals and
families can use mission statements to hel# them determine (ho they are and (hat they (ant to
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accom#lish* The first $oo.' /ow to Deelo! and 'se a &ersonal 8ission %tatement' e,#lains
(hy indi!iduals should (rite mission statements to #ro!ide a sense of direction and #ur#ose for
their li!es* The second $oo.' /ow to Deelo! a >amily 8ission %tatement' a##lies the same
#rinci#les in a family conce#t* e#ort Ser!ice at Chtt#%DD(((*#rars*comE* This
ser!ice #ro!ides free access to the annual re#orts of o!er -'177 #u$lic com#anies*
G8* W>8T8NG &ND G&elations among these forces and an organi4ation are de#icted in Figure --+* ,ternal
trends and e!ents significantly affect all #roducts' ser!ices' mar.ets' and organi4ations
in the (orld*
-* "hanges in e,ternal forces translate into changes in consumer demand for $oth
industrial and consumer #roducts and ser!ices*
B* The Process of Performing an ,ternal &udit
)* The #rocess of #erforming an e,ternal audit must in!ol!e as many managers and
em#loyees as #ossi$le* &s em#hasi4ed in earlier cha#ters' in!ol!ement in the strategic-
management #rocess can lead to understanding and commitment from organi4ational
mem$ers*
+* To #erform an e,ternal audit' a com#any first must gather com#etiti!e intelligence and
information a$out social' cultural' demogra#hic' en!ironmental' economic' #olitical'
legal' go!ernmental' and technological trends*
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a* 8ndi!iduals can $e as.ed to monitor !arious sources of information such as .ey
maga4ines' trade ;ournals' and ne(s#a#ers*
$* The 8nternet is another source for gathering strategic information' as are cor#orate'
uni!ersity' and #u$lic li$raries*
c* Su##liers' distri$utors' sales#ersons' customers' and com#etitors re#resent other
sources of !ital information*
-* 9nce information is gathered' it should $e assimilated' e!aluated' and #rioriti4ed*
/* Key e,ternal factors should $e im#ortant to achie!ing long term and annual
o$;ecti!es' measura$le' a##lica$le to all com#eting firms' and hierarchical in the sense
that some (ill #ertain to the o!erall com#any (hile others (ill $e more narro(ly
focused*
Teaching Tip% Many organi4ations are scram$ling to collect information a$out ho( to conduct
$usiness on the 8nternet* The follo(ing is a list of the #remier maga4ines that are a!aila$le online that
focus on e-commerce and the 8nternet*
• Money Maga4ineChtt#%DDmoney*cnn*comDmaga4inesDmoneymagDE
• The 8ndustry Standard Chtt#%DD(((*thestandard*comDE
• >ed =erring Chtt#%DD(((*redherring*comDE
Teaching Tip% There are a num$er of 8nternet sites that #ro!ide a (ealth of information on #u$licly
traded cor#orations' including DG&> filings' com#any #ress releases' ne(s#a#er articles' and
analysts5 estimates* The follo(ing is a sam#le of the sites that are #articularly useful*
• =oo!ers 9nline Chtt#%DD(((*hoo!ers*comDE
• "BS Mar.et(atch Chtt#%DDc$s*mar.et(atch*comDE
• Morningstar*com Chtt#%DD(((*morningstar*comDE
• Motley Fool Chtt#%DD(((*fool*comDE
• FahooQ "om#any 8nformation Chtt#%DDfinance*yahoo*comDE
88* T= 8NDHST>8&< 9>G&N8R&T89N J8D9K G8W
&* ,ternal Factors !ersus 8nternal Factors
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)* ,ternal factors are more im#ortant than internal factors in a firm achie!ing
com#etiti!e ad!antage* 9rgani4ational #erformance is #rimarily determined $y
industry forces*
+* Managing strategically from the 8D9 #ers#ecti!e entails firms stri!ing to com#ete in
attracti!e industries' a!oiding (ea. or faltering industries' and gaining a full
understanding of .ey e,ternal factor relationshi#s*
B* Factors &ffecting Firm Performance
)* Firm #erformance is #rimarily $ased on industry #ro#erties such as economies of
scale' $arriers to mar.et entry' #roduct differentiation' and le!el of com#etiti!eness*
+* &##ro,imately +7S of a firm5s #rofita$ility can $e e,#lained $y industry factors (hile
a$out -1S of the !ariance is attri$uted to a firm5s internal factors*
888* "9N9M8" F9>"S
&* conomic Factors =a!e a Direct 8m#act
)* conomic factors ha!e a direct im#act on the #otential attracti!eness of !arious
strategies* For e,am#le' if interest rates rise' then funds needed for ca#ital e,#ansion
$ecome more costly or una!aila$le*
+* The .ey economic !aria$les that a firm should monitor are listed in Ta$le --)* The list
includes J)K shifts to a ser!ice economy in the Hnited States? J+K a!aila$ility of credit?
J-K le!el of dis#osa$le income? J/K #ro#ensity of #eo#le to s#end? J0K interest rates? J1K
inflation rate? J2K unem#loyment trends? and so on*
-* The economic standard of li!ing !aries considera$ly across cities and countries* Ta$le
--+ illustrates the cost of li!ing in !arious cities (orld(ide* For e,am#le' a cu# of
coffee is T/*21 in To.yo $ut ;ust 6/ cents in >io de Ianeiro*
VTN (Visit the Net): htt!:$$www.h4.nasa.go$office$ns!$toc.htm e-!lains NA%A=s strategic
management !rocess and !roides NA%A=s entire strategic !lan.
/* >ussia5s conomy
a* Political $ureaucracy in >ussia se!erely limits its a$ility to de!elo# its economy*
$* Business #eo#le (ho do not cater to the go!ernment5s interests are targeted (ith
#uniti!e interference li.e audits' fines' and ins#ections*
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Teaching Tip% The 2conomist is a high-:uality British maga4ine that is a!aila$le online* The
maga4ine #u$lishes insightful articles on economic and #olitical issues that are of interest to $usiness
strategists Chtt#%DD(((*economist*comE*
888* S9"8&&P=8"' &ND NG8>9NMNT&< F9>"S
&* Social' "ultural' Demogra#hic' and n!ironmental 8m#act
)* Social' cultural' demogra#hic' and en!ironmental changes ha!e a ma;or im#act on
!irtually all #roducts' ser!ices' mar.ets' and customers*
+* Social' cultural' demogra#hic' and en!ironmental trends are sha#ing the (ay
&mericans li!e' (or.' #roduce' and consume* Ne( trends are creating a different ty#e
of consumer and' conse:uently' a need for different #roducts' ser!ices' and strategies*
-* Significant trends for the future include consumers $ecoming more educated' the
#o#ulation aging' minorities $ecoming more influential' #eo#le loo.ing for local
rather than federal solutions to #ro$lems' and fi,ation on youth decreasing*
/* Ta$le --+ identifies states (ith the oldest and youngest #o#ulations* Ta$le --- lists .ey
social' cultural' demogra#hic' and en!ironmental !aria$les*
Natural Environment Perspective: &merian Business ole* The 8nternet is changing the !ery nature of
o##ortunities and threats $y altering the life cycles of #roducts' increasing the s#eed of
distri$ution' creating ne( #roducts and ser!ices' erasing limitations of traditional
geogra#hic mar.ets' and changing the historical trade-off $et(een #roduction
standardi4ation and fle,i$ility*
B* To effecti!ely ca#itali4e on information technology' a num$er of organi4ations are
esta$lishing t(o ne( #ositions in their firms% chief information officer J"89K and chief
technology officer J"T9K*
Teaching Tips% There are a num$er of on-line #eriodicals that focus s#ecifically on technology related
$usiness issues* & sam#le of these maga4ines' (hich #ro!ides information to strategists in terms of
monitoring changes in their $usiness5s technological en!ironments' are as follo(s%
• "89 Chtt#%DD(((*cio*comD"89DE
• "om#uterWorld Chtt#%DD(((*com#uter(orld*comDE
• 8ntranet Iournal Chtt#%DD(((*intranet;ournal*comDE
• M8T Tech>e!ie( Chtt#%DD(((*techre!ie(*comDE
• Wired Chtt#%DD(((*(ired*comE
G8* "9MPT8T8G F9>"S
&* &n &(areness of "om#etiti!e Forces is ssential for Success
)* The to# fi!e H*S* com#etitors in four different industries are identified in Ta$le --0*
&n im#ortant #art of an e,ternal audit is identifying ri!al firms and determining their
strengths' (ea.nesses' ca#a$ilities' o##ortunities' threats' o$;ecti!es' and strategies*
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+* "ollecting and e!aluating information on com#etitors are essential for successful
strategy formulation*
-* Ta$le --1 #ro!ides .ey :uestions a$out com#etitors*
VTN (Visit the Net): www.fuld.com !roides information on the im!ortance of gathering com!etitie
information. Bt offers an audio fre4uently as"ed 4uestions section on intelligence systems.
B* "om#etiti!e 8ntelligence J"8K Programs
)* Good "8 in $usiness' as in the military' is one of the .eys to success* The more
information and .no(ledge a firm can o$tain a$out com#etitors' the more li.ely it can
formulate and im#lement effecti!e strategies*
a* What is "8? "8' as formally defined $y the Society of "om#etiti!e 8ntelligence
Professionals JS"8PK' is a systematic and ethical #rocess of gathering and
analy4ing information a$out the com#etition5s acti!ities and general $usiness
trends to further a $usiness5s o(n goals JS"8P (e$siteK*
+* Firms need an effecti!e com#etiti!e intelligence #rogram* The three $asic missions of
a "8 #rogram are J)K to #ro!ide a general understanding of an industry and its
com#etitors' J+K to identify areas in (hich com#etitors are !ulnera$le and to assesses
the im#act strategic actions (ould ha!e on com#etitors' and J-K to identify #otential
mo!es that a com#etitor might ma.e that (ould endanger a firm5s #osition in the
mar.et*
-* Hnethical tactics such as $ri$ery' (ireta##ing' and com#uter $rea.-ins should ne!er $e
used to o$tain information*
VTN (Visit the Net): www.non!rofits.org$n!ofa4$)+$,,.html describes the nature and role of strategic
!lanning in a firm.
Teaching Tip% Whis#er Num$er is an e,am#le of a (e$-$ased firm that conducts com#etiti!e
intelligence for $usiness organi4ations Chtt#%DD(((*(his#ernum$er*comE* The (e$site is interesting
and #ro!ides the most #o#ular com#anies according to indi!idual in!estors as (ell as the most
#essimistic and o#timistic e,#ectations*
"* "oo#eration &mong "om#etitors
)* Strategies that stress coo#eration among com#etitors are $eing used more* For
e,am#le' esource similarity is the e,tent to (hich the ty#e and amount of a firm5s internal
resources arecom#ara$le to a ri!al*
VTN (Visit the Net): htt!:$$www.!lanware.org$strategy.htm gies +)C !ages of e-cellent detail on
DDeelo!ing a 1usiness %trategy.E
G88* "9MPT8T8G &N&T>5S F8G-F9>"S M9D<
&* Porter5s Fi!e-Forces Model
)* Figure --- illustrates Porter5s Fi!e-Forces Model* The intensity of com#etition among
firms !aries (idely from industry to industry* Ta$le --2 re!eals the a!erage >98 for
firms in different industries*
+* &ccording to Porter' the nature of com#etiti!eness in a gi!en industry can $e !ie(ed
as a com#osite of fi!e forces*
a* >i!alry among com#etiti!e firms*
$* Potential entry of ne( com#etitors*
c* Potential de!elo#ment of su$stitute #roducts*
d* Bargaining #o(er of su##liers*
e* Bargaining #o(er of consumers*
-* These three ste#s can re!eal (hether com#etition in a gi!en industry is such that a
firm can ma.e an acce#ta$le #rofit%
a* 8dentify .ey as#ects or elements of each com#etiti!e force that im#act the firm*
$* !aluate ho( strong and im#ortant each element is for the firm*
c* Decide (hether the collecti!e strength of the elements is (orth the firm entering
or staying in the industry*
/* >i!alry among com#eting firms* 8s usually the most #o(erful of the fi!e com#etiti!e
forces* The strategies #ursued $y one firm can $e successful only to the e,tent that
they #ro!ide com#etiti!e ad!antage o!er the strategies #ursued $y ri!al firms*
0* Potential entry of ne( com#etitors* Whene!er ne( firms can easily enter a #articular
industry' the intensity of com#etiti!eness among firms increases*
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1* Potential de!elo#ment of su$stitute #roducts* 8n many industries' firms are in close
com#etition (ith #roducers of su$stitute #roducts in other industries*
2* Bargaining #o(er of su##liers* The $argaining #o(er of su##liers affects the intensity
of com#etition in an industry' es#ecially (hen there are a large num$er of su##liers'
(hen there are only a fe( good su$stitute ra( materials' or (hen the cost of s(itching
ra( materials is es#ecially costly*
3* Bargaining #o(er of consumers* When customers are concentrated' large' or $uy in
!olume' their $argaining #o(er re#resents a ma;or force affecting intensity of
com#etition in an industry* 8n #articular' consumers gain increasing $argaining #o(er
under the follo(ing circumstances%
a* 8f they can ine,#ensi!e s(itch to com#eting $rands or su$stitutes'
$* 8f they are #articularly im#ortant to the seller'
c* 8f sellers are struggling in the face of falling consumer demand'
d* 8f they are (ell informed a$out sellers5 #roducts' #rices' and costs' and
e* 8f they ha!e discretion in (hether and (hen they #urchase the #roduct*
VTN (Visit the Net): The 8ind Tools website (www.mindtools.com) gies good information about why
em!loyees may resist change.
G888* S9H>"S 9F LT>N&< 8NF9>M&T89N
&* 8nformation is &!aila$le from Both Pu$lished and Hn#u$lished Sources
)* Hn#u$lished sources include customer sur!eys' mar.et research' s#eeches at
#rofessional and shareholders5 meetings' tele!ision #rograms' inter!ie(s' and
con!ersations (ith sta.eholders*
+* Pu$lished sources of strategic information include #eriodicals' ;ournals' re#orts'
go!ernment documents' a$stracts' $oo.s' directories' ne(s#a#ers' and manuals*
B* 8nternet
)* Millions of #eo#le today use on-line ser!ices for $oth $usiness and #ersonal #ur#oses*
+* The 8nternet offers consumers and $usinesses a (idening range of ser!ices and
information resources from all o!er the (orld*
VTN (Visit the Net): htt!:$$www.csuchico.edu$mgmt$strategy gies an e-tensie slide show
!resentation about strategic management, from beginning to the end of the !rocess.
8L* F9>"&ST8NG T999F8< M&T>8L J"PMK
&* The "PM Matri,
)* The "PM' illustrated in Ta$le --6' identifies a firm5s ma;or com#etitors and their
#articular strengths and (ea.nesses in relation to a sam#le firm5s strategic #osition*
+* Ta$le --)7 #ro!ides a "om#etiti!e Profile Matri, e,am#le*
-* There are some im#ortant differences $et(een the F and "PM* First' the critical
success factors in a "PM are $roader* These factors are also not grou#ed into
o##ortunities and threats as in the F* 8n a "PM' the ratings and (eighted scores can
$e com#ared to ri!al firms*
0) | P a g e
VTN (Visit the Net): Visit the te-t=s website, www.!renhall.com$daid, for this cha!ter=s WWW
e-ercises.
0+ | P a g e
ISSUES FOR REVIEW AND DISCUSSION
1. Expla! #+" %+ )+!.0)% a! 'x%'&!al -%&a%'()7*a!a('*'!% a0.%.
&ns(er% &n effecti!e a##roach for conducting an e,ternal strategic-management audit
consists of four $asic ste#s% J)K select .ey !aria$les' J+K select .ey sources of information' J-K
use forecasting tools and techni:ues' and J/K construct an F Matri,*
2. I.'!%,$ a &')'!% ')+!+*)> -+)al> p+l%)al> +& %')#!+l+()al %&'!. %#a% -(!,)a!%l$ a,,')%-
,!a!)al !-%%0%+!-.
&ns(er%
conomicV8nterest rates remain lo(*
SocialVMany states are #assing no smo.ing ordinances*
PoliticalVastern uro#ean countries are e,#eriencing #olitical insta$ility*
TechnologicalVHse of the 8nternet is dou$ling e!ery )77 days*
6. D-)0-- %#' ,+ll+"!( -%a%'*'!%: Ma=+& +pp+&%0!%'- a!. %#&'a%- 0-0all$ &'-0l% ,&+* a!
!%'&a)%+! a*+!( 3'$ '!:&+!*'!%al %&'!.- &a%#'& %#a! ,&+* a -!(l' 'x%'&!al ':'!% +&
,a)%+&.
&ns(er% This statement is accurate* 8t re!eals ho( com#le, the e,ternal audit #art of strategy
formulation can $e* There are an infinite num$er of interactions among .ey e,ternal factors*
8. I.'!%,$ %"+ !.0-%&'- 'xp'&'!)!( &ap. %')#!+l+()al )#a!('- a!. %#&'' !.0-%&'- %#a%
a&' 'xp'&'!)!( l%%l' %')#!+l+()al )#a!('. H+" .+'- %#' !''. ,+& %')#!+l+()al ,+&')a-%!(
.,,'& ! %#'-' !.0-%&'-5 W#$5
&ns(er% The com#uter industry' communications industry' and aeros#ace industry are
e,#eriencing ra#id technological change* Three industries that are e,#eriencing little technological
change are the forest #roducts industry' the shi##ing industry' and the dairy industry*
9. U-' P+&%'&F- ,:'7,+&)'- *+.'l %+ ':al0a%' )+*p'%%:'!'-- "%#! %#' U.S. atings in the 8F indicate (hether the factor is a ma;or or
minor (ea.ness or strength* esearch and De!elo#ment
?
Management 8nformation Systems
?
Galue "hain &nalysis
?
The 8nternal Factor !aluation J8FK Matri,
CHAPTER OBJECTIVES
&fter studying this cha#ter' you should $e a$le to do the follo(ing%
)* Descri$e ho( to #erform an internal strategic-management audit*
+* Discuss the >esource-Based Gie( J>BGK in strategic management*
-* Discuss .ey interrelationshi#s among the functional areas of $usiness*
/* "om#are and contrast culture in the Hnited States !ersus other countries*
0* 8dentify the $asic functions or acti!ities that ma.e u# management' mar.eting' financeD accounting'
#roductionDo#erations' research and de!elo#ment' and management information systems*
1* ,#lain ho( to determine and #rioriti4e a firm5s internal strengths and (ea.nesses*
2* ,#lain the im#ortance of financial ratio analysis*
3* Discuss the nature and role of management information systems in strategic management*
6* De!elo# an 8F Matri,*
)7* ,#lain $enchmar.ing as a strategic management tool*
CHAPTER OVERVIEW
"ha#ter / focuses on identifying and e!aluating a firm5s strengths and (ea.nesses in the functional areas of $usiness'
including management' mar.eting' financeDaccounting' #roductionDo#erations' research and de!elo#ment' and management
information systems* >elationshi#s among these areas of $usiness and the strategic im#lications of im#ortant functional area
conce#ts are e,amined* The #rocess of #erforming an internal audit is descri$ed* Strategies are formulated that ta.e
ad!antage of an organi4ation5s internal strengths and im#ro!e u#on (ea.nesses* The >esource-Based Gie( J>BGK of
strategic management is introduced as (ell as the Galue "hain &nalysis JG"&K conce#t*
EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS
8* T= N&TH> 9F &N 8NT>N&< &HD8T
&* Strengths and Wea.nesses
06 | P a g e
)* &ll organi4ations ha!e strengths and (ea.nesses in the functional areas of $usiness* No enter#rise is
e:ually strong or (ea. in all areas* 8nternal strengthsD(ea.nesses' cou#led (ith e,ternal
o##ortunitiesDthreats and a clear statement of mission' #ro!ide the $asis for esta$lishing o$;ecti!es and
strategies*
+* The internal-audit #art of the strategic-management #rocess is illustrated in Figure /-)*
VTN (Visit the Net): htt!:$$www.!lanware.org$4uotes.htm.+ !roides 4uotes on strategic !lanning.
B* Key 8nternal Forces
)* & firm5s strengths that cannot $e easily matched or imitated $y com#etitors are called distincti!e
com#etencies* Building com#etiti!e ad!antages in!ol!es ta.ing ad!antage of distincti!e com#etencies*
+* Strategies are designed in #art to im#ro!e on a firm5s (ea.nesses' turning them into strengths' and
may$e e!en into distincti!e com#etencies*
"* The Process of Performing an 8nternal &udit
)* The #rocess of #erforming an internal audit closely #arallels the #rocess of #erforming an e,ternal audit*
>e#resentati!e managers and em#loyees from throughout the firm need to $e in!ol!ed in determining a
firm5s strengths and (ea.nesses*
+* Performing an internal audit re:uires gathering' assimilating' and e!aluating information a$out the firm5s
o#erations*
-* "om#ared to the e,ternal audit' the #rocess of #erforming an internal audit #ro!ides more o##ortunity
for #artici#ants to understand ho( their ;o$s' de#artments' and di!isions fit into the (hole organi4ation*
/* Financial ratio analysis e,em#lifies the com#le,ity of relationshi#s among the functional areas of
$usiness*
VTN (Visit the Net): htt!:$$www.state.wy.us$state$strategy$insurance.html !roides the com!lete strategic !lan for the
Wyoming Bnsurance De!artment Agency.
88* T= >S9H>"-B&SD G8W J>BGK
&* 8nternal Factors !ersus ,ternal Factors
)* The >BG ta.es the o##osing !ie( to that of the 8D9 theorists discussed in "ha#ter -* The >BG a##roach to
com#etiti!e ad!antage contends that internal resources are more im#ortant than e,ternal factors for a
firm in achie!ing and sustaining com#etiti!e ad!antage*
+* 8nternal resources come from three categories*
a* Physical resources% #lant' e:ui#ment' location' technology' ra( materials' machines' etc*
$* =uman resources% em#loyees' training' e,#erience' intelligence' .no(ledge' s.ills' a$ilities' etc*
c* 9rgani4ational resources% firm structure' #lanning #rocesses' information systems' #atents' trademar.s'
co#yrights' data$ases' etc*
B* The Basic Premise
)* The mi,' ty#e' amount' and nature of a firm5s internal resources should $e considered first and foremost
in de!ising strategies that can lead to sustaina$le com#etiti!e ad!antage*
+* Firms should #ursue strategies that are not currently $eing im#lemented $y any com#eting firm*
17 | P a g e
"* Galua$le >esources
)* >esources are only !alua$le if they ha!e one or more of the follo(ing characteristics%
a* rare
$* hard to imitate
c* not easily su$stituta$le
888* 8NTG>&T8NG ST>&TGF &ND "H[TH]
&* Strategy and "ulture
)* >elationshi#s among a firm5s functional $usiness acti!ities #erha#s can $e e,em#lified $y focusing on
organi4ational culture' an internal #henomenon that #ermeates through all de#artments and di!isions of
an organi4ation*
+* 9rgani4ational culture can $e defined as a #attern of $eha!ior de!elo#ed $y an organi4ation as it learns
to co#e (ith its #ro$lem of e,ternal ada#tation and internal integration that has (or.ed (ell enough to
$e considered !alid and to $e taught to ne( mem$ers as the correct (ay to #ercei!e' thin.' and feel*
>emar.a$ly resistant to change' culture can re#resent a ma;or strength or (ea.ness for the firm*
-* Defined in Ta$le /-)' cultural #roducts include !alues' $eliefs' rites' rituals' ceremonies' myths' stories'
legends' sagas' language' meta#hors' sym$ols' heroes' and heroines*
/* 9rgani4ational culture significantly affects $usiness decisions and thus' must $e e!aluated during an
internal strategic-management audit*
B* Hnited States !ersus Foreign "ultures
)* To successfully com#ete in (orld mar.ets' H*S* managers must o$tain a $etter .no(ledge of historical'
cultural' and religious forces that moti!ate and dri!e #eo#le in other countries*
a* 8n Ia#an' for e,am#le' $usiness relations o#erate (ithin the conte,t of wa' (hich stresses grou#
harmony and social cohesion* 8n "hina' $usiness $eha!ior re!ol!es around guian-i' or #ersonal
relations* 8n Korea' acti!ities in!ol!e concern for inhwa' or harmony $ased on res#ect of
hierarchical relationshi#s' including o$edience to authority*
$* H*S* managers ha!e a lo( tolerance for silence' (hereas &sian managers !ie( e,tended #eriods of
silence as im#ortant for organi4ing and e!aluating one5s thoughts* The $oo. lists other im#ortant
differences $et(een H*S* and foreign managers*
+* Ta$le /-+ contains an e,cellent list of cultural #itfalls that indi!iduals need to .no( (hen tra!eling in
foreign countries*
-* Pro$a$ly the $iggest o$stacle to the effecti!eness of H*S* managers' or managers from any country
(or.ing in another' is the fact that it is almost im#ossi$le to change the attitude of a foreign (or.#lace*
@The system dri!es you? you cannot fight the system or culture'A says Bill Par.er' #resident of Philli#s
Petroleum in Nor(ay*
8G* M&N&GMNT
1) | P a g e
&* The Functions of Management
)* The functions of management consist of fi!e $asic acti!ities% #lanning' organi4ing' moti!ating' staffing'
and controlling* &n o!er!ie( of these acti!ities is #ro!ided in Ta$le /--*
a* PlanningVPlanning consists of all those managerial acti!ities related to #re#aring for the future*
S#ecific tas.s include forecasting' esta$lishing o$;ecti!es' de!ising strategies' de!elo#ing #olicies'
and setting goals* Planning is most im#ortant in the strategy-formulation stage of the strategic-
management #rocess*
$* 9rgani4ingV9rgani4ing includes all those managerial acti!ities that result in a structure of tas. and
authority relationshi#s* S#ecific areas include organi4ational design? ;o$ s#eciali4ation'
descri#tions' s#ecifications' design' and analysis? s#an of the control? unity of command? and
coordination* 9rgani4ing is most im#ortant in the strategy im#lementation stage of the strategic-
management #rocess*
c* Moti!atingVMoti!ating in!ol!es efforts directed to(ard sha#ing human $eha!ior* S#ecific to#ics
include leadershi#' communication' (or. grou#s' $eha!ior modification' delegation of authority' ;o$
enrichment' and so on* Moti!ating is most im#ortant in the strategy-im#lementation stage of the
strategic-management #rocess*
d* StaffingVStaffing acti!ities are centered on #ersonnel or human resource management* 8ncluded
are (age and salary administration' em#loyee $enefits' inter!ie(ing' hiring' firing' training'
em#loyee safety' and so on* Staffing is most im#ortant in the strategy-im#lementation stage of the
strategic-management #rocess*
e* "ontrollingV"ontrolling refers to all those managerial acti!ities directed to(ard ensuring that
actual results are consistent (ith #lanned results* Key areas of concern include :uality' financial'
sales' in!entory' and e,#ense control? analysis of !ariances? re(ards? and sanctions* "ontrolling is
most im#ortant in the strategy-e!aluation stage of the strategic-management #rocess* 8t consists of
four $asic ste#s% )K esta$lishing #erformance standards' +K measuring indi!idual and organi4ational
#erformance' -K com#aring actual #erformance to #lanned #erformance standards' and /K ta.ing
correcti!e actions*
Teaching Tip% Se!eral :ui44es are a!aila$le on-line from the "enter for "oaching B Mentoring that hel# students access
their management' leadershi#' and coaching s.ills* The :ui44es' (hich are fun and insightful' are a!aila$le at the "oaching
B Mentoring (e$site at Chtt#%DD(((*coachingandmentoring*comD:ui44es*htmE*
B* Management &udit "hec.list of Nuestions
This chec.list can hel# determine s#ecific strengths and (ea.nesses* @NoA ans(ers indicate #otential
(ea.nesses' (hile @FesA ans(ers indicate areas of strength*
)* Does the firm use strategic-management conce#ts?
+* &re com#any o$;ecti!es and goals measura$le and (ell communicated?
-* Do managers at all hierarchical le!els #lan effecti!ely?
/* Do managers delegate authority (ell?
0* 8s the organi4ation5s structure a##ro#riate?
1* &re ;o$ descri#tions and s#ecifications clear?
2* 8s em#loyee morale high?
3* &re em#loyee turno!er and a$senteeism lo(?
6* &re organi4ational re(ard and control mechanisms effecti!e?
G* M&>KT8NG
&* Mar.eting
1+ | P a g e
)* Mar.eting* Mar.eting can $e descri$ed as the #rocess of defining' antici#ating' creating' and fulfilling
customers5 needs and (ants for #roducts and ser!ices* There are se!en $asic functions of mar.eting% J)K
customer analysis' J+K selling #roductsDser!ices' J-K #roduct and ser!ice #lanning' J/K #ricing' J0K
distri$ution' J1K mar.eting research' and J2K o##ortunity analysis*
+* "ustomer &nalysis* "ustomer analysisVthe e,amination and e!aluation of consumer needs' desires' and
(antsVin!ol!es administering customer sur!eys' analy4ing consumer information' e!aluating mar.et
#ositioning strategies' de!elo#ing customer #rofiles' and determining o#timal mar.et segmentation
strategies*
a* The information generated $y customer analysis can $e essential in de!elo#ing an effecti!e mission
statement*
$* Successful organi4ations continually monitor #resent and #otential customers5 $uying #atterns*
-* Selling ProductsDSer!ices* Successful strategy im#lementation generally rests on the a$ility of an
organi4ation to sell some #roduct or ser!ice* Selling includes many mar.eting acti!ities such as
ad!ertising' sales #romotion' #u$licity' and so on* Ta$le /*/ lists the firms (hich s#end the most on
ad!ertising*
/* Product and Ser!ice Planning* Product and ser!ice #lanning include acti!ities such as test mar.eting?
#roduct and $rand #ositioning? de!ising (arranties? #ac.aging? determining #roduct o#tions' #roduct
features' #roduct style' and #roduct :uality? deleting old #roducts? and #ro!iding for customer ser!ice*
a* 9ne of the most effecti!e #roduct and ser!ice #lanning techni:ues is test mar.eting*
$* "onsumer goods com#anies use test mar.eting more fre:uently than industrial goods com#anies* 8t
can allo( com#anies to a!oid su$stantial losses $y re!ealing (ea. #roducts and ineffecti!e
mar.eting a##roaches $efore large-scale #roduction $egins*
0* Pricing* Fi!e ma;or sta.eholders affect #ricing decisions% consumers' go!ernments' su##liers'
distri$utors' and com#etitors*
a* Sometimes an organi4ation (ill #ursue a for(ard integration strategy #rimarily to gain $etter control
o!er #rices charged to consumers*
$* Go!ernments can im#ose constraints on #rice fi,ing' #rice discrimination' minimum #rices' unit
#ricing' #rice ad!ertising' and #rice controls*
1* Distri$ution* Distri$ution includes (arehousing' distri$ution channels and co!erage' retail site locations'
sales territories' in!entory le!els and location' trans#ortation carriers' (holesaling' and retailing*
a* Distri$ution $ecomes es#ecially im#ortant (hen a firm is stri!ing to im#lement a mar.et
de!elo#ment or for(ard integration strategy*
$* Successful organi4ations identify and e!aluate alternati!e (ays to reach their ultimate mar.et*
2* Mar.eting >esearch* Mar.eting research is the systematic gathering' recording' and analy4ing of data
a$out #ro$lems relating to the mar.eting of goods and ser!ices*
a* Mar.eting research can unco!er critical strengths and (ea.nesses' and mar.eting researchers can
em#loy numerous scales' instruments' #rocedures' conce#ts' and techni:ues to gather information*
$* Mar.eting research acti!ities su##ort all ma;or $usiness functions*
1- | P a g e
3* 9##ortunity &nalysis* The ne,t function of mar.eting is o##ortunity analysis' (hich in!ol!es assessing
the costs' $enefits' and ris.s associated (ith mar.eting decisions*
a* Three ste#s are re:uired to #erform a costD$enefit analysis% J)K com#ute the total costs associated
(ith a decision' J+K estimate the total $enefits from the decision' and J-K com#are the total costs (ith
the total $enefits*
$* &s e,#ected $enefits e,ceed total costs' an o##ortunity $ecomes more attracti!e*
B* Mar.eting &udit "hec.list of Nuestions
)* &re mar.ets segmented effecti!ely?
+* 8s the organi4ation #ositioned (ell among com#etitors?
-* =as the firm5s mar.et share $een increasing?
/* &re #resent channels of distri$ution relia$le and cost-effecti!e?
0* Does the firm ha!e an effecti!e sales organi4ation?
1* Does the firm conduct mar.et research?
2* &re #roduct :uality and customer ser!ice good?
3* &re the firm5s #roducts and ser!ices #riced a##ro#riately?
6* Does the firm ha!e an effecti!e #romotion' ad!ertising' and #u$licity strategy?
)7* &re mar.eting #lanning and $udgeting effecti!e?
))* Do the firm5s mar.eting managers ha!e ade:uate e,#erience and training?
G8* F8N&N"D&""9HNT8NG
&* 8m#ortance of Finance and &ccounting
)* Financial condition is often considered the single $est measure of a firm5s com#etiti!e #osition and
o!erall attracti!eness to in!estors* Determining an organi4ation5s financial strengths and (ea.nesses is
essential to formulating strategies effecti!ely*
+* & firm5s li:uidity' le!erage' (or.ing ca#ital' #rofita$ility' asset utili4ation' cash flo(' and e:uity can
eliminate some strategies as $eing feasi$le alternati!es*
B* FinanceD&ccounting Functions
)* &ccording to Iames Gan =orne' the functions of financeDaccounting com#rise three decisions% the
in!estment decision' the financing decision' and the di!idend decision*
+* Basic Ty#es of Financial >atios* Financial ratios are com#uted from an organi4ation5s income statement
and $alance sheet* Trend analysis' illustrated in Figure /-+' is an e,am#le of a techni:ue that incor#orates
$oth the time and industry a!erage dimensions of financial ratios* Four ma;or sources of industry-
a!erage financial ratios are%
a* Dun B Bradstreet5s Bndustry Norms and Fey 1usiness 6atios
$* >o$ert Morris &ssociates5 Annual %tatement %tudies
c* Almanac of 1usiness G Bndustrial >inancial 6atios
d* Federal Trade "ommission >e#orts
VTN (Visit the Net): ?ahooH >inance offers financial com!any news at htt!:$$finance.yahoo.com.
-* Key Financial >atiosVTa$le /-0 lists good (e$sites for getting financial information* Ta$le /-1 #ro!ides
a summary of .ey financial ratios sho(ing ho( each ratio is calculated and (hat each ratio measures*
They can $e classified into fi!e ty#es*
1/ | P a g e
a* "= &ND DGBDK
&* 8m#ortance of >BD
)* The fifth ma;or area of internal o#erations that should $e e,amined for s#ecific strengths and (ea.nesses
is >BD* Many firms today do not conduct >BD' and yet many other com#anies de#end on successful
>BD acti!ities for sur!i!al* Firms #ursuing a #roduct de!elo#ment strategy es#ecially need to ha!e a
strong >BD orientation*
B* 8nternal and ,ternal >BD
)* >BD in organi4ations can ta.e t(o $asic forms% J)K internal >BD' in (hich an organi4ation o#erates its
o(n >BD de#artment' andDor J+K contract >BD' in (hich a firm hires inde#endent researchers or
inde#endent agencies to de!elo# s#ecific #roducts* Many com#anies use $oth a##roaches to de!elo#
ne( #roducts* & (idely used a##roach for o$taining outside >BD assistance is to #ursue a ;oint !enture
(ith another firm*
+* Most firms ha!e no choice $ut to continually de!elo# ne( and im#ro!ed #roducts $ecause of changing
consumer needs and tastes' ne( technologies' shortened #roduct life cycles' and increased domestic and
foreign com#etition*
"* >BD &udit "hec.list of Nuestions
)* Does the firm ha!e >BD facilities? &re they ade:uate?
+* 8f outside >BD firms are used' are they cost effecti!e?
-* &re the organi4ation5s >BD #ersonnel (ell :ualified?
/* &re >BD resources allocated effecti!ely?
0* &re management information and com#uter systems ade:uate?
1* 8s communication $et(een >BD and other organi4ational units effecti!e?
2* &re #resent #roducts technologically com#etiti!e?
Teaching Tip% &n e,am#le of the >BD acti!ities that ta.e #lace at a large firm is #ro!ided $y G at
Chtt#%DD(((*crd*ge*comE*
8L* M&N&GMNT 8NF9>M&T89N SFSTMS
&* 8m#ortance of 8nformation
)* 8nformation ties all $usiness functions together and #ro!ides the $asis for all managerial decisions*
+* & management information system recei!es ra( material from $oth the e,ternal and internal e!aluation
of an organi4ation* 8t gathers data a$out mar.eting' finance' #roduction' and #ersonnel matters
internally? and social' cultural' demogra#hic' en!ironmental' economic' #olitical' go!ernment' legal'
technological' and com#etiti!e factors e,ternally* Data is integrated in (ays needed to su##ort
managerial decision ma.ing*
-* Because organi4ations are $ecoming more com#le,' decentrali4ed' and glo$ally dis#ersed' the function
of information systems is gro(ing in im#ortance*
B* Strategic Planning Soft(are
)* Strategic #lanning soft(are can allo( firms to ta# the .no(ledge $ase of e!eryone in the firm* There are
a num$er of commercially a!aila$le soft(are #roducts designed to train and assist managers in strategic
#lanning*
+* "hec.M&T is one such ty#e of soft(are* 8t is an e,#ert system that carries a firm through strategy
formulation and im#lementation*
12 | P a g e
"* Management 8nformation Systems &udit "hec.list of Nuestions
)* Do all managers in the firm use the information system to ma.e decisions?
+* 8s there a chief information officer or director of information systems #osition in the firm?
-* &re data in the information system u#dated regularly?
/* Do managers from all functional areas of the firm contri$ute in#ut to the information system?
0* &re there effecti!e #ass(ords for entry into the firm5s information system?
1* &re strategists of the firm familiar (ith the information systems of ri!al firms?
2* 8s the information system user friendly?
3* Do all users of the information system understand the com#etiti!e ad!antages that information can
#ro!ide firms?
6* &re com#uter training (or.sho#s #ro!ided for users of the information system?
)7* 8s the firm5s information system continually $eing im#ro!ed in content and user-friendliness?
Teaching Tip% There are a num$er of com#anies that sell strategic #lanning soft(are* ,am#les of the com#anies include%
• Guru Soft(are% Chtt#%DD(((*gurusoft(are*comDDou$le8tSummary*htmE
• "hec.M&T Strategic Planning Soft(are% Chtt#%DD(((*chec.mate#lan*comDE
L* G& G&8L
&* The 8F Matri,
)* & summary ste# in conducting an internal strategic-management audit is to construct an 8F Matri,* This
strategy-formulation tool summari4es and e!aluates the ma;or strengths and (ea.nesses in the functional
areas of a $usiness' and it also #ro!ides a $asis for identifying and e!aluating relationshi#s among these
areas*
+* 8ntuiti!e ;udgments are re:uired in de!elo#ing an 8F Matri,' so the a##earance of a scientific a##roach
should not $e inter#reted to mean this is an all-#o(erful techni:ue*
B* &n 8F Matri, is de!elo#ed in fi!e ste#s* &n e,am#le 8F Matri, is #ro!ided in Ta$le /-6*
)* ,+0& *..l' *a!a('&-> a!. 1@ l+"'&7l':'l *a!a('&-. N+"> .a(&a* %#&''
+:'&lapp!( a!. #$p+%#'%)al !,+&*a%+! (&+0p -%&0)%0&'-. H+" )a! %#- !,+&*a%+! BD e,#enditures (ill li.ely increase $ecause technological
ad!ancements are shortening the #roduct life cycle in nearly all industries*
Products of all ty#es are $ecoming o$solete more :uic.ly than e!er $efore'
thus re:uiring greater >BD e,#enditures to gain com#etiti!e ad!antages in
the mar.et#lace*
;. Expla! #+" $+0 "+0l. *+%:a%' *a!a('&- a!. '*pl+$''- %+ *pl'*'!% a *a=+& !'"
-%&a%'($.
&ns(er% There is a need to demonstrate clearly ho( the ne( strategy (ill $enefit managers and em#loyees of the
organi4ation* &rticulate effecti!ely (hy the ne( strategy is needed' gi!en com#etitors5 strategies' #roducts' and
ser!ices* Stri!e to mo$ili4e the firm5s cultural #roducts to su##ort the ne( strategy* 8n!ol!e as many managers as
#ossi$le in discussions a$out ho( to effecti!ely im#lement the strategy* The #rocess is more im#ortant than the #lan*
?. W#$ .+ $+0 %#!3 p&+.0)%+!G+p'&a%+!- *a!a('&- a&' +,%'! !+% .&')%l$ !:+l:'. !
-%&a%'($7,+&*0la%+! a)%:%'-5 W#$ )a! %#- - %#a% al"a$- a! +&(a!Ca%+!al -%&'!(%#5
W#$ +& "#$ !+%5
&ns(er% Whene!er an organi4ation5s return on in!estment or #rofit margin e,ceeds the cost of de$t' it may $e
ad!isa$le to use de$t to finance the firm5s strategies* Thus' it is not al(ays an organi4ational strength to ha!e 4ero de$t
in a firm5s ca#ital structure* &s an indi!idual' if you (ere sure you could ma.e )0 #ercent on monies in!ested' then you
(ould #ro$a$ly o$tain a su$stantial amount of de$t at )7 #ercent to in!est at that higher le!el*
11. D'-)&S8F8"&T89N ST>&TG8S
&* >elated Di!ersification
)* Businesses are said $e related (hen their !alue chains #ossess com#etiti!ely !alua$le
cross-$usiness strategic fits*
26 | P a g e
+* >elated di!ersification strategies ena$le $usinesses to ca#itali4e on synergies such as%
a* transferring com#etiti!ely !alua$le e,#ertise'
$* com$ining the related acti!ities of se#arate $usinesses into a single o#eration to
achie!e lo(er costs'
c* e,#loiting common use of a (ell-.no(n $rand name' and
d* colla$orating across $usinesses to create !alua$le resource strengths and
ca#acities*
-* Si, guidelines for (hen related di!ersification may $e effecti!e are identified $elo(%
a* When an organi4ation com#etes in a no-gro(th or slo( gro(th industry*
$* When adding ne(' $ut related #roducts (ould enhance sales of current #roducts*
c* When ne(' $ut related #roducts could $e offered at com#etiti!e #rices*
d* When ne(' $ut related #roducts ha!e seasonal sales le!els that counter$alance
e,isting #ea.s and !alleys*
e* When an organi4ation5s #roducts are in the decline stage of the life cycle*
f* When an organi4ation has a strong management team*
B* Hnrelated Di!ersification
)* Businesses are said to $e unrelated (hen their !alue chains are so dissimilar that no
com#etiti!ely !alua$le cross-$usiness relationshi#s e,ist*
+* &n unrelated di!ersification strategy fa!ors ca#itali4ing u#on a #ortfolio of $usinesses
that are ca#a$le of deli!ering e,cellent financial #erformance in their res#ecti!e
industries*
-* Ten guidelines for (hen unrelated di!ersification may $e effecti!e are identified
$elo(%
a* When re!enues deri!ed from an organi4ation5s current #roducts or ser!ices
(ould increase significantly $y adding the ne(' unrelated #roducts*
$* When an organi4ation com#etes in a highly com#etiti!e andDor no-gro(th
industry*
c* When an organi4ation5s #resent channels of distri$ution can $e used to mar.et
the ne( #roducts to current customers*
d* When the ne( #roducts ha!e countercyclical sales #atterns com#ared to an
organi4ation5s #resent #roducts*
e* When an organi4ation5s $asic industry is e,#eriencing declining annual sales
and #rofits*
f* When an organi4ation has the ca#ital and managerial talent needed to
com#ete*
g* When an organi4ation has the o##ortunity to #urchase an unrelated $usiness
that is an attracti!e in!estment*
37 | P a g e
h* When financial synergy e,ists $et(een the ac:uired and ac:uiring firms*
i* When e,isting mar.ets for an organi4ation5s #resent #roducts are saturated*
;* When antitrust action could $e charged against an organi4ation that
historically has concentrated on a single industry*
Teaching Tip% The %trategic 8anagement 7ournal JSMIK is the #remier academic ;ournal for strategic
management* The ;ournal co!ers di!ersification e,tensi!ely* The Strategic Management Society at
Chtt#%DD(((*sms(e$*orgDE s#onsors SMI*
Teaching Tip% ¬her strategic-management ;ournal that may $e of interest to your students is the
7ournal of 1usiness %trategies*
G88* DFNS8G ST>&TG8S
&* >etrenchment
)* >etrenchment occurs (hen an organi4ation regrou#s through cost and asset reduction
to re!erse declining sales and #rofits*
+* Sometimes called a turnaround or reorgani4ational strategy' retrenchment is designed
to fortify an organi4ation5s $asic distincti!e com#etence*
-* Ban.ru#tcy can $e an effecti!e retrenchment strategy*
a* "ha#ter 2 $an.ru#tcy is a li:uidation #rocedure used only (hen a cor#oration
sees no ho#e of $eing a$le to o#erate successfully or to o$tain the necessary
creditor agreements*
$* "ha#ter 6 $an.ru#tcy a##lies to munici#alities*
c* "ha#ter )) $an.ru#tcy allo(s organi4ations to reorgani4e and come $ac. after
filing*
d* "ha#ter )+ $an.ru#tcy #ro!ides s#ecial relief to family farmers (ith de$t e:ual to
or less than T)*0 million*
e* "ha#ter )- $an.ru#tcy is similar to "ha#ter )) $ut a!aila$le only to small
$usinesses o(ned $y indi!iduals (ith unsecured de$ts of less than T)77'777 and
secured de$ts of less than T-07'777*
/* Fi!e guidelines identify (hen retrenchment may $e an es#ecially effecti!e strategy to
#ursue%
a* When an organi4ation has a clearly distincti!e com#etence $ut has failed to
meet o$;ecti!es consistently*
$* When an organi4ation is one of the (ea.er com#etitors in a gi!en industry*
3) | P a g e
c* When an organi4ation is #lagued $y inefficiency' lo( #rofita$ility' #oor em#loyee
morale' and #ressure from stoc.holders to im#ro!e #erformance*
d* When an organi4ation has failed to ca#itali4e on e,ternal o##ortunities' minimi4e
e,ternal threats' ta.e ad!antage of internal strengths' and o!ercome internal
(ea.nesses o!er time*
e* When an organi4ation has gro(n so large so :uic.ly that ma;or internal
reorgani4ation is needed*
B* Di!estiture
)* Selling a di!ision or #art of an organi4ation is called di!estiture* Di!estiture often is
used to raise ca#ital for further strategic ac:uisitions or in!estments*
+* Di!estiture has $ecome a !ery #o#ular strategy as firms try to focus on their core
strengths' lessening their le!el of di!ersification* & fe( di!estitures consummated
recently are gi!en in Ta$le 0-/*
-* Si, guidelines for (hen to use di!estiture%
a* When an organi4ation has #ursued a retrenchment strategy and it failed to
accom#lish needed im#ro!ement*
$* When a di!ision needs more resources to $e com#etiti!e than the com#any
can #ro!ide*
c* When a di!ision is res#onsi$le for an organi4ation5s o!erall #oor #erformance*
d* When a di!ision is a misfit (ith the rest of an organi4ation*
e* When a large amount of cash is needed :uic.ly and cannot $e o$tained*
f* When go!ernment antitrust action threatens an organi4ation*
"* &TG8S
&ccording to Porter' strategies allo( organi4ations to gain com#etiti!e ad!antage from three
different $ases% cost leadershi#' differentiation' and focus* "ost leadershi# and focus strategies
can $e further segmented $y (hether the a##roach is lo(-cost or $est-!alue* Thus' there are
fi!e generic strategies% cost leadershi#-lo( cost' cost leadershi#-$est !alue' differentiation'
focus-lo( cost' and focus-$est !alue* These are illustrated in Figure 0--*
&* "ost BD and mar.eting functions and su$stantial
amenities to attract scientists and creati!e #eo#le*
"* Focus
)* Focus means #roducing #roducts and ser!ices that fulfill the needs of small grou#s of
consumers*
+* There are t(o ty#es of focus strategies*
a* & lo(-cost focus strategy offers #roducts or ser!ices to a small range JnicheK of
customers at the lo(est #rice a!aila$le on the mar.et*
$* & $est-!alue focus strategy offers #roducts to a small range of customers at the $est
#rice-!alue a!aila$le on the mar.et* This is sometimes called focused
differentiation*
-* Focus strategies are most effecti!e (hen the niche is #rofita$le and gro(ing' (hen
industry leaders are uninterested in the niche' (hen industry leaders feel #ursuing the
niche is too costly or difficult' (hen the industry offers se!eral niches' and (hen there
is little com#etition in the niche segment*
D* Strategies for "om#eting in Tur$ulent' =igh-Gelocity Mar.ets
)* Some industries change so fast that they are called tur$ulent' high-!elocity mar.ets*
,am#les include telecommunications' $iotechnology' and com#uter-related
industries*
+* Figure 0-/ illustrates ho( firms can meet the challenges #resented (ith this ty#e of
mar.et $y reacting' antici#ating' or leading the mar.et (ith its strategies*
Teaching Tip% & $i$liogra#hy of Michael Porter is a!aila$le through the =ar!ard Business School
(e$site at Chtt#%DDdrfd*h$s*eduDfitD#u$licDfaculty8nfo*do?fac8nfoU$ioBfacm8dUm#orterBlocUe,tnE*
8L* M&NS F9> &"=8G8NG ST>&TG8S
&* Ioint Genture
)* Ioint !enture is a #o#ular strategy that occurs (hen t(o or more com#anies form a
tem#orary #artnershi# or consortium for the #ur#ose of ca#itali4ing on some
o##ortunity*
3/ | P a g e
+* 9ther ty#es of coo#erati!e arrangements include >BD #artnershi#s' cross-distri$ution
agreements' cross-licensing agreements' cross-manufacturing agreements' and ;oint-
$idding consortia*
-* Ioint !entures and coo#erati!e arrangements are $eing used increasingly $ecause they
allo( com#anies to im#ro!e communications and net(or.ing' to glo$ali4e o#erations
and minimi4e ris.*
/* Many' if not most' organi4ations #ursue a com$ination of t(o or more strategies
simultaneously' $ut a com$ination strategy can $e e,ce#tionally ris.y if carried too
far* No organi4ation can afford to #ursue all the strategies that might $enefit the firm*
Difficult decisions must $e made* Priorities must $e esta$lished* 9rgani4ations' li.e
indi!iduals' ha!e limited resources* Both organi4ations and indi!iduals must choose
among alternati!e strategies and a!oid e,cess inde$tedness*
0* Ioint !entures may fail (hen%
a* Managers (ho must colla$orate regularly are not in!ol!ed in the !enture*
$* The !enture may $enefit #artnering com#anies $ut not the customers*
c* Both #artners may not su##ort the !enture e:ually*
d* The !enture com#etes (ith one of the #artners*
1* Ioint !entures are es#ecially effecti!e (hen%
a* & #ri!ately o(ned organi4ation forms one (ith a #u$lic organi4ation*
$* & domestic organi4ation (or.s (ith a foeign com#any*
c* The distinct com#etencies of the firms com#lement each other es#ecially (ell*
d* Some #ro;ect is #otentially #rofita$le $ut re:uires much ris.*
e* T(o or more smaller firms (ish to com#ete against a larger firm*
f* There is a need to introduce a ne( technology :uic.ly*
B* Mergers and ac:uisitions
Mergers and ac:uisitions are t(o commonly used (ays to #ursue strategies*
)* & merger occurs (hen t(o organi4ations of a$out e:ual si4e unite to form one
enter#rise*
+* &n ac:uisition occurs (hen a large organi4ation #urchases Jac:uiresK a smaller firm
or !ice !ersa*
-* Ta$le 0-/ sho(s some mergers and ac:uisitions com#leted in +772* There are many
reasons for mergers and ac:uisitions' including the follo(ing%
a* To #ro!ide im#ro!ed ca#acity utili4ation
$* To ma.e $etter use of an e,isting sales force*
c* To reduce managerial staff*
d* To gain economies of scale*
e* To smooth out seasonal trends in sales*
30 | P a g e
f* To gain access to ne( su##liers' distri$utors' customers' #roducts' and creditors*
g* To gain ne( technology*
h* To reduce ta, o$ligations*
/* Mergers and ac:uisitions may fail due to the follo(ing reasons%
a* 8ntegration difficulties
$* 8nade:uate e!aluation of target
c* educed em#loyee morale due to layoffs and relocations
"* esearch also indicates that strategic management in small firms is more informal than in
large firms' $ut small firms that engage in strategic management out#erform those that do not*
32 | P a g e
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Teaching Tip% For small $usinesses that are unsure of ho( to organi4e' the Ser!ice "or#s of >etired
,ecuti!es JS"9>K is an e,cellent resource to o$tain management ad!ice from* S"9> maintains
a (e$site at Chtt#%DD(((*score*orgDE* The (e$site #ro!ides information a$out S"9> and a toll free
num$er J)-377-1-/-7+/0K that hel#s an indi!idual locate the closest S"9> cha#ter to his or her
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WWW e,ercises*
ISSUES FOR REVIEW AND DISCUSSION
1. H+" .+'- -%&a%'($ ,+&*0la%+! .,,'& ,+& a -*all :'&-0- la&(' +&(a!Ca%+!5 F+& a ,+&7p&+,%
:'&-0- a !+!p&+,% +&(a!Ca%+!5
&ns(er% Strategy formulation is conce#tually the same for $oth small and large organi4ations*
=o(e!er' for large firms' there are more !aria$les to include in $oth the e,ternal and internal
audits* The #rocess is usually more formal in a large firm*
2. G:' &')'!% 'xa*pl'- +, *a&3'% p'!'%&a%+!> *a&3'% .':'l+p*'!%> a!. p&+.0)%
.':'l+p*'!%.
&ns(er% Mar.et #enetration means selling more #roducts to e,isting mar.ets* The class (ill
li.ely thin. of se!eral e,am#les $ut some #ossi$ilities include Sony lo(ering the #rice on its
Game$oy in order to increase selling* Mar.et de!elo#ment means selling an e,isting #roduct to a
ne( mar.et* Sony has de!elo#ed se!eral ro$ots for its Ia#anese mar.et* 8t is no( see.ing to
de!elo# a mar.et for ro$otics in H*S* households* Product de!elo#ment means selling a ne(
#roduct to an e,isting mar.et* &n e,am#le of this is S(iffer S(ee#er de!elo#ing the mo##ing
!ersion of its s(ee#er*
6. G:' &')'!% 'xa*pl'- +, ,+&"a&. !%'(&a%+!> .:'-%%0&'> a!. l40.a%+!.
&ns(er% Students (ill ha!e a !ariety of ans(ers' $ut here are some e,am#les* Mo!ielin. is a
;oint !enture $y fi!e ma;or mo!ie studios aimed at creating an 8nternet !ideo-on-demand
ser!ice* &rthur &nderson is currently undergoing a retrenchment strategy' as are many
airlines*
CMO> HRM> RHD> a!. %"+ .:-+! p&'-.'!%-. H!%: D:-+! p&'-.'!%- &'p+&% %+ %#'
COO.
&ns(er%
1;. H+" .+ %#' l':'l- +, -%&a%'($ .,,'& ! a la&(' ,&* :'&-0- a -*all ,&*5
&ns(er% 8n large firms' the #ersons #rimarily res#onsi$le for ha!ing effecti!e strategies at the
!arious le!els include the "9 at the cor#orate le!el' the #resident or e,ecuti!e !ice #resident at
the di!isional le!el' the res#ecti!e "F9' "89' =>M' "M9' at the functional le!el and the #lant
manager' regional sales manager at the o#erational le!el* 8n small firms' the #ersons #rimarily
res#onsi$le for ha!ing effecti!e strategies at the !arious le!els include the $usiness o(ner or
#resident at the com#any le!el and then the same range of #ersons at the lo(er t(o le!els as (ith
a large firm*
1?. L-% %#' %$p'- +, -%&a%'('-. G:' a #$p+%#'%)al 'xa*pl' +, 'a)# -%&a%'($ l-%'..
6+ | P a g e
&ns(er%
• For(ard integration% Widgets' 8nc* o#ens retail stores to sell its (idgets*
• Bac.(ard integration% Widgets' 8nc* #urchases a steel mill to control its su##ly of steel at a
reasona$le #rice*
• =ori4ontal integration% Widgets' 8nc* #urchases We > Widgets' a com#eting (idget
manufacturer*
• Mar.et Penetration% Widgets' 8nc* launches a (idget loyalty #rogram to re(ard hea!y
$uyers of (idgets*
• Mar.et De!elo#ment% Widgets' 8nc* $egins to offer (idgets in 8ndia' a ne( geogra#hic
mar.et area for the com#any*
• Product De!elo#ment% Widgets' 8nc* de!elo#s a s#ecial (idgets drill*
• >elated Di!ersification% Widgets' 8nc* (ill no( manufacture and sell fasteners*
• Hnrelated Di!ersification% Widgets' 8nc* (ill offer a credit card for its customers*
• >etrenchment% Widgets' 8nc* is cutting ;o$s in +7 mar.ets in the South(est*
• Di!estiture% Widgets' 8nc* is selling off its #lastics di!ision*
• e#ort? Some go!ernments mandate that
$usinesses #u$licly re#ort on the #ollutants and (astes #roduced $y their facilities* The re#orts on
social res#onsi$ility #ractices are called sustaina$ility re#orts* The Glo$al >e#orting 8nitiati!e has
issues a detailed re#ort of guidelines s#ecifying (hat information should go in sustaina$ility re#orts*
61 | P a g e
888* T= 8NPHT ST&G
&* The 8n#ut Stage includes the ,ternal Factor !aluation JFK Matri,' the "om#etiti!e
Profile Matri, J"PMK' and the 8nternal Factor !aluation J8FK Matri,*
B* Procedures for de!elo#ing an F Matri,' an 8F Matri,' and a "PM (ere #resented
earlier*
"* The in#ut tools re:uire strategists to :uantify su$;ecti!ely during early stages of the
strategy-formulation #rocess* Ma.ing small decisions in the in#ut matrices regarding the
relati!e im#ortance of e,ternal and internal factors allo(s strategists to generate and
e!aluate alternati!e strategies more effecti!ely*
8G* T= M&T"=8NG ST&G
&* The Matching Stage
)* The Matching Stage includes the Strengths-Wea.nesses-9##ortunities-Threats
JSW9TK Matri,' the Strategic Position and &ction !aluation JSP&"K Matri,' the
Boston "onsulting Grou# JB"GK Matri,' the 8nternal-,ternal J8K Matri,' and the
Grand Strategy Matri,*
+* &ny organi4ation' (hether military' #roduct-oriented' ser!ice-oriented' go!ernmental'
or e!en athletic must de!elo# and e,ecute good strategies to (in*
-* Ta$le 1-) #ro!ides the $asic conce#t of matching*
VTN (Visit the Net): htt!:$$www.csuchico.edu$mgmt$strategy$module($sld),*.htm gies e-am!le
ob3ecties.
B* The SW9T Matri,
)* The SW9T Matri, is an im#ortant matching tool that hel#s managers de!elo# four
ty#es of strategies%
a* S9 strategiesVuse a firm5s internal strengths to ta.e ad!antage of e,ternal
o##ortunities*
$* W9 strategiesVare aimed at im#ro!ing internal (ea.nesses $y ta.ing ad!antage
of e,ternal o##ortunities*
c* ST strategiesVuse a firm5s strengths to a!oid or reduce the im#act of e,ternal
threats*
d* WT strategiesVare defensi!e tactics directed at reducing internal (ea.nesses and
a!oiding e,ternal threats*
62 | P a g e
+* & schematic re#resentation of the SW9T Matri, is #ro!ided in Figure 1-- in the
te,t$oo.*
-* There are eight ste#s to construct a T9WS Matri,%
a* ates World(ide M uro#e is ate Jro(sKD
>elati!e Mar.et Share JcolumnsK
=igh J)*7K Medium J*07K O2B> a!. O8B ! &':'!0'-> a!. O2> O8> a!.
O1 ! p&+,%-. S%a%' +%#'& a--0*p%+!- a- !''.'.. Lae!enue
JTK
>e!enue
JSK
Profit JTK Profit JSK F 8F
) )7 )/ + +6 + +
+ +7 +6 / 02 / /
- /7 02 ) )/ ) +
8n this e,am#le' Di!ision ) falls in :uadrant G' Di!ision + falls in :uadrant 8' and Di!ision - falls
in :uadrant G888*
8 88 888
8G G G8
G88 G888 8L
19. W#a% p&+)'.0&'- )+0l. esource "oncerns When 8m#lementing Strategies
CHAPTER OBJECTIVES
&fter studying this cha#ter' you should $e a$le to do the follo(ing%
)* ,#lain (hy strategy im#lementation is more difficult than strategy formulation*
+* Discuss the im#ortance of annual o$;ecti!es and #olicies in achie!ing organi4ational
commitment for strategies to $e im#lemented*
-* ,#lain (hy organi4ational structure is so im#ortant in strategy im#lementation*
/* "om#are and contrast restructuring and reengineering*
0* Descri$e the relationshi#s $et(een #roductionDo#erations and strategy im#lementation*
1* ,#lain ho( a firm can effecti!ely lin. #erformance and #ay to strategies*
2* Discuss em#loyee stoc. o(nershi# #lans JS9PsK as a strategic-management conce#t*
3* Descri$e ho( to modify an organi4ational culture to su##ort ne( strategies*
6* Discuss the culture in Me,ico and Ia#an*
)7* Descri$e the glass ceiling in the Hnited States*
))+ | P a g e
CHAPTER OVERVIEW
The strategic-management #rocess does not end (hen the firm decides (hich strategy or
strategies to #ursue* There must $e a translation of strategic thought into strategic action* This
translation is much easier if managers and em#loyees of the firm understand the $usiness' feel a
#art of the com#any' and' through in!ol!ement in strategy-formulation acti!ities' ha!e $ecome
committed to hel#ing the organi4ation succeed* Without understanding and commitment'
strategy-im#lementation efforts face ma;or #ro$lems*
EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS
8* T= N&TH> 9F ST>&TGF 8MPe#resent the $asis for allocating resources*
$* &re a #rimary mechanism for e!aluating managers*
c* &re the ma;or instrument for monitoring #rogress to(ards achie!ing long-term
o$;ecti!es*
d* sta$lish organi4ational' di!isional' and de#artmental #riorities*
-* "learly stated and communicated o$;ecti!es are critical to success in all ty#es and
si4es of firms*
a* &nnual o$;ecti!es should $e measura$le' consistent' reasona$le' challenging'
clear' communicated throughout the organi4ation' characteri4ed $y an a##ro#riate
time dimension' and accom#anied $y commensurate re(ards and sanctions*
$* Too often' o$;ecti!es are stated in generalities' (ith little o#erational usefulness*
/* &nnual o$;ecti!es should $e com#ati$le (ith em#loyees5 and managers5 !alues and
should $e su##orted $y clearly stated #olicies*
0* Figure 2-+ illustrates ho( the Statmus "om#any could esta$lish annual o$;ecti!es
$ased on long-term o$;ecti!es* Ta$le 2-) re!eals associated re!enue figures that
corres#ond to the o$;ecti!es in Figure 2-+*
888* P9S9H>" &esources at the Hni!ersity of "alifornia-Da!is has an e,cellent online $rochure on dealing (ith
(or.#lace !iolence* 8t is a!aila$le at htt#%DD(((*hr*ucda!is*eduDlrDrDGiolenceDBrochure*
G8* M&T"=8NG ST>&TGF W8T= ST>H"TH>
&* "hanges in Strategy 9ften >e:uire "hanges in Structure
)* "hanges in strategy often re:uire changes in the (ay an organi4ation is structured for
t(o ma;or reasons*
a* First' structure largely dictates ho( o$;ecti!es and #olicies (ill $e esta$lished*
For e,am#le' o$;ecti!es and #olicies esta$lished under a geogra#hic
organi4ational structure are couched in geogra#hic terms* 9$;ecti!es and #olicies
are stated largely in terms of #roducts in an organi4ation (hose structure is $ased
on #roduct grou#s* The structural formula for de!elo#ing o$;ecti!es and #olicies
can significantly im#act all other strategy-im#lementation issues*
$* The second ma;or reason (hy changes in strategy often re:uire changes in
structure is that structure dictates ho( resources (ill $e allocated*
+* "hanges in strategy lead to changes in organi4ational structure* Structure should $e
designed to facilitate the strategic #ursuit of a firm and' therefore' follo( strategy*
Figure 2-- illustrates a structure se:uence re#eated as organi4ations gro( and change
o!er time*
-* There is not ;ust one o#timal organi4ational design or structure for a gi!en strategy or
ty#e of organi4ation*
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B* The Functional Structure
)* The most (idely used structure is the functional or centrali4ed ty#e $ecause this
structure is the sim#lest and least e,#ensi!e of the se!en alternati!es*
+* & functional structure grou#s tas.s and acti!ities $y $usiness function such as
#roductDo#erations' mar.eting' financeDaccounting' >BD' and com#uter information
systems*
a* &d!antages% Besides $eing sim#le and ine,#ensi!e' a functional structure also
#romotes s#eciali4ation of la$or' encourages efficiency' minimi4es the need for an
ela$orate control system' and allo(s ra#id decision-ma.ing*
))1 | P a g e
$* Disad!antages% Some disad!antages of a functional structure are that it forces
accounta$ility to the to#' minimi4es career de!elo#ment o##ortunities' and is
sometimes characteri4ed $y lo( em#loyee morale*
"* The Di!isional Structure
)* The di!isional or decentrali4ed structure is the second most common ty#e used $y
&merican $usinesses*
+* The di!isional structure can $e organi4ed in one of four (ays% $y geogra#hic area'
#roduct or ser!ice' customer' or #rocess* With a di!isional structure' functional
acti!ities are #erformed $oth centrally and in each se#arate di!ision*
a* &d!antages% & di!isional structure has some clear ad!antages* First' and #erha#s
foremost' is accounta$ility* 9ther ad!antages of the di!isional structure are that it
creates career de!elo#ment o##ortunities for managers' allo(s local control of
local situations' leads to a com#etiti!e climate (ithin an organi4ation' and allo(s
ne( $usinesses and #roducts to $e added easily*
$* Disad!antages% Perha#s the most im#ortant limitation is that a di!isional structure
is costly*
-* & di!isional structure $y geogra#hic area is a##ro#riate for organi4ations (hose
strategies need to $e tailored to fit the #articular needs and characteristics of customers
in different geogra#hic regions*
/* & di!ision structure $y #roduct is most effecti!e for im#lementing strategies (hen
s#ecific #roducts or ser!ices need s#ecial em#hasis*
0* & di!ision structure $y #rocess is similar to a functional structure' $ecause acti!ities
are organi4ed according to the (ay (or. is actually #erformed*
D* The Strategic Business Hnit JSBHK Structure
)* The SBH structure grou#s similar di!isions into strategic $usiness units and delegates
authority and res#onsi$ility for each unit to a senior e,ecuti!e (ho re#orts directly to
the "9*
+* &d!antages% This change in structure can facilitate strategy im#lementation $y
im#ro!ing coordination $et(een similar di!isions and channeling accounta$ility to
distinct $usiness units* 8t also ma.es the tas. of #lanning and control $y the cor#orate
office more managea$le*
-* Disad!antages% T(o disad!antages of an SBH structure are that it re:uires an
additional layer of management' (hich increases salary e,#enses' and the role of the
grou# !ice #resident is often am$iguous*
))2 | P a g e
/* Figure 2-/ illustrates the SBH Structure used $y Sonoco*
* The Matri, Structure
)* 8t is the most com#le, of all designs $ecause it de#ends u#on $oth !ertical and
hori4ontal flo(s of authority and communication*
+* 8t can result in higher o!erhead $ecause it creates more managerial #ositions*
-* 8t also creates dual lines of $udget authority' dual sources of re(ard and #unishment'
shared authority' and dual re#orting channels*
/* 8ts ad!antages are that #ro;ect o$;ecti!es are clear' there are many channels of
communication' (or.ers can see !isi$le results of (or.' and #ro;ects can $e shut
do(n easily*
0* Figure 2-0 illustrates the matri, structure*
F* Some Do5s and Don5ts in De!elo#ing 9rgani4ational "harts
)* >eser!e the title of "9 for the to# #erson in the organi4ation and use the term
President for di!ision to# managers' if there are di!isions in the firm*
+* Functional $usiness e,ecuti!es should ha!e titles li.e "hief' Gice President' Manager'
or 9fficer*
-* 8t is $est to ha!e a "99 re#orting to the "9 and all di!isional #residents (ill re#ort
to the "99*
/* Figure 2-1 illustrates an organi4ational chart for to# managers of a large firm*
G88* >ST>H"TH>8NG' >NG8N>8NG' &ND -NG8N>8NG
&* >esha#ing "or#orate estructuring' also called do(nsi4ing' rightsi4ing' or delayering' in!ol!es reducing the
si4e of the firm in terms of num$er of em#loyees' di!isions or units' and hierarchical
le!els in the firm5s organi4ational structure*
+* The 8nternet is ushering in a ne( (a!e of $usiness transformations*
-* >eengineering is concerned more (ith em#loyee and customer (ell-$eing than (ith
shareholder (ell-$eing*
/* >eengineering' also called #rocess management' #rocess inno!ation' or #rocess
redesign' in!ol!es reconfiguring or redesigning (or.' ;o$s' and #rocesses for the
#ur#ose of im#ro!ing cost' :uality' ser!ice' and s#eed*
))3 | P a g e
B* >estructuring
)* Firms often em#loy restructuring (hen !arious ratios a##ear out of line (ith
com#etitors' as determined through $enchmar.ing e,ercises*
+* The #rimary $enefit sought from restructuring is cost reduction* The do(nside of
restructuring can $e reduced em#loyee commitment' creati!ity' and inno!ation that
accom#anies the uncertainty and trauma associated (ith #ending and actual em#loyee
layoffs*
G888* F9>M&N" &ND P&F T9 ST>&TG8S
&* Pay-for-Performance
)* Profit sharing is a (idely used form of incenti!e com#ensation*
+* Gain sharing re:uires em#loyees or de#artments to esta$lish #erformance targets? if
actual results e,ceed o$;ecti!es' all mem$ers get $onuses*
-* "riteria such as sales' #rofit' #roduction efficiency' :uality' and safety could also ser!e
as $ases for an effecti!e $onus system*
B* Fi!e tests are often used to determine (hether a #erformance-#ay #lan (ill $enefit an
organi4ation%
)* Does the #lan ca#ture attention?
+* Do em#loyees understand the #lan?
-* 8s the #lan im#ro!ing communication?
/* Does the #lan #ay out (hen it should?
0* 8s the com#any or unit #erforming $etter?
8L* M&N&G8NG >S8ST&N" T9 "=&NG
&* >esistance to "hange
)* >esistance to change can $e considered the single greatest threat to successful strategy
im#lementation*
+* 8t may ta.e on such forms as sa$otaging #roduction machines' a$senteeism' filing
unfounded grie!ances' and an un(illingness to coo#erate*
-* >esistance to change can emerge at any stage or le!el of the strategy-im#lementation
#rocess*
/* There are three commonly used strategies for im#lementing change%
))6 | P a g e
a* Force change strategy
$* ducati!e change strategy
c* Self-interest change strategy
Teaching Tip% The 7ournal of Krgani#ational orce
>ield Analysis to a!!roach change.
L* M&N&G8NG T= N&TH>&< NG8>9NMNT
&* &ll $usiness functions are affected $y natural en!ironment considerations or stri!ing to
ma.e a #rofit* =o(e!er' $oth em#loyees and consumers are es#ecially resentful of firms
that ta.e more than they gi!e to the natural en!ironment? li.e(ise' #eo#le today are
es#ecially a##reciati!e of firms that conduct o#erations in a (ay that mends rather than
harms the en!ironment*
B* The ecological challenge facing all organi4ations re:uires managers to formulate
strategies that #reser!e and conser!e natural resources and control #ollution*
"* Managing as if the earth matters re:uires an understanding of ho( international trade'
com#etiti!eness' and glo$al resources are connected*
D* Firms should formulate and im#lement strategies from an en!ironmental #ers#ecti!e*
Natural Environment Perspective% 8n =iring' Do "om#anies "onsider n!ironmental Training of
Students? & recent study re#orted that 22S of cor#orate recruiters said that students should ha!e some
a(areness of social and en!ironmental res#onsi$ility* >esearch suggests that $usiness schools do a
#oor ;o$ of educating students on en!ironmental issues at the undergraduate le!el* "om#anies fa!or
hiring students from schools (ith the $est en!ironmental #rograms* To fill the !oid in education' the
World >esource 8nstitute JW>8K created the BT8G "H[TH]
&* Strategists should stri!e to #reser!e' em#hasi4e' and $uild on as#ects of an e,isting culture
that su##ort #ro#osed ne( strategies*
B* Iac. Duncan descri$ed triangulation as an effecti!e' multimethod techni:ue for studying
and altering a firm5s culture*
)* Triangulation includes the com$ined use of o$trusi!e o$ser!ation' self-administered
:uestionnaires' and #ersonal inter!ie(s to determine the nature of a firm5s culture*
)+7 | P a g e
+* The #rocess of triangulation re!eals needed changes in a firm5s culture that could
$enefit strategy*
B* The Me,ican "ulture
)* Me,ico al(ays has $een and still is an authoritarian society in terms of schools'
churches' $usinesses' and families* m#loyers see. (or.ers (ho are agreea$le'
res#ectful' and o$edient' rather than inno!ati!e' creati!e' and inde#endent* Me,ican
(or.ers tend to $e acti!ity oriented rather than #ro$lem sol!ers*
+* Me,ican em#loyers are #aternalistic' #ro!iding (or.ers (ith more than a #aychec.'
$ut in return' they e,#ect allegiance*
VTN (Visit the Net): htt!:$$www.managementhel!.org$orgNthry$culture$culture.htm !roides an
oeriew on culture and lin"s to other culture sites.
"* The Ia#anese "ulture
)* The Ia#anese #lace great im#ortance on grou# loyalty and consensus' a conce#t called
wa* Nearly all cor#orate acti!ities in Ia#an encourage (a among managers and
em#loyees* Wa re:uires that all mem$ers of a grou# agree and coo#erate? this results
in constant discussion and com#romise*
+* Most Ia#anese managers are reser!ed' :uiet' distant' intros#ecti!e' and other oriented'
(hereas most H*S* managers are tal.ati!e' insensiti!e' im#ulsi!e' direct' and
indi!idual oriented*
Global Perspective: &merican !ersus Foreign "ommunication Differences* This $o, #ro!ides hints
for good communications in different cultures. When negotiating orally (ith Ia#anese e,ecuti!es'
#eriodically allo( for a time of silence and do not as. @=o( (as your (ee.end?A (hich could $e
!ie(ed as intrusi!e*
L88* P>9DH"T89ND9P>&T89NS "9N">NS W=N 8MP&TG8S
&* ProductionDo#erations ca#a$ilities' limitations' and #olicies can significantly enhance or
inhi$it attainment of o$;ecti!es* Production #rocesses ty#ically constitute more than 27
#ercent of a firm5s total assets*
B* ,am#les of ad;ustments in #roduction systems that could $e re:uired to im#lement
!arious strategies are #ro!ided in Ta$le 2-/ for $oth for-#rofit and non#rofit organi4ations*
L888* =HM&N >S9H>" "9N">NS W=N 8MP&TG8S
&* =uman >esource #ro$lems that arise (hen $usinesses im#lement strategies can usually $e
traced to one of three causes%
)+) | P a g e
)* Disru#tion of social and #olitical structures
+* Failure to match indi!iduals5 a#titudes (ith im#lementation tas.s
-* 8nade:uate to# management su##ort for im#lementation acti!ities
B* m#loyee Stoc. 9(nershi# Plans JS9PsK
)* &n S9P is a ta,-:ualified' defined-contri$ution' em#loyee $enefit #lan (here$y
em#loyees #urchase stoc. of the com#any through $orro(ed money or cash
contri$utions*
+* S9Ps reduce (or.er alienation' stimulate #roducti!ity' and allo( su$stantial ta,
sa!ings for the firm*
-* Ta$le 2-/ lists the eight largest S9P firms*
"* Balancing Wor. BD' and management information systems acti!ities*
)+6 | P a g e
EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS
8* T= N&TH> 9F ST>&TGF 8MPeflect the >etained arnings total
on $oth the income statement and $alance sheet $ecause this item is the .ey lin.
$et(een the t(o #ro;ected statements* Bring this retained earnings amount for that
)-- | P a g e
year JN8-D8G U >K o!er to the $alance sheet $y adding it to the #rior year5s >
sho(n on the $alance sheet* The > on the $alance sheet is a cumulati!e num$er
rather than money a!aila$le for strategy im#lementation*
e* Pro;ect the $alance sheet items' $eginning (ith retained earnings and then
forecasting stoc.holder5s e:uity' long-term lia$ilities' current lia$ilities' total
lia$ilities' total assets' fi,ed assets' and current assets Jin that orderK* Hse the cash
account as the #lug figure? that is use the cash account to ma.e the assets total the
lia$ilities and net (orth* Then' ma.e a##ro#riate ad;ustments*
f* e!lon*
F* Deciding Whether to Go Pu$lic
)* Going #u$lic means selling off a #ercentage of your com#any to others in order to
raise ca#ital? conse:uently' it dilutes the o(ners5 control of the firm*
+* Before going #u$lic' a firm must ha!e :uality management (ith a #ro!en trac. record
for achie!ing :uality earnings and a #ositi!e cash flo(*
Global Perspective% Standardi4ing &ccounting Standards Glo$ally* The Financial &ccounting
Standards Board JF&SBK in the H*S* and its counter#art' the 8nternational &ccounting Standards
Board J8&SBK' are each modifying its @rulesA in an effort to con!erge accounting standards
glo$ally* The con!ergency of accounting systems (ill ma.e glo$al $usiness much easier*
8G* >S&>"= &ND DGBDK 8SSHS
&* >BD
)* >BD #ersonnel can #lay an integral #art in strategy im#lementation*
+* Sur!eys suggest that the most successful organi4ations use an >BD strategy that ties
e,ternal o##ortunities to internal strengths and is lin.ed (ith o$;ecti!es*
-* >BD #olicies can enhance strategy-im#lementation efforts to%
a* m#hasi4e #roduct or #rocess im#ro!ements*
$* Stress $asic or a##lied research*
c* Be leaders or follo(ers in >BD*
d* De!elo# ro$otics or manual-ty#e #rocesses*
e* S#end a high' a!erage' or lo( amount of money on >BD*
f* Perform >BD (ithin the firm or contract >BD to outside firms*
g* Hse uni!ersity researchers or #ri!ate sector researchers*
/* Ta$le 3-6 #resents research and de!elo#ment in!ol!ement in selected strategy-
im#lementation situations*
B* >BD &##roaches for 8m#lementing Strategy
)-0 | P a g e
)* There are at least three ma;or >BD a##roaches for im#lementing strategies*
a* The first strategy is to $e the first firm to mar.et ne( technological #roducts*
$* The second >BD a##roach is to $e an inno!ati!e imitator of successful #roducts'
thus minimi4ing the ris.s and costs of start-u#*
c* & third >BD strategy is to $e a lo(-cost #roducer $y mass-#roducing #roducts
similar to' $ut less e,#ensi!e than #roducts recently introduced*
+* >BD acti!ities among &merican firms need to $e more closely aligned to $usiness
o$;ecti!es*
-* Perha#s the most current trend in >BD management has $een lifting the !eil of
secrecy (here$y firms' e!en ma;or com#etitors' are ;oining forces to de!elo# ne(
#roducts*
Natural Environment Perspective: Should Fou Put & Solar Panel 9n To# of Four =ome and
Business? Solar electricity is gro(ing in #o#ularity* Many states #ro!ide incenti!es for the costs of
installation* Solar energy is @greenA energy and is increasingly cost effecti!e*
G* M&N&GMNT 8NF9>M&T89N SFSTMS JM8SK 8SSHS
&* M8S
)* <hough no firm (ould use the same mar.eting or management a##roach for +7
years' many com#anies ha!e +7-year-old com#uter information systems that threaten
their !ery e,istence*
+* Firms that gather' assimilate' and e!aluate e,ternal and internal information most
effecti!ely are gaining com#etiti!e ad!antages o!er other firms*
-* 8nformation collection' retrie!al' and storage can $e used to create com#etiti!e
ad!antages in (ays such as cross-selling to customers' monitoring su##liers' .ee#ing
managers and em#loyees informed' coordinating acti!ities among di!isions' and
managing funds*
Teaching Tip% "89 J"hief 8nformation 9fficerK 9nline is an a(ard-(inning (e$site that contains a
!ast array of information #ertaining to the role of com#uters and information technology in the
(or.#lace* The (e$site' (hich includes an on-line maga4ine' is a!aila$le at
Chtt#%DD(((*cio*comD"89DE*
Teaching Tip: Gisit the te,t5s (e$site at (((*#renhall*comDda!id for this cha#ter5s (e$ e,ercises*
)-1 | P a g e
ISSUES FOR REVIEW AND DISCUSSION
1. S0pp+-' $+0& )+*pa!$ #a- =0-% a)40&'. a ,&* %#a% p&+.0)'- a!. -%&a%'(-%- "a!% %+ *pl'*'!% a *a&3'%7p'!'%&a%+! -%&a%'($. H+" "+0l. $+0
-'(*'!% %#' *a&3'% ,+& %#- p&+.0)%5 J0-%,$ $+0& a!-"'&.
&ns(er% Se!eral segmentation $ases can $e used in this case* First' segmentation $y geogra#hic
location may $e useful* Battery-o#erated la(n mo(ers may not $e a##ro#riate for large yards*
Therefore' segmentation $ased on (hether families li!e in cities or su$ur$s may $e useful*
Second' families (ho are concerned a$out the en!ironment may $e more li.ely to #urchase a
$attery-o#erated la(n mo(er* 8n this case' #sychogra#hic segmentation (ill $e useful* 8n addition'
$ecause it is an inno!ati!e #roduct' families (ith a higher socioeconomic status may $e more
li.ely to #urchase a $attery-o#erated la(n mo(er* Furthermore' men tend to ma.e decisions a$out
la(n e:ui#ment* 8n this case' demogra#hic segmentation (ill $e useful* 9ften times' segmentation
is accom#lished using se!eral $ases*
2. Expla! #+" $+0 "+0l. '-%*a%' %#' %+%al "+&%# +, a RHD> a!. )+*p0%'& !,+&*a%+! -$-%'*-
*a!a('&-F !:+l:'*'!% ! -%&a%'($ ,+&*0la%+! )a! '!#a!)' -%&a%'($ *pl'*'!%a%+!.
&ns(er% Mar.eting' financeDaccounting' >BD' and com#uter information systems managers #lay
a !ital role in im#lementing strategies' so their acti!e in!ol!ement in formulating strategies is
needed to gain su##ort and commitment for actions to come* Perha#s' more im#ortantly' their
e,#ertise should (eigh hea!ily in #rioriti4ing internal strengthsD(ea.nesses' e,ternal
o##ortunitiesDthreats' and in generating and selecting from among alternati!e strategies*
@. C+!-.'& %#' ,+ll+"!( -%a%'*'!%: /R'%a!'. 'a&!!(- +! %#' etained earnings on the $alance sheet re#resent historical
earnings that ha!e $een rein!ested in the firm in the form of #lants' e:ui#ment' in!entory' and the
li.e*
A. Expla! "#$ p&+=')%'. ,!a!)al -%a%'*'!% a!al$-- - )+!-.'&'. ,!a!)'Ga))+0!%!(> RHD> a!. *a!a('*'!% !,+&*a%+! -$-%'*-
a)%:%'- %#a% a -*all &'-%a0&a!% )#a! *(#% 0!.'&%a3' %+ 'xpa!. !%+ a !'(# R +, -#a&'- +0%-%a!.!( - 9BB *ll+!> a!. EBIT &a!('
- O1BB D"a- 9BBE %+ O6BB *ll+! D"a- O1 &TGF-G&&MW9>K
Ta$le 6-- summari4es the strategy-e!aluation acti!ities in terms of .ey :uestions that should
$e addressed' alternati!e ans(ers to those :uestions' and a##ro#riate actions for an
organi4ation to ta.e* Figure 6-+ illustrates the strategy e!aluation frame(or.*
&* >e!ie(ing Bases of Strategy
)/0 | P a g e
)* &s sho(n in Figure 6-+' $y de!elo#ing a re!ised F Matri, and 8F Matri,' the
underlying $ases of an organi4ation5s strategy can $e a##roached and re!ie(ed*
a* & re!ised 8F Matri, should focus on changes in the organi4ation5s management'
mar.eting' financeDaccounting' #roductionDo#erations' >BD' and M8S strengths
and (ea.nesses*
$* & re!ised F Matri, should indicate ho( effecti!ely a firm5s strategies ha!e
$een in res#onse to .ey o##ortunities and threats*
VTN (Visit the Net): www.sba.go$startingNbusiness$!lanning$basic.html !roides a business !lan
outline.
B* Measuring 9rgani4ational Performance
)* ¬her im#ortant strategy-e!aluation acti!ity is measuring organi4ational
#erformance* This acti!ity includes com#aring e,#ected results to actual results'
in!estigating de!iations from #lans' e!aluating indi!idual #erformance' and
e,amining #rogress $eing made to(ard meeting stated o$;ecti!es* Both long-term
and annual o$;ecti!es are commonly used in this #rocess*
+* Failure to ma.e satisfactory #rogress to(ard accom#lishing long-term or annual
o$;ecti!es signals a need for correcti!e action*
-* Nuantitati!e criteria commonly used to e!aluate strategies are financial ratios' (hich
strategists use to ma.e three critical com#arisons%
a* com#aring the firm5s #erformance o!er different time #eriods'
$* com#aring the firm5s #erformance to com#etitors' and
c* com#aring the firm5s #erformance to industry a!erages*
/* Key financial ratios for measuring organi4ational #erformance%
a* return on in!estment
$* return on e:uity
c* #rofit margin
d* mar.et share
e* de$t to e:uity
f* earnings #er share
g* sales gro(th
h* asset gro(th
)/1 | P a g e
0* There are si, :ualitati!e :uestions useful for e!aluating strategies%
a* 8s the strategy internally consistent?
$* 8s it consistent (ith the en!ironment?
c* 8s the strategy a##ro#riate in !ie( of a!aila$le resources?
d* Does the strategy in!ol!e an acce#ta$le degree of ris.?
e* Does the strategy ha!e an a##ro#riate time frame(or.?
f* 8s the strategy (or.a$le?
"* Ta.ing "orrecti!e &ction
)* The final strategy-e!aluation acti!ity' ta.ing correcti!e action' re:uires ma.ing
changes to re#osition a firm com#etiti!ely for the future*
+* ,am#les of changes that may $e needed are altering an organi4ation5s structure'
re#lacing one or more .ey indi!iduals' selling a di!ision' or re!ising a $usiness
mission*
-* Ta.ing correcti!e action raises em#loyees5 and managers5 an,ieties* >esearch
suggests that #artici#ation in strategy-e!aluation acti!ities is one of the $est (ays to
o!ercome indi!iduals5 resistance to change*
888* T= B&"&>D
&* Nuestions to "onsider
)* =o( (ell is the firm continually im#ro!ing and creating !alue along measures such as
inno!ation' technological leadershi#' #roduct :uality' o#erational #rocess efficiencies'
etc*?
+* =o( (ell is the firm sustaining and e!en im#ro!ing u#on its core com#etencies and
com#etiti!e ad!antages?
-* =o( satisfied are the firm5s customers?
B* Fi!e Key 8ssues
)* "ustomers
+* ManagersDm#loyees
-* 9#erationsDProcesses
/* Business thicsDNatural n!ironment
0* Financial
"* Ta$le 6-/ #ro!ides an e,am#le of a $alanced scorecard*
8G* PHB"S 9F ST>&TGF-G&M&T89N
)/2 | P a g e
&* ,am#les of =el#ful Pu$lications
)* & num$er of #u$lications are hel#ful in e!aluating a firm5s strategies* For e,am#le'
>ortune annually identifies and e!aluates the >ortune )'777 Jthe largest
manufacturersK and the >ortune 07 Jthe largest retailers' trans#ortation com#anies'
utilities' $an.s' insurance com#anies' and di!ersified financial cor#orations in the
Hnited StatesK*
+* ¬her e,cellent e!aluation of cor#orations in &merica' @The &nnual >e#ort on
&merican 8ndustry'A is #u$lished annually in the Ianuary issue of >orbes* 1usiness
Wee"' Bndustry Wee"' and Dun=s 1usiness 8onth also #eriodically #u$lish detailed
e!aluations of &merican $usinesses and industries*
Teaching Tip: The follo(ing are the (e$site addresses of #u$lications that fre:uently re#ort on the
strategies of &merican firms*
? 1usiness Wee" Chtt#%DD(((*$usiness(ee.*comDE
? >ast ortune Chtt#%DDmoney*cnn*comDmaga4inesDfortuneDE
? >orbes Chtt#%DD(((*for$es*comDE
? Bndustry Wee" Chtt#%DD(((*industry(ee.*comDE
? 6ed /erring Chtt#%DD(((*redherring*comDE
G* "=&>&"T>8ST8"S 9F &N FF"T8G G&F "=& 'xpla! #+" $+0 "+0l. ':al0a%' %#' ,&*F-
-%&a%'($.
&ns(er% For small $usinesses such as a local su#ermar.et' strategy e!aluation is less formal than
in large organi4ations* =o(e!er' $oth :ualitati!e and :uantitati!e criteria should $e used to
e!aluate the small su#ermar.et5s strategies' $ecause large su#ermar.et stores that offer one-sto#
sho##ing for !irtually e!erything are #roliferating across the country*
9. U!.'& "#a% )+!.%+!- a&' )+&&')%:' a)%+!- !+% &'40&'. ! %#' -%&a%'($7':al0a%+!
p&+)'--5
&ns(er% The only time correcti!e actions (ould not $e re:uired in strategy e!aluation is (hen
ma;or changes ha!e not occurred in the firm5s internal or e,ternal strategic #osition and the firm is
#rogressing satisfactorily to(ards achie!ing its stated o$;ecti!es*
)0+ | P a g e
;. I.'!%,$ %#' %$p'- +, +&(a!Ca%+!- %#a% *a$ !''. %+ ':al0a%' -%&a%'($ *+&' ,&'40'!%l$ %#a!
+%#'&-. J0-%,$ $+0& )#+)'-.
&ns(er% 9rgani4ations that com#ete in more tur$ulent industries may need to e!aluate strategies
more often than others* Se!eral e,am#les of tur$ulent industries are the com#uter industry' the
communications industry' and the aeros#ace industry*
?. A- 'x')0%:' .&')%+& +, %#' -%a%' ,+&'-%&$ )+**--+!> ! "#a% "a$ a!. #+" ,&'40'!%l$
"+0l. $+0 ':al0a%' %#' +&(a!Ca%+!F- -%&a%'('-5
&ns(er% Strategy e!aluation should $e an ongoing' continuous #rocess rather than conducted at
the end of a s#ecified #eriod of time' such as at the end of each year or at the end of e!ery three
years* The need e,ists to continually re-e!aluate the forestry commission5s strategies as legislati!e
actions e!ol!e and as constituency grou#s align for or against im#ortant issues facing the state*
@. I.'!%,$ -+*' 3'$ ,!a!)al &a%+- %#a% "+0l.