P A R T 1

Strategic Analysis

PA R T O U T L I N E

1 Strategic Management: Creating Competitive Advantages

2 Analyzing the External Environment of the Firm

3 Assessing the Internal Environment of the Firm

4 Recognizing a Firm’s Intellectual Assets: Moving beyond a Firm’s

Tangible Resources

1
 Chapter 1
Analyzing
Goals and
Objectives

Chapter 2 Chapter 3
Analyzing Analyzing
the External the Internal
Environment Environment

Chapter 4
Assessing
Intellectual
Capital

Strategy Analysis

Chapter 5 Chapter 9
Formulating Implementation:
Business-Level Strategic
Strategies Controls

Chapter 6 Chapter 7 Chapter 10 Chapter 11

Strategic
Formulating Formulating Implementation:
Leadership:
Corporate-Level International Organization
Excellence, Ethics
Strategies Strategies Design
and Change

Chapter 8 Chapter 12
Formulating Strategic
Internet Leadership:
Strategies Fostering
Entrepreneurship
Strategy Formulation Strategy Implementation

Chapter 13
Case
Analysis
 C H A P T E R 1
Strategic Management:
Creating Competitive Advantages

CHAPTER OBJECTIVES

After reading this chapter, you should have a good understanding of:
■ The definition of strategic management and its four key attributes.
■ The strategic management process and its three interrelated and principal
activities.
■ Why stakeholder management is so critical in the strategic management process
and how “symbiosis” can be achieved among an organization’s stakeholders.
■ The key environmental forces that are creating more unpredictable change and
requiring greater empowerment throughout the organization.
■ How an awareness of a hierarchy of strategic goals can help an organization
achieve coherence in its strategic direction.

W
e define strategic management as consisting of the analysis, decisions, and
actions an organization undertakes in order to create and sustain competi-
tive advantages. At the heart of strategic management is the question: How
and why do some firms outperform others? Thus, the challenge to managers is to de-
cide on strategies that provide advantages that can be sustained over time. There are
four key attributes of strategic management. It is directed at overall organizational
goals, includes multiple stakeholders, incorporates short-term as well as long-term per-
spectives, and recognizes trade-offs between effectiveness and efficiency. We discuss
the above definition and the four key attributes in the first section.
The second section addresses the strategic management process. The three major
processes are strategy analysis, strategy formulation, and strategy implementation.
These three components parallel the analyses, decisions, and actions in the above

3
4 PA R T 1 Strategic Analysis

definition. We discuss how each of the 12 chapters addresses these three processes and
provide examples from each chapter.
The third section discusses an important concept—stakeholder management—that
must be taken into account during the strategic management process. The interests of
various stakeholders, such as owners, customers, and employees, can often conflict and
create challenging decision-making dilemmas for managers. However, we will also dis-
cuss how some firms have been able to achieve “symbiosis” among stakeholders wherein
their interests are considered interdependent and can be achieved simultaneously.
The fourth section addresses three interrelated factors in the business environ-
ment—globalization, technology, and intellectual capital—that have increased the level
of unpredictable change for today’s leaders. These factors have also created the need for
a greater strategic management perspective and reinforced the role of empowerment
throughout the organization.
The final section focuses on the need for organizations to ensure consistency in
their vision, mission and strategic objectives which, collectively, form a hierarchy of
goals. While visions may lack specificity, they must evoke powerful and compelling
mental images. Strategic objectives are much more specific and are essential for driv-
ing toward overall goals. 

One of the things that makes the study of strategic management so interesting is that
struggling firms can become stars and high flyers can become earthbound very rapidly.
During the stock market slump of 2000 and 2001, many technology and dot-com firms
were particularly ravaged. Let’s look at one such firm that experienced a hard fall from
grace—Lucent Technologies.1

In 1996, AT&T excited Wall Street when it spun off Lucent Technologies. Lucent was seen
as a fast-growing company that would rapidly propel the value of its stock. And it did for a
while. Wall Street snapped up the firm’s shares, expecting a high growth, innovative strat-
egy that would capture increasing portions of the telecom equipment market. Lucent didn’t
disappoint these early investors. In the year after the company was spun off from AT&T, Lu-
cent reported an increase in sales of 13 percent. The next year, 1998, sales again rose, this
time by 20 percent. This sales growth translated into a spectacular growth in earnings of 49
percent, trouncing competitors Motorola and Nortel.
When the telecom equipment industry was growing at 14 to 17 percent, Lucent man-
agement announced that they believed the company would consistently outpace this growth
rate by 3 to 5 percent. Investors hastily bought more shares, but this time around, things
didn’t turn out so well. Beginning in 2000, shares of Lucent began a downward spiral that
left the company on shaky ground. The first wave of declines in 2000 pushed the stock price
down a moderate amount, but that was only the beginning. Investors who thought the de-
cline was a brief downturn, seeing it as a buying opportunity, were disappointed as the de-
cline turned into a nosedive. By fall of 2001, the stock price had dropped from its high of
over $80 per share in late 1999 to just under $6 per share.
What or who was to blame? Lucent had structured itself into eleven autonomous busi-
ness units. The idea was that each unit could operate autonomously, reducing bureaucracy
and creating faster, more agile market responses. Unfortunately, this had the opposite effect.
The optics business unit placed big bets that a new optical networking gear technology was
just a passing fad, while competitors embraced the new technology.
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 5

Lucent’s flawed actions and faulty market analysis took their toll. The firm missed a lu-
crative market opportunity, allowing competitors to gain first-mover advantages. Lucent’s
executive team didn’t even see the problems coming. As late as mid-2000, Lucent’s CEO
Rich McGinn continued to project optimistic growth. But it takes more than projections to
boost a stock price. Eventually, bottom-line measures take over. Despite the upbeat tone
coming from Lucent’s executive suite, Wall Street demanded results, not promises. Lucent
began deeply slashing prices just before quarterly sales reports became available to Wall
Street analysts. This increased sales and pumped up quarterly revenue, but in the long run,
the discounted prices hurt the firm’s future earning potential.
Another problem was that inventories grew much faster than sales. In 2000, annual rev-
enue growth increased by 12 percent, but inventory increased by 34 percent. This was not
only a problem at Lucent; the whole industry faced similar problems. Sharp declines in de-
mand for telecom equipment from declining capital investment of the industry’s primary
buyers stalled new sales. Unable to find buyers, at least a half dozen telecom upstarts such
as ICG Communications, PSI Net, Inc., and GST Telecom faced bankruptcy. Layoffs in the
industry totaled approximately 170,000 employ0ees in the first seven months of 2001. To
further illustrate the industry’s woes, from 1996 to 2000 capital investment in the industry
had risen 25 percent annually. However, analysts estimated a 15 percent decrease for 2001.
This erosion in aggregate industry demand aggravated Lucent’s existing self-inflicted
wounds. In addition to its previous problems, it found itself competing in an industry where
it was difficult for any firm to remain above water.

Today’s leaders—such as those at Lucent Technologies—face a large number of com-

plex challenges in today’s global marketplace. In considering how much credit (or blame)
they deserve, two perspectives of leadership come immediately to mind: the “romantic”
and “external control” perspectives.2 First, let’s look at the romantic view of leadership.
Here, the implicit assumption is that the leader is the key force in determining an organi-
zation’s success—or lack thereof. This view dominates the popular press in business mag-
azines such as Fortune, Business Week, and Forbes, wherein the CEO is either lauded for
his or her firm’s success or chided for the organization’s demise. Consider, for example, the
credit that has been bestowed on leaders such as Jack Welch, the late Katharine Graham,
and Herb Kelleher for the tremendous accomplishments of their firms, General Electric,
The Washington Post Co., and Southwest Airlines, respectively. In the world of sports,
managers and coaches, such as Joe Torre of the New York Yankees, get a lot of the credit
for their team’s outstanding success on the field. On the other hand, when things don’t go
well, much of the failure of an organization can also, rightfully, be attributed to the leader.
After all, Rich McGinn, Lucent’s CEO, made a lot of mistakes. These included errors in
assessing market and competitive conditions, deciding what objectives to set and which
strategies to pursue, redesigning the organization into the 11 business units, and so on.
However, this only gives part of the picture. Another perspective of leadership is
called the “external control” perspective. Here, rather than making the implicit as-
sumption that the leader is the most important factor in determining organizational out-
comes, the focus is on external factors that may positively or negatively affect a firm’s
success. One doesn’t have to look far to support this perspective. Lucent, like other
firms in its industry, suffered from a precipitous drop in the demand for telecommuni-
cations equipment during 2000 and 2001. Somewhat coincidentally, Nortel, which was
considered far ahead on the technology curve, also saw its stock drop by an amount
similar to that of Lucent Technologies!
6 PA R T 1 Strategic Analysis

The point, of course, is that while neither the romantic nor the external control per-
spective is entirely correct, we must acknowledge both in the study of strategic man-
agement. Our premise is that leaders can make a difference, but they must be constantly
aware of the opportunities and threats that they face in the external environment as well
as have a thorough understanding of their firm’s resources and capabilities. They can’t
do it all by themselves.
Before we move on, we’d like to provide a recent, dramatic example of the exter-
nal control perspective at work: the terrorist aircraft hijacking and bombings of the twin
towers of the World Trade Center in New York City and the Pentagon building in Wash-
ington, D.C., on September 11, 2001. The loss of life and injuries to innocent people
were immense and the damage to property was enormous. Wall Street suffered a loss of
about $1.4 trillion dollars in the five trading sessions after the market reopened on Sep-
tember 17. The effect on many industries was devastating. Strategy Spotlight 1.1 looks
at some industries that were particularly hard hit.
Now that we’ve briefly discussed the importance of strategic management, let’s
turn to some of the central concepts and ideas in this field of study.

WHAT IS STRATEGIC MANAGEMENT?

Given the many challenges and opportunities in the global marketplace, today’s
managers must do more than set long-term strategies and hope for the best. They must go
beyond what some have called “incremental management,” whereby they view their job
as making a series of small, minor changes to improve the efficiency of their firm’s oper-
ations.3 That is fine if your firm is competing in a very stable, simple, and unchanging
industry. But there aren’t many of those left. As we shall discuss in this chapter and
throughout the book, there are many accelerating changes that exert pressure on managers
to increasingly make both major and minor changes in a firm’s strategic direction.
Rather than see their jobs merely as custodians of the status quo, today’s leaders
must be proactive, anticipate change, and continually refine and, when necessary, make
significant changes to their strategies. The strategic management of the organization
must become both a process and a way of thinking throughout the organization.

Defining Strategic Management

As we stated at the beginning of this chapter, strategic management consists of the
analysis, decisions, and actions an organization undertakes in order to create and sus-
tain competitive advantages. This definition captures two main elements that go to the
heart of the field of strategic management.
First, the strategic management of an organization entails three ongoing processes:
analysis, decision, and actions. That is, strategic management is concerned with the
analysis of the hierarchy of the strategic goals (vision, mission, and strategic objectives)
along with the analysis of the internal and external environment of the organization.
Next, leaders must make strategic decisions. These decisions, broadly speaking, address
two basic questions: What industries should we compete in? How should we compete
in those industries? These questions also often involve an organization’s domestic as
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 7
STRATEGY SPOTLIGHT 1.1 | TERRORISM
AND U.S. BUSINESS

The morning of September 11, 2001, two planes hi- been its worst annual performance since 1992. How-
jacked by terrorists flew into the twin towers of the ever, after the September 11th tragedy, the losses for
World Trade Center in New York City, bringing them to 2001 were estimated to be enormous: between $10 bil-
the ground and killing thousands. A third plane flew di- lion and $11 billion.
rectly into the Pentagon in Washington, D.C., where Tourism will be particularly devastated. Tourism in
hundreds more lost their lives. A fourth plane crashed in New York City, for instance, had been climbing all year
a Pennsylvania field in a failed attempt to crash into an- until the attack, with 282,000 jobs, annual revenues of
other likely target in Washington, D.C. $17 billion, and 3,500 new rooms added from the first of
The economic fallout has been enormous. The the year until the attack. But with a rapid decline in the
United States was already experiencing economic weak- nation’s economic outlook coupled with the city’s focus
ness prior to the attack, but things got worse literally on rebuilding, demand for tourism services seems dras-
overnight. Gross domestic product had been projected to tically reduced.
decline by 0.3 percent for the third quarter of 2001, but Internet travel sites, one of the few profitable areas
projections suddenly changed to a full 1 percent decline. in e-commerce in the recent past, are not immune.
The financial services industry, which leads New E-commerce travel site Orbitz, for example, has slashed
York City’s employment at 552,000 workers, was espe- marketing in half, Lowestfare.com has laid off 460 em-
cially hard hit. The industry usually contributes about ployees, and BizTravel.com has gone out of business
$207 billion to the city’s $444 billion in output annually. altogether.
But with many financial services offices located in the
World Trade Center, it will be difficult for the industry Sources: B. Powell “Battered but Unbroken” Fortune, October 1, 2001,
to make a fast comeback. pp. 69–80; J. L. Lunsford and A. Pasztor “Boeing Co.’s Course in
Demand in the airline industry dried up as passen- Terror’s Wake Seen as a Wider U.S. Test,” Wall Street Journal,
September 20, 2001, p. A1; M. Merzer and S. Chatterjee “Bush Urges
gers cancelled their reservations, afraid that other hi-
Americans to Trust Airlines,” Lexington (KY) Herald Leader,
jackings might ensue. Soon after the attack, Boeing an- September 28, 2001, p. A1; R. S. Dunham, A. Borrus, and S. Crock
nounced it would lay off up to 30,000 workers, nearly “This Changes Everything,” Business Week, September 24, 2001, pp.
one-third of its workforce in its commercial aircraft di- 38–40; M. Mandel, L. Cohn, C. Tierney, S. Anderson-Forest, C. Elton,
vision. The airlines quickly followed suit; announcing and A. Barrett “Worldwide, Hope for Recovery Dims” Business Week,
September 24, 2001, pp. 42–45; L. Braham, M. Conlin, T. Lowry,
layoffs of approximately 100,000 employees. Before S. Scherreik, and A. Tergesen “On the Disabled List: New York”
the disaster, the industry had already lost $2.5 billion Business Week, September 24, 2001, p. 48; and, S. Tully “From Bad
and was on track to lose $3.5 billion. This would have to Worse” Fortune, October 15, 2001, pp. 118–128.

well as its international operations. And last are the actions that must be taken. Deci-
sions are of little use, of course, unless they are acted on. Firms must take the necessary
actions to implement their strategies. This requires leaders to allocate the necessary re-
sources and to design the organization to bring the intended strategies to reality. As we
will see in the next section, this is an ongoing, evolving process with a great deal of in-
teraction among these three processes.
Second, the essence of strategic management is the study of why some firms out-
perform others.4 Thus, managers need to determine how a firm is to compete so that it
can obtain advantages that are sustainable over a lengthy period of time. That means fo-
cusing on two fundamental questions: How should we compete in order to create com-
petitive advantages in the marketplace? For example, managers need to determine if the

7
8 PA R T 1 Strategic Analysis

firm should position itself as the low-cost producer, or develop products and services
that are unique which will enable the firm to charge premium prices—or some combi-
nation of both.
Managers must also ask how to make such advantages sustainable, instead of
highly temporary, in the marketplace. That is: How can we create competitive advan-
tages in the marketplace that are not only unique and valuable but also difficult for
competitors to copy or substitute?5 After all, if managers focus only on making minor
improvements to their firm’s operations, it will be quite easy for competitors to dupli-
cate their moves and take away their advantages in the marketplace. At best, they will
be forced to engage in intensive price competition that will erode everyone’s profits. At
worst, if they direct the vast majority of their efforts to internal operations, they might
be blindsided by a new competitor offering a far superior product, service, or technol-
ogy that just might make their firm irrelevant.6

The Four Key Attributes of Strategic Management

Before discussing the strategic management process in more detail—which forms the
overall framework for the book—let’s briefly talk about four attributes of strategic man-
agement.7 In doing so, it will become clear how this course differs from other courses
that you have had in functional areas, such as accounting, marketing, operations, and fi-
nance. Exhibit 1.1 provides a definition and the four attributes of strategic management.
First, strategic management is directed toward overall organizational goals and ob-
jectives. That is, effort must be directed at what is best for the total organization, not
just a single functional area. Some authors have referred to this perspective as “organi-
zational versus individual rationality.”8 That is, what might look “rational” or most ap-
propriate for a functional area such as operations may not be in the best interest of the
firm overall. For example, operations may decide to schedule long production runs of
similar products in order to lower unit costs. However, the standardized output may be
counter to what marketing needs in order to appeal to a sophisticated and demanding
target market. Similarly, research and development may overengineer the product in
order to develop a far superior offering, but the design may make the product so ex-
pensive that market demand is minimal. Therefore, in this course you will look at cases
and strategic issues from the perspective of the organization rather than that of the func-
tional area(s) in which you have had the most training and experience.
Second, strategic management involves the inclusion of multiple stakeholders in de-
cision making. Managers must incorporate the demands of many stakeholders when mak-
ing decisions. Stakeholders are those individuals, groups, and organizations who have a

Exhibit 1.1 Strategic Management Concepts

Definition: Strategic management consists of the analysis, decisions, and actions an

organization undertakes in order to create and sustain competitive advantages.
Key attributes of strategic management
■ Directs the organization toward overall goals and objectives.
■ Involves the inclusion of multiple stakeholders in decision making.
■ Needs to incorporate short-term and long-term perspectives.
■ Recognizes trade-offs between efficiency and effectiveness.
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 9

“stake” in the success of the organization, including owners (shareholders in a publicly

held corporation), employees, customers, suppliers, the community-at-large, and so on.
We’ll discuss this in more detail in the next section. Managers will not be successful if
they continually focus on a single stakeholder. For example, if the overwhelming empha-
sis is on generating profits for the owners, employees may become alienated, customer
service may suffer, and the suppliers may become resentful of continual demands for pric-
ing concessions. As we will see, however, many organizations have been able to satisfy
multiple stakeholder needs simultaneously. For example, financial performance may ac-
tually be greater because employees who are satisfied with their jobs make a greater ef-
fort to enhance customer satisfaction, thus leading to higher profits.
Third, strategic management requires the need to incorporate both short-term and
long-term perspectives. Peter Senge, a leading strategic management author at the Mas-
sachusetts Institute of Technology, has referred to this need as a “creative tension.”9 That
is, managers must maintain both a vision for the future of the organization as well as a
focus on its present operating needs. However, as one descends the hierarchy of the or-
ganization from the executives to the middle-level managers to the managers at the level
of operations, there tends to be a narrower, short-term perspective. Nonetheless, all man-
agers throughout the organization must maintain a strategic management perspective and
assess how their actions impact the overall attainment of organizational objectives. For
example, laying off several valuable employees may help to cut costs and improve prof-
its in the short term, but the long-term implications for employee morale and customer
relationships may suffer—leading to subsequent performance declines.10
Fourth, strategic management involves the recognition of trade-offs between effective-
ness and efficiency. Closely related to the third point above, this recognition means being
aware of the need for organizations to strive to act effectively and efficiently. Some authors
have referred to this as the difference between “doing the right thing” (effectiveness) and
“doing things right” (efficiency).11 While managers must allocate and use resources wisely,
they must still direct their efforts toward the attainment of overall organizational objectives.
Managers that are totally focused on meeting short-term budgets and targets may fail to at-
tain the broader goals of the organization. Consider the following amusing story told by
Norman Augustine, formerly CEO of defense giant, Martin Marietta:
I am reminded of an article I once read in a British newspaper which described a problem
with the local bus service between the towns of Bagnall and Greenfields. It seemed that, to
the great annoyance of customers, drivers had been passing long queues of would-be pas-
sengers with a smile and a wave of the hand. This practice was, however, clarified by a bus
company official who explained, “It is impossible for the drivers to keep their timetables if
they must stop for passengers.”12

Clearly the drivers who were trying to stay on schedule had ignored the overall mission.
As Augustine noted: “Impeccable logic but something seems to be missing!”

THE STRATEGIC MANAGEMENT PROCESS

We’ve identified three ongoing processes—analysis, decisions, and actions—that are
central to strategic management. In practice, strategies are not developed in a lockstep
manner wherein managers conduct a sophisticated analysis, make appropriate strategic
 STRATEGY SPOTLIGHT 1.2 | ONLINE PRESCRIPTIONS:
GOOD IDEA, BAD STRATEGY

Wouldn’t customers love to be able to refill prescriptions efit managers work with insurance companies to ap-
without the hassle of waiting in line at a pharmacy? This prove reimbursement of prescription costs. Viewing on-
was an opportunity just waiting to happen. Once a few line drugstores as competitive threats, pharmacy benefit
online pharmacies such as Drugstore.com and Planet Rx managers simply made sure that insurance companies
entered the scene, a host of others followed. didn’t reimburse many of these sales. This dried up the
But today, most have gone out of business and cus- online orders, forcing many of the Web pharmacies out
tomers are once again waiting in line at the local drug- of business and the few survivors to team up with tradi-
store. The websites were well designed, easy to use, and tional bricks-and-mortar drugstores.
less expensive than traditional pharmacies. So what was
the problem? Why couldn’t such an innovative idea that
Sources: L. Downes, “Strategy Can Be Deadly,” The Industry
customers loved be successful? Standard, May 14, 2001, pp. 72–75; Anonymous, “NABP Awards
These new ventures didn’t take into account the na- VIPPS Certification to VitaRx.com,” National Association of Boards of
ture of competition in the retail industry. Pharmacy ben- Pharmacy press release, November 23, 2000.

decisions, and engage in the necessary actions to implement the chosen strategies.
Instead, these three processes—often referred to as strategy analysis, strategy formula-
tion, and strategy implementation—are highly interdependent. Success in one of the
processes does not guarantee success in the marketplace.
Let’s go back to our opening example of Lucent Technologies. Regardless of how
effective its strategies were implemented, Lucent seemed doomed to a rapidly eroding
competitive and financial position. This is, in large part, because Lucent formulated
strategies that were based on a faulty assessment of the opportunities and threats in its
competitive environment. Similarly, many firms experience dismal results because
seemingly sound strategies are poorly implemented. In Strategy Spotlight 1.2 we dis-
cuss the problems that some firms have had implementing Internet strategies.
In the next three subsections, we will address each of the three key strategic man-
agement processes: strategy analysis, strategy formulation, and strategy implementa-
tion. We provide brief examples from business practice that are based on the opening
vignettes for each chapter. They serve to demonstrate that effective strategic manage-
ment poses complex challenges and that sometimes things can go wrong.
Exhibit 1.2 depicts the strategic management process and indicates how it ties into
the chapters in the book. Consistent with our discussion above, we use two-way arrows
to convey the interactive nature of the processes.

Strategy Analysis
Strategy analysis may be looked upon as the starting point of the strategic management
process. It consists of the “advance work” that must be done in order to effectively for-
mulate and implement strategies. Many strategies fail because managers may want to for-
mulate and implement strategies without a careful analysis of the overarching goals of the
organization and without a thorough analysis of its external and internal environment.

10
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 11

Chapter 1
Analyzing
Goals and
Objectives

Chapter 2 Chapter 3
Analyzing Analyzing
the External the Internal
Environment Environment

Chapter 4
Assessing
Intellectual
Capital

Strategy Analysis

Chapter 5 Chapter 9
Formulating Implementation:
Business-Level Strategic
Strategies Controls

Chapter 6 Chapter 7 Chapter 10 Chapter 11

Strategic
Formulating Formulating Implementation:
Leadership:
Corporate-Level International Organization
Excellence, Ethics,
Strategies Strategies Design
and Change

Chapter 8 Chapter 12
Formulating Strategic
Internet Leadership:
Strategies Fostering
Entrepreneurship
Strategy Formulation Strategy Implementation

Chapter 13
Case
Analysis

Exhibit 1.2 The Strategic Management Process

12 PA R T 1 Strategic Analysis

Analyzing Organizational Goals and Objectives (Chapter 1) Organizations must

have clearly articulated goals and objectives in order to channel the efforts of individuals
throughout the organization toward common ends. Goals and objectives also provide a
means of allocating resources effectively. A firm’s vision, mission, and strategic objec-
tives form a hierarchy of goals that range from broad statements of intent and bases for
competitive advantage to specific, measurable strategic objectives.
As indicated in Exhibit 1.2, this hierarchy of goals is not developed in isolation.
Rather, it is developed in concert with a rigorous understanding of the opportunities and
threats in the external environment (Chapter 2) as well as a thorough understanding of
the firm’s strengths and weaknesses (Chapter 3). Chapter 1 describes a set of interre-
lated strategic problems that caused a “rising star,” Lucent Technologies, to fall from
grace.
■ Lucent lost over $200 billion in market value alone in 2000 by failing to anticipate
changes in overall demand and competitor moves. It also had major problems with
strategy formulation and implementation. For example, Lucent set unrealistic sales
and profitability goals. It also did a poor job in implementing its strategies,
particularly the restructuring of the firm into 11 separate business units.
Analyzing the External Environment (Chapter 2) Managers must monitor and
scan the environment as well as analyze competitors. Such information is critical in de-
termining the opportunity and threats in the external environment. We provide two
frameworks of the external environment. First, the general environment consists of sev-
eral elements such as demographic, technological, and economic segments from which
key trends and events can have a dramatic impact on the firm. Second, the industry en-
vironment is “closer to home” and consists of competitors and other organizations that
may threaten the success of a firm’s products and services.
■ We go back into history and look at two firms, Aristo (a slide rule maker) and
A. C. Gilbert (the producer of the famous “American Flyer” trains and Erector
sets). Aristo failed to note the arrival of the “electronic calculator” and A. C.
Gilbert ignored the powerful potential of television as an advertising medium.
Despite long histories, both firms failed in the 1960s.
Assessing the Internal Environment (Chapter 3) We provide some useful frameworks
for analyzing a firm’s internal environment. Such analysis helps to identify both strengths
and weaknesses that can, in part, determine how well a firm will succeed in an industry. An-
alyzing the strength and relationships among the activities that comprise a firm’s value chain
(e.g., operations, marketing and sales, and human resource management) can be a means of
uncovering potential sources of competitive advantage for the firm. Chapter 3 describes a
promising young firm named Frox that ignored the rules of value creation.
■ Frox seemed to have everything going for it—money, talent, and experience. Its
goal was to develop and market a state-of-the art “smart TV” for the home
entertainment market. However, it put all of its “eggs” in the engineering
“basket” and wound up producing a product with an astonishing retail price of
$30,000 and technical problems. Poor product, limited market.
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 13

Assessing a Firm’s Intellectual Assets (Chapter 4) The knowledge worker and a

firm’s other intellectual assets (e.g., patents, trademarks) are becoming increasingly im-
portant as the drivers of competitive advantages and wealth creation in today’s econ-
omy. In addition to human capital, we assess how well the organization creates net-
works and relationships among its employees as well as its customers, suppliers, and
alliance partners. We also address the need for organizations to use technology to en-
hance collaboration among employees as well as provide a means of accumulating and
storing knowledge. Chapter 4 describes how one of America’s greatest corporate icons
botched its lead in technology by managing its intellectual assets poorly.
■ To say Xerox has disappointed its shareholders would be an understatement. Its
stock has plummeted from a high of $64 in 1999 to around $8 in late 2001. Why?
In addition to poor product-market choices, the firm mismanaged its intellectual
capital and there were poor working relationships among executives. Among other
things, this inhibited their ability to provide a solid strategic direction for the firm.

Strategy Formulation
A firm’s strategy formulation is developed at several levels. First, business-level strat-
egy addresses the issue of how to compete in given business environments to attain
competitive advantage. Second, corporate-level strategy focuses on two issues: (1) what
businesses to compete in and (2) how businesses can be managed to achieve synergy—
that is, create more value by working together than if they operate as stand-alone busi-
nesses. Third, a firm must develop international strategies as it ventures beyond its na-
tional boundaries. Then the central issue is whether a firm desires to treat foreign
markets as homogeneous and achieve scale economies by producing undifferentiated
goods and services or whether it should consider each country’s market as unique and
tailor its products and services to local market conditions. Finally, the growing impor-
tance of the Internet has increased the necessity for firms to explore the ramifications of
this new strategic platform and formulate Internet and e-business strategies.
Formulating Business-Level Strategies (Chapter 5) The question of how firms
compete and outperform their rivals and how they achieve and sustain competitive ad-
vantages goes to the heart of strategic management. Successful firms strive to develop
bases for competitive advantage that can consist of cost leadership and/or differentia-
tion as well as by focusing on a narrow or industrywide market segment. We’ll also dis-
cuss why some advantages can be more sustainable (or durable) over time and how a
firm’s business-level strategy changes with the industry life cycle—that is, the stages of
introduction, growth, maturity, and decline. Chapter 5 describes how a fast-growing
competitor overextended its cost reduction efforts in its attempt to get ahead.
■ Food Lion, a player in the grocery business, had a very successful overall low cost
strategy for a long time. But they carried it too far. The firm suffered from a startling
exposé on ABC’s PrimeTime Live charging employee exploitation, false packaging
data, and unsanitary meat-handling practices. The result: soured employees, eroding
profitability, and a damaged reputation. But Food Lion is trying to make a comeback.
14 PA R T 1 Strategic Analysis

Formulating Corporate-Level Strategies (Chapter 6) Whereas business-level

strategy is concerned with how to create and sustain competitive advantage in an indi-
vidual business, corporate-level strategy addresses issues concerning a firm’s portfolio
(or group) of businesses. That is, it asks (1) what business (or businesses) should we
compete in? and (2) how can we manage this portfolio of businesses to create synergies
among the businesses? In this chapter, we explore the relative advantages and disad-
vantages of firms pursuing strategies of related or unrelated diversification. In addition,
we discuss the various means that firms can employ to diversify—internal development,
mergers and acquisitions, and joint ventures and strategic alliances—as well as their rel-
ative advantages and disadvantages. Chapter 6 describes a well-known international
company that tried unsuccessfully to build on its fame.
■ Saatchi & Saatchi was one of the world leaders in the advertising industry. Its
client list expanded as it diversified into related areas such as marketing services,
public relations, direct marketing, and promotion. But the firm strayed from a
successful strategy and nearly went bankrupt. Saatchi & Saatchi eroded its most
important asset: relationships with marketing clients.

Formulating International-Level Strategies (Chapter 7) When firms expand their

scope of operations to include foreign markets, they encounter many opportunities and
potential pitfalls. They must decide not only on the most appropriate entry strategy but
also how they will go about attaining competitive advantages in international markets.
Many successful international firms have been able to attain both lower costs and higher
levels of differentiated products and services through the successful implementation of
a “transnational strategy.” Chapter 7 describes the Ford Motor Company’s missteps in
trying to introduce its cars in Japan.
■ Even historically successful multinational firms can make blunders. Ford tried to
sell its Taurus automobile in Japan—and failed. The car was too long and had poor
fuel efficiency—hardly selling points in Japan! After all, Japan has small parking
places and very high gasoline prices. But then Ford followed up with the Ka—a
subcompact car. It too was unsuccessful. Why? It had a stick shift—and Japanese
drivers prefer automatic transmissions. Also, Ka in Japanese means “mosquito.”

Formulating Internet Strategies (Chapter 8) Given the rapid advances in technol-

ogy in recent years, the Internet and e-commerce promise new opportunities and threats
for virtually all businesses. We believe that when firms formulate their strategies they
should give explicit consideration to how these technologies might impact their strate-
gies. The effective use of the Internet and e-commerce strategies can help an organiza-
tion improve its competitive position in an industry and enhance its ability to create ad-
vantages based on cost leadership or differentiation strategies. Chapter 8 describes one
Internet start-up that misread the competitive environment.
■ Garden.com seemed destined for success. This high-flying Web start-up was
chalking up awards for Web savvy and design and was attracting thousands each
month to its website. However, it became one of many casualties of the dot-com
crash. Why? People would shop on the website—getting a free garden show and
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 15

information—but not buy. And far too often, when they did buy, they often got
sick or dying plants—hardly, a product to enhance customer loyalty.

Strategy Implementation
As we have noted earlier in the chapter, effective strategies are of no value if they are not
properly implemented. Strategy implementation involves ensuring that a firm has proper
strategic controls and organizational designs. Of particular importance is ensuring that the
firm has established effective means to coordinate and integrate activities within the firm
as well as with its suppliers, customers, and alliance partners. In addition, leadership plays
a central role. This involves many things. Paramount among these, however, is ensuring
that the organization is committed to excellence and ethical behavior as well as consis-
tently being entrepreneurial in creating and taking advantage of new opportunities.

Implementing Strategy: Achieving Effective Strategic Control (Chapter 9) Firms

are unable to successfully implement their chosen strategies unless they exercise effec-
tive strategic control. This consists of two types. First, informational control requires
that the organization continually monitor and scan the environment and respond effec-
tively to threats and opportunities. Second, behavioral control involves the proper bal-
ance of rewards and incentives, culture, and boundaries (or constraints). Organizations
that have strong and effective cultures and reward systems typically require fewer rules
and regulations because employees tend to understand and internalize the “boundaries”
of acceptable behavior.
■ Dan Gill, a tough, “bottom-line” manager, was CEO of Bausch & Lomb. “Make
the numbers or else” was the clear message to his managers. However, problems
arose when overall demand eroded and managers still were forced to maintain
historical double-digit growth rates. Poor judgment and ethical lapses followed.
Restatements of earnings and an SEC investigation cost Dan Gill his job. That
seemed to be about the only good news in a long time—the firm’s stock went up
7.2 percent the day of that announcement!

Implementing Strategy: Creating Effective Organizational Designs (Chapter 10)

To succeed, firms must have organizational structures and designs that are consistent with
their strategy. For example, firms that diversify into related product-market areas typically
implement divisional structures. In addition, in today’s rapidly changing competitive en-
vironments, firms must design their companies to ensure that their organizational bound-
aries—those internal to the firm and external—are more flexible and permeable. In many
cases, organizations should consider creating strategic alliances in order to capitalize on
the capabilities of other organizations. Chapter 10 describes how one company failed to
design a new organizational structure to match its newly implemented technology.
■ This End Up, a furniture manufacturer, was highly successful, with sales reaching
$100 million. However, the failed implementation of a computerized logistics
system forced the company into bankruptcy. Why? The system failed to link
important internal operations at This End Up with customers, suppliers, and
distributors. Everybody wound up losing—except, perhaps, the firm’s competitors.
16 PA R T 1 Strategic Analysis

Effective Strategic Leadership: Creating a Learning Organization and an Ethical

Organization (Chapter 11) Effective leaders must engage in several ongoing activi-
ties: setting a direction, designing the organization, and developing an organization that
is committed to excellence and ethical behavior. In addition, given the rapid and un-
predictable change in today’s competitive environments, leaders need to create a “learn-
ing organization.” This ensures that the organization can benefit from individual and
collective talents throughout the organization. Chapter 11 describes how one leader’s
mismanagement almost caused a world-class company to go under.
■ Morrison Knudsen is one of the world’s best-known construction companies. It
worked on projects such as the Hoover Dam, the Trans-Alaska Pipeline, and the
San Francisco–Oakland Bay Bridge. However, under Bill Agee’s leadership, the
firm almost folded. Among his failings was a lack of visionary leadership,
inappropriate diversification, an inability to empower managers, poor
communication, and ethical lapses. A textbook case of poor leadership.
Effective Strategic Leadership: Fostering Corporate Entrepreneurship and New Ven-
ture Creation (Chapter 12) Today’s success does not guarantee success in the future.
With rapid and unpredictable change in the global marketplace, firms of all sizes must con-
tinue to seek out opportunities for growth as well as find new ways to renew their organi-
zations. Within corporations, autonomous entrepreneurial behavior by product champions
and other organizational members can emerge from anywhere in the organization to fill
essential entrepreneurial roles and activities. Additionally, many of the concepts that we ad-
dress in the text can be applied to new ventures and small businesses. Chapter 12 describes
some of the pitfalls faced by two brothers who wanted to start a new venture.
■ Rosen Motors started out with an ambitious goal: to develop an innovative,
hybrid drive train for the largest automobile manufacturers. Unfortunately,
Rosen’s technological success did not translate into commercial success. Among
the problems: The big automakers were not willing, in essence, to scrap their
own investments in hybrids and adopt Rosen’s product. Similarly, the automakers
were unwilling to subcontract out such a vital component of their cars to a
fledgling firm. Clearly, unfavorable market forces and competitive dynamics can
prevent a new technology from attracting customers.
We’ve discussed the strategic management process. In addition, Chapter 13, “Ana-
lyzing Strategic Management Cases,” provides guidelines and suggestions on how to
evaluate cases in this course. Thus, the concepts and techniques discussed in these 12
chapters can be applied to real-world organizations.
Let’s now address a concept—stakeholder management—that must continually be
taken into account during the strategic management process.

THE ROLE OF STAKEHOLDER MANAGEMENT

Most business enterprises that employ more than a few dozen people are organized as
corporations.13 As such, the managers are charged with the primary task of maximizing
profits and producing a satisfactory return for the shareholders, who are the owners. In
turn, the management of the corporation is overseen by a board of directors who are sup-
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 17

posed to look out for the interests of those shareholders.14 That is, the management of
the company runs the day-to-day operations while the board of directors governs the
management and protects the interests of the firm’s shareholders. At times the board me-
diates and resolves conflicts when shareholders and managers disagree. Some of the key
issues that they address include takeovers and control, executive compensation, capital
structure, top management succession, board nomination, and shareholder rights.
Despite the board’s charge to look out for the best interests of shareholders, this is
certainly not always the case. If we go back to our opening vignette of Lucent Technolo-
gies, one could claim that its board of directors was hardly fulfilling its responsibility.
Under the board’s watch (using the term loosely), Lucent Technologies destroyed more than
an astonishing $200 billion in market value during 2000 alone! Although it eventually fired
CEO Rich McGinn and brought back former CEO/Chairman Henry Schacht, little has been
done to address the firm’s problems.
Few could argue that the board is not overpaid. Directors get an annual retainer of
$100,000. This amount is nearly twice that of the board of Nortel and three times that of
Cisco Systems. There is no nominating committee, and important functions that merit their
own standing committees (finance, audit, and compensation) are simply lumped together.
This “suggests that [the board] has not yet recognized the importance of focused and inde-
pendent oversight,” says Nell Minow, editor of the Corporate Library, an online source of
corporate governance information.15
Exhibit 1.3 summarizes some examples of the attributes of both excellent and poor
boards of directors.

Exhibit 1.3 Excellent versus Poor Boards of Directors

Fortune magazine recently pinpointed some of the key attributes of some excellent and poor
boards of directors.
Hall of Fame Hall of Shame
A good board is hard to find, but a few draw Entrenched, clubby, blind to shareholder
raves year after year. concerns: These boards just don’t get it.

Coca-Cola This feisty board isn’t afraid to Advanced Micro Devices Talk about
make waves, nixing CEO Doug Daft’s plan weak: This board slavishly kowtows to
to acquire Quaker Oats last year. omnipotent founder/CEO Jerry Sanders.
Intel Its big-name directors regularly assess Archer Daniels Midland As the stock falls
one another’s performance, a rarity in the near 10-year lows, the family-controlled
boardroom. board twiddles its thumbs.
Pfizer This year the Wharton School Maxxam With loads of common and
named this board—packed with heavy preferred stock, CEO/Chairman Charles
hitters—the second best in the nation. Hurwitz has most of the voting power.
Target The proof is in the performance. Occidental Petroleum Its board pays CEO
This unflashy board has presided over years Ray Irani obscene amounts even as the
of solid returns. company underperforms its peers.
Texas Instruments Deadly serious about Warnaco This board, dominated by
good governance, TI’s board had near- Chairman/CEO Linda Wachner, seems to
perfect attendance in 2000. exist solely to redefine excessive CEO pay.

Source: M. Boyle, “The Dirty Half-Dozen: America’s Worst Boards.” © 2001 Time Inc. All rights reserved.
18 PA R T 1 Strategic Analysis

As you recall from your finance classes, generating long-term returns for the share-
holders is the primary goal of a publicly held corporation. As noted by former Chrysler
vice chairman Robert Lutz: “We are here to serve the shareholder and create share-
holder value. I insist that the only person who owns the company is the person who paid
good money for it.”16
Despite the primacy of generating shareholder value, managers who focus solely
on the interests of the owners of the business will often make poor decisions that lead
to negative, unanticipated outcomes. For example, decisions such as mass layoffs to in-
crease profits, ignoring issues related to conservation of the natural environment to save
money, and exerting undue pressure on suppliers to lower prices can certainly harm the
firm in the long run. Such actions would likely lead to negative outcomes such as alien-
ated employees, increased governmental oversight and fines, and disloyal suppliers.
Clearly, in addition to shareholders, there are other stakeholders that must be explic-
itly taken into account in the strategic management process.17 A stakeholder can be defined
as an individual or group, inside or outside the company, that has a stake in and can influ-
ence an organization’s performance. Although companies can have different stakeholders,
each generally has five prominent stakeholder groups: customers, employees, suppliers (of
goods, services, and capital), the community at large, and, of course, the owners.18

Zero Sum or Symbiosis? Two Alternate Perspectives

of Stakeholder Management
There are two opposing ways of looking at the role of stakeholder management in the
strategic management process. The first one can be termed “zero sum.” In this view the
role of management is to look upon the various stakeholders as competing for the at-
tention and resources of the organization. In essence, the gain of one individual or group
is the loss of another individual or group. That is, employees want higher wages (that
drive down profits), suppliers want higher prices for their inputs and slower, more flex-
ible delivery times (that drive up costs), customers want fast deliveries and higher qual-
ity (that drive up costs), the community at large wants charitable contributions (that take
money from company goals), and so on. This zero-sum thinking is rooted, in part, in the
traditional conflict between workers and management, leading to the formation of
unions and sometimes ending in adversarial union-management negotiations that can
lead to long, bitter strikes.
Although there will always be some conflicting demands placed on the organization
by the various stakeholders, there is value in exploring how the organization can achieve
mutual benefit through stakeholder symbiosis, which recognizes that stakeholders are
dependent upon each other for their success and well-being.19 That is, managers ac-
knowledge the interdependence among employees, suppliers, customers, shareholders,
and the community at large as we will discuss in Chapter 3 in more detail. Sears, for ex-
ample, has developed a sophisticated quantitative model to predict the relationship be-
tween employee satisfaction, customer satisfaction, and financial results.20 The Sears
model found that a 5 percent improvement in employee attitudes led to a 1.3 percent im-
provement in customer satisfaction which, in turn, will drive a 0.5 percent improvement
in revenue.
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 19

Social Responsibility: Moving beyond the Immediate

Stakeholders
Organizations must acknowledge and act upon the interests and demands of stakehold-
ers such as citizens and society in general that are beyond its immediate constituencies—
customers, owners, suppliers, and employees. That is, they must consider the needs of
the broader community at large and act in a socially responsible manner.
Social responsibility is the expectation that businesses or individuals will strive to
improve the overall welfare of society.21 From the perspective of a business, this means
that managers must take active steps to make society better by virtue of the business
being in existence. Similar to norms and values, actions that constitute socially respon-
sible behavior tend to change over time. In the 1970s affirmative action was a high pri-
ority and firms responded. During the 1990s and up to the present time, the public has
been concerned about the quality of the environment. Many firms have responded to
this by engaging in recycling and lowering amounts of wastes. Today, in the wake of
terrorist attacks on New York City and Washington, D.C., a new kind of priority has
arisen: the need to be responsible and vigilant concerning public safety.
McDonald’s Corporation has claimed that its “social responsibility is part of our
heritage and we are committed to building on it worldwide.”22 Exhibit 1.4 lists some of
its wide-ranging efforts.
To become viable in the long run, many companies are measuring what has been
called a triple bottom line. This technique involves an assessment of environmental, social,
and financial performance.23 Shell, NEC, and Procter & Gamble, along with other corpo-
rations, have recognized that failing to account for the environmental and social costs of
doing business poses risks to the company and the community in which it operates.
In the new “triple bottom line” accounting model, the first bottom line presents the
financial measures with which all leaders are familiar. The second bottom line assesses
ecological and material capital. And the third bottom line measures human and social
capital. In its 1999 annual report, for example, BP Amoco reported on such perfor-
mance indicators as annual sales and operating costs (bottom line #1); levels of hydro-
carbon emissions, greenhouse emissions, and oil spills compared to the prior year (bot-
tom line #2); and its workforce safety record, training delivered to employees, and
philanthropic contributions compared to the prior year (bottom line #3).

Exhibit 1.4 Social Responsibility at McDonald’s: Some Elements

■ Supporting more than 200 Ronald McDonald Houses in 19 countries (providing comfort and
care to children and their families).
■ Eliminating 150,000 tons of recycled products and more than one million tons of corrugated
cardboard in the United States over a 10-year period.
■ As part of their diversity program, more than 30% of their franchisees are now women or
minorities. In 1999 McDonald’s purchased approximately $3 billion worth of goods and
services from women and minority suppliers.
■ Providing about $5 million in educational assistance through a variety of scholarships.
■ Partnered with Chicago’s Field Museum to restore Sue, the largest Tyrannosaurus Rex fossil
ever discovered, for public viewing.
Source: McDonald’s Corporation 1999 Annual Report, p. 6.
 STRATEGY SPOTLIGHT 1.3 | BEN & JERRY’S: PROFITS
AND ETHICS

Ben Cohen, one of the founders of Vermont-based Ben content may be as detrimental to health as the nicotine
& Jerry’s Ice Cream, stated: sold by RJR.
Former CEO Robert Holland tried to remedy this
Values-led business is based on the idea that business has
a responsibility to the people and the society that make its situation. He suggested that the company move to nonfat
existence possible. Our experience has shown that you sorbet. But to do this, the company would need less
don’t have to sacrifice social involvement on the altar of hormone-free milk from the Vermont dairy farmers it
maximized profits. One builds on the other. had worked with and supported over the years. The re-
sult: Keep that fat and keep the dairy farmers in business.
Indeed, Ben & Jerry’s treats its employees well, is
Holland also tried to enter the ice-cream market in
involved in social causes, and supports charities through
France. This worked fine until Holland issued a state-
company donations. In fact, the firm donates 7.5 percent
ment condemning a nuclear testing program initiated by
of pretax profits to charities. This is nearly four times as
the French government. The outcome: no Ben & Jerry’s
much as the average donated by other U.S. companies.
for the French.
But when a company answers to multiple stakehold-
Interestingly, Holland is no longer with Ben &
ers, the tightrope between maximizing shareholder value
Jerry’s. In an ironic twist, the company replaced him
and maintaining social responsibility can become a diffi-
with a consultant from the shotgun and rifle industry.
cult balancing act. For example, Ben & Jerry’s became
Maybe they struck a compromise—just don’t use the
concerned about purchasing supplies from RJR Nabisco
guns on the Vermont dairy farmer’s cows! After all, that
because of RJR’s strong ties to the tobacco industry. The
would dry up the supply of hormone-free, high-fat milk.
firm discontinued its Oreo Mint ice cream to avoid work-
ing with RJR as one of the primary suppliers for this fla-
Sources: A. Taylor III, “Yo, Ben! Yo, Jerry! It’s Just Ice Cream!”
vor. Instead, Ben & Jerry’s changed the name of the prod- Fortune, April 28, 1997, p. 374; B. Cohen, J. Greenfield, and
uct to Mint Chocolate Cookie, which doesn’t require M. Maran, Ben & Jerry’s Double-Dip: Lead With Your Values and
the same ingredients. However, the artery-clogging fat Make Money, Too (New York: Simon & Schuster, 1997).

The approach is “a revolution in the way we conceptualize corporate responsibil-

ity,” according to Thomas Gladwin, professor of sustainable enterprise at the University
of Michigan. He has helped corporations develop new ways of assessing performance.
He sees a shift in the attitudes and assumptions of even the most established companies.
“Literally hundreds of companies are taking in-depth, serious looks at what sustain-
ability means.”
Gladwin proposed that companies continue to build and manage capital but widen
the definition to include all the resources they depend on, not just financial capital. He
distinguished four additional types of capital:
■ Ecological Renewable resources generated by living systems, such as wood or
animal by-products.
■ Material Nonrenewable or geological resources such as mineral ores and fossil fuels.
■ Human People’s knowledge, skills, health, nutrition, safety, security, and
motivation.
■ Social Assets of civil society such as social cohesion, trust, reciprocity, equity,
and other values that provide mutual benefit.

20
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 21

Despite the inherent value of a commitment to social responsibility, leaders must

continue to assess the relative benefits and costs of such initiatives as well as their impli-
cations for the other stakeholder individuals and groups. At times such initiatives may be-
come somewhat misguided and inadvertently have an adverse impact on the primary goal
of a corporation—creating value for shareholders. Strategy Spotlight 1.3 provides an ex-
ample of the well-known producer and retailer of superpremium ice cream, Ben & Jerry’s.

THE STRATEGIC MANAGEMENT PERSPECTIVE:

AN IMPERATIVE THROUGHOUT
THE ORGANIZATION
As we have noted in this chapter, strategic management requires managers to take an
integrative view of the organization and assess how all of the functional areas and ac-
tivities “fit together” to help an organization achieve its goals and objectives. This can-
not be accomplished if only the top managers in the organization take an integrative,
strategic perspective of issues facing the firms and everyone else “fends” for themselves
in their independent, isolated functional areas. Marketing and sales will generally favor
broad, tailor-made product lines, production will demand standardized products that are
relatively easy to make in order to lower manufacturing costs, research and develop-
ment will offer design products to demonstrate technical elegance, and so on. Instead,
people throughout the organization need to be striving toward overall goals.
The above argument clearly makes sense. However, the need for such a perspective
is accelerating in today’s increasingly complex, interconnected, ever-changing global
economy. In this section, we will address some major trends that are making the need
for a strategic perspective throughout the organization even more critical. As noted by
Peter Senge of MIT, the days when Henry Ford, Alfred Sloan, and Tom Watson (top ex-
ecutives at Ford, General Motors, and IBM, respectively) “learned for the organization
are gone.” He went on to say:
In an increasingly dynamic, interdependent, and unpredictable world, it is simply no longer
possible for anyone to “figure it all out at the top.” The old model, “the top thinks and
the local acts,” must now give way to integrating thinking and acting at all levels. While the
challenge is great, so is the potential payoff. “The person who figures out how to harness
the collective genius of the people in his or her organization,” according to former Citibank
CEO Walter Wriston, “is going to blow the competition away.”24

In this section we will first address some of the key forces that are driving the need
for a strategic perspective at all levels as well as greater participation and involvement
in the strategic management process throughout the organization. Then, we will provide
examples of how firms are engaging people throughout the organization to these ends.

Some Key Driving Forces

There are many driving forces that are increasing the need for a strategic perspective
and greater involvement throughout the organization. Among the most important of
these are globalization, technology, intellectual capital, and increasing change.25 These
22 PA R T 1 Strategic Analysis

forces are inherently interrelated and, collectively, they are accelerating the rate of
change and uncertainty with which managers at all levels must deal. The implication of
such unpredictable change was probably best captured by AOL Time Warner Chairman
Stephen M. Case, in a talk to investors and analysts:

I sometimes feel like I’m behind the wheel of a race car . . . One of the biggest challenges
is there are no road signs to help navigate. And . . . no one has yet determined which side of
the road we’re supposed to be on.26

Globalization The defining feature of the global economy is not the flow of goods—
international trade has existed for centuries—but the flow of capital, people, and infor-
mation worldwide. With globalization, time and space are no longer a barrier to mak-
ing deals anywhere in the world. Computer networks permit instantaneous transactions,
and the market watchers operate on a 24-hour basis.
Along with the increasing speed of transactions and global sourcing of all forms of
resources and information, managers are struggling to balance the paradoxical demand
to think globally and act locally. This requires them to move resources and information
rapidly around the world to meet local needs. In addition, they must add new and im-
portant ingredients to the mix when formulating strategies: volatile political situations,
difficult trade issues, ever-fluctuating exchange rates, and unfamiliar cultures. Today
managers must be more literate in the ways of foreign customers, commerce, and com-
petition than ever before.
As markets become more open—as evidenced by free trade agreements between
nations—more foreign firms are likely to enter domestic markets, thus increasing the
amount of competition. Furthermore, since firms are operating in global markets, com-
petitive moves in a domestic economy may negatively impact the firm in another seg-
ment of the international market. Such increasing amounts and types of competition
place pressure on firms to move into international markets in order to maintain their
competitiveness in areas where they already operate. To summarize, globalization re-
quires that organizations increase their ability to learn and collaborate and to manage
diversity, complexity, and ambiguity. Top-level managers can’t do it all alone.

Technology Technological change and diffusion of new technologies are moving at

an incredible pace. Such development and diffusion accelerates the importance of in-
novation for firms if they are to remain competitive. David de Pury, former cochair of
the board of Asea Brown Boveri, claimed that “innovate or die” is the first rule of in-
ternational industrial competition. Similarly, continuous technological development
and change have produced decreasing product life cycles. Andrew Grove, chairman of
Intel, explained the introduction of a new product at his company. In January 1998 the
firm introduced a sophisticated product in which it had invested considerable funds.
However, by December of that year, Intel introduced a new product that would canni-
balize its existing product. Thus, the firm had only 11 months to recoup that significant
investment. Such time-intensive product development involves the efforts and collabo-
ration of managers and professionals throughout the organization.
From videoconferencing to the Internet, technology has made our world smaller and
faster moving. Ideas and huge amounts of information are in constant movement. The
 STRATEGY SPOTLIGHT 1.4 | DESIGNER BABIES

No one would dispute that it’s all right to custom-design entific advances, such as treatment of certain diseases,
some products and services. With individual tastes, it’s that are valuable and ethical. But when it comes to cus-
only natural to desire to bring customization into the tomizing a human being, the line between right and
plan. But customization, and the associated technology, wrong can become blurry. For example, some may be-
can go too far. lieve it is ethical for parents to choose the color of their
Since Watson and Crick’s discovery of the DNA baby’s eyes, but not the baby’s gender. Others may find
molecule in 1954, customization possibilities regarding an ethical dilemma in artificially raising a baby’s poten-
children have become technologically feasible. Watson tial for a high IQ, but believe that it is ethical to geneti-
and Crick probably never foresaw this. But nearly a half cally enhance a baby’s overall health. Technology, with
century later, the potential to genetically alter babies be- all its benefits, must also be considered in light of these
fore birth is here. and other ethical considerations.
This raises a host of ethical questions. Imagine de-
signer babies, children that are born to parents that have
the financial resources to create the “perfect” child. Source: E. Licking, “Ten Technologies That Will Change Our Lives,”
Without a doubt, DNA experimentation has led to sci- BusinessWeek, Spring 2000.

challenge for managers is to make sense of what technology offers. Not all technology
adds value. In the coming years, managers in all organizations will be charged with mak-
ing technology an even more viable, productive part of the work setting. They will need
to stay ahead of the information curve and learn to leverage information to enhance busi-
ness performance. If not, they risk being swallowed in a tidal wave of data—not ideas.
In addition to its potential benefits, technology can raise some important ethical is-
sues that need to be addressed. Strategy Spotlight 1.4 raises the issue of “designer babies.”
Intellectual Capital Knowledge has become the direct source of competitive advan-
tage(s) for companies selling ideas and relationships (e.g., professional services, soft-
ware, and technology-driven companies) as well as an indirect source of competitive
advantage for all companies trying to differentiate themselves from rivals by how they
create value for their customers. As we will note in Chapter 4, Merck, the $40 billion
pharmaceutical company, has become an enormously successful company because its
scientists discover medicines, not because of their skills in producing pills in an effi-
cient manner. As noted by Dr. Roy Vagelos, Merck’s former CEO: “A low-value prod-
uct can be made by anyone anywhere. When you have knowledge no one else has ac-
cess to—that’s dynamite. We guard our research even more carefully than our financial
assets.”27
Exhibit 1.5 displays some interesting figures on the importance of knowledge or
“brainpower” in the creation of value. What’s behind the numbers? While manufactured
goods have steadily accounted for a shrinking proportion of the total economy, their value
has risen substantially. Why? In the information age, manufactured goods have increas-
ingly become what can be called “congealed brainpower.” Intel, for example, turns some-
thing of less value than metal—sand (which becomes silicon)—into something far more
valuable than gold, Pentium III chips. Geoffrey Colvin, the Fortune magazine writer,
noted that the “magic ingredient, brainpower, can work in many ways. Sometimes, it takes

23
24 PA R T 1 Strategic Analysis

Exhibit 1.5 Brainpower Weighs In

Weight Price
Product Price in Pounds per Pound

Pentium III 800MHz microprocessor $ 851.00 0.01984 $42,893.00

Viagra (tablet) 8.00 0.00068 11,766.00
Gold (ounce) 301.70 0.0625 4,827.20
Hermès scarf 275.00 0.14 1,964.29
Palm V 449.00 0.26 1,726.92
Saving Private Ryan on DVD 34.99 0.04 874.75
Cigarettes (20) 4.00 0.04 100.00
Who Moved My Cheese? by Spencer 19.99 0.49 40.80
Johnson
Mercedes-Benz E-class four-door sedan 78,445.00 4,134.00 18.98
The Competitive Advantage of Nations by
Michael Porter 40.00 2.99 13.38
Chevrolet Cavalier four-door sedan 17,770.00 2,630.00 6.76
Hot-rolled steel (ton) 370.00 2,000.00 0.19

Source: G. Colvin, “We’re Worth Our Weight in Pentium Chips,” Fortune, March 20, 2000, p. 68. © 2001
Time Inc. All rights reserved.

the form of ultrahigh technology, as in the Pentium chip. Sometimes it’s brand power, as
in the Hermès scarf. Most often it’s both, as in the Mercedes-Benz.”28
Creating and applying knowledge to deliver differentiated products and services of
superior value for customers requires the acquisition of superior talent, as well as the
ability to develop and retain that talent.29 However, successful firms must also create an
environment with strong social and professional relationships where people feel strong
“ties” to their colleagues and their organization. Gary Hamel, one of today’s leading
strategic management writers, noted: “As the number and quality of interconnections
between individuals and ideas go up, the ability to combine and recombine ideas ac-
celerates as well.”30
Technologies must also be used effectively to leverage human capital to facilitate
collaboration among individuals and to develop more sophisticated knowledge manage-
ment systems.31 The challenge and opportunity of management is not only to acquire and
retain human capital but also to ensure that they develop and maintain a strategic per-
spective as they contribute to the organization. This is essential if management is to use
its talents to effectively help the organization attain its goals and objectives.
Let’s now look at what some companies are doing to increase the involvement of
employees throughout the organization in the strategic management process.

Enhancing Employee Involvement

in the Strategic Management Process
Today’s organizations increasingly need to anticipate and respond to dramatic and un-
predictable changes in the competitive environment. With the emergence of the knowl-
edge economy, human capital (as opposed to financial and physical assets) has become
the key to securing advantages in the marketplace that persist over time.
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 25

To develop and mobilize people and other assets in the organization, leaders are
needed throughout the organization.32 No longer can organizations be effective if the
top “does the thinking” and the rest of the organization “does the work.” Everyone
needs to be involved in the strategic management process. Peter Senge noted the criti-
cal need for three types of leaders.
■ Local line leaders who have significant profit and loss responsibility.
■ Executive leaders who champion and guide ideas, create a learning infrastructure,
and establish a domain for taking action.
■ Internal networkers who, although having little positional power and formal
authority, generate their power through the conviction and clarity of their ideas.33
Sally Helgesen, author of The Web of Inclusion: A New Architecture for Building
Great Organizations, made a similar point regarding the need for leaders throughout the
organization. She asserted that many organizations “fall prey to the heroes-and-drones
syndrome, exalting the value of those in powerful positions while implicitly demeaning
the contributions of those who fail to achieve top rank.”34 Culture and processes in
which leaders emerge at all levels, both up and down as well as across the organization,
typify today’s high-performing firms.35
Now we will provide examples of what some firms are doing to increase the in-
volvement of employees throughout the organization. Top-level executives are key in
setting the tone. Consider Richard Branson, founder of the Virgin Group, whose core
businesses include retail operations, hotels, communications, and an airline. He is well
known for creating a culture and informal structure where anybody in the organization
can be involved in generating and acting upon new business ideas. In a recent interview,
he stated
[S]peed is something that we are better at than most companies. We don’t have formal board
meetings, committees, etc. If someone has an idea, they can pick up the phone and talk to
me. I can vote “done, let’s do it.” Or, better still, they can just go ahead and do it. They know
that they are not going to get a mouthful from me if they make a mistake. Rules and regu-
lations are not our forte. Analyzing things to death is not our kind of thing. We very rarely
sit back and analyze what we do.36

To inculcate a strategic management perspective throughout the organization, many

large traditional organizations often require a major effort in transformational change.
This involves extensive communication, training, and development to strengthen a strate-
gic perspective throughout the organization. Ford Motor Company is one such example.
Ford instituted a major cultural overhaul and embarked on a broad-based attempt
to develop leaders throughout the organization. It wanted to build an army of “warrior-
entrepreneurs”—people who have the courage and skills to reject old ideas, and who
believe in change passionately enough to make it happen. A few details:
This year, Ford will send about 2,500 managers to its Leadership Development Center for
one of its four programs—Capstone, Experienced Leader Challenge, Ford Business Associ-
ates, and New Business Leader—instilling in them not just the mind-set and vocabulary of
a revolutionary but also the tools necessary to achieve a revolution. At the same time,
through the Business Leaders Initiative, all 100,000 salaried employees worldwide will
 STRATEGY SPOTLIGHT 1.5 | STRATEGY AND THE VALUE
OF INEXPERIENCE

Peter Gruber, chairman of Mandalay Entertainment, ex- laughed and wondered what she was doing in the meet-
plained how his firm benefited from the creative insights ing with experienced filmmakers. Hours later, someone
of an inexperienced intern. casually asked her what she had meant. She said, “What
Sometimes life is all about solving problems. In if you sent a really good cinematographer into the jungle
the movie business, at least, there seems to be one with a ton of film to shoot the gorillas. Then you could
around every corner. One of the most effective lessons write a story around what the gorillas did on film.” It was
I’ve learned about tackling problems is to start by ask- a brilliant idea. And we did exactly what she suggested:
ing not “How to?” but rather “What if?” I learned that We sent Alan Root, an Academy Award-nominated cine-
lesson from a young woman who was interning on a matographer, into the jungle for three weeks. He came
film I was producing. She actually saved the movie from back with phenomenal footage that practically wrote the
being shelved by the studio. story for us. We shot the film for $20 million—half of the
The movie, Gorillas in the Mist, had turned into a original budget!
logistical nightmare. We wanted to film at an altitude of This woman’s inexperience enabled her to see op-
11,000 feet, in the middle of the jungle, in Rwanda— portunities where we saw only boundaries. This experi-
then on the verge of a revolution—and to use more than ence taught me three things. First, ask high-quality
200 animals. Warner Brothers, the studio financing the questions, like “what if?” Second, find people who add
movie, worried that we would exceed our budget. But new perspectives and create new conversations. As ex-
our biggest problem was that the screenplay required perienced filmmakers, we believed that our way was the
the gorillas to do what we wrote—in other words, to only way—and that the intern lacked the experience to
“act.” If they couldn’t or wouldn’t, we’d have to fall have an opinion. Third, pay attention to those with new
back on a formula that the studio had seen fail before: voices. If you want unlimited options for solving a prob-
using dwarfs in gorilla suits on a soundstage. lem, engage the what if before you lock onto the how to.
We called an emergency meeting to solve these You’ll be surprised by what you discover.
problems. In the middle of it, a young intern asked,
Source: P. Gruber, “My Greatest Lesson,” Fast Company 15 (1998),
“What if you let the gorillas write the story?” Everyone pp. 88, 90.

participate in business-leadership “cascades,” intense exercises that combine trickle-down

communications with substantive team projects.37

We’d like to close with a favorite example of how inexperience can be a virtue. It
further reinforces the benefits of having broad involvement throughout the organization
in the strategic management process (see Strategy Spotlight 1.5)

ENSURING COHERENCE
IN STRATEGIC DIRECTION
To be successful, employees and managers throughout the organization must be striv-
ing for common goals and objectives. By specifying desired results, it becomes much
easier to move forward. Otherwise, when no one knows what the firm is striving to ac-
complish, they have no idea of what to work toward. As the old nautical expression puts
it: “No wind favors the ship that has no charted course.”
Organizations express priorities best through stated goals and objectives that form
a hierarchy of goals. The hierarchy of goals for an organization includes its vision,

26
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 27

mission, and strategic objectives. What visions may lack in specificity, they make up for
in their ability to evoke powerful and compelling mental images. On the other hand,
strategic objectives tend to be more specific and provide a more direct means of deter-
mining if the organization is moving toward broader, overall goals. We will now address
visions, missions, and goals in the next subsections.38

Organizational Vision
The starting point for articulating a firm’s hierarchy of goals is the company vision. It is
often described as a goal that is “massively inspiring, overarching, and long-term.” A vi-
sion represents a destination that is driven by and evokes passion. A vision may or may
not succeed; it depends on whether everything else happens according to a firm’s strategy.
Developing and implementing a vision is one of a leader’s central roles. In a sur-
vey of 1,500 senior leaders, 870 of them CEOs (from 20 different countries), respon-
dents were asked what they believed were the key traits that leaders must have. Ninety-
eight percent responded that “a strong sense of vision” was the most important.
Similarly, when asked about the critical knowledge skills, the leaders cited “strategy
formulation to achieve a vision” as the most important skill. In other words, managers
need to have not only a vision but also a plan to implement it. Regretfully, 90 percent
reported a lack of confidence in their own skills and ability to conceive a vision for their
organization. For example, T. J. Rogers, CEO of Cypress Semiconductor, the electronic
chipmaker that faced some difficulties in 1992, lamented that his own shortsightedness
caused the danger: “I did not have the 50,000-foot view, and got caught.”39
One of the most famous examples of a vision is from Disneyland: “To be the hap-
piest place on earth.” Other examples are:
■ “Restoring patients to full life.” (Medtronic)
■ “We want to satisfy all of our customers’ financial needs and help them succeed
financially.” (Wells Fargo)
■ “Our vision is to be the world’s best quick service restaurant.” (McDonald’s)
Although such visions cannot be accurately measured by a specific indicator of
how well they are being achieved, they do provide a fundamental statement of an orga-
nization’s values, aspirations, and goals. Such visions go well beyond narrow financial
objectives, of course, and strive to capture both the minds and hearts of employees.
The vision statement may also contain a slogan, a diagram, or picture—whatever
grabs attention.40 The aim is to capture the essence of the more formal parts of the vision
in a few words that are easily remembered, yet evoke the spirit of the entire vision state-
ment. In its 20-year battle with Xerox, Canon’s slogan or battle cry was “Beat Xerox.” Mo-
torola’s slogan is “Total Customer Satisfaction.” Outboard Marine Corporation’s slogan is
“To take the World Boating.” And Chevron strives “To Become Better than the Best.”
Clearly, vision statements are not a cure-all. Sometimes they backfire and the
leaders’s credibility may be eroded. Visions fail for many reasons, including the
following:41
The Walk Doesn’t Match the Talk An idealistic vision can arouse employee enthu-
siasm. However, that same enthusiasm can be quickly dashed if they find that senior
28 PA R T 1 Strategic Analysis

management’s behavior is not consistent with the vision. Often, vision is a sloganeer-
ing campaign of new buzzwords and empty platitudes like “devotion to the customer,”
“teamwork,” or “total quality” that aren’t consistently backed by management’s action.

Irrelevance A vision that is created in a vacuum—unrelated to environmental threats

or opportunity or an organization’s resources and capabilities—can ignore the needs of
those who are expected to buy into it. When the vision is not anchored in reality, em-
ployees will reject it.

Not the Holy Grail Managers often search continually for the one elusive solution
that will solve their firm’s problems—that is, the next holy grail of management. They
may have tried other management fads only to find that they fell short of their expecta-
tions. However, they remain convinced that one exists. Visions support sound manage-
ment, but they require everyone to walk the talk and be accountable for their behavior.
A vision simply cannot be viewed as a magic cure for an organization’s illness.

An Ideal Future Irreconciled with the Present Although visions are not designed
to mirror reality, they do need to be anchored somehow in it. People have difficulty
identifying with a vision that paints a rosy picture of the future but takes no account of
the often hostile environment in which the firm competes or ignores some of the firm’s
weaknesses. As we will see in the next section, many of these same issues can apply to
mission statements.

Mission Statements
A company’s mission differs from vision in that it is encompasses both the purpose of
the company as well as the basis of competition and competitive advantage.
Exhibit 1.6 contains the vision statement and mission statement of WellPoint Health
Networks, a $9 billion, managed health care organization. Note that while the vision
statement is broad based, the mission statement is more specific and focused on the
means by which the firm will compete. This includes providing branded products that
will be tailor-made to customers in order to create long-term customer relationships.
Effective mission statements incorporate the concept of stakeholder management,
suggesting that organizations must respond to multiple constituencies if they are to sur-

Exhibit 1.6 Comparing Wellpoint Health Network’s Vision and Mission

Vision
WELLPOINT will redefine our industry:
Through a new generation of consumer-friendly products that put individuals back in control
of their future.
Mission
The WELLPOINT companies provide health security by offering a choice of quality branded
health and related financial services designed to meet the changing expectations of individuals,
families and their sponsors throughout a lifelong relationship.
Source: Company records.
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 29

vive and prosper. Customers, employees, suppliers, and owners are the primary stake-
holders, but others may also play an important role in a particular corporation. Mission
statements also have the greatest impact when they reflect an organization’s enduring,
overarching strategic priorities and competitive positioning. Mission statements can also
vary in length and specificity. The two mission statements below illustrate these issues:
■ To produce superior financial returns for our shareholders as we serve our
customers with the highest quality transportation, logistics, and e-commerce.
(Federal Express)
■ To be the very best in the business. Our game plan is status go . . . we are
constantly looking ahead, building on our strengths, and reaching for new goals. In
our quest of these goals, we look at the three stars of the Brinker logo and are
reminded of the basic values that are the strength of this company . . . People,
Quality and Profitability. Everything we do at Brinker must support these core
values. We also look at the eight golden flames depicted in our logo, and are
reminded of the fire that ignites our mission and makes up the heart and soul of this
incredible company. These flames are: Customers, Food, Team, Concepts, Culture,
Partners, Community and Shareholders. As keeper of these flames, we will
continue to build on our strengths and work together to be the best in the business.
(Brinker International whose restaurant chains include Chili’s and On the Border)42
Few mission statements identify profit or any other financial indicator as the sole
purpose of the firm. Indeed, most do not even mention profit or shareholder return.43
Employees of organizations or departments are usually the mission’s most important
audience. For them, the mission should help to build a common understanding of pur-
pose and commitment to nurture.
Profit maximization not only fails to motivate people but also does not differenti-
ate between organizations. Every corporation wants to maximize profits over the long
term. A good mission statement, by addressing each principal theme, must communi-
cate why an organization is special and different. Two studies that linked corporate val-
ues and mission statements with financial performance found that the most successful
firms mentioned values other than profits. The less successful firms focused almost en-
tirely on profitability.44 In essence, profit is the metaphorical equivalent of oxygen,
food, and water that the body requires. They are not the point of life, but without them,
there is no life.
Although vision statements tend to be quite enduring and seldom change, a firm’s
mission can and should change when competitive conditions dramatically change or the
firm is faced with new threats or opportunities. Strategy Spotlight 1.6 provides an ex-
ample of a firm that changed its mission in order to realize new opportunities.

Strategic Objectives
Thus far, we have discussed both visions and missions. Statements of vision tend to be
quite broad and can be described as a goal that represents an inspiring, overarching, and
emotionally driven destination. Mission statements, on the other hand, tend to be more
specific and address questions concerning the organization’s reason for being and the
basis of its intended competitive advantage in the marketplace. Strategic objectives are
 STRATEGY SPOTLIGHT 1.6 | STARBUCKS CHANGES
DIRECTION

“You’ve got to understand with great clarity what you attraction to customers, Collins quickly changed direc-
can do better than any other company in the world,” ac- tion, returning to what the company was renowned
cording to author Jim Collins. Starbucks’s CEO Howard for—the atmosphere, the aroma, the ambiance of a
Schultz realized this just before he directed company re- small, intimate coffeehouse.
sources in what may have been a disastrous direction. The opportunity Starbucks sought turned out to be
Schultz envisioned Starbucks as the Internet coffee- right in its own backyard. Schultz’s realization encour-
house of the world. You would be able to order specialty aged him to focus on the increasing attraction of the
coffees, cappuccino machines, even pots and pans. But public to local bricks-and-mortar coffeehouses. By turn-
before he tried to move the aroma of freshly brewed latté ing his attention away from expansion to the Internet
to the Internet, he reconsidered his strategy. According to and toward those features that attracted customers into
one writer, “It’s as if he woke up one morning, rubbed his cafés, Schultz capitalized on the opportunity offered
his eyes, sipped a strong Sumatran brew, and said to him- by his market. It must be working: From January
self, ‘Wait a minute. I sell coffee!’ ” through August 2001, revenues totaled $2.4 billion, a 22
Schultz realized in time that Starbucks’s market percent increase from the same period the previous year.
was not Internet shoppers, but local customers who
Source: J. Creswell, “Remedies for an Economic Hangover,” Fortune,
wanted a relaxing atmosphere to enjoy quiet conversa- June 25, 2001, p. 130; C. Stetkiewicz, “After 30 Years, Starbucks Still
tion and a cup of cappuccino. By rethinking Starbucks’s the Roast of Seattle,” Reuters, September 7, 2001.

used to operationalize the mission statement. That is, they help to provide guidance on
how the organization can fulfill or move toward the “higher goals” in the goal hierarchy—
the mission and vision.
Setting objectives demands a yardstick to measure the fulfillment of the objectives.45
If an objective lacks specificity or measurability, it is not very useful simply because
there is no way of determining whether it is helping the organization to move toward the
organization’s mission and vision.
Exhibit 1.7 lists several strategic objectives of corporations divided into financial
and nonfinancial categories. While most of these strategic objectives are directed to-
ward generating greater profits and returns for the owners of the business, others are di-
rected at customers or society at large.
For objectives to be meaningful, they need to satisfy several criteria. They must be:
■ Measurable There must be at least one indicator (or yardstick) that measures
progress against fulfilling the objective.
■ Specific This provides a clear message as to what needs to be accomplished.
■ Appropriate It must be consistent with the vision and mission of the
organization.
■ Realistic It must be an achievable target given the organization’s capabilities and
opportunities in the environment. In essence, it must be challenging but doable.
■ Timely There needs to be a time frame for accomplishment of the objective.
After all, as the economist John Maynard Keynes once said, “In the long run, we
are all dead!”

30
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 31

Exhibit 1.7 Strategic Objectives

Strategic Objectives (Financial)

■ Increase sales growth 6% to 8% and accelerate core net earnings growth to 13% to 15% per
share in each of the next five years. (Procter & Gamble)
■ Generate Internet-related revenue of $1.5 billion. (Automation)
■ Increase the contribution of Banking Group earnings from investments, brokerage, and
insurance from 16% to 25%. (Wells Fargo)
■ Cut corporate overhead costs by $30 million per year. (Fortune Brands)
Strategic Objectives (Nonfinancial)
■ Capitalize on e-commerce. (Federal Express)
■ We want a majority of our customers, when surveyed, to say they consider Wells Fargo the
best financial institution in the community. (Wells Fargo)
■ We want to operate 6,000 stores by 2010—up from 3000 in the year 2000. (Walgreen’s)
■ Develop a smart card strategy that will help us play a key role in shaping online payments.
(American Express)
■ Reduce greenhouse gases by 10 percent (from a 1990 base) by 2010. (BP Amoco)
Sources: Company documents and annual reports.

When objectives satisfy the above criteria, there are many benefits for the organi-
zation. First, they help to channel employees throughout the organization toward com-
mon goals. This helps to concentrate and conserve valuable resources in the organiza-
tion and to work collectively in a more timely manner.
Second, challenging objectives can help to motivate and inspire employees
throughout the organization to higher levels of commitment and effort. A great deal of
research has supported the notion that individuals work harder when they are striving
toward specific goals instead of being asked simply to “do their best.”
Third, as we have noted earlier in the chapter, there is always the potential for dif-
ferent parts of an organization to pursue their own goals rather than overall company
goals. Although well intentioned, these may work at cross-purposes to the organization
as a whole. Meaningful objectives thus help to resolve conflicts when they arise.
Finally, proper objectives provide a yardstick for rewards and incentives. Not only
will they lead to higher levels of motivation by employees but also they will help to en-
sure a greater sense of equity or fairness when rewards are allocated.
There are, of course, still other objectives that are even more specific. These are often
referred to as short-term objectives—essential components of “action plans” that are crit-
ical in implementing a firm’s chosen strategy. We will discuss these issues in Chapter 9.

SUMMARY
We began this introductory chapter by defining strategic management and articulating
some of its key attributes. Strategic management is defined as “consisting of the analy-
sis, decisions, and actions an organization undertakes to create and sustain competitive
advantages.” The issue of how and why some firms outperform others in the marketplace
32 PA R T 1 Strategic Analysis

is central to the study of strategic management. Strategic management has four key at-
tributes: It is directed at overall organizational goals, includes multiple stakeholders,
incorporates both short-term and long-term perspectives, and incorporates trade-offs be-
tween efficiency and effectiveness.
The second section discussed the strategic management process. Here, we paral-
leled the above definition of strategic management and focused on three core activities
in the strategic management process—strategy analysis, strategy formulation, and strat-
egy implementation. We noted how each of these activities is highly interrelated to
and interdependent on one another. We also discussed how each of the 12 chapters fit
into the three core activities and provided a summary of the opening vignettes in each
chapter.
Next, we introduced an important concept—stakeholder management which must be
taken into account throughout the strategic management process. We identified five key
stakeholders in all organizations: owners, customers, suppliers, employees, and society at
large. Successful firms go beyond an overriding focus on satisfying solely the interests of
owners. Rather, they recognize the inherent conflicts that arise among the demands of the
various stakeholders as well as the need to endeavor to attain “symbiosis”—that is, inter-
dependence and mutual benefit—among the various stakeholder groups.
In the fourth section, we discussed three interrelated factors—globalization, tech-
nology, and intellectual capital—that have accelerated the rate of unpredictable change
that managers face today. These factors, and the combination of them, have increased
the need for managers and employees throughout the organization to have a strategic
management perspective and to become more empowered.
The final section addressed the need for consistency between a firm’s vision, mis-
sion, and strategic objectives. Collectively, they form an organization’s hierarchy of
goals. Visions should evoke powerful and compelling mental images. However, they
are not very specific. Strategic objectives, on the other hand, are much more specific
and are vital to ensuring that the organization is striving toward fulfilling its vision and
mission.

Summary Review Questions

1. How is “strategic management” defined in the text and what are its five key
attributes?
2. Briefly discuss the three key activities in the strategic management process. Why
is it important for managers to recognize the interdependent nature of these
activities?
3. Explain the concept of “stakeholder management”? Why shouldn’t managers be
solely interested in stockholder management, that is, maximizing the returns for
owners of the firm—its shareholders?
4. How can “symbiosis” (interdependence, mutual benefit) be achieved among a
firm’s stakeholders?
5. What are some of the major trends that now require firms to have a greater
strategic management perspective and empowerment in the strategic
management process throughout the firm?
 CHAPTER 1 Strategic Management: Creating Competitive Advantages 33

6. What is meant by a “hierarchy of goals”? What are the main components of it

and why must consistency be achieved among them?

APPLICATION QUESTIONS AND EXERCISES

1. Go to the Internet and look up one of these company sites: www.walmart.com,
www.ge.com, and www.fordmotor.com. What are some of the key events that
would represent the “romantic” perspective of leadership? What are some of the
key events that depict the “external control” perspective of leadership?
2. Select a company that competes in an industry in which you are interested.
What are some of the recent demands that stakeholders have placed on this
company? Can you find examples of how the company is trying to develop
“symbiosis” (interdependence and mutual benefit) among its stakeholders? (Use
the Internet and library resources.)
3. Provide examples of companies that are actively trying to increase the amount of
empowerment in the strategic management process throughout the organization.
Do these companies seem to be having positive outcomes? Why? Why not?
4. Look up the vision statements and/or mission statements for a few companies.
Do you feel that they are constructive and useful as a means of motivating
employees and providing a strong strategic direction? Why? Why not? (Note:
Annual reports, along with the Internet, may be good sources of information.)

ETHICS QUESTIONS
1. A company focuses solely on short-term profits to provide the greatest return to
the owners of the business (i.e., the shareholders in a publicly held firm). What
ethical issues could this raise?
2. A firm has spent some time—with input from managers at all levels—in
developing a vision statement and a mission statement. Over time, however, the
behavior of some executives is contrary to these statements. Could this raise
some ethical issues?

REFERENCES
1. This example draws on Mehta, S. N. 2001. Lessons from the Lucent debacle. Fortune,
February 5:143–48 and Boyle, M. 2001. The dirty half-dozen: America’s worst boards.
Fortune, May 14:249–54; Locke, C. P. & Copeland, M.V. 2000. Hello, Lucent? The big
red zero tries to reinvent itself. Red Herring, December 19:96–100; Rho, G. 2001.
Telecommunications equipment industry. Value Line Investment Survey, July 6:751;
Crockett, R. O. 2001. Nortel: Optimism or hubris? Business Week, March 12:86–90.
2. For a discussion of the “romantic” versus “external control” perspective, refer to Meindl, J. R.
1987. The romance of leadership and the evaluation of organizational performance. Academy
of Management Journal, 30:92–109, and Pfeffer, J. & Salancik, G. R. 1978. The external
control of organizations: A resource dependence perspective. New York: Harper & Row.
3. Porter, M. E. 1996. What is strategy? Harvard Business Review, 74(6):61–78.
34 PA R T 1 Strategic Analysis

4. See, for example, Barney, J. B. & Arikan, A. M. 2001. The resource-based view: Origins
and implications. In Hitt, M. A., Freeman, R. E. & Harrison, J. S., eds. Handbook of
Strategic Management. Malden, MA: Blackwell Business:124–89.
5. Barney, J. 1991. Firm resources and sustained competitive advantage. Journal of
Management, 17 (1):99–120.
6. Much of Gary Hamel’s work advocates the importance of not focusing on incremental
change. For example, refer to Hamel, G. & Prahalad, C. K. 1994. Competing for the
Future. Boston: Harvard Business School Press; see also Christenson, C. M. 2001. The
past and future of competitive advantage. Sloan Management Review, 42(3):105–9.
7. This section draws upon Dess, G. G. & Miller, A. 1993. Strategic management. New
York: McGraw-Hill.
8. See, for example Hrebiniak, L. G. & Joyce, W. F. 1986. The strategic importance of
managing myopia. Sloan Management Review, 28 (1):5–14.
9. Senge, P. 1996. Leading learning organizations: The bold, the powerful, and the invisible.
In Hesselbein, F., Goldsmith, M. & Beckhard, R., eds. The Leader of the Future. San
Francisco: Jossey Bass:41–58.
10. For another interesting perspective on this issue, refer to Abell, D. F. 1999. Competing
today while preparing for tomorrow. Sloan Management Review, 40 (3):73–81.
11. Loeb, M. 1994. Where leaders come from. Fortune, September 19:241 (quoting Warren
Bennis).
12. Address by Norman R. Augustine at the Crummer Business School, Rollins College,
Winter Park, FL, October 20, 1989.
13. Nocera, J. 2000. The corporation comes home. Fortune, March 6:F–74.
14. Bianco, D. P. 2000. Corporate governance. In M. M. Helms, ed. Encyclopedia of
Management. 4th ed. Farmington Hills, MI: Gale Group:150.
15. Boyle, M. 2001. The dirty half-dozen: America’s worst boards. Fortune, May 14:249–52.
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