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CHAPTER
Strategic Management and
Entrepreneurship 6
Planning Ahead
Chapter 6 Study Questions
■ What is strategic management?
■ How are strategies formulated?
■ How are strategies implemented?
■ What is entrepreneurship?

Wal-Mart’s master plan is famous in the world of retail strategy—consistently low

prices and high customer service. The firm was started by the late Sam Walton in
Bentonville, Arkansas. “Mr. Sam” started in small southern towns. Now America’s
largest retailer and employer, Wal-Mart is located in all fifty states. With success
came entry into broader national markets and international expansion. Industry
analysts point to Wal-Mart’s “productivity loop”—ability to offer lower prices and
better service than its rivals—as a major competitive advantage. All this is backed up
by the latest in technology. A sophisticated corporate satellite system and computer
network keeps the home office in touch with operations at all stores. Inventories are
monitored around the clock so that stores are rarely out of the items customers are
seeking. Given Wal-Mart’s impressive track record and strength, the question is,
“Can other budget retailers keep up?” Of course, the visionaries at Wal-Mart are
probably asking another question: How can we stay ahead?1
Even as Wal-Mart sets the pace, we will surely see many changes in competi-
tive retailing in the years ahead. The industry is being challenged on many fronts,
including catalog sales, home shopping by Internet and television, and the growth
of electronic commerce. Success will come to those with a sense of future oppor-
tunities, clear vision about what needs to be done, and the strong management and
organizational systems needed to get it accomplished.

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84 CHAPTER 6 STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP

S t r ate g y a n d C o m pe t i t i ve A dva n tag e

The opening example introduces the competitive domain of strategy and strategic
■ A competitive advan- management. An organization with competitive advantage operates with an attrib-
tage comes from operat- ute or combination of attributes that allows it to outperform its rivals. At Wal-Mart,
ing in successful ways that for example, one source of such advantage is information technology that allows
are difficult to imitate. the retailer to quickly track sales and monitor inventories. In other industries, Dell
Computer eliminates wholesale supplier markup by marketing direct to con-
sumers; Toyota’s shorter cycle times allow it to carry smaller amounts of work-in-
progress inventory. The goal for any organization, however, is not just to achieve
competitive advantage, it is to make it sustainable, even as rivals attempt to dupli-
cate and copy a success story. A sustainable competitive advantage is one that is dif-
ficult for competitors to imitate. At Wal-Mart, the firm’s use of IT is continuously
improved. Competitors have trouble catching up, let alone getting ahead.
■ A strategy is a com- A strategy is a comprehensive action plan that identifies long-term direction
prehensive plan that sets and guides resource utilization to accomplish an organization’s mission and objec-
direction and guides the tives with sustainable competitive advantage. It is a plan for using resources with
allocation of resources consistent strategic intent, that is, with all organizational energies focused on a uni-
to achieve long-term fying and compelling target.2 In the case of Coca-Cola that intent has been
objectives. described as “To put a Coke within ‘arm’s reach’ of every consumer in the world.”
To gain competitive advantage, an organization must deal with market and envi-
ronmental forces better than its competitors.3 The task of crafting strategies with
this potential can be daunting. Consider the retailing industry again. Wal-Mart,
Kmart, and Target each began operating in 1962. Of the ten top discounters they
faced in that year, none exists today. They were killed by competition.

T H E S T R AT E G I C M A NAG E M E N T P R O C E S S
The demands of intense competition in the global economy call for strategies that
■ Strategic management are often bold, aggressive, and fast-moving. Strategic management is the process of
is the process of formulat- formulating and implementing strategies that create competitive advantage and
ing and implementing advance an organization’s mission and objectives. The essence of strategic manage-
strategies. ment is to look ahead, understand the environment, and effectively position an
organization for competitive success in changing times.
Figure 6.1 describes two major responsibilities in the strategic management
process. The first is strategy formulation. This involves assessing existing strategies,
organization, and environment to develop new strategies and strategic plans capa-
ble of delivering future competitive advantage. Peter Drucker associates this process
with a set of five strategic questions: (1) What is our business mission? (2) Who are
our customers? (3) What do our customers consider value? (4) What have been our
results? (5) What is our plan?4
The second strategic management responsibility is strategy implementation. Once
strategies are created, they must be acted upon successfully to achieve the desired
results. As Drucker says, “The future will not just happen if one wishes hard enough.
It requires decision—now. It imposes risk—now. It requires action—now. It demands
allocation of resources and above all, of human resources—now. It requires work—
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STRATEGY AND COMPETITIVE ADVANTAGE 85

THE STRATEGIC MANAGEMENT PROCESS OF STRATEGY FORMULATION

FIGURE 6.1
AND STRATEGY IMPLEMENTATION

Strategy Formulation— Strategy Implementation—

Creating strategies Putting strategies into action

Identify current Analyze: Revise mission Implement Evaluate results

mission, Mission and and objectives strategic plans: and renew
objectives, objectives and select new Mobilize strategic
and strategies Values and strategies: resources management
corporate culture Corporate Utilize process
Internal strengths Business management
and weaknesses Functional systems and
Environmental practices
opportunities
and threats

now.”5 This “work” is the responsibility for actually putting strategies and strategic
plans into action—the process of implementation. All of this, in turn, requires a com-
mitment to mastering the full range of strategic management tasks listed here.
1. Identify organizational mission and objectives.
Ask: What business are we in? Where do we want to be in the future?
2. Assess current performance vis-à-vis mission and objectives.
Ask: How well are we currently doing?
3. Create strategic plans to accomplish purpose and objectives.
Ask: How can we get where we really want to be?
4. Implement the strategic plans.
Ask: Has everything been done that needs to be done?
5. Evaluate results; change strategic plans and/or implementation processes
as necessary.
Ask: Are things working out as planned, and what can be improved upon?

M I S S I O N , VA L U E S , A N D O B J E C T I V E S
The strategic management process begins with a careful assessment and clarifica-
tion of organizational mission, values, and objectives.6 In today’s quality-conscious
and highly competitive environments, all must be directly centered on serving the
needs of customers or clients. After all, their satisfaction and continued support are
the ultimate keys to organizational survival.
■ The mission of an
organization is its reason
Mission for existence as a supplier
The mission or purpose of any organization may be described as its “reason” for of goods and services
existence as a supplier of goods and/or services to society. The best organizations to society.
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86 CHAPTER 6 STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP

have a clear and compelling mission.7 At Mary Kay Cosmetics, for example, it is “To
give unlimited opportunity to women”; at 3M it is “To solve unsolved problems
innovatively”; at Merck it is “To preserve and improve human life.” A good mission
statement is precise in identifying the domain in which the organization intends to
operate—including the customers it intends to serve, the products and/or services it
intends to provide, and the location in which it intends to operate. The mission
statement should also communicate the underlying philosophy that will guide
employees in these operations. America West’s mission statement seems to meet
each of these requirements. It reads “America West will support and grow its mar-
ket position as a low-cost, full-service nationwide airline. It will be known for its
focus on customer service and its high-performance culture. America West is com-
mitted to sustaining financial strength and profitability, thereby providing stability
for its employees and shareholder value for its owners.”
An important test of corporate mission is how well it serves the organization’s
■ Stakeholders are those stakeholders. These are employees and members of the external environment, cus-
directly affected by an tomers, shareholders, suppliers, creditors, community groups, and others who are
organization and its directly involved with the organization and/or affected by its operations. In a strate-
accomplishments. gic constituencies analysis the specific interests of each stakeholder are assessed
along with the organization’s record in responding to them. Figure 6.2 gives an
example of how stakeholder interests can be addressed in a mission statement.

Core Values
Behavior in and by organizations will always be affected in part by values, which are
■ Corporate culture is broad beliefs about what is or is not appropriate. The predominant value system of
the predominant value the organization as a whole forms its corporate culture.8 The presence of strong core
system for the organiza- values gives character to an organization, backs up the mission statement, and helps
tion as a whole. guide the behavior of members in meaningful and consistent ways. For example, core

FIGURE 6.2 STAKEHOLDER INTERESTS AND THE CORPORATE MISSION STATEMENT

Employees Communities

We respect the individuality of each We are committed to being caring and

employee . . . creativity and productivity supportive corporate citizens within the
are encouraged, valued, and rewarded. worldwide communities in which
we operate.

Mission

to create value for our multiple stakeholders.

Shareholders Customers Suppliers

We are dedicated to . . . We are committed to We think of our suppliers

performing in a manner providing superior value as partners who share our
that will enhance returns in our products and goal of . . . highest quality.
on investments. services.
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STRATEGY AND COMPETITIVE ADVANTAGE 87

values at Merck include corporate social responsibility, science-based innovation,

honesty and integrity, and profit from work that benefits humanity.

Objectives
Whereas a mission statement sets forth an official purpose for the organization,
operating objectives direct activities toward key and specific results. They are ■ Operating objectives
shorter-term targets against which actual performance can be measured. Examples are specific results that
of business operating objectives include:9 organizations try to
■ Profitability: Producing at a net profit in business. accomplish.
■ Market share: Gaining and holding a specific share of a product market.
■ Human talent: Recruiting and maintaining a high-quality workforce.
■ Financial health: Acquiring financial capital and earning positive returns.
■ Cost efficiency: Using resources well to operate at low cost.
■ Product quality: Producing high-quality goods or services.
■ Innovation: Developing new products and/or processes.
■ Social responsibility: Making a positive contribution to society.

A NA LY S I S O F O R G A N I Z AT I O NA L
R E S O U R C E S A N D CA PA B I L I T I E S
Two critical steps in the strategic management process are analysis of the organiza-
tion and analysis of its environment. They may be approached by a technique known
as SWOT analysis: the internal analysis of organizational Strengths and Weaknesses ■ A SWOT analysis
as well as the external analysis of environmental Opportunities and Threats. examines organizational
As shown in Figure 6.3, a SWOT analysis begins with a systematic evaluation of strengths and weaknesses
the organization’s resources and capabilities. A major goal is to identify core compe- and environmental
tencies in the form of special strengths that the organization has or does exceptionally opportunities and threats.
well in comparison with competitors. They are capabilities that by virtue of being rare,
costly to imitate, and nonsubstitutable become viable sources of competitive advan- ■ A core competency is
tage.10 Core competencies may be found in special knowledge or expertise, superior a special strength that
technologies, efficient manufacturing technologies, or unique product distribution gives an organization a
systems, among many other possibilities. But always, and as with the notion of strat- competitive advantage.
egy itself, they must be viewed relative to the competition. Simply put, organizations
need core competencies that do important things better than the competition and that
are very difficult for competitors to duplicate. The goal in strategy formulation is to
create strategies that leverage core competencies for competitive advantage by build-
ing upon organizational strengths and minimizing the impact of weaknesses.

A NA LY S I S O F I N D U S T RY A N D E N V I R O N M E N T
A SWOT analysis is not complete until opportunities and threats in the external envi-
ronment are also analyzed. They can be found among macroenvironment factors such
as technology, government, social structures, population demographics, the global
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88 CHAPTER 6 STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP

SWOT ANALYSIS OF STRENGTHS, WEAKNESSES, OPPORTUNITIES,

FIGURE 6.3
AND THREATS

Internal Assessment
of the Organization

What are our strengths? What are our weaknesses?

Manufacturing efficiency? Outdated facilities?
Skilled workforce? Inadequate R & D?
Good market share? Obsolete technologies?
Strong financing? Weak management?
Superior reputation? Past planning failures?

SWOT
Analysis

What are our opportunities? What are our threats?

Possible new markets? New competitors?
Strong economy? Shortage of resources?
Weak market rivals? Changing market tastes?
Emerging technologies? New regulations?
Growth of existing market? Substitute products?

External Assessment
of the Environment

economy, and the natural environment. They can also include developments in the
industry environment of resource suppliers, competitors, and customers. As shown in
Figure 6.3, opportunities may exist as possible new markets, a strong economy, weak-
nesses in competitors, and emerging technologies. Weaknesses may be identified in
such things as the emergence of new competitors, resource scarcities, changing cus-
tomer tastes, and new government regulations, among other possibilities.
With respect to the external environment as a whole, the more stable and pre-
dictable it is, the more likely that a good strategy can be implemented with success
for a longer period of time. But when the environment is composed of many
dynamic elements that create uncertainties, more flexible strategies that change
with time are needed. Given the nature of competitive environments today, strate-
gic management must be considered an ongoing process in which strategies are for-
mulated, implemented, revised, and implemented again in a continuous manner.
Michael Porter offers the five forces model shown in Figure 6.4 as a way of adding
sophistication to this analysis of the environment.11 His framework for competitive
industry analysis directs attention toward understanding the following forces:
1. Industry competitors—intensity of rivalry among firms in the industry
2. New entrants—threats of new competitors entering the market
3. Suppliers—bargaining power of suppliers
4. Customers—bargaining power of buyers
5. Substitutes—threats of substitute products or services
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STRATEGY AND COMPETITIVE ADVANTAGE 89

PORTER’S MODEL OF FIVE STRATEGIC FORCES FIGURE 6.4

New Entrants
Threat of potential
new competitors

Suppliers Industry Competition Customers

Bargaining power Rivalry among Bargaining power
of suppliers competing firms of buyers

Substitute Products
Threat of substitute
products or services

SOURCE: Developed from Michael E. Porter, Competitive Strategy (New York: Free Press, 1980).

From Porter’s perspective, the foundations for any successful strategy rest with a
clear understanding of these competitive environmental voices. He calls this the
“industry structure.” The strategic management challenge is to position an organiza-
tion strategically within its industry, taking into account the implications of forces
that make it more or less attractive. In general, an unattractive industry is one in which
rivalry among competitors is intense, substantial threats exist in the form of possible
new entrants and substitute products, and suppliers and buyers are very powerful in
bargaining over such things as process and quality. An attractive industry, by contrast,
has less existing competition, few threats from new entrants or substitutes, and low
bargaining power among suppliers and buyers. By systematically analyzing industry
attractiveness with respect to the five forces, Porter believes that strategies can be cho-
sen to give the organization a competitive advantage relative to its rivals.

S T R AT E G I E S U S E D B Y O R G A N I Z AT I O N S
The strategic management process encompasses the three levels of strategy shown
in Figure 6.5. Strategies of various types are formulated and implemented at the
organizational or corporate level, business level, and functional level. All should be
integrated in means-end fashion to accomplish objectives and create sustainable
competitive advantage.

L eve l s o f S t r ate g y
The level of corporate strategy directs the organization as a whole toward sustain- ■ A corporate strategy
able competitive advantage. It describes the scope of operations by answering this sets long-term direction
strategic question: In what industries and markets should we compete? In diversified for the total enterprise.
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90 CHAPTER 6 STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP

FIGURE 6.5 LEVELS OF STRATEGY IN A LARGE AND COMPLEX BUSINESS

Corporate strategy
What directions
Corporation
should we pursue
as a total enterprise?

Business strategy
How do we compete
Division 1 Division 2 Division 3
in each of our major
businesses?

Functional strategy
How do we best Research and Human Manufacturing Marketing
support each of our development resources
major businesses?

conglomerate organizations such as General Electric, corporate strategy identifies the

different areas of business in which a company intends to compete. The firm pursues
business interests in aircraft engines, appliances, capital services, lighting, medical sys-
tems, broadcasting, plastics, and power systems, for example. Typical strategic deci-
sions at GE’s corporate level relate to the allocation of resources for acquisitions, new
business development, divestitures, and the like across this business portfolio.
Increasingly, corporate strategies for many businesses include an important role for
global operations such as international joint ventures and strategic alliances.
■ A business strategy At the level of business strategy, strategy is set for a single business unit or
identifies how a division product line. It describes strategic intent with respect to a given industry or mar-
or strategic business unit ket, such as GE’s appliances division. In large conglomerates such as General
will compete in its prod- Electric, the term strategic business unit (SBU) is often used to describe such divi-
uct or service domain. sions when they operate with separate missions within a larger enterprise. The
selection of business strategy involves answering this strategic question: How are
we going to compete for customers within this industry and market? Typical busi-
ness strategy decisions include choices about product/service mix, facilities loca-
tions, new technologies, and the like. In single-business enterprises, business
strategy is the corporate strategy.
■ A functional strategy Functional strategy guides the use of resources to implement business strat-
guides activities within egy. This level of strategy focuses on activities within a specific functional area of
one specific area of opera- operations, such as marketing, manufacturing, finance, human resources and
tions. research and development. The strategic question to be answered in selecting func-
tional strategies is: How can we best utilize resources to implement our business
strategy? For example, Worthington Industries, a premier supplier of steel and
plastic products, pursues a distinct human resource strategy based on trust. There
are no time clocks, and all full-time employees are on salaries. Almost all absences
are fully paid. The firm provides free coffee, in-plant barbershops, and medical-
wellness centers. Not surprisingly, Worthington has made Fortune’s list of “100
Best Companies to Work for in America.”
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STRATEGY AND COMPETITIVE ADVANTAGE 91

Ty pe s o f S t r ate g i e s
Growth strategies pursue larger size and expanded operations. They are popular in ■ A growth strategy
part because growth is necessary for long-term survival in some industries. Coca- involves expansion of the
Cola, for example, pursues a highly aggressive and global growth strategy. There is a organization’s current
tendency to equate growth with effectiveness, but that is not necessarily true. Any operations.
growth must be well managed to achieve the desired results. Some organizations grow
through concentration—that is, by using existing strengths in new and productive
ways and without taking the risks of great shifts in direction. Others grow through
diversification, the acquisition of or investment in new businesses in unrelated areas.
Retrenchment strategies reduce the scale of operations in order to gain efficiency ■ A retrenchment strat-
and improve performance. The decision to retrench can be difficult to make since it egy involves reducing the
seems to be an admission of failure. But in today’s era of challenging economic condi- scale of current opera-
tions and environmental uncertainty, retrenchment strategies have gained renewed tions.
respect. Retrenchment by turnaround is a strategy of “downsizing” to reduce costs and
“restructuring” to improve operating efficiency. Retrenchment by divestiture involves
selling parts of the organization to refocus on core competencies, cut costs, and
improve operating efficiency. Retrenchment by liquidation involves closing operations
through the complete sale of assets or the declaration of bankruptcy.
A stability strategy maintains the present course of action without major ■ A stability strategy
operating changes. Stability is sometimes pursued when an organization is doing maintains the present
well and the environment is not perceived to be changing. It is also used when time course of action.
is needed to consolidate organizational strengths after a period of growth or
retrenchment. Of course, stability can also be pursued by default when decision
makers are unwilling to make strategic changes.
One of the trends today is toward cooperation strategies. In Chapter 3 on global
dimensions of management, international joint ventures were discussed as a com-
mon form of international business. They are one among many forms of strategic ■ In a strategic alliance
alliances in which two or more organizations join together in partnership to pursue organizations join
an area of mutual interest. One way to cooperate strategically is through outsourcing together in partnership to
alliances, contracting to purchase important services from another organization. pursue an area of mutual
Many organizations today, for example, are outsourcing their IT function to firms interest.
such as EDS in the belief that these services are better provided by a specialist firm.
Without a doubt, one of the most frequently asked questions these days for the
business executive is: What is your e-business strategy? This is the strategic use of ■ An e-business strategy
the Internet to gain competitive advantage. strategically uses the
Popular e-business strategies involve B2B (business-to-business) and B2C Internet to gain competi-
(business-to-customer) applications. B2B business strategies involve the use of IT and tive advantage.
the Internet to vertically link organization with members of their supply chains. One
of the interesting developments in this area involves the use of on-line auctions as a
replacement for preferred supplier relationships and outsourcing alliances.
Organizations can now go to the Internet to participate in auction bidding for sup-
plies of many types. Whether small or large in size they immediately have access to
potential suppliers competing for their attention from around the world. One of the
largest of the on-line auctioneers is Freemarkets.com. Participants in its auctions
save an average of 20 percent over their normal purchase prices.
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92 CHAPTER 6 STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP

B2C business strategies use IT and the Internet to link organizations with their
customers. A common B2C strategy has already been illustrated several times in
this chapter—e-tailing or the sale of goods directly to customers via the Internet.
For some firms, e-tailing is all that they do; these are “new economy” firms and the
business strategy is focused entirely on Internet sales—examples include
Amazon.com, priceline.com, and Dell.com. For others, part of the traditional or
“old economy,” e-tailing has been added as a component in their business strategy
mix—including Walmart.com and IBM.com.

S t r ate g y For mu l at i o n
When strategies are being developed, it is important to remember the goal—to
achieve sustainable competitive advantage. The major opportunities for competitive
advantage have been traditionally found in the following areas:13
■ Cost and quality—where strategy drives an emphasis on operating effi-
ciency and/or product or service quality.
■ Knowledge and timing—where strategy drives an emphasis on learning,
innovation and speed of delivery to market for new ideas.
■ Barriers to entry—where strategy drives an emphasis on creating a mar-
ket stronghold that is protected from entry by others.
■ Financial resources—where strategy drives an emphasis on investments
■ A portfolio planning
and/or loss sustainment that competitors can’t match.
approach seeks the best
mix of investments
among alternative busi-
P O RT F O L I O P L A N N I N G
ness opportunities. The portfolio planning approach to strategy formulation is designed to help allo-
cate scarce organizational resources among competing opportunities, including the
■ The BCG matrix ana- mix of product lines and business units.14 Figure 6.6 summarizes a portfolio plan-
lyzes business opportuni- ning approach developed by the Boston Consulting Group known as the BCG
ties according to market matrix. It ties strategy formulation to an analysis of business opportunities accord-
growth rate and market ing to market growth rate and market share.15 The matrix shows the following four
share. possibilities, with each linked to a possible strategic direction.

CASE IN POINT
PROCTER & GAMBLE

You’re Never Too Big for a Web-Based Turnaround

It’s no secret that Procter & Gamble has some of the best brands in the global consumer
goods industry. But like other old economy success stories, P&G has struggled with the new
economy. The new CEO, A. G. Lafly, is trying to integrate the firm with the Web. Use of the
Internet may cut the firm’s marketing research costs as much as 70 percent; Web-based com-
munications are improving supply-chain management and customer-relationship manage-
ment. Says a senior executive: “We’re at an inflection point in history. The challenge for all of
us is either to change or die.”12
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STRATEGY FORMULATION 93

THE BCG MATRIX: A PORTFOLIO MODEL FOR CORPORATE

FIGURE 6.6
STRATEGY FORMULATION

High
Question Marks—poor competitive Stars—dominant competitive position in a
position in a growing industry growing industry
Recommended strategy = growth or Recommended strategy = growth; add
Market Growth Rate for

retrenchment; apply resources to accomplish resources and build the business further
SBU Products/Services

positive turnaround or pull back if based upon market projections

outlook poor

Dogs—poor competitive position in low- Cash Cows—dominant position in low-

growth industry growth industry
Recommended strategy = retrenchment; Recommended strategy = stability or
divest, sell, liquidate the business to eliminate modest growth; maintain benefits of strong
resource drain cash flow while keeping resource
investments minimum
Low
Low High
Market Share of SBU Products/Services

SBU = Strategic Business Unit

Stars are high market share businesses in high-growth markets. They produce
large profits through substantial penetration of expanding markets. The preferred
strategy for stars is growth, and further resource investments in them are recom-
mended. Question marks are low market share businesses in high-growth markets.
They do not produce much profit but compete in rapidly growing markets. They
are the source of difficult strategic decisions. The preferred strategy is growth, but
the risk exists that further investments will not result in improved market share.
The most promising question marks should be targeted for growth; others are
retrenchment candidates.
Cash cows are high market share businesses in low-growth markets. They pro-
duce large profits and a strong cash flow. Because the markets offer little growth
opportunity, the preferred strategy is stability or modest growth. The choice of
terms is very descriptive; “cows” should be “milked” to generate cash that can be
used to support needed investments in stars and question marks. Dogs are low mar-
ket share businesses in low-growth markets. They do not produce much profit, and
they show little potential for future improvement. The preferred strategy for dogs
is retrenchment by divestiture.

P O RT E R ’ S G E N E R I C S T R AT E G I E S
Michael Porter’s five forces model for industry analysis was introduced earlier. Use
of the model helps answer the question: Is this an attractive industry for us to com-
pete in? Within an industry, however, the initial strategic challenge becomes posi-
tioning one’s firm and products relative to competitors. The strategy question
becomes: How can we best compete for customers in this industry?16 Porter advises
managers to answer this question by using his genetic strategies framework shown
in Figure 6.7.
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94 CHAPTER 6 STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP

PORTER’S GENERIC STRATEGIES FRAMEWORK:

FIGURE 6.7
SOFT-DRINK INDUSTRY EXAMPLES

Cost leadership strategy Differentiation strategy

Broad
Big K Kola Coke, Pepsi

Market
Scope

Focused low cost strategy Focused differentiation

Narrow strategy
Cherokee Red Pop A&W Root Beer,
YooHoo

Low Price Uniqueness

Source of Competitive Advantage

According to Porter, business-level strategic decisions are driven by two basic factors:
(1) market scope—ask: “How broad or narrow is your market target?” (2) source of
competitive advantage—ask: “How will you compete for competitive advantage, by
lower price or product uniqueness?” As shown in the figure, these factors combine
to create the following four generic strategies that organizations can pursue. the
examples in the figure and shown here are of competitive positions within the soft-
drink industry.
1. Differentiation—where the organization’s resources and attention are
directed toward distinguishing its products from those of the competi-
tion (example: Coke, Pepsi).
2. Cost leadership—where the organization’s resources and attention are
directed toward minimizing costs to operate more efficiently than the
competition (example: Big K Kola, discounter cola brands).
3. Focused differentiation—where the organization concentrates on one
special market segment and tries to offer customers in that segment a
unique product (example: A&W Root Beer, YooHoo).
4. Focused cost leadership—where the organization concentrates on one
special market segment and tries in that segment to be the provider with
lowest costs (example: Cherokee Red Pop).
■ A differentiation Organizations pursuing a differentiation strategy seek competitive advantage
strategy offers products through uniqueness. They try to develop goods and services that are clearly differ-
that are unique or differ- ent from those of the competition. The objective is to attract loyal long-term cus-
ent from the competition. tomers. This strategy requires organizational strengths in marketing, research and
development, technological leadership, and creativity. It is highly dependent for its
success on continuing customer perceptions of product quality and uniqueness. An
example in the apparel industry is Polo Ralph Lauren, retailer of upscale classic
fashions and accessories. In Lauren’s words, Polo “redefined how American style
and quality is perceived. Polo has always been about selling quality products by cre-
ating worlds and inviting our customers to be part of our dream.”17
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STRATEGY IMPLEMENTATION 95

Organizations pursuing a cost leadership strategy try to continuously improve ■ A cost leadership
the efficiency of production, distribution, and other organizational systems. The strategy seeks to operate
objective is to have lower costs than competitors and, therefore, achieve higher profits. with lower costs than
This requires efficient systems and tight controls, as well as products that are easy to competitors.
manufacture and distribute. Of course, quality must not be sacrificed in the process.
Wal-Mart, for example, aims to keep its costs so low that it can always offer customers
the lowest prices and still make a reasonable profit. In financial services, Vanguard
Group has succeeded with a strategy based on keeping its costs low and, therefore,
offering mutual funds to customers with minimum fees. Its Web site proudly pro-
claims that Vanguard is the industry leader in having the lowest average expense ratios.
Organizations pursuing a focus strategy concentrate attention on a special mar- ■ A focused differentia-
ket segment with the objective of serving its needs better than anyone else. The strat- tion strategy offers a
egy focuses organizational resources and expertise on a particular customer group, unique product to a spe-
geographical region, or product or service line. This requires a willingness to concen- cial market segment.
trate attention and the ability to use resources to special advantage in a single area.
Cathay Pacific, long one of Asia’s leading airlines, refocused on the tourist trade to bol- ■ A focused cost leader-
ster lagging revenues during the region’s economic crisis. The firm offered dramatic ship strategy seeks the
discounts and special travel packages in attempting to lure customers from its rivals. lowest costs of operations
within a special market
segment.
E M E R G E N T S T R AT E G I E S
The real world of strategy formulation is complex and demanding. Not all strategies
are developed at one point in time and then implemented step by step. Many take
shape, change, and develop over time as modest adjustments to past patterns. James
Brian Quinn calls this a process of logical incrementalism, whereby incremental
changes in strategy occur as managers learn from experience.18 This approach has
much in common with Henry Mintzberg’s and John Kotter’s descriptions of manage-
rial behavior described in Chapter 1.19 They view managers as planning and acting in
complex interpersonal networks and in hectic, fast-paced work settings. Effective man-
agers must have the capacity to stay focused on long-term objectives while still remain-
ing flexible enough to master short-run problems and opportunities as they occur.
Such reasoning has led Mintzberg to identify what he calls emergent strategies.20
These are strategies that develop progressively over time as “streams” of decisions made
by managers as they learn from and respond to work situations. There is an important
element of “craftsmanship” here that Mintzberg worries may be overlooked by managers
who choose and discard strategies in rapid succession while using the formal planning
models. He also believes that emergent strategies allow managers and organizations to
become really good at implementing strategies, not just formulating them.

S t r ate g y I m p l e m e n tat i o n
No strategy, no matter how well formulated, can achieve long-term success if it is
not properly implemented. Current issues in strategy implementation call atten-
tion to the need for excellence in all management systems and practices, the
importance of leadership and top management teams, and the responsibilities of
corporate governance.
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96 CHAPTER 6 STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP

M A NAG E M E N T P R AC T I C E S A N D S Y S T E M S

In order to successfully put strategies into action, the entire organization and all of
its resources must be mobilized in support of them. This involves the complete
management process from planning and controlling through organizing and lead-
ing. Every strategy requires supporting structures, well-designed tasks and work-
flows, and the right people. And, it must be enthusiastically supported by leaders
who are capable of motivating everyone, building individual performance commit-
ments, and utilizing teams and teamwork to best advantage. Only with such total
systems support can strategies be implemented well enough to actually achieve
competitive advantage.
Common strategic planning pitfalls that hinder implementation include both
failures of substance and failures of process. Failures of substance reflect inadequate
attention to the major strategic planning elements—analysis of mission, values and
objectives, organizational strengths and weaknesses, and environmental opportunities
and threats. Manager’s Notepad 6.1 offers useful guidelines on how to double-check a
strategy from a substance perspective.21 Failures of process reflect poor handling of the
strategic planning process itself. A good example is lack of participation error. This is
failure to include key people in the strategic planning effort.22As a result, they lack suf-
ficient commitment to action and follow-through. This often occurs as a result of too
much centralization of planning in top management or too much delegation of plan-
ning activities to staff planners or separate planning departments.

C O R P O R AT E G OV E R NA N C E
■ Corporate governance Organizations today are experiencing new pressures at the level of corporate gover-
is the system of control nance. This is the system of control and performance monitoring of top management
and performance moni- that is maintained by boards of directors and other major stakeholder representatives.
toring of top manage- In businesses, for example, corporate governance is enacted by boards, institutional
ment. investors in a firm’s assets, and other ownership interests. Each in its own way is a
point of strategic performance accountability for top management.23
Boards of directors are formally charged with ensuring that an organization
operates in the best interests of its owners and/or the representative public in the
case of nonprofit organizations. Controversies often arise over the role of inside
directors who are chosen from the senior management of the organization and

M A N A G E R ’ S N O T E PA D 6 . 1
H O W T O D O U B L E - C H E C K A S T R AT E G Y

Check 1: Is the strategy consistent with mission and values?

Check 2: Is the strategy feasible, given strengths/weaknesses?
Check 3: Is the strategy responsive to opportunities and threats?
Check 4: Is the strategy sustainable in competitive advantage?
Check 5: Is the risk in the strategy a “reasonable” risk?
Check 6: Is the strategy flexible enough?
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STRATEGY IMPLEMENTATION 97

outside directors who are chosen from other organizations and positions external
to the organization. In the past corporate boards may have been viewed as largely
endorsing or confirming the strategic initiatives of top management. Today they
are increasingly expected to take active roles in ensuring that strategies are well
chosen and that the strategic leadership of an enterprise is successful.
If anything, the current trend is toward greater attention to issues of corporate
governance. Top managers probably feel more accountability for performance than
ever before to boards of directors and other stakeholder interest groups.
Furthermore, this strategic accountability relates not only to financial performance
but also to broader social responsibility concerns. For example, there are institu-
tional investors who purposely buy stock in a company to gain a voice in shareholder
meetings. They do this to bring pressure on organizations to behave in socially
responsible ways. Such pressure was felt by PepsiCo and Texaco for their controver-
sial involvements in Burma, a country whose totalitarian rulers were accused of
human rights abuses. Under pressure from consumers and activist groups, both
PepsiCo and Texaco terminated their business interests in that country.

S T R AT E G I C L E A D E R S H I P
Strategic management is a leadership responsibility. Effective strategy implementa-
tion and control depends on the full commitment of all manages to supporting and
leading strategic initiatives within their areas of supervisory responsibility. To suc-
cessfully put strategies into action the entire organization and all of its resources
must be mobilized in support of them. In our dynamic and often-uncertain envi-
ronment, the premium is on strategic leadership—the capability to enthuse peo- ■ Strategic leadership
ple to successfully engage in a process of continuous change, performance enthuses people to contin-
enhancement, and implementation of organizational strategies.24 uously change, refine, and
Porter argues that the CEO of a business has to be the chief strategist, someone improve strategies and
who provides strategic leadership.25 He describes the task in the following way. A their implementation.
strategic leader has to be the guardian of trade-offs. It is the leader’s job to make sure
that the organization’s resources are allocated in ways consistent with the strategy.
This requires the discipline to sort though many competing ideas and alternatives
to stay on course and not get sidetracked. A strategic leader also needs to create a
sense of urgency, not allowing the organization and its members to grow slow and
complacent. Even when doing well, the leader keeps the focus on getting better, and
being alert to conditions that require adjustments to the strategy.
According to Porter, a strategic leader needs to make sure that everyone under-
stands the strategy. Unless strategies are understood, the daily tasks and contributions
of people lose context and purpose. Everyone might work very hard, but without
alignment to strategy the impact is dispersed rather than advancing in a common
direction to accomplish the goals. A strategic leader must be a teacher. It is the leader’s
job to teach the strategy and make it a “cause,” says Porter. In order for strategy to
work it must become an ever-present commitment throughout the organization.
Everyone must understand the strategy that makes their organization different from
others. This means that a strategic leader must also be a great communicator, keeping
everyone focused on the organization’s strategic priorities.
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98 CHAPTER 6 STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP

Finally, it is important to note that the challenges faced by organizations today

are so complex that it is often difficult for one individual to fulfill all strategic lead-
ership needs. Strategic management in large firms is increasingly viewed as a team
leadership responsibility. when Michael Dell founded Dell Computer, he did it in
his dormitory room at college. Now the firm operates globally with $30 billion in
sales. Dell is still chairman and CEO, but he has two vice-chairmen to help with top
management tasks. He observes: “I don't think you could do it with one person …
there’s way too much to be done.”26

S t r ate g y a n d E n t re p re n e u r s h i p
In dynamic times organizations must adapt and renew themselves continually to
become and remain successful. People and organizations not only must change—
they must change frequently and at a rapidly accelerating pace. Success in the highly
■ Entrepreneurship is competitive business environments, in particular, depends on entrepreneurship.
a dynamic, risk-taking, This term is used to describe strategic thinking and risk-taking behavior that results
creative, and growth- in the creation of new opportunities for individuals and/or organizations. These
oriented behavior. opportunities frequently appear in the form of new business ventures, such as the
now familiar Domino’s Pizza and Federal Express’s overnight package delivery, or
as new goods or services, such as the popular 3M Post-It Note.

WHO ARE THE ENTREPRENEURS?

■ An entrepreneur pur- An entrepreneur is a risk-taking individual who takes action to pursue opportuni-
sues opportunities in risk ties in situations others may fail to recognize as such or may even view as problems
situations. or threats.27 In the business context, an entrepreneur starts new ventures that bring
to life new product or service ideas. Typical characteristics of entrepreneurs include
the following:
■ Internal focus of control: Entrepreneurs believe that they are in control of
their own destiny; they are self-directing and like autonomy.
■ High energy level: Entrepreneurs are persistent, hard working, and willing
to exert extraordinary efforts to succeed.
■ High need for achievement: Entrepreneurs are motivated to act individu-
ally to accomplish challenging goals.
■ Tolerance for ambiguity: Entrepreneurs are risk takers; they tolerate situa-
tions with high degrees of uncertainty.
■ Self-confidence: Entrepreneurs feel competent, believe in themselves, and
are willing to make decisions.
■ Action oriented: Entrepreneurs try to act ahead of problems; they want to
get things done quickly and do not want to waste valuable time.
A common image of an entrepreneur is as the founder of a new business enter-
prise that achieves large-scale success. Anita Roddick’s Body Shop, Bill Gates’s
Microsoft, and Sam Walton’s Wal-Mart are but a few dramatic examples of this type
of entrepreneurship. But entrepreneurs also operate on a smaller scale. Those who
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STRATEGY AND ENTREPRENEURSHIP 99

take the risk of buying a local McDonald’s or Subway Sandwich franchise, opening
a small retail shop, or going into a self-employed service business are also entrepre-
neurs. Similarly, anyone who assumes responsibility for introducing a new product
or change in operations within an organization is also demonstrating the qualities
of entrepreneurship.

BENCHMARK
WWW.ANITASANTIAGO.COM

Anita Santiago Advertising, Inc.

Hispanic Ad Agency Helps Others Bridge the Gap
After moving to the United States from Venezuela some twenty years ago, Anita Santiago
said, “I’ll never be able to land a job.” But she did, in the advertising business. Four years
later she started her own ad agency to focus on the Latin community and help commu-
nicate her culture to large companies. Que gran idioma tengo, reads the front page
of her Web site, quoting Chilean poet Pablo Neruda: “What a great language I have.”
Says Santiago: “I can see culture from both sides. You can’t learn that from a book.”
What’s Santiago’s advice to the about-to-be entrepreneur? “Be the expert—as we are in
biculturalism … Be creative,” she says, adding: “Lastly, hire the best people.”28

ENTREPRENEURSHIP AND
SMALL BUSINESS DEVELOPMENT
Entrepreneurship plays an important role in the formation of smaller enterprises. A
small business is commonly defined as one with 500 or fewer employees. The U.S. ■ A small business has
Small Business Administration, or SBA, also states that a small business is one that fewer than 500 employees,
is independently owned and operated and that does not dominate its industry.29 is independently owned
Almost 99 percent of American businesses meet this definition, and the small busi- and operated, and does
ness sector is very important in most nations of the world. Among other things, not dominate its industry.
small businesses offer major economic advantages by creating job opportunities and
providing new goods and services. The most common ways to get involved in a small
business are to (1) start one, (2) buy an existing one, or (3) buy and run a franchise.
Unfortunately, small businesses have a high failure rate. As many as 60 to 80
percent fail in their first five years of operation. Although many factors affect such
outcomes, an important foundation for such success is a business plan. This is a
written document that describes the nature of the business and its strategy, as well
as exactly how an entrepreneur intends to start and operate it. Writing such a busi-
ness plan helps the entrepreneur craft strategy and “think” through the various
details of setting up a business.30 Typically, this plan will be shared with banks, ven-
ture capitalists, and other potential investors in order to attract any additional
funds that may be needed to make the startup possible.
A variety of resources are available to promote the development of small and
medium scale enterprises. The SBA, for example, works with state and local agen-
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100 CHAPTER 6 STRATEGIC MANAGEMENT AND ENTREPRENEURSHIP

cies to support more than 1,000 Small Business Development Centers (SBDCs)
nationwide. They advise entrepreneurs and small business owners on how to set up
and successfully run a business. Often these centers are associated with universities
or colleges and offer opportunities for students to learn first-hand the nature of
small business and entrepreneurship. At the Silicon Valley Small Business
Development Center, for example, Jean Jaffess and her partners in Mambo Design
& Consulting were able to find assistance on writing a business plan, understand-
ing financial reports, and tax requirements.31
There is also considerable attention devoted to business incubation, where spe-
cial facilities provide a variety of shared administrative services and facilities to help
small businesses get started. The idea is that by nurturing the new businesses in the
incubators they will be able to grow more quickly and become healthy enough to
survive on their own. And, of course, with survival the economic benefits of job cre-
ation and new community businesses are expected. The National Business
Incubation Association, headquartered at Ohio University, serves as the network
hub of business incubation professionals around the United States.

ENTREPRENEURSHIP AND LARGE ENTERPRISES

Larger organizations also depend on entrepreneurial workers who are willing to
assume risk and display creativity. Such entrepreneurship helps drive the innova-
tion so important to continued success in dynamic and competitive environments.
Yet this task is especially challenging in very large and complex systems where the
natural tendencies may be toward stability, rigidity, and avoidance of risk. The con-
■ Intrapreneurship is cept of intrapreneurship specifically describes entrepreneurial behavior on the
entrepreneurial behavior part of people and subunits operating within large organizations.32
displayed by people or To enhance their competitive edge through intrapreneurship, large organiza-
subunits within large tions must find ways to act like small ones. This is often accomplished with an
organizations. emphasis on teams and teamwork. Some large organizations create small subunits
allowed to work in a setting that is highly creative and free of bureaucratic restric-
tions. A classic example is the small group of enthusiastic employees once sent off
to create Apple Computer’s original Macintosh. The group operated free of the
firm’s normal product development bureaucracy, set its own norms, and even oper-
ated in a special location. It worked. And, the legendary success of the Macintosh is
a fitting reminder of the importance of strategic management and entrepreneur-
ship in organizations.

S U M M A RY
What Is Strategic Management?
■ A strategy is a comprehensive plan that sets long-term direction and guides
resource allocation to accomplish an organization’s mission.
■ The strategic management process begins with analysis of mission, clarifica-
tion of core values, and identification of objectives.
■ The strategic management process involves a SWOT analysis of organizational
resources and capabilities and industry/environment opportunities and threats.
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SUMMARY 101

■ Corporate strategy sets direction for an entire organization; business strategy

sets direction for a business division or product/service line; functional strategy
sets direction for the operational support of business and corporate strategies.
■ The grand or master strategies used by organizations include growth, retrench-
ment, and stability, which can be used singly or in combinations.
How Are Strategies Formulated?
■ The BCG matrix is a portfolio planning approach that classifies businesses or
product lines as “stars,” “cash cows,” “question marks,” or “dogs.”
■ Porter’s model of competitive strategy identifies three major generic strategic
options: differentiation—distinguishing one’s products from the competition;
cost leadership—minimizing costs relative to the competition; and focus—
concentrating on a special market segment.
■ The product life-cycle model focuses on different strategic needs at the intro-
duction, growth, maturity, and decline stages of a product’s life.
■ The incremental or emergent model recognizes that many strategies are for-
mulated and implemented incrementally over time.
How Are Strategies Implemented?
■ Management practices and systems—including the functions of planning,
organizing, leading, and controlling—must be mobilized to support strategy
implementation.
■ Among the pitfalls that inhibit strategy implementation are failures of sub-
stance, such as poor analysis of the environment, and failures of process, such
as lack of participation in the planning process.
■ Strategic leadership responsibilities are distributed among all managers
throughout an organization.
■ Increasingly, organizations utilize top management teams to energize and
direct the strategic management process.
■ Corporate governance, involving the role of boards of directors in the per-
formance monitoring of organizations, is an important element in strategic
performance accountability.
What Is Entrepreneurship?
■ Entrepreneurship is risk-taking behavior that results in the creation of new
opportunities for individuals and/or organizations.
■ An entrepreneur is someone who takes strategic risks to pursue opportunities
in situations others may view as problems or threats.
■ Entrepreneurship results in the founding of many small business enterprises
that offer job creation and other economic benefits.
■ In the United States, small businesses have access to a variety of forms of sup-
port and assistance, including Small Business Development Centers and busi-
ness incubators.
■ Intrapreneurship, or entrepreneurial behavior within larger organizations, is
an important impetus to creativity and innovation in organizations.