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STRATEGIC
MANAGEMENT
Students trying to navigate the strategy jungle may lose sight of the fact that strategic
management is about creating value in an organization. Understanding strategic management
is a core part of all business qualifications and this textbook brings a new and easy-to-follow
understanding of this vital business function.
In addition to walking the student through the basics of the subject, the authors provide
an array of analytical tools to help facilitate a comprehensive understanding of strategic
management. The book addresses thoroughly the impact of financial markets on a firm’s
strategic capabilities, as well as looking at other challenging environmental factors.
Aided by an array of student-friendly features, such as learning objectives, ‘strategic
management in practice’ case studies and review questions in each chapter, Strategic
Management will help students to excel in their strategic management classes and better
prepare them for the real business world.
Peter FitzRoy is Emeritus Professor at Monash University, Australia, where he has taught
strategic management for several years. He has held appointments at a number of institutions
worldwide and has extensive experience in lecturing on management development pro-
grammes in Asia, Australia, the UK and the USA. He is actively involved in the Strategic
Management Society, and served for many years on the editorial board of the Strategic Manage-
ment Journal.
James M. Hulbert is Visiting Professor at Peking University, China and RC Kopf
Professor Emeritus at Columbia University, USA. He has taught or held visiting positions at
numerous institutions and has also taught on executive development programmes worldwide.
He has worked as a consultant with numerous global companies, including 3M, IBM, General
Electric and Unilever. His research interests are strategy and planning, which have resulted
in several published books and numerous articles in leading journals including the Strategic
Management Journal.
Abby Ghobadian is Professor at the University of Reading, UK. He has taught or held
visiting positions at a number of institutions in the UK, Europe and also at Monash University,
Australia. His research interests are strategy and performance enhancement and he has
published close to 100 journal articles, seven research monographs and two edited books.
He is the Chairman of the British Academy of Management and co-editor of the Journal of
Strategy and Management.
This textbook, competently written by world leading experts in the field of strategic
management, provides an integrated theoretical and practical approach to strategic manage-
ment for value creation. The logical development of the chapters draws on relevant theoretical
frameworks, which integrate contemporary business issues into the model of strategy
formulation, implementation, value creation and performance measurement. Such a compre-
hensive model provides todays’ and future business leaders, managers and consultants with
the relevant knowledge, in order to cope with the strategic challenge of formulating and
executing sustainable value-creating strategies. The inclusion of the financial markets and
performance measurement perspectives enriches the model by truly recognising the real
challenges and dilemmas that managers face in today’s global markets. The practical orienta-
tion of the textbook, also achieved with the use of contemporary examples and business
cases, makes this textbook a valuable companion and easy reading for the wider community
of students, academics, business leaders and managers.
Laura A. Costanzo, University of Surrey, UK
With the business world facing the worst crisis in generations, this book is a much needed
reminder of the crucial importance of strategy in any organization. Dealing with a variety of
contemporary issues, inter alia, managing innovation, cost structures, and social responsibility, it
presents strategy from a whole new perspective. With a plethora of current examples, ranging
from rock bands to multinational corporations from all sectors, it ties theory and international
practice together exceptionally well. This is a must-read core text for students and academics
involved in strategy formulation and strategic management.
Chris Liassides, Academic Director,
International Faculty of the University of Sheffield, UK
The authors present the complex topic of Strategic Management with a fine balance of latest
thinking and references to traditional concepts. They “bring the concepts to life” in a practical
and engaging way with their use of relevant examples. This text can truly help managers expand
their understanding to make better business decisions. We will be using this book as an essential
tool for the executive education programs we conduct throughout the world.
Mary Abbazia, Managing Director, Impact Planning Group
The authors use an accessible style in presenting key ideas of strategic management and bring a
remarkable range of resources especially (through) updated (company/organizational) cases to
enliven/enrich/illustrate their argument/discussion.
Highly original and insightful/resourceful, this book will be invaluable to postgraduates and
advanced undergraduates in the fields of strategic management, international business/business
studies and organization theory.
Andrew Chan, City University of Hong Kong, Hong Kong SAR
A well crafted strategic management teaching resource and a welcome update. The text has a nice
balance between theory and practice, and connects in an accessible way to major issues, debates
and trends in the subject area. I appreciated the attention to detail in use of the strategy vocabulary
and the precision of explanations.
Tim O’Shannassy, RMIT University, Melbourne, Australia
FitzRoy, Hulbert, and Ghobadian have written a superbly comprehensive and up-to-date book,
reflecting the latest scholarly insights and practical wisdom about strategy. The book, which is
extremely readable and engaging, is loaded with examples from a wide array of industries and
regions. If you want to become a more thoughtful and successful strategist, you should read
this book.
Donald C. Hambrick, The Pennsylvania State University, USA
Writing a great strategy text is like cooking a five-star meal – and just as difficult. Many authors
take similar ingredients and produce bland, insipid offerings: as the glazed look and mimetic
thinking of legions of business students will attest. In contrast, FitzRoy, Hulbert and Ghobadian
are master-chefs taking classic ingredients and adding new and unexpected ideas to produce an
invigorating feast. Strategic Management: The challenge of creating value is more than food for
thought, it offers a rare prize: differentiated thinking.
Pierre Berthon, Bentley University, USA
STRATEGIC
MANAGEMENT
The Challenge of Creating Value
Second edition
PETER FITZROY,
JAMES M. HULBERT
and
ABBY GHOBADIAN
First published 2012
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2012 Peter FitzRoy, James M. Hulbert and Abby Ghobadian
The right of Peter FitzRoy, James M. Hulbert and Abby Ghobadian to be
identified as authors of this work has been asserted by them in accordance
with sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilized in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
FitzRoy, Peter T.
Strategic management : the challenge of creating value / Peter FitzRoy,
James Hulbert, and Abby Ghobadian. — 2nd ed.
p. cm.
Includes bibliographical references and index.
1. Strategic planning. I. Hulbert, James M. II. Ghobadian, Abby, 1951–
III. Title.
HD30.28.F573 2011
658.4’012—dc22 2011009565
ISBN: 978-0-415-56763-3 (hbk)

ISBN: 978-0-415-56764-0 (pbk)
ISBN: 978-0-203-80440-7 (ebk)
Typeset in Minion Pro and Futura

by Florence Production Ltd, Stoodleigh, Devon
CONTENTS
List of figures and tables xviii

About this book xxiii
How to use this book xxvii
How to use the online resources xxix
About the authors xxxi
Acknowledgements xxxiii
Photo acknowledgements xxxiv
Section 1 STRATEGIC MANAGEMENT CONCEPTS 1
1 Managing strategically 3
Strategic management in practice – News Corporation 4
1.1 Introduction 8
Definition of strategic management terms 10
Strategic decisions 10
Strategy 10
Strategic management 12
1.2 What determines firm success? 13
What do we mean by success? 13
What determines success? 15
Persistence of success 18
1.3 The concept of the firm 22
Managerial implications 24
1.4 Dynamics of change 25
1.5 Strategic management process 26
Context 27
Strategy 28
CONTENTS
Implementation 30
Performance 30
1.6 Who ‘does’ strategy? 31
1.7 Changes affecting strategic management 32
Globalization 32
Increased competition 33
Technological change 34
Knowledge intensity 36
Corporate social responsibility and sustainability 36
Deregulation and privatization 38
1.8 Summary 39
View from the Top – Electrolux 40
Mini-case – MTP Limited 41
Review questions 43
References 43
2 Strategic management fundamentals 46

Strategic management in practice – Shell, Nestlé 47
2.1 Introduction 49
2.2 Characteristics of strategic decisions 50
Create value 50
Major resource commitment 51
Difficult to reverse 52
Long-term commitment 52
2.3 Characteristics of strategy 53
Incremental or revolutionary strategy 54
Corporate- and business unit-level strategy 60
Strategy as building capabilities 62
Strategy as resolving paradox 63
Other characteristics of strategy 65
2.4 Characteristics of strategic management 67
Creating the organization 67
Creating and managing change 68
Creating value 69
Ethics 70
2.5 Business models 70
Components of a business model 72
2.6 The strategy development process – a management
perspective 73
Impediments to the strategy process 74
viii
CONTENTS
2.7 Stakeholders and organizational value 77

Shareholders 78
Customers 79
Employees 79
Achieving a synthesis 79
Other stakeholders 80
2.8 Getting strategy implemented 80
2.9 Summary 81
View from the Top – MasterCard 82
Mini-case – Argus Technology Ltd 83
Review questions 86
References 86
Section 2 STRATEGIC ANALYSIS 89
3 External analysis: the business environment 91

Strategic management in practice – chip makers 92
3.1 Introduction 93
Environmental scanning 94
Select key variables 95
Forecast changes 96
Estimate the impact of the changes 97
Levels of environmental analysis 97
3.2 The remote environment 100
Economic 101
Political 106
Socio-cultural 110
Technological 111
Legal 116
Environmental 119
3.3 The industry environment 123
Industry value chain 126
Limitations of the industry model 128
3.4 The business unit environment 131
Customer analysis 131
Analysing competitors 133
3.5 Multi-industry competition 135
Network competition 135
Corporate-level competition 137
ix
CONTENTS
3.6 Summary 137

View from the Top – Capita Group plc 138
Mini-case – Linn Products Limited 139
Review questions 144
References 144
4 External analysis: the financial environment 148

Strategic management in practice – Lafarge 149
4.1 Introduction 150
4.2 The two markets in which firms compete 152
Competition in financial markets 153
Competition in product markets 153
Relationship between the two markets 153
Market for corporate control 153
The managerial challenge 154
Risk types 155
4.3 Financial markets 157
Major participants in financial markets 159
Global nature of financial markets 161
Current concerns with financial markets 164
4.4 Equity markets 166
Types of investors 166
The cost of equity capital 168
Trends in equity markets 171
4.5 Debt markets 172
Types of debt 172
Ratings agencies 175
Islamic banking 177
4.6 Cost of capital and firm valuation 179
Firm valuation 179
Accounting measures of profitability 183
4.7 Risk management and derivatives 184
Options 186
Swaps 186
4.8 Summary 187
View from the Top – HSBC Holdings plc 189
Mini-case – Focus (DIY) Ltd 190
References 195
x
CONTENTS
5 Internal analysis: managing capabilities, costs and

knowledge 199
Strategic management in practice – ARM Holdings 200
5.2 Resources 205
Tangible resources 205
Intangible resources 206
Classifying resources 209
5.3 Resources and capabilities 213
5.4 Capabilities and competitive advantage 216
Valuable 216
Scarce 217
Non-imitable 218
Sustainable 218
Appropriable 218
5.5 Dynamic capabilities 220
5.6 The value chain 223
5.7 Cost drivers 225
Economies of scale 225
Experience effect 228
Value drivers 229
5.8 Knowledge and intellectual capital 229
Types of knowledge 232
Characteristics of knowledge products 234
5.9 Summary 236
View from the Top – IBM 238
Mini-case – OATS 239
References 245
Section 3 STRATEGY DEVELOPMENT 249
6 Creating future direction 251

Strategic management in practice – Canon 252
6.2 Vision 258
The vision statement 259
Characteristics of vision statements 261
Creating a vision statement 263
xi
CONTENTS
6.3 Values 264

Values as a source of problems 266
6.4 Mission 268
Corporate versus business unit mission statements 270
Characteristics of mission statements 271
Creating and changing a mission statement 271
6.5 Objectives 274
Corporate and business unit objectives 274
Financial and non-financial objectives 277
Setting objectives 278
Categories of financial objectives 278
Level of objectives 280
Problems in setting objectives 280
Synthesizing the concepts 282
6.6 An integrative example 282
6.7 Summary 284
View from the Top – nVIDIA 285
Mini-case – Coca-Cola 286
References 289
7 Business-level strategy 292

Strategic management in practice – Tata Group 293
Corporate and business unit relationships 295
Strategic management of the business 297
Business vision and objectives 298
7.2 The changing product/market environment of the business 300
Remote environment 300
Industry environment 300
Customer value 303
Competitor analysis 304
7.3 Internal analysis for developing strategy 305
The business value chain 305
Business unit analysis 308
7.4 Developing business-level strategy 308
A strategic decision framework 309
7.5 Where to compete 310
Vertical positioning 310
Horizontal positioning 316
xii
CONTENTS
7.6 How to compete 321

Competitive business strategies 321
Dynamics of competitive advantage 325
Entry strategy 327
Capabilities and architecture 330
7.7 Business growth 330
Product/market growth alternatives 331
Capabilities/market alternatives 332
Innovation and sources of value 333
7.8 Summary 336
View from the Top – Sandvik 337
Mini-case – Ryanair 338
References 339
8 Corporate-level strategy 342

Strategic management in practice – HMV Group 343
Understanding corporate structures 347
Creating value 349
8.2 Elements of corporate strategy 351
Creating future direction 351
Style of the centre 351
Portfolio management 353
Diversification and relatedness among business units 354
Financial decisions 354
Other corporate decisions 354
8.3 Creating future direction 355
8.4 Style of the centre 356
Synergy 358
Centralized services 359
8.5 Managing the corporate portfolio 360
Resource allocation – current and future portfolio 362
Tools for allocating resources 364
8.6 Diversification 374
Related diversification 376
Unrelated diversification 377
8.7 Financial decisions 378
Capital structure 378
Dividend policy 382
xiii
CONTENTS
Share repurchases 383

Senior management salary and incentive alternatives 384
8.8 Managing strategic risk 384
Assessing strategy 385
8.9 Summary 387
View from the Top – Whitbread Plc 388
Mini-case – Philips Electronics NV 389
References 392
9 Managing innovation and the dynamic scope of the firm 395

Strategic management in practice – Porsche and VW 396
9.2 Key considerations in innovation 399
Features of innovation 399
Organizing for innovation 402
Types of innovation 403
9.3 Managing the dynamic scope of the firm 407
Risk and innovation 411
Means of changing scope 412
9.4 Managing the dynamic scope – internal development 413
Technological innovation 415
9.5 Managing the dynamic scope – mergers and acquisitions 420
Drivers of mergers and acquisitions 423
Success of mergers and acquisitions 424
Process model of mergers and acquisitions 425
9.6 Managing the dynamic scope – hybrid approaches 435
Strategic alliances 435
Licensing and technology purchase 436
Equity investment 436
Consortia 437
Option buying 437
9.7 Managing the dynamic scope – divestments, spin-offs and
restructuring 438
Divestments and spin-offs 438
Restructuring 440
9.8 Summary 440
View from the Top – Diageo plc 441
Mini-case – Takeover of ABN Amro 445
References 448
xiv
CONTENTS
Section 4 STRATEGY IMPLEMENTATION 453
10 Leading organizational change 455

Strategic management in practice – Whitbread 456
Drivers of change 458
Changes in the firm 459
10.2 Characteristics of organizational change 463
Change and the environment 463
Change and the firm 464
10.3 The change process 474
Initiating change 475
Managing change 477
Sustaining change: the organization of the future 481
10.4 Leadership 482
Definition of leadership 482
Leader versus manager 483
Capabilities of leaders 484
10.5 Summary 485
View from the Top – Diageo plc 486
Mini-case – British Airways 488
References 491
11 Designing organizational architecture 494

Strategic management in practice – PerkinElmer 495
What is organizational architecture? 497
11.2 Structure 499
The nature of structure 500
Types of organizational structures 505
11.3 Processes and process management 517
Key process management activities 519
Business process re-engineering 520
Information technology infrastructure 521
Major IT initiatives 522
Knowledge management systems 523
11.4 Human resources 529
Managing resources and capabilities 530
Succession planning 530
Managing human resource policies 532
xv
CONTENTS
11.5 Summary 535

View from the Top – Sony 536
Mini-case – Anglo American plc 538
References 541
Section 5 ASSESSING STRATEGIC PERFORMANCE 545
12 Measuring organizational performance 547

Strategic management in practice – Toyota 548
12.2 Performance measures 551
Shareholder value and firm value 552
Variables and measures 552
Diagnostic use 553
Financial and non-financial measures 553
Benchmarking 554
Need for a set of measures 554
12.3 Developing a performance measurement system 554
Identifying and designing performance measures 555
12.4 Measuring business-level performance 558
Customer measures 559
Internal measures 562
Innovation and learning measures 563
Financial measures 564
12.5 Corporate performance measures 567
Product/market performance and external stakeholders 568
Internal measures and internal stakeholders 570
Innovation and change management 574
Financial measures and stakeholders 575
Corporate social responsibility 581
12.6 Summary 583
View from the Top – Dow Chemical 584
Mini-case – Interface Inc 585
References 590
13 Corporate governance and social responsibility 592

Strategic management in practice – Siemens 593
xvi
CONTENTS
What is corporate governance? 594

Global issues in corporate governance 596
13.2 The modern corporation 597
Global institutional arrangements 598
13.3 The governance model 602
13.4 Shareholders and boards 603
13.5 Management and boards 604
13.6 The role of directors and the board 606
Responsibilities of directors 607
Composition of the board 608
Capabilities of directors 610
Compensation of directors 612
13.7 Board operations 612
Board processes 612
Board tasks 614
Board committees 618
13.8 Global governance approaches 620
Europe 620
Asia 621
13.9 Corporate social responsibility 623
13.10 Summary 624
View from the Top – Cable and Wireless 626
Mini-case – Prudential plc 627
References 631
14 Postscript 635
Introduction 636
Context 636
Strategy 637
Implementation 638
Performance 640
Conclusion 640
Glossary 641
Subject and author index 657
Company index 665
xvii
TABLES AND
FIGURES
FIGURES
0 Structure of the book xxvi

1.1 Five-year common stock performance of News Corporation 7
1.2 Simplified strategic management process 9
1.3 Persistence of success 19
1.4 Profit before tax – Thomas Cook turnaround 21
1.5 Airline industry outsourcing 23
1.6 Alternative forms of economic exchanges 24
1.7 Rates of penetration of new technologies 26
1.8 Strategic management model 27
1.9 RWE pie chart 29
1.10 Changes affecting strategic management 32
2.1 Characteristics of strategic decisions 51
2.2 Characteristics of strategy 54
2.3 Value components for a firm 55
2.4 Types of strategic change 56
2.5 Corporate- and business-level strategy 61
2.6 Strategy as resolving paradox 63
2.7 Economic profit profile of a new strategy 64
2.8 Components of a business model 72
2.9 Impediments to developing strategy 74
2.10 Major organizational stakeholders 78
2.11 Australian iron ore exports and prices 84
3.1 A process for making sense of weak signals 94
3.2 Process of environmental analysis 95
3.3 Environmental changes impact vs. probability 96
3.4 Levels of environmental analysis 98
3.5 Corporate and business unit level of environmental analysis 98
3.6 Framework for analysis of the remote environment 100
TABLES AND FIGURES
3.7 UK quarterly GDP 103

3.8 Rising global broadband penetration 113
3.9 Ratio of IT investment to all other investment by US firms 114
3.10 The industry environment 123
3.11 Industry value chain, aluminium and plastic packaging 127
3.12 The augmented industry environment 130
3.13 Process for competitor analysis 134
3.14 Types of competitive information at different levels 134
3.15 WiMAX network firms 136
4.1 The two markets in which firms compete 152
4.2 UBS share price, 2007–11 155
4.3 Financial market participants 157
4.4 Global choices for investors 162
4.5 Percentage of shares ($ value) of major US companies held by institutional
investors 167
4.6 Required rate of return by an investor 169
4.7 Spreads of 10-year government benchmark bonds to German bunds 170
4.8 Loans to UK private non-financial corporations 174
4.9 Interest rates for treasury and corporate bonds 177
5.1 Resources and performance 204
5.2 Tangible and intangible assets 207
5.3 Intangible assets as a percentage of total assets – European firms 209
5.4 Resources and capabilities 214
5.5 Properties of capabilities 217
5.6 Dynamic capabilities 222
5.7 Economies of scale 226
5.8 Changes in economies of scale 227
5.9 Disk drive experience curve 228
5.10 The relationship between data and insight 232
5.11 OATS’ position in the lubricant value chain 239
5.12 Trends in lubrication specification and permitted emissions in OECD region 242
5.13 Transformation since 1984 243
6.1 Overview of 2008 252
6.2 Outlook for 2010 and beyond 253
6.3 Elements of aspirations 255
6.4 Commonly sought values transitions 268
6.5 Iterative loops in the strategy process (illustrative only) 275
6.6 Accor Group hotel openings 275
6.7 Role of different concepts 284
7.1 Simplified strategic management model 297
7.2 The US PC industry’s value chain 302
7.3 Price and value creation 304
7.4 Using the value chain 305
xix
TABLES AND FIGURES
7.5 Illustrative value chains 306

7.6 Competitive advantage by activity 307
7.7 Critical business strategy questions 309
7.8 Horizontal positioning 319
7.9 Competitive business strategies 324
7.10 Evolution of new bases of competitive advantage 325
7.11 Product/market growth alternatives 332
7.12 Capabilities/market alternatives 333
8.1 Siemens organization structure 348
8.2 Elements of corporate-level strategy 352
8.3 Styles of the corporate centre 357
8.4 Current and future business portfolio 363
8.5 Growth/share matrix 367
8.6 Growth/share matrix 368
8.7 Cash cycle of businesses 368
8.8 Business screen matrix 371
8.9 Business portfolio 372
8.10 Relationship between organizational performance and diversity 376
8.11 Risk/return trade-off for strategy 386
9.1 Innovation: key considerations 399
9.2 Characteristics of innovative firms 402
9.3 Types of innovation 403
9.4 Dynamic business portfolio 408
9.5 Risk and innovation 412
9.6 Virtuous development cycle 413
9.7 Issues in technological innovation 415
9.8 S curves for two technologies 416
9.9 European mergers and acquisitions 422
9.10 The merger and acquisition process 425
9.11 Valuing acquisitions 430
9.12 The smart way to divest 439
10.1 Change in the environment and the firm 464
10.2 Characteristics of organizational change 465
10.3 When to change 467
10.4 Portfolio of change initiatives 473
10.5 The change process 474
10.6 Trust/agreement matrix 479
11.1 Organizational architecture 497
11.2 Functional structure 505
11.3 Trader Media Group organizational chart 506
11.4 Multidivisional structure 507
11.5 Multidivisional structure of the Getinge Group 509
11.6 Group and business structure 509
xx
TABLES AND FIGURES
11.7 Group organization of Bayer AG 510

11.8 Procter & Gamble global organizational structure 514
11.9 Human resource policies and culture 532
12.1 Dynamic strategy process 551
12.2 A process for identifying and developing performance measures 555
12.3 Cause–effect chain for customer satisfaction 557
12.4 The balanced scorecard 558
12.5 Future cash flows of a strategy 566
12.6 Corporate-level scorecard 568
12.7 Sources of corporate growth 569
12.8 Distribution of corporate revenue – 2011 570
12.9 Economic profit of business units 571
12.10 Financial performance of SAP 577
12.11 Health services company corporate dashboard 580
12.12 John Lewis Partnership CSR categories 582
12.13 Carpet tile penetration of selected geographic regions (2009) 586
12.14 Carpet tile market segmentation 586
12.15 Interface current strategy 587
12.16 Interface gross profit and margins 588
13.1 Corporate governance model 602
13.2 Board tasks 616
13.3 Prudential share prices 628
TABLES
1.1 Economic profit of selected US firms 14

2.1 Layoffs announced by European firms, 2009 58
2.2 Performance of General Motors 76
3.1 Selected economic variables 101
3.2 Selected political variables 106
3.3 Regional trading blocks 108
3.4 Selected socio-cultural variables 110
3.5 Median age by country 111
3.6 Selected technological variables 112
3.7 Average cost per transaction in retail banking 114
3.8 Selected legal variables 116
3.9 Selected environmental variables 119
3.10 UK retail sales of albums by format 143
3.11 UK retail sales of singles by format 143
3.12 Trade income by format, 2004 to 2009 143
4.1 Total return to shareholders for selected US firms, 2008 182
4.2 Profit and loss account 193
xxi
TABLES AND FIGURES
4.3 Balance sheet 194

5.1 Variability of firm profitability within the supermarket industry – 2008 202
5.2 Market-to-book ratios, UK firms 208
5.3 Value of selected global brands 213
5.4 Competitive value chains 224
6.1 Corporate and business unit objectives 276
6.2 Siemens’ objectives 276
6.3 Review question 3 288
6.4 Review question 7 289
7.1 Reasons for outsourcing 315
8.1 Corporate opportunities to add or destroy value 350
8.2 Business segment information for BHP Billiton 361
8.3 Segment data for Henkel 362
8.4 Segment cash flows 369
8.5 Market share/profitability relationship 369
8.6 Calculation of business strength 372
8.7 Debt/equity ratios for selected firms 381
9.1 Acquisitions and divestments by European firms (1987–93) 408
9.2 Calculation of the value of a combined firm 432
11.1 Evolution of economies and organizations 517
11.2 Profile of general managers in BHP 531
12.1 Performance measures – segment 1 559
12.2 Internal performance measures 562
12.3 Productivity of European auto factories in 2002 (2001 in parentheses) 563
12.4 Innovation and learning performance measures 563
12.5 Financial measures of performance 564
12.6 Illustrative corporate overview of business unit performance 572
12.7 Economic profit of Henkel businesses – 2009 576
12.8 Selected financial measures 577
12.9 John Lewis Partnership’s engagement with NGOs, campaign groups
and consumer associations 582
13.1 Prudential deal costs 629
xxii
ABOUT THIS BOOK
DEVELOPMENTS IN STRATEGIC MANAGEMENT OVER

YOUR CAREER
Whether you are nearing the end of your undergraduate course, or in the midst of an MBA,
your career in business lies ahead of you. We have been mindful of this in writing this book
and have therefore focused on how strategic management is likely to develop in future. Just
as we believe that strategic management is about making decisions now to ensure the future
success of a firm, so we believe that when studying strategic management, the focus should
be on the future competitive environment in which you will work, not on the present.
So how do we think the practice of strategic management will develop in future? Markets
are increasingly global, intensely competitive and characterized by rapid and turbulent
changes. To create value for stakeholders in these circumstances is a complex task with no
easy solutions. These challenges are reflected in each of the themes that run through our
text.
Globalization
We live at an exciting time. Never before has our world been so globally interconnected.
Electronic media have brought knowledge to billions, removing the literacy barrier. The fast-
widening spread of the internet has revolutionized communications, which are no longer
dominated by large companies and ‘mass media’. Individuals communicate with each other
and talk back to suppliers in unprecedented ways. Whether you work for a multinational, a
regional, a national or a local firm, globalization will profoundly affect your life as a manager,
and you will be living with very different and interconnected relationships with customers,
suppliers and others. Reflecting these changes, we have drawn our examples from a wide
range of countries, developed and developing, and included firms – both large and small –
that are on the cutting edge of the changes created by the information revolution. Chapter
1, for example, has a mini-case on MTP Ltd, a small Irish technology firm facing possible
opportunities in Europe. At the same time it must deal with the likely entry of global
competitors into its domestic market, and develop a strategy in response, including identifying
the new capabilities and skills that will be required.
ABOUT THIS BOOK
Change
Not only is the world experiencing an increasing rate of change, it is also being battered by
the increasing turbulence of that change. Pressures on business range from the blurring of
industry and firm boundaries, driven by technology, de-regulation and globalization, to
dealing with the demands of NGOs for more ethical behaviour and governments for reduced
carbon emissions. Surely no strategy will last for long in tomorrow’s world and you will be
continually innovating in all the activities and elements of the firms for which you will work.
Despite the pressures of managing for success today, however, you must prepare your firms
for a changed and uncertain tomorrow. The UK-based firm HMV has experienced significant
changes in its environment, with new technology such as internet downloading of music and
books, as well as the expansion of supermarkets into both book and music categories. As we
examine in Chapter 8, handling this turbulent environment has proved challenging for the
firm’s management. The need to manage both for today and for tomorrow is one of numerous
dilemmas with which you will have to wrestle, and this book explores these issues in depth.
Intangible assets
Competitive advantage and value are more and more created through intangible rather than
physical assets. The meteoric rise in the value of such firms as Google, Facebook and Groupon
is embedded in their people, processes, technology and customer relationships. In a
knowledge-based economy, the management of intangible assets and the firm’s knowledge
base take centre stage. In Chapter 12 we report on an interview with the chief technology
officer of Dow Chemical, who discusses how that firm has addressed innovation and research
and development. Our text spotlights the increased importance of knowledge and intangible
assets as issues that will be central to your success as a strategic manager in the world of the
future. Unfortunately, many traditional books on strategic management have failed to
recognize this important transformation.
Firm performance
You will live in a world driven by tough competition, not just in product markets, but
pressured also by the demands of financial markets. There is therefore in our view no
alternative to the value-based approach to firm performance that we take: a firm is an
economic entity!
As future strategic managers, it is critical that you understand the impact of financial
markets on strategy – yet this topic is ignored by virtually every other book in the field, a
staggering omission! Of course we recognize that firms have multiple stakeholders with
varied interests in its performance. Environmental and social concerns will be important
issues you will have to deal with. However, in a competitive world – whether in product
markets or financial markets – the pre-eminent importance of customers and shareholders
is self-evident. It is therefore vital that you understand that financial markets, besides
pressuring a firm for performance, also facilitate and constrain the strategy it adopts. Focus
xxiv
ABOUT THIS BOOK
(DIY) is a UK-based retailer which has faced a challenging environment. The mini-case in
Chapter 4 highlights the point that how the firm resolves its financial problems and high
debt levels will be the key to its future.
Governance and ethics

Despite our concern that a firm generates value, the corporate scandals of the early twenty-
first century underlined the importance of ethical behaviour on the part of senior executives.
As you move into management roles, you must expect very stringent scrutiny of your
behaviour and ethics. Nor is this an issue of morals alone. Governments in much of the
world are slowly (too slowly!) recognizing that the ability of the state to provide ageing
populations with adequate income is disappearing. The fact that countless millions have
become dependent on private savings and pensions is already reflected in the increased
activism of the institutions that manage these funds. The political pressures arising from
these demographic and economic changes mean that senior managers’ behaviour is now
recognized as having a critical economic dimension. Our text contains dilemmas called ‘The
Challenge of Strategic Management’ as well as many other examples. As you explore these,
you will find that many of them have ethical dimensions, and you will find how difficult
some of these issues – which may seem simple at first sight – can become. The Chapter 9
mini-case describes the disastrous results of the takeover of ABN Amro by the consortium
led by the Royal Bank of Scotland. The case provides a graphic illustration of the need for
an active board which is involved in the strategic management of the firm.
Synthesis
A key challenge in teaching strategic management is ensuring that students are able to think
critically about problems which by their very nature are interdisciplinary. Developing and
implementing strategy is a complex task, involving critical thinking, creativity and analytical
rigour. Achieving this task requires a deep understanding of many academic disciplines.
PerkinElmer is a US-based firm which has achieved success through superior strategic
management. As Chapter 11 documents however, this has involved not only developing new
strategies, but also successfully revising the organizational structure, installing a new culture
and management systems, as well as innovating technologically.
We wrote this book for a capstone course on strategic management for advanced
undergraduate and MBA students. You should therefore have had a basic foundation in
marketing, economics, finance, accounting, information technology and organizational
behaviour. Your challenge in mastering strategic management is to integrate these subjects,
synthesizing them into an overall perspective on strategic management of the enterprise that
can support you throughout your career. Our goal in writing this book has been to help you
achieve this synthesis, and to help you do so in a way that is interesting, informative and
enjoyable.
xxv
ABOUT THIS BOOK
Action
Finally, strategic management is all about action, not plans. This is emphasized in the text
using a plethora of real-world examples of ‘Strategic Management in Practice’. Firms from
all around the world are used to illustrating how managers have acted strategically, providing
an invaluable link between concept and practice. These examples not only span the breadth
of the globe, but also range from the smallest firms to the very largest organizations.
Furthermore, in a unique, cutting-edge feature called ‘View from the Top’, we include
interviews with top CEOs and senior executives, presenting students with an exclusive and
illuminating insight into the working practices of such leaders as Howard Stringer, CEO of
Sony, and Richard Lapthorne, Chairman of Cable and Wireless.
ORGANIZATION OF THE TEXT
To help you develop the understanding needed to handle these future challenges, our book
contains five sections, each with several chapters. An overview is provided in Figure 0.
Strategic
Management Concepts
Understanding strategic
management
Why are firms successful?
How firms create value
Assessing Strategic Strategic Analysis

Performance Analysing the external
world and firm capabilities
Measuring performance Analysing financial
Corporate governance markets
Strategy Implementation Strategy Development

Developing strategy for a
Implementation single business unit and the
Change management multi-business firm
Figure 0 Structure of the book
xxvi
HOW TO USE
THIS BOOK
The book has many examples, features and tools to help you, the student, learn and put into
practice relevant concepts in strategic management. The examples have been chosen to
illustrate how strategic management concepts are applied in many different countries,
industries and firms. This is designed to show you both the richness and the complexity
involved in managing strategically in a global business context.
To help you learn, we use a common structure for each chapter.
Each chapter incorporates a set of Learning objectives – the capabilities you should develop LEAR NING
from studying the chapter. These objectives cover a wide range from acquiring basic OBJECTIVE
knowledge, through analysis, to the ability to synthesize and apply concepts from several
disciplines.
Strategic management in practice opens each chapter by providing a short description of

the situation faced by a real company, describing how the firm has utilized the material to
be discussed in the chapter, and its level of success. The examples illustrate the relevance of
the chapter’s subject matter to the firm, providing an action link between concept and
practice. By showing practical applications of strategic management by senior managers in
successful – (and some unsuccessful) – firms we hope your understanding of the concepts
will be enhanced.
‘Concept’ in practice examples are used to illustrate how a firm has applied or adopted a
specific concept, such as outsourcing. These again link concept to practice, but are more
narrowly focused.
The Challenge of strategic management questions are designed as discussion vehicles on

the content and dilemmas of strategic management. Instructors will likely challenge you to
think more deeply about these topics. We encourage you to engage in critical reflection on
these challenges, grounding them in your own experience wherever possible.
HOW TO USE THIS BOOK
Each chapter contains a View from the Top, highlighting the views of a senior executive,
typically the CEO, indicating how a particular firm has used or implemented the concepts
described in the chapter. These views demonstrate that the concepts we discuss are entrenched
in practice – they are not just academic ideas. CEOs may not use the same words, but they
use the same ideas! In some cases, the views they express may differ from ours, which
permits a class discussion of why these different perspectives exist.
Key terms Key terms are highlighted in blue when they first appear, and are defined in the margin at
the most appropriate point in the text, as well as being a repeated in the glossary. Terms in
orange are defined in the glossary at the end of the book.
Extensive use is made of Cross-references, linking the material in different chapters. These
Chapter indicate that strategic management, by its very nature, is interdisciplinary, requiring an
understanding and synthesis of theories from many disciplines.
Each chapter includes a Chapter overview and Summary. These describe, respectively, the
material to be covered and a summary of the main points of the chapter. These provide a
useful aid for revision.
Mini-cases are used with each chapter to permit you to apply the material developed in the
chapter to help you understand how strategic managers operate. In many of the mini-cases,
chapter material will need to be integrated with material from other chapters. By its very
nature, strategic management is integrative in nature, not compartmentalized. These short
cases generally only provide limited information on the company and its situation. You may
want to obtain more information from appropriate websites before making a recommendation
on the case.
Each chapter contains a number of Review questions, designed to test your knowledge and
understanding of the content of the chapter and how this content enhances the strategic
management of a firm.
xxviii
HOW TO USE THE
ONLINE RESOURCES
The online resources accompanying the text provide the instructor and student with a range
of teaching and learning resources, complementing text. Students can freely access this
website. Instructors should contact their local Routledge representative to enable access.
Learning aids for students
• Flashcard glossary, to test your knowledge of essential terms

• An array of true/false questions for each chapter
Teaching aids for instructors
• Comprehensive testbank including multiple choice, true/false and short answer

questions for each chapter, with feedback
• PowerPoint lecture slides divided by chapter
HOW TO USE THE ONLINE RESOURCES
• Case study library comprising a list, together with a short description, of additional
cases for each chapter. These can be used either as exams or as part of continuous
student assessment
• Pedagogy matrix, giving you a comprehensive overview of all the pedagogical features
of the book
• Answers to end of chapter questions from within the book
• Additional case studies and related questions
• Regular updates on ‘Strategy in the News’
xxx
ABOUT THE
AUTHORS
Peter Fitzroy is a Professor in the MBA programme at Monash University in Melbourne,

Australia where he has taught Strategic Management for several years. He has held
appointments at a number of institutions including Columbia University, the University of
Illinois, the Manchester Business School, the Wharton School of the University of
Pennsylvania, the University of Waterloo and Purdue University. He also has extensive
experience in lecturing on management development programmes in Asia, Australia, the
UK and the US. He is actively involved in the Strategic Management Society, and served for
many years on the editorial board of the Strategic Management Journal.
James (Mac) Hulbert is Visiting Professor at the Guanghua School of Management of Peking
University and R.C. Kopf Professor Emeritus at the Graduate School of Business, Columbia
University. He has taught or held visiting positions at the Fundacao Joao Pinheiro (Brazil),
Henley Management College, the London Business School, the University of Grenoble,
Monash University and UCLA among others. He has also taught on executive development
programmes in Europe, South America, North America, the Middle East, Africa and Asia.
He has worked as a consultant with numerous global companies, including DuPont, 3M,
IBM, General Electric, Chase Manhattan Bank, BASF, Philip Morris, Caterpillar, BHP Billiton,
Unilever and Visa International. His research interests are strategy, planning and marketing.
His many books have been translated into Spanish, Chinese and Russian, and he has written
over 100 academic papers that have appeared in the Strategic Management Journal, Sloan
Management Review, California Management Review and European Management Journal
among others.
Abby Ghobadian is Professor at Henley Business School, University of Reading. He has

taught or held visiting positions at Bristol Business School, Middlesex University Business
School, Kingston Business School, Brunel Business School, Warwick Business School,
Westminster Business School, Higher Commercial Management School of Moscow, Lodz
University, Lubin Graduate School of Business at Pace University, Pecs University, ESCP-
EAP, and Monash University. Abby has taught on executive programmes of companies such
as Ford, Bechtel and Bovis Lend Lease, and in Russia, Hungary, Poland, Serbia and the
ABOUT THE AUTHORS
Middle East. He has consulted with a number of UK companies. His research interests are
strategy and performance enhancement. He has published close to 100 articles in peer-
reviewed journals, seven research monographs and two edited books as well as numerous
book chapters and conference papers. He is Chairman of the British Academy of Management.
He is co-editor of the Journal of Strategy and Management and serves on the editorial board
of a number of journals in the UK, USA and Hungary. Abby was elected a Fellow of Academy
Management in 2008, an Academician by the Academy of Social Sciences in 2010 and
received an honorary doctorate from University of Pecs in 2004.
xxxii
11EE
2
3
4
ACKNOWLEDGEMENTS
5
6
7
8
9
10
1
2
3
4EEE Many individuals and organizations have contributed towards this text. Although anonymous,
5 we are very grateful to the large numbers of MBA students in the US, Australia, Europe and
6 Asia who used some or all of the material as it was in preparation. We also owe a debt of
7 gratitude to the anonymous reviewers who provided us with so much useful feedback on
8 our earlier drafts. Finally, we wish to acknowledge the many colleagues who have influenced
9 our thinking on strategy over the years.
20 We also express our appreciation to several organizations for the use of material from
1 their web pages.
2 We also wish to acknowledge the help we received from the secretarial and library staff
3 at Monash, Columbia and Henley, as well as the constant encouragement of our partners,
4 Margaret, Madge and Anita.
5 We would also like to express our thanks to the staff at Routledge, including Terry
6 Clague, Alex Krause, David Cox, Katy Hamilton, Faye Mousley and Emily Senior.
7
8
9
30
1
2
3
4
5
6
7
8
9
40
1
2
3EEE
PHOTO
ACKNOWLEDGEMENTS
‘News Corporation’ (p. 7) AFP/Getty Images; ‘Restructured cartoon’ (p. 35) ©Tim Cordell,
reproduced with permission from www.cartoonstock.com; ‘Electrolux’ (p. 40) Bloomberg
via Getty Images; ‘Shell’ (p. 47) for editorial use only © shutterstock.com/Robert Davies;
‘Nestlé’ (p. 47) © Showface |Dreamstime.com; ‘MasterCard’ (p. 82) editorial use only ©
istockphoto.com/DNY59; ‘Intel’ (p. 92) editorial use only © istockphoto.com/Nnehring;
‘AMD’ (p. 92) Getty Images; ‘Vestas’ (p. 121) istockphoto.com/rpaz; ‘Linn’ (p. 139) Linn
Products Ltd; ‘Lafarge’ (p. 149) Bloomberg via Getty Images; ‘Hostile takeover cartoon’
(p. 163) © John Morris, reproduced with permission from www.cartoonstock.com; ‘Superdry’
(p. 167) for editorial use only © shutterstock.com/paul prescott; ‘HSBC’ (p. 189) © Digitalric
| Dreamstime.com; ‘ARM’ (p. 200) Bloomberg via Getty Images; ‘IBM’ (p. 238) Getty Images;
‘Canon’ (p. 252) © Perolsson | Dreamstime.com; ‘Haier’ (p. 269) AFP/Getty Images; ‘nVidia’
(p. 285) AFP/Getty Images; ‘Coca-Cola’ (p. 286) © Lucian Milasan | Dreamstime.com; ‘Tata’
(p. 293) editorial use only © shutterstock.com/Max Earey; ‘Unilever’ (p. 296) AFP/Getty
Images; ‘Sandvik’ (p. 337) Sandvik; ‘Ryanair’ (p. 338) editorial use only © istockphoto.com/
ilbusca; ‘HMV’ (p. 343) editorial use only © istockphoto/jentakespictures; ‘Premier Inn’
(p. 388) Bloomberg via Getty Images; ‘Philips’ (p. 389) editorial use only © Bill Lunney |
Dreamstime.com; ‘Porsche’ (p. 396) editorial use only © istockphoto/WendellandCarolyn;
‘VW’ (p. 397) editorial use only © istockphoto.com/gmalandra; ‘Merger/Takeover cartoon’
(p. 422) © John Morris, reproduced with permission from www.cartoonstock.com; ‘Smirnoff ’
(p. 441) Bloomberg via Getty Images; ‘ABN Amro’ (p. 445) AFP/Getty Images; ‘Costa’
(p. 456) Bloomberg via Getty Images; ‘Sea of pills’ (p. 472) istockphoto.com/FotografiaBasica;
‘British Airways’ (p. 488) editorial use only © istockphoto.com/rypson; ‘PerkinElmer’
(p. 495) SSPL via Getty Images; ‘Sony’ (p. 536) editorial use only © istockphoto.com/ilbusca;
‘Anglo American’ (p. 538) Getty Images; ‘Toyota’ (p. 548) editorial use only © istockphoto.com/
WendellandCarolyn; ‘Air New Zealand’ (p. 578) editorial use only © shutterstock.com/Robert
Cumming; ‘Siemens’ (p. 593) © Viorel Dudau | Dreamstime.com; ‘Marks & Spencer’ (p. 611)
© Naiyyer | Dreamstime.com; ‘Flag of Germany’ (p. 620) shutterstock.com/Route66; ‘Flag of
Japan’ (p. 621) shutterstock.com/Route66; ‘Flag of India’ (p. 622) shutterstock.com/Andrew
Chin; ‘Flag of China’ (p. 623) shutterstock.com/ekler; ‘Palm Oil Plantation’ (p. 624) © Kheng
Guan Toh | Dreamstime.com; ‘Cable and Wireless’ (p. 626) AFP/Getty Images; ‘Prudential’
(p. 627) AFP/Getty Images.
Section 1
STRATEGIC
MANAGEMENT
CONCEPTS
CHAPTER 1
MANAGING
STRATEGICALLY
LEARNING OBJECTIVES
Upon completing this chapter you should be able to:
1 Articulate the importance of strategic management to firm growth,

innovation and performance.
2 Distinguish between strategic decisions, strategy and strategic

management.
3 Contrast the major theories which endeavour to explain firm success.
4 Recognize why firms exist as economic entities and be able to describe

alternate forms of economic exchanges.
5 Argue the need for continual innovation and change: nothing is fixed;
all attributes of the firm are variable.
6 Apply the model of strategic management and be aware of the major

changes driving the practice of strategic management.
STRATEGIC MANAGEMENT CONCEPTS
NEWS CORPORATION
To illustrate many of the principles of strategic management,
consider a brief history of News Corporation, a global news
and entertainment firm.
In 2009, News Corporation reported revenues of $US30.4
billion, with cash and cash equivalents of $US6.5 billion and
total assets of $US53.1 billion. This is a major achievement
for a firm that started in the 1950s owning one newspaper, with assets of about $US1 million, in
Adelaide, a small state capital in Australia. Its growth in becoming a global news and entertainment
firm illustrates many of the principles of strategic management which will be covered in this and later
chapters.
S T R AT E G I C M A N A G E M E N T I N P R A C T I C E
News Corporation started its growth in the 1950s through acquiring several small unprofitable
newspapers in other geographic areas of Australia, including Sydney, Australia’s largest city, where
competition between newspapers was intense. Recognizing the opportunity presented by television, the
company acquired a majority interest in an Adelaide TV station, demonstrating the ability to manage a
technology completely new to the firm. These actions were followed by more aggressive growth during
the 1960s, when News Corporation expanded internationally. The initial expansion was to New
Zealand, a culturally similar country. This was soon followed by the acquisition of a magazine company
in Hong Kong, characterized by both a new culture and a new industry. At the same time, News
launched Australia’s first national newspaper, which has become the leading quality newspaper in
Australia. International expansion was further enhanced by the acquisition of The Sun and The News of
the World in London – both of which were unprofitable at the time.
During the 1970s, the global expansion continued, with the purchase of newspapers in San Antonio
and New York, again buying unprofitable papers. The UK presence was enhanced during the 1980s
with the purchase of The Times and The Sunday Times, as well as other papers in Hong Kong, Chicago
and Boston. In the UK, News Corporation was responsible for a massive restructuring of the newspaper
industry when production was moved from Fleet Street to a technologically advanced plant, which
resulted in major industrial action.
The level and nature of diversification increased during this period, with the launch of Fox, as the
fourth TV network in the US and the acquisition of Twentieth Century-Fox, a major movie production
company. European activities continued to expand in the 1990s. News Corporation’s TV interests were
merged with a competitor to form BSkyB and the firm acquired Telipiu from Vivendi, suffering substantial
losses for several years.
In the 2000s, News Corporation divested several US TV stations and the TV Guide magazine. They
also acquired Dow Jones at a cost of $US5.7 billion, representing a further diversification into information
services. During this period the firm also moved its place of incorporation from Australia to the US to
better reflect its geographic mix of businesses and to be closer to major financial institutions, customers
and competitors.
Rupert Murdoch has been CEO and Chairman of News Corporation over this entire period and the
Murdoch family maintains a significant shareholding in the firm. In terms of success, revenue has
certainly increased over the duration, but over the last five years the share price has suffered a steady
4
MANAGING STRATEGICALLY
decline. This could possibly arise from shareholder concern with the challenges facing News Corporation
in 2010. One of the most significant is the threat from online sources of news and a widespread view
that the Internet is free. Gathering news stories is expensive, and the industry is faced with the challenge
of how to get readers willing to pay for high-quality news stories (Shawcross, 1997; NewsCorp, 2009).
As of late 2011, News Corporation faces another major challenge. News International, the British
part of News Corporation, was accused of phone hacking as long ago as 2005, and one of their
reporters was jailed for four months in 2007. Allegations of further phone hackings took on a different
dimension in 2011 when journalists from The News of the World were accused of hacking into the mobile
phone of a missing girl who was later found murdered. Journalists were also accused of accessing
personal data of politicians, and others, often with the acquiescence of the police. Following public
outcry, the UK government initiated a judicial inquiry into the firm and its relationships with police,
politicians and others. A few days later, the head of the metropolitan police, and a senior deputy,
announced their resignations as did several senior News of the World executives. In the US, the FBI
announced that it was investigating bribery allegations by the firm and its staff. As of late summer 2011,
the crisis has had a significant impact on the strategy of News Corporation. The firm announced the
closure of The News of the World, and the withdrawal of its £8 billion bid for the remaining 61 per cent
of BSkyB that it did not own. What other impact this crisis will have is difficult to predict at the time of
writing. News Corporation’s share price has dropped, wiping more than $US10 billion from its market
capitalization, possibly calling into question the future of the firm and of its chairman and founder, Rupert
Murdoch. Mired in scandal and controversy, the situation not only raises major questions about the
adequacy of governance procedures at News Corporation, but also illustrates dramatically the harm
that can be caused to a major corporation by transgressions in one aspect of its business operations.
The final resolution of these issues will occur after the publication of this book, but the crisis illustrates
the turbulent and interconnected environment in which global firms operate and the challenge of
consistently creating value.
5
The short example of News Corporation illustrates many important principles of strategic
LEAR NING
management. First, a firm exists in a turbulent and rapidly changing context, which includes
OBJECTIVE 1
both the external world and the firm’s internal skills. As a firm in the media business, News
Articulate the Corporation has clearly been experiencing many changes in its external environment: the
importance of
emergence of satellite TV; globalization; and more recently the digital revolution. Strategy is
strategic management
to firm growth, about understanding and capitalizing upon these changes. Context also includes the necessity
innovation and for understanding the operations of financial markets. In early 1990 News Corporation had
performance. high debts and was almost brought down by a regional US bank but managed to survive. It
has also weathered the 2008/2009 recession, albeit with reductions in sales volumes and
significant losses. The firm has, however, been proactive in its environment, actively soliciting
support from a broad range of interest groups such as politicians, governments, regulators,
financial markets and allies in many countries. Context also includes development of new
skills within the firm. Certainly News Corporation has had to develop new skills in TV, cable
operations and international operations, among many others.
The case also illustrates that News Corporation’s strategy displays both a constancy and
an evolution over time. In the 2009 annual report, the CEO, Rupert Murdoch, described the
firm as a creative media company that attracts and retains customers by giving them the
news and entertainment that they value (NewsCorp, 2009). The firm’s vision can clearly be
characterized by aggressive growth with global aspirations. At the same time, the firm has
sometimes shown opportunistic behaviour. Telipiu in Italy became an acquisition target due
to cash flow problems experienced by its parent, Vivendi, and News Corporation was able
to take advantage of this. In pursuit of its vision, it adopted both incremental and revolutionary
Chapter 2 strategies (‰Chapter 2). Geographic expansion by purchasing several regional papers in
Texas was incremental. Setting up a new TV network in the US, or a new national newspaper
in Australia was revolutionary.
Strategy involves improving operating performance as well as the glamour of acquisitions.
Acquisitions have been an important element in its strategy, but News Corporation has also
improved the financial performance of many of its acquisitions, providing cash flow for
further growth. It has also achieved ongoing improvement in existing operations, growing
established markets as well as internally developing new businesses such as the fourth US
TV network. These decisions have involved considerable risk. The acquisition of MySpace
was initially hailed as a great success, but has since stumbled, with an exodus of key managers
(Smith, 2009). Indeed, News Corporation has been close to collapse several times, so good
understanding of financial markets has been essential.
In addition, News Corporation illustrates that strategic management is about making
decisions (not plans), even when the outcome is uncertain. These decisions may involve
‘betting’ the company as with News Corporation’s continued investment in Sky, which almost
forced the firm into bankruptcy. Strategy is about change, both reacting to change (the
emergence of satellite as a medium for TV broadcasting) and creating change (the launch of
new newspapers). This has led News Corporation down a path of continuous change, with
growth from geographic expansion, adoption of new technologies and entry into new
industries. Indeed, News Corporation was an important part of the forces driving these
industry changes. To support these strategic developments, the internal arrangements in
6
30
NewsCorp share price
25
20
US$
15
10
0
2/01/2007 2/01/2008 2/03/2009 2/01/2010 2/01/2011
Figure 1.1 Five-year common stock performance of News Corporation

(NewsCorp, 2010a)
News Corporation have also changed. Its organizational structure, processes, capabilities
and people are different (‰Chapter 11). The incentives are different, the values and culture Chapter 11
are different, and of course not all employees have accepted these changes.
Finally, the financial performance of the firm has been variable. In fiscal 2009, for
example, the firm reported assets of approximately $US53 billion and revenue of over $US30
billion. However, it also reported fiscal 2009 net losses of over $US3 billion, a huge swing
from the 2008 net profits of over $US5 billion. Yet as an indication of how far the firm has
moved from its Australian and newspaper roots, 55 per cent of revenue was generated in the
US and 31 per cent in Europe, while newspapers and related information services were
responsible for just 19 per cent of revenue (‰Chapter 12). At the time of writing, investors Chapter 12
buying News Corporation shares in the last few years have been very disappointed, for the
firm’s shares have performed poorly, as indicated in Figure 1.1 (NewsCorp, 2010b).
With its willingness to take risks and adopt a long time horizon, News Corporation has
survived and prospered over the last 50 years. What the future will bring is hard to assess,
but it is in a number of attractive industries, and seems to have the skills in its staff to make
the best of the opportunities it both creates and is presented with.
7
CHAPTER OVERVIEW
Building on the News Corporation example, this chapter introduces our model of the strategic management
process, which incorporates four interrelated elements: context – the internal and external environment in
which the firm competes; strategy – what the firm decides to do in response to these changes; implementation
– how the firm will put the strategy into practice; and performance – how well the firm is performing. We then
introduce the differences between strategic decisions (decisions that affect the long-term well-being of the firm),
strategy (the theme that underlies a set of strategic decisions) and strategic management (the managerial
process of creating an organization which generates value).
This is followed by a discussion of the major theories about what determines firm success, and influences
on the longevity of that success. Having established this understanding, we review the economic structure of
the firm, and introduce some of the alternatives as they relate to economic exchange and firm boundaries, for
example, which processes the firm should own directly and which can be outsourced. We briefly cover the
importance of innovation and change, a major theme to which we return later. We then develop the strategic
management model in more detail, indicating how the structure of the book relates to this model. This is
followed by a discussion of some of the changes, such as corporate social responsibility, which are influencing
the evolution of strategic management. To illustrate how the concepts discussed in this chapter are utilized in
practice, we include a View from the Top, by the CEO of Electrolux, indicating how that firm has grappled
with change. The chapter concludes with a mini-case – MTP Limited, a small Irish IT firm – providing an
opportunity to put these concepts into practice.
1.1 INTRODUCTION
As the example of News Corporation illustrates, this is an exciting and challenging time for
Globalization all organizations. The high rate of change, reflected in rapid globalization, rapid shifts in
The process which enables technology, major political and social upheavals, are all putting extreme pressure on
the free movement of goods, governments, companies and not-for-profits, affecting their ability to survive.
services, people, skills and In business, these changes pose both challenges and opportunities: some companies
ideas across political
borders. prosper while others atrophy and significant new firms arise while others die.
The last few decades have seen the emergence of major new organizations. The US
witnessed the rise of Microsoft, Intel, Google and Facebook, Europe the success of IKEA,
Airbus and SAP. From Asia come Haier of China, Tata of India, Acer of Taiwan and LG of
Korea, now well known around the world. At the same time, existing firms such as Nestle
and Unilever have demonstrated continued success, while others such as Woolworths UK,
Arcandor, Northern Rock, Lehman Brothers, Sabena, Swiss Air and Fortis Bank have stumbled
fatally. The FTSE 100 index was established on 3 January 1984, listing the largest 100 public
companies by market capitalization. The constituents of FTSE 100 are reviewed each quarter
and if necessary the membership is adjusted. A comparison between the original FTSE 100
in 1984 and those listed on 6 April 2009 reveals that only 29 firms have survived as FTSE
100 companies. Since its inception, 365 companies have entered and the same number have
left the index, therefore movement in and out of the index is significant.
8
CONTEXT
(Changing environment)
STRATEGY IMPLEMENTATION
(What to do) (Making it happen)
PERFORMANCE
Figure 1.2
(Creating value) Simplified strategic
management process
These examples illustrate the difficulty that firms experience in developing and executing
value-creating strategies over a long-term period. While the rewards from success are greater
than ever, so are the penalties of failure. In such a dynamic world, any strategy must be
modified as the world changes. Successful firms have both constancy of vision and flexibility
in execution. In a turbulent and unpredictable world, innovation in all aspects of the firm is
the only route to sustained success. This constitutes the strategic management challenge:
how to create value in the present while building a platform for future value creation. Strategic
management is an ongoing, continual process, not a single event or decision.
Figure 1.2 shows a simplified model of the strategic management process.
First, strategic managers must be aware of the changing context in which they compete
(‰Chapters 3, 4). They need a deep understanding of environmental changes and their Chapters
future impact. Coupled with this, they must understand what the firm is capable of, where 3, 4, 5
it excels, what it is good at (‰Chapter 5). In other words, what resources and capabilities
do the firm and its members possess? These must also be seen dynamically: firms must
develop new skills and capabilities to survive over the long haul, as is vividly demonstrated
by News Corporation.
Strategy will be driven by a combination of external changes and the skills of the people
in the firm. Management needs to decide how to respond to both challenges and
opportunities. Since the world is changing rapidly, we can also expect the firm’s strategy to
do so (‰Chapters 6, 7). This may involve developing new bases of competitive advantage Chapters
or completely new lines of business, either internally or via acquisition (‰Chapters 8, 9). 6,7,8,9
9
But strategic management is not just about what to do; it is also about how to do it, how
the strategy will be implemented. New skills and capabilities will likely be required to take
advantage of opportunities created by a changing environment. In addition, the future may
Chapters call for new leadership skills, changing the structure and/or culture of the firm (‰Chapters
10, 11, 12, 13 10, 11). The firm must learn to operate in new environments with different competitors and
possibly new technologies. Finally, the total strategic management process must result in
organizations which create value over the long term (‰Chapters 12, 13).
As shown in Figure 1.2, these processes are interconnected. Strategic management and
strategy development are not linear processes but are interactive and recursive.
LEARNING
OBJECTIVE 2 Definition of strategic management terms
Distinguish between Our text focuses on strategic management, the managerial aspect of strategy. We begin by
strategic decisions, distinguishing several concepts that are often confused; namely, strategic decisions, strategy
strategy and strategic
and strategic management.
management.
Strategic decisions
Strategic decisions Strategic decisions involve major resource commitments and are difficult to reverse, implying
Those decisions that affect a long-term commitment. Decisions that can be regarded as strategic can occur at all levels
the long-term well-being of of the firm. What is strategic depends on the entity we are considering. In this book we will
the organization. concentrate on two levels of decisions – corporate and business. Corporate-level decisions
are those that affect the entire firm, while business-level decisions affect a particular business
or division. If there is only one business in the firm, then corporate and business levels are
identical. What is regarded as long term will also depend on the firm and the industry in
which it competes. For a firm developing software, long term may be as short as 2–3 years.
For an oil company involved in all activities from exploration to retail, long term may be
15–20 years.
Strategic decisions in practice – ExxonMobil

In December 2009, ExxonMobil announced a $41 billion acquisition of XTO,
a natural gas producer. This was seen by several commentators as confirmation
that the future for energy companies was with natural gas, not petroleum. Natural
gas is plentiful, and in countries which are politically secure. By contrast, under the
leadership of John Brown, BP made significant investments in hydrogen technology.
Each of these represents a strategic decision for the company involved, and each
reflects different strategies.
Strategy
Strategy In our view, an acquisition is a strategic decision, not a strategy. The strategy may be
The common theme changing the business scope of the firm or changing the geographical scope to become
underlying a set of strategic
decisions.
10
Strategy in practice – IKEA

IKEA has grown around the world with a strategy of organic expansion, exporting
to many different countries a consistent store format and operating philosophy
incorporating the use of long-term relationships with its network of suppliers (Baraldi,
2008).
IKEA’s competitive advantage is built on a value-for-money proposition underpinned
by:
• in-house design capability

• limited customer services
• self-selection by customers
• modular furniture design
• low manufacturing costs
• ample inventories
• logistic capabilities
• continuous evolutionary change.
global. The decision to acquire a particular firm is then a component of that strategy.
Such a strategy may involve other significant decisions, such as increasing the level of debt
to fund the acquisition. As a result of its 2010 acquisition of Cadbury, Kraft arranged
£5.5 billion of debt financing to fund the acquisition (Crane, 2010). Strategy is about the
firm’s relationship with the environment and developing the resources and capabilities to
enable it to prosper.
It is our view that all firms have a strategy and this strategy may be explicit or implicit.
It may be developed with substantial analysis or not, pre-specified or allowed to develop in
an evolutionary fashion. A firm’s strategy can generally be expressed in relatively simple
terms, although this may hide complexity within. When thinking about strategy, we must
also recognize that in strategy nothing about the firm is fixed, it is all variable. The strategy
may change a firm’s scope, its culture, its structure, its vision or all of the above. When
developing strategy, we must therefore think creatively about a wide range of possible changes.
Contrast the success of IKEA with the failure of MFI, a national British furniture retailer.
MFI was one of the largest suppliers of kitchen and bedroom furniture in the UK, operating
mainly in retail parks in out-of-town locations (just like IKEA). After success in its early
decades, in more recent years it experienced recurring financial problems accompanied by
several changes of ownership. On 26 November 2008 it was announced that the company
had been placed into administration. The company ceased trading on 19 December 2008
after the administrators failed to find buyers. MFI failed not only because of the economic
downturn and loss of consumer confidence in 2008 but also because it failed to deliver a
consistent value proposition and the attendant poor publicity this generated.
11
Strategic management
Strategic Strategic management is a process that involves leadership, creativity, passion and analysis,
management building an organization that both generates and responds to change, developing compen-
Creating organizations that sation systems to reward staff, devising appropriate structures and systems, competing for
generate value in a turbulent funds in global financial markets and ensuring necessary resources are developed and allocated
world over an extended to worthwhile opportunities. Strategic management means both managing for the present as
period of time.
well as creating change so that the firm continues to prosper in a global, uncertain world.
Strategic Management in practice – News Corporation

News Corporation has grown from a small regional Australian newspaper to a
global business with interests in many areas of communications. This has involved
leadership, developing new skills, and balancing growth with financial and other
constraints. Growth has not been an accident; instead, the management of the firm
has driven it.
The examples we have discussed underline the fact that organizational innovation is the
key to strategy and wealth creation. The firm that finds an innovative approach is generally
the one that shifts industry equilibrium in its favour. Further, the examples indicate that
success is not pre-determined by the industry in which the firm operates; successful and
unsuccessful firms may co-exist in the same industry. Indeed, two firms in the same industry
can have different strategies, yet both can be successful, the so-called equifinality principle.
Of course, success may be assessed in many ways. Different stakeholder groups, such as
Chapter 2 shareholders, customers and employees, may use very different criteria (‰Chapter 2). Of
one thing we are confident however: management makes a difference to organizational
performance.
Only a few years ago a great deal of effort was expended to improve forecasting models
and forecast accuracy. Indeed, forecasts of revenues, costs, investments and profit are central
to much of the panoply of modern management. However, over time the business
environment has become more turbulent, even chaotic, and too unpredictable for historical
data to provide guaranteed guidance to the future, no matter how sophisticated the model.
With turbulence, fixed investments and costs become more perilous, flexibility and variable
costs more desirable (Economist, 2009). With these changes it is becoming more and more
important for firms to experiment and to learn quickly from their experiences, and to
incorporate different scenarios into their decision-making (Bryan & Farrell, 2009). Yet we
must not throw the baby out with the bathwater. Forecasting has become more difficult, but
at the same time the future is not completely unpredictable. Demand for many products and
services such as petroleum, electricity, steel, education and banking is remarkably stable.
Further, predictions of environmental trends such as population have little error associated
with them in the short to medium term.
Developing strategy in today’s environment is a challenging undertaking. When the
world is turbulent and unpredictable, how should an organization respond? Should it respond
12
purposefully or just drift? Some suggest that in such a world, strategy is obsolete before it
can be developed. We reject this argument. We believe the firm must have a strategy for
reacting and responding to developments. If it just drifts, it is unlikely to survive. A clear
idea of where the firm is going is a necessary prerequisite to develop the resources, capabilities
and, ultimately, the products and services required by targeted markets. Managers need to
understand the way the world is evolving and what responses are likely to enhance the firm’s
survival and prosperity. Without some sense of direction, albeit imperfect, the firm cannot
operate.
This discussion leads us to consider, and to clarify, what we mean by firm success.
1.2 WHAT DETERMINES FIRM SUCCESS? LEARNING

OBJECTIVE 3
We define an organization as a set of individuals and other productive assets that voluntarily Contrast the major
come together for a common purpose (Barney, 1991). In this text, we focus primarily on theories which
endeavour to explain
business organizations, organizations whose common purpose is primarily economic. The
firm success.
primary purpose of many organizations, such as UNICEF or the Metropolitan Opera in New
York, is non-economic. While such organizations must pay some attention to their economic
performance, this is not their primary focus.
The definition of success of a business firm depends on whose eyes we are looking
through. Shareholders have a different view from employees, who in turn look at things very
differently from customers. The firm has many stakeholders or constituencies, but these
three are undoubtedly among the most important. In Chapter 2, we discuss success from
each of these perspectives in more detail (‰Chapter 2). Here, we take the firm itself as the Chapter 2
unit of analysis and explore three related questions:
• What do we mean by the success of a firm?

• What determines firm success?
• What is the persistence of that success?
What do we mean by success?

At its simplest level, success may mean survival. If a firm only survives for a few years (or a
few months, as with many start-up firms), then we would not consider it as a successful firm.
By contrast, Akzo-Nobel can trace its origins back to 1646, with significant changes to its
scope and, of course, management. Success has not depended on a single individual. Rather
successful processes have been transferred to succeeding generations of managers. Continuity
is certainly an element in defining success, but the challenge of strategic management is to
create organizations capable of creating value over a sustained period.
We regard a firm as successful when it has the ability to create positive net economic
profit as an entity; that is, the value created by the firm is greater than the costs incurred in
creating that value. The objective of strategic management is to develop strategies, and to
13
make strategic decisions so that this occurs. Let’s look at what this implies in terms of value
and costs.
The gross value created by the firm is the total revenue generated from the sale or lease
of the goods and services it supplies to customers. This revenue must be larger than all the
costs incurred in generating it. While there are many ways to classify costs, the most important
ones are the costs of all inputs, material, labour and capital. The value created by the firm as
an entity is then simply:
Value created by the firm = revenue less all costs
Economic profit Economic profit is a different concept from the accounting profit, for in determining
The revenue of a firm less economic profit we also consider the amount and cost of capital employed in the business.
all costs. A firm may make an accounting profit, but employ a huge capital base in order to do so.
Since capital is not free, a capital charge must be included to measure economic profit. So
we define economic profit as:
Economic profit = revenue minus all costs

including corporate taxes and capital costs (both equity and debt)
If a firm covers all other costs, but not capital costs, the firm is destroying value, and
hurting its shareholders. Since they may easily move their funds from one investment to
another, failure to generate economic profit will motivate them to invest elsewhere, rather
than suffer opportunity losses.
Table 1.1 shows the economic profit earned by several US firms where economic profit
is as defined above. The measurement of economic profit is discussed in greater depth in
Chapter 12 Chapter 12 (‰Chapter 12).
In Table 1.1, we have used economic value added (EVA®) developed by Stern Stewart,
as a measure of economic profit (Uyemura et al., 1996). Microsoft has consistently delivered
a strong economic profit, even through the recession of 2008/9, as have Wal-Mart and Procter
& Gamble. In 2009, Microsoft created an additional US$10.6 billion of wealth for its
Table 1.1 Economic profit of selected US firms (US$ millions) (Yang, 2009)
EVA EVA EVA
Nov 2009 Nov 2008 Nov 2004
Microsoft 10,680 14,170 8,313
Apple Inc. 4,876 4,246 –150
Wal-Mart Stores 7,910 7,267 5,407
Procter & Gamble Co. 3,225 3,305 3,708
Coca-Cola Co. 3,689 3,597 3,517
Motorola Inc. –4,339 –3,370 –2,898
Time Warner Inc. –12,824 –8,476 –7,249
Bank of America Corp. –6,598 –1,609 5,655
14
shareholders than they would have received from other investments of equal risk. In contrast,
Motorola and Time Warner have suffered large economic losses, indicating that they have
actually destroyed shareholder value over the period 2004 to 2009. Bank of America has
historically been a successful firm until it destroyed value during the financial crisis in
2008/09.
The purpose of strategic management is to ensure that the firm generates an economic
profit that is available for distribution among its stakeholders, or which the firm can use for
innovation to create additional value. How this surplus is distributed, however, will be a
source of debate within the firm, reflecting the values of managers, available growth
opportunities, and the political power of various stakeholders.
What determines success?

Although many concepts such as game theory and organization theory have influenced the
development of strategic management, the literature generally suggests that there are two
main models of successful performance. These are referred to as the ‘structure–conduct–
performance’ model (SCP) and the ‘resource-based view’ (RBV), each of which have
antecedents in earlier work, particularly by Chandler (Chandler, 1962) and Learned (Learned
et al., 1969).
The structure–conduct–performance (SCP) model postulates that the dominant
influence on firm performance is the external environment in which it competes. By contrast,
the resource-based model postulates that it is the unique resources, skills and capabilities of Structure–conduct–
the firm that are the source of its success. We briefly discuss the contribution made by each performance model
model, subsequently developing our view that each is an incomplete framework for success. The SCP model assumes that
the structural characteristics
Structure–conduct–performance model of the industry determine
business performance.
With the SCP model, the structural characteristics of the industry are seen as determining
conduct (or what we would regard as strategy), which in turn determines the performance
of the business (‰Chapter 3). Chapter 3
Structural characteristics include such parameters as barriers to entry, customer
concentration, the existence of substitutes and level of product differentiation between
competitors, among others. These characteristics determine the conduct of the business that
includes such elements as pricing, product strategy, R&D, advertising, levels of investment
and so on. This conduct in turn is the primary influence on the performance of the business.
This model was popularized for managers by Porter (Porter, 1980), but has a long history as
documented by Caves (1998). The SCP model suggests that the industry in which the firm
chooses to compete is more important than the choices managers make. Success occurs
when the firm elects to compete in structurally attractive industries. Under this model, the
emphasis in strategy is on optimal positioning: locate in an attractive industry and attempt
to become market leader. The emphasis is on analysing the firm’s environment to assess the
overall economic profit of the industry since this is considered the major influence on firm
profitability. We can see the importance of this approach in the airline industry, where
15
average profitability is extremely low. This low profit arises from the structural characteristics
of that industry – intense competition, high capital requirements, fluctuating demand and
so on.
However, even in the airline industry, some competitors do significantly better than
others. This situation also arises in commodity markets such as oil or iron ore. Some firms
may be more skilled at reducing costs, or possess unique knowledge in processing, or be in
possession of a high-grade ore body and are able to generate superior financial returns.
Under the SCP framework, strategy choices are seen as constrained by industry structure,
with successful strategies being either producing at a lower cost than competitors, or
producing a differentiated product for which customers are prepared to pay a premium.
Which is to be preferred is determined by industry structure. All firms are assumed to
possess similar resources, although there is some discretion for the firm – it may be able to
implement strategy better than competitors.
While we agree that these structural characteristics influence the nature of the strategy
that leads to success, successful firms must also be able to develop the skills required to
implement the strategy. In management consulting, the ability to offer a global client a
Resource-based
consulting project at the lowest possible price may not be an advantage. Instead, the successful
view
Sees the firm as a collection firms are those with credibility, and the staff who can deliver on the proposal. Hence, while
of unique resources and we regard industry structure as relevant, performance is linked to firm characteristics as well,
capabilities that are the which leads us to a consideration of the second approach – the resource-based view of
basis of its strategy and strategy.
success.
The resource-based view of the firm
The resource-based perspective sees the firm as a collection of unique resources and
Chapter 5 capabilities that are the basis of its strategy and success (‰Chapter 5).
Resources are the more fundamental financial, physical and intangible attributes of the
firm. Capabilities – which are largely intangibles – refer to the firm’s ability to combine and
integrate these resources. In this view, differences in firm success are explained by differences
in resources available to each firm, not industry characteristics. Such a view of strategy also
has a long history, with the early work on strengths and weaknesses (Learned et al., 1969)
and distinctive capabilities (Selznick, 1957).
Such resources and capabilities can only lead to superior returns if they are specific to
the firm, so they must be valuable to customers and difficult to imitate by competitors
(Rugman & Verbeke, 2002). To be valuable, the resource must increase revenue or reduce
costs compared to what they would have been without the resource. If it is easy to transfer
resources from one firm to another, any advantage would be quickly competed away. These
resources then become the basis for competitive advantage, a necessary but not sufficient
condition for success. Of course, over time, the firm will undoubtedly need to acquire new
capabilities; thus we must think of them dynamically (Easterby-Smith et al., 2009).
The resource-based view of the firm (RBV) focuses on the need to exploit differences
between firms to establish unique positions of competitive advantage, a view aligned with
Porter’s later work. He notes that ‘competitive strategy is about being different . . . choosing
16
a different set of activities to deliver a unique mix of value’ (Porter, 1996). Further, since the
world changes, superior returns can only be sustained if new resources are generated
(Markides, 1999). In our consulting example, a successful firm develops the intellectual
ability and knowledge of its staff to ensure that these are superior to competitors.
Synthesis
We consider both of these frameworks to be incomplete, and now discuss some of their
shortcomings.
The SCP model is concerned with the performance of a ‘firm’ which is assumed to
compete in a single industry. Yet most global firms compete in many industries; consequently
this model can only be relevant for a division, or what Chapter 2 describes as a business unit
of the firm (‰Chapter 2). Most of the factors that the SCP model considers as affecting Chapter 2
performance are actually industry factors. Their impact must therefore be on a business unit,
not the overall firm, which may compete in many industries. As we have seen, News
Corporation competes in newspapers, film and television and on the Internet, and the
structures of these industries differ considerably. When we discuss ‘firm success’ we need to
be clear whether we are discussing the success of the parent or the success of a business unit
within that parent. If it is the former, then considerations such as the firm’s degree and nature
of diversification or level of debt may be relevant. If it is a business unit, industry factors
have some relevance, but obviously they are not relevant for a diversified corporation; they
can only be relevant for one of its businesses.
In addition, the focus on industry characteristics is also incomplete. If we consider a
business unit, it exists in more than just an industry environment; it also exists in what in
Chapter 3 we call the remote environment (‰Chapter 3). Chapter 3
This remote environment includes such things as anti-trust legislation, an overall
economy, average income levels of the members of the economy, and other factors that will
Remote
influence the profitability of the business. Possibly as a consequence of this remote
environment
environment, we see successful firms in unattractive industries and unsuccessful firms in
The broad socio/
attractive industries. technical/economic
The RBV is also incomplete. A specific resource or capability has no value independent environment in which
of the environment in which the firm competes (Priem & Butler, 2001). So a resource such the firm competes.
as specialized knowledge may or may not be valuable. To return to our consulting example,
the firm may have detailed and comprehensive knowledge of the auto industry. But if the
firm has no clients in that industry, such knowledge has no value.
As shown in Figure 1.2, our model of strategic management is richer and more
comprehensive than either of these two paradigms, but uses both as inputs. First, the firm
exists in a changing external world and this world will have a bearing on its strategy. This
external world has two elements, which we refer to as the product/market environment and
the financial market environment (‰Chapters 3, 4). Both are relevant. The product/market Chapters 3, 4
environment includes such characteristics as the political context (say anti-trust law) which
will influence many business units within the firm. It includes the industry environment,
which can only affect the performance of a business in that industry. Financial markets –
17
the ability of the firm to raise debt and equity – also affect strategy and performance. We
also need to clarify what unit we are talking about: the entire firm or a unit within that firm.
For example, if we are talking about the performance of a unit within a diversified firm, then
we may expect characteristics of the parent to influence the performance of the unit (Bowman
& Helfat, 2001).
What the firm elects to do in the way of strategy will also be influenced by what the
firm does well, what specialized resources and capabilities it possesses. However, strategic
management is not only about a good idea; it is also about getting that idea to work. The
strategy must be able to be implemented; if not, it must be changed. Finally, the firm estimates
likely performance resulting from the chosen strategy. If this is not satisfactory, the strategy
Chapter 12 is likely to be revised. As will be discussed in Chapter 12 (‰Chapter 12), there are a number
of performance measures which can be used for strategy assessment.
Persistence of success
The challenge for strategic management is to build organizations capable of creating and
delivering value over an extended period. This has proved to be extremely difficult. Typically,
firms seem to have their day in the sun and then decline, either absolutely or relatively as
new firms emerge in the growth sectors of the economy. Sustained success will only occur
when strategic managers are able to both manage for today and manage for tomorrow (Abell,
1999).
Managing for today: exploitation of existing resources/capabilities

Managing for today typically involves fine-tuning current operations, introducing incremental
changes with strategy staying reasonably fixed. These changes are smaller, more evolutionary;
the managerial focus is on managing complexity. Ideally, vision and values are in place, deep
in the firm, well understood and accepted by all. A key managerial concern is ensuring that
the strategy is well understood and clear performance criteria are established and met. When
managing for today, the firm’s organizational structure is assumed to have been designed
appropriately, as is the control system and performance management system.
Managing for tomorrow: exploration of new resources/capabilities

Managing for tomorrow requires different skills. To have the foresight and knowledge to
imagine how the firm will look in the future requires creating a vision of what the firm and
Chapter 6 its environment is likely to look like, a topic to which we return in Chapter 6 (‰Chapter 6).
To move towards realizing such a vision demands not only good leadership skills, but also
an understanding of what capabilities will be required and specific planning to acquire or
develop them (Ambrosini et al., 2009). This challenge will often require that we loosen up
thinking in the firm. Managers and other employees must be open to change, willing to
listen, keeping information systems open to external as well as internal inputs. Senior
managers should not become overly dependent on formal systems or their immediate staff.
Useful insights may come from suppliers, customers, universities and technical bodies, and
18
other such sources. They must seek leading indicators of change in all dimensions –
technological, socio-demographic, political, etc. The key is less trend identification than
spotting turning points and points of inflection in growth curves. The company that is
continually surprised by change is unlikely to deal with it well.
Given an uncertain future, a strategy cannot be set in concrete. It must evolve as the
world evolves. At the same time, strategy must encourage a sense of common direction.
Strategy making is an ongoing process, not something that is done periodically on a rigid
planning cycle. The firm has to continually develop new ideas, a succession of initiatives over
time. However, changes in strategy should be driven by change in circumstances, not the
passage of time.
We can link today and tomorrow by recognizing that long-term sustainability of success
depends upon to two factors:
• The extent to which the firm can exploit its existing capabilities in a given market or
industry.
• The rate at which new industry sectors emerge and the ability of the firm to alter its
scope and develop the capabilities required to compete in these new sectors.
• These two influences are depicted in Figure 1.3.
In a relatively free market, with no institutional barriers, any

Develop new opportunities/
advantage will be competed away. Other firms will copy and/or capabilities
enhance the initial competitive advantage and the rate at which this
advantage is competed away is influenced by industry structure (Bou
& Satorra, 2007). Strategic management has to ensure the invention
and development of offerings that will create value in an uncertain
future, as well as the creation of value through present offerings. If
no value is created in the short term, the firm will lose the support of
both customers and shareholders. However, if there is only a short-
term focus, then the firm will have no future.
Sustainability
Thus strategic management involves creating and managing a of success
process of ongoing change and improvement, adapting to a contin-
uously changing world.
As we noted earlier, in strategy all characteristics of the firm are
candidates for change. In the long term, nothing is fixed. Strategic
management must create an organizational architecture that encour-
ages continual re-invention alongside current operations. Strategic
management therefore involves making either incremental and/or
revolutionary changes to strategy to ensure sustained success for the
Exploit existing
firm. opportunities/capabilities
When a firm is in difficulty, it is often because its strategy and
its underlying assumptions no longer fit reality. Assumptions about
the nature and form of competition, what values customers are Figure 1.3 Persistence of success
19
Strategy in practice – Thomas Cook

Thomas Cook was the founder of the modern travel industry. His name lives on as
‘“Thomas Cook Plc”, one of the world’s leading leisure travel groups with sales of
£8.8 billion, 22.3 million customers, 31,000 employees, a fleet of 93 aircraft and
a network of over 3,400 owned and franchized travel stores and interests in 86
hotels and resort properties. It operates under five geographic segments in 21 coun-
tries’ (ThomasCook, 2007). The company’s recent history is a fascinating example
of the ongoing change and adaptation necessary for survival in a rapidly changing
world.
In common with other travel industry companies, Thomas Cook was in trouble in
the early 2000s. However, a major turnaround initiative rapidly changed the outlook
as shown in Figure 1.4.
Nor was the Thomas Cook saga yet finished. In 2001–02, the firm was acquired
by German firm C&N Touristic AG, which then changed its name to Thomas Cook
AG. In 2006, Thomas Cook AG became wholly owned by KarstadtQuelle, later
renamed Arcandor. In 2007 Thomas Cook AG firm merged with the UK group
MyTravel and was listed on the London Stock Exchange, when it became a FTSE 100
firm, with Arcandor holding a 51 per cent ownership share. In 2009, Arcandor
declared bankruptcy, but the directors of Thomas Cook announced that the bank-
ruptcy would have ‘no impact on customers and is not expected to result in any
adverse effect on any of the contractual arrangements of the Thomas Cook group’
since it operated as a stand-alone entity (Finch, 2009).
Throughout its existence, Thomas Cook has demonstrated an ability to exploit
existing capabilities, originally in rail travel, as well as develop new capabilities in
air travel, computer reservation systems and global management.
Strategy in practice – Tesco

Tesco, currently the leading UK supermarket chain, could continue to seek new
supermarket sites expand in the UK, using existing methods of operating. Or they
could change the layout within their existing stores. Both of these would be incremental
changes to the existing strategy. However, by introducing online shopping, Tesco
significantly changed its historic strategy, as it did when it chose to expand outside
the UK, where it now operates in 15 different countries. It has also added a bank,
mobile, broadband and VOIP telecommunications services and acquired a major
chain of garden centres. An even more radical change in strategy would be for them
to become a global media company such as Time Warner!
20
INDICATIVE
1999 2000 2001 2002 2003
Thomas Cook My Travel/Airtours
TUI UK First Choice
Figure 1.4 Profit before tax – Thomas Cook turnaround (Ailles, 2004)
seeking, or the factors driving success become outdated. This is why the maintenance of an
external perspective is a key element in strategic management. An early warning system is
needed to see when the existing ‘model’ is in danger of becoming inadequate. We explore
these issues in more depth in Chapter 2 (‰Chapter 2). Chapter 2
Fundamental re-invention of strategy is much more difficult in practice than in theory.
It requires innovation, creativity, and a deep understanding of the business, its customers
and how the environment is changing. Further, implementation of a new strategy may
outdate existing capabilities, requiring the firm to cannibalize existing products and threaten
existing jobs. Previously successful firms often demonstrate an inability to change; they
perceive the world though increasingly obsolete eyes. Indeed, some believe that most
innovation in an industry comes from firms outside the industry, which are not constrained
by the incumbents’ implicit assumptions and mindsets.
Regardless, it is surely better that we cannibalize our business than allow others to do
so. Yet many firms find this very difficult. They may re-invent themselves once, but then
stop. For this reason, in many industries, relatively unknown companies that create and
exploit new strategic positions have humbled once formidable companies with seemingly
unassailable positions (Markides, 1999). Nor are these innovative approaches, witnessed by
such innovators as Google and Facebook, limited to high-tech industries. Companies such
as Aldi (the German discount retailer), Ryanair (the Irish low-cost airline) and Starbucks
21
(the US coffee chain) have brought major innovations to traditional industries, enjoying
strong commercial success. We have no doubt that there will be many more examples in the
future.
In summary, to ensure sustainability of success, a firm needs a portfolio of strategy
Chapters 8, 9 initiatives: some focused on the short term, others on the longer term (‰Chapters 8, 9). The
firm has to compete in product markets, and in these markets competitive advantage is a
necessary but not sufficient condition for success. We can be successful relative to competitors,
but not create value as an entity. The challenge for strategic managers is to simultaneously
create value in the present, while setting the stage for future value creation. This goal, in
turn, poses a classic managerial dilemma: how much to invest in current businesses versus
how much to invest in new businesses (Baghai et al., 1999). We believe that in a changing
world, successful firms will be those that both create and adapt to change. They will be firms
that have, in fact, helped to change the world.
LEARNING
OBJECTIVE 4 1.3 THE CONCEPT OF THE FIRM
Recognize why firms
exist as economic As was noted earlier, a business organization or firm is one whose primary purpose is
entities and be able to
economic. Since these firms are competing with other firms providing similar goods and
describe alternate
forms of economic
services, they must organize themselves efficiently. An important determinant of firm
exchanges. efficiency is the selection of activities that it will undertake itself and those that will be
bought in from others. Which activities are best grouped under common ownership and
which are best handled by other arrangements? Should a firm employ its own accountants,
Chapter 7 or should this activity be outsourced (‰Chapter 7)?
These decisions constitute a fundamental issue in strategic management: what should
be the scope of the firm, and where should firm boundaries be drawn?
Outsourcing The question of which activities should be retained within the firm and which should
The transfer of a recurring, be pursued by other means is the content of organizational economics or the theory of the
internal value-creating
firm (Williamson, 1975). In this theory, it is generally considered that there are two archetypal
activity to an external
provider, where the forms of economic organization – the market and the hierarchy (or firm). With the market
arrangement is specified in form of economic organization, the flow of goods and services occurs across separate legal
a formal contract. entities. When transactions are handled within the firm, the economic activity is called a
hierarchy. The fundamental proposition of organizational economics is that the firm will be
more integrated (perform production activities using its own resources) when the combined
costs of production and coordination are less than the price they would pay from a supplier
together with all transaction costs (Safizadeh et al., 2008).
Market-based With a market-based system, exchanges occur between two separate and independent
exchange entities.
A system in which exchanges When Ericsson purchases electronic components from a company such as Fujitsu, the
of goods and services occur transaction occurs in the market. In this arrangement, prices are used to coordinate the flow
between two separate and of goods across separate legal entities, each of which has its own objectives. These independent
independent entities.
companies make their own decisions on what and how much to produce in response to price
and demand signals. Incentives are relatively clear. Ericsson will continue to purchase from
22
Strategy in practice – airline industry outsourcing

Whereas in the earlier days of the airline industry most operators owned their aircraft
and operated their own flight kitchens, today many lease their aircraft, which are
actually owned by leasing companies, and buy in their meals from specialized
suppliers. Some have even outsourced maintenance of their aircraft. The results of
such outsourcing may well be questioned, as the chart for the US airline industry in
Figure 1.5 suggests. We discuss outsourcing in depth later in the book.
60% Per cent of major 150,000

domestic airline
maintenance
outsourced
50% Number of 120,000

cancellations
40% 90,000
30% 60,000
’96 ’97 ’98 ’99 ’00 ’01 ’02 ’03 ’04 ’05
Figure 1.5 Airline industry outsourcing (ConsumerReports, 2007)

Copyright 2007 by Consumers Union of US, Inc. Yonkers, NY 10703-1057, a non-profit organization.
Reprinted with permission for educational purposes only. No commercial use or reproduction permitted.
www.consumerreports.org
Fujitsu provided it meets its requirements and there is therefore considerable pressure on
Fujitsu to have a deep understanding of Ericsson’s needs. In many cases these market-based
systems involve long-term and stable relationships among firms, such that they constitute a
network, as in the case of IKEA, mentioned earlier. Under a market-based system problems
may arise if there is market failure – such as a monopoly, or when the two parties do not
have access to the same information or when the transaction is one for which it is difficult
to write a contract (Roberts, 2004) Hierarchically
With a hierarchically based system of exchange, goods are produced and exchanged based exchange
between different units of the same firm, that is, transactions occur between entities under A system in which goods are
common ownership. produced and exchanged
Such arrangements may be beneficial to the firm since all individuals are employed by between different units of the
same firm, sharing common
the same firm and should possess similar objectives. There is a bargain between the obedience
ownership.
of the subordinate and the responsibility of the superior, resting on the capacity to form
23
relationships of trust to reduce conflicts of interest, where individuals act in their own
interests rather than those of the firm.
The question senior managers must resolve is when are hierarchies better than markets?
The answer is determined by four considerations: production costs, governance costs, search
costs and capabilities. Production costs can vary with each arrangement. Take an example
of software. If it is produced within the firm, staff may be less skilled than outside specialists
who have access to more sophisticated test and development equipment so that costs are
higher. On the other hand, software produced within the firm may have superior functionality,
since it has been developed specifically for an internal application.
Governance costs are the costs associated with managing transactions (Coase, 1937).
With market-based transactions these include the costs of searching for, negotiating,
monitoring and enforcing a contract with the external provider. Under conditions of high
external uncertainty it is difficult to write a contract allowing for all future possibilities,
thereby ensuring a fair return to both parties. Under these conditions we would expect
transactions to take place within the firm. Governance costs also occur when transactions
occur within the firm. These include coordination costs, costs of the bureaucracy, costs of
complexity and slow decision-making.
A final consideration affecting firm boundaries is its capabilities. Distinctive capabilities,
based on tangible and intangible firm assets, can be used to extend the firm’s scope. They
are also critical to developing a competitive advantage. The firm will want to ensure that
current and future capabilities are kept within the firm, as they are the basis of future success.
As firms become more knowledge-intensive, they must develop, protect and integrate this
knowledge to enhance competitive position.
Managerial implications
These two forms of economic exchange represent extremes, as shown in Figure 1.6. Economic
exchanges may be at one of the two extremes or they may occur through one of a wide range
of other relational forms, such as networks or alliances, long-term supplier agreements,
licensing, contract staff, franchising, equity spin-outs and so on. Managers should consider
a variety of alternatives, since they may permit a better balance between individual initiative
and structured cooperation (Day & Wendler, 1998).
The issues described above have implications for a number of strategic decisions,
including mergers and acquisitions, networks, outsourcing, strategic alliances, joint
ventures, vertical integration and relationships (Collis & Montgomery, 1998). At the same
time, decisions on firm boundaries reflect mission, capabilities and innovation. Since these
drivers are themselves in flux, decisions regarding boundaries are a dynamic process. Various
Market Network Alliance Franchise Licensing Hierarchy
Figure 1.6 Alternative forms of economic exchanges
24
Challenge of strategic management

It is suggested above that developments in communications and information
technology will make it easier for firms to form networks and alliances with partners
from anywhere in the world. In your view, does this mean the end of the mammoth
corporation, and that the future belongs to small, nimble and focused organizations
who supplement their capabilities with the capabilities of others?
purchasing exchanges have been developed which allow the firm to reduce the costs of
interacting with both customers and suppliers, permitting the firm to engage in more market-
based transactions. The development of the World Wide Web has changed the economics
of information, enabling a firm to effectively utilize a network of other firms, drawing on
the talents of many people to create products using email, file transfers, Lotus Notes and
other means to achieve real-time coordination. These firms can be geographically remote,
even in different countries. One consequence of these developments is to encourage firms
to concentrate on a small set of core capabilities, while making use of the core skills of other
firms located anywhere in the world.
1.4 DYNAMICS OF CHANGE LEARNING

OBJECTIVE 5
Change is not a new social or technological phenomenon, it has always occurred. What Argue the need for
characterizes the new century is the rapid pace and unpredictability of change, and its global continual innovation
nature. and change: nothing
is fixed; all attributes
Figure 1.7 indicates the changes in the rate of penetration of new technologies in the
of the firm are
twentieth-century US market. Notice that technologies introduced in the early part of the variable.
century, such as automobiles and electricity, not only had much slower rates of overall growth
than more recent introductions but they also had longer latencies before ‘take-off ’ occurred.
Mid-century technologies such as radio and television also had long latencies, but then grew
very quickly. But technologies introduced towards the end of the century, such as the Internet
and mobile phones, had both minimal latencies and extremely rapid growth. Clearly,
opportunities had to be realized quickly, or they might no longer be available. Developing
strategy in these circumstances, which seem likely to prevail in the twenty-first century,
cannot take place at the leisurely pace of earlier years.
Change is often considered as existing along a continuum, from incremental or
evolutionary to radical or discontinuous. Looking at Figure 1.7, for example, the rate of
growth of air travel looks like an incremental trend line. In contrast the growth of Internet
access comes much closer to a discontinuity. Other examples of incremental change would
be the ageing of the population, the addition of new product features to refrigerators and
the move to smaller families. Perhaps the most striking example of discontinuous change
was the collapse of financial markets and the consequent freezing of liquidity in 2008/09
when the survival of the world’s financial system was in jeopardy, and many banks had to
25
100
90
Electricity Telephone
80
Television Radio
70
Automobile
% of households
60
50
PC
40
Internet
30
Air Travel
20
Cell
10 phone
0
0 10 20 30 40 50 60 70 80 90 100 110 120
Years since product invented
Figure 1.7 Rates of penetration of new technologies (Cox, 2002)
be rescued by governments. Another example would be the so-called ‘Asian meltdown’ in

1997, which was not predicted by most economic analysts. In general, economic systems,
macro or micro, tend to cope well with incremental change but experience shock when
major discontinuities occur!
The pattern that characterizes many markets is periods of incremental change coupled
with radical change at various points. Such a pattern of change is referred to as a punctuated
Chapter 2 equilibrium model (‰Chapter 2). Discontinuities are typically exogenous to the firm, in
that it rarely creates them. The development of the Internet was not as a result of activities
by any of the companies in such traditional industries as airlines, entertainment or retailing,
but all have had to respond to maintain their competitive positions. Such radical changes
are disruptive and are likely to fundamentally change competitive positions within the market
as some firms adapt and others do not.
LEARNING 1.5 STRATEGIC MANAGEMENT PROCESS

OBJECTIVE 6
Apply the model of Firms undertake the development of strategy in a variety of ways: the process can be formal
strategic management or informal, intuitive or analytical. In this text we will emphasize more formal approaches.
and be aware of the But we also have to remember that even when the firm has a formal strategy process, not all
major changes driving
strategic decisions will flow from that process. The term ‘Strategy as Action’ is sometimes
the practice of
strategic manage- used to describe this more evolutionary and people-oriented view (Jarzabkowski, 2005).
ment. In addition, a company may supplement the formal processes with a ‘project’-based process
to decide upon strategy. Acquisition strategies are often conducted on a project basis, although
pre-emptive candidate screening is increasingly common.
26
Ch. 2 – Strategic management

fundamentals
Ch. 3 – External analysis: the

CONTEXT business environment
Ch. 4 – External analysis: the
(Changing environment) financial environment
Ch. 5 – Internal analysis
STRATEGY IMPLEMENTATION
(What to do) (Making it happen)
Ch. 6 – Creating future Ch. 10 – Leading

direction organizational
Ch. 7 – Business-level strategy PERFORMANCE change
Ch. 8 – Corporate-level strategy Ch. 11 – Designing
Ch. 9 – Managing innovation and organizational
the dynamic scope of
(Creating value) architecture
the firm
Ch. 12 – Measuring organizational performance

Ch. 13 – Corporate governance
Ch. 14 – Postscript
Figure 1.8 Strategic management model
Our model of the strategic management process is shown in Figure 1.8, which also
indicates which chapters cover particular aspects.
As we have noted, strategic management is about creating organizations that can continue
to generate value in a turbulent world over a sustained period of time. Such a challenge
requires a holistic process, from understanding the external and internal environment, to
developing strategy, to getting that strategy implemented, to understanding likely future
performance and whether or not this is acceptable. In a changing, even turbulent environment,
however, this process will itself need to be reviewed much more frequently, with much
higher demands for innovation and strategic change than was traditionally the case.
We now review the four main elements of our model – context, strategy, implementation
and performance.
Context
The firm exists within a changing external environment and managers have to understand
these dynamics. This environment comprises two markets: the product markets within which
the products of the firm compete for customers; and the financial markets, the markets
within which the firm competes for capital. Managers must be able to identify prospective
27
changes in these markets that are important for the firm, yet few predicted the meltdown of
2008/09. What is critical for one firm may not be for another. For banks, major changes have
resulted from improvements in communications and information processing. These have
resulted in the rise of ‘non-branch’ banking and a redefinition of banking. Which players
will perform banking functions in the future? Will it be existing banks, new Internet-based
entrants or other retailers such as supermarkets? For aluminium producers such as Hindalco
Industries of India, the key environmental issues may be energy and raw material prices,
inter-material substitution and access to financial resources. Almost all global firms are faced
with significant concerns as governments attempt to develop emission trading and carbon
pricing systems to combat human-induced climate change. Emission trading is an example
of government regulation, and it is likely that regulation will increase in future as governments
try to cope with the consequences of the global financial crisis. Managers have to ascertain
the relative importance of changes that may occur, how significant they will be, when they
may occur and their likely impact, topics that will be further developed in Chapter 3
Chapters 3, 5 (‰Chapter 3).
At the same time, managers need to understand the firm’s internal resources and capa-
bilities. There is no point in developing a strategy that cannot be executed due to limited or
non-existent resources. Chapter 5 explores the resource-based view of the firm (‰Chapter 5).
Here we take a holistic view. Strategy will be based on a combination of the resources and
capabilities of the firm and the changes occurring in the external environment, recog-
nizing that resources and capabilities are dynamic. An important element of strategy, as
we saw with Tesco and News Corporation, is the ability of the firm to generate new resources
and capabilities.
Strategy
Senior managers must decide upon vision, strategy, and the firm’s evolving business portfolio.
Vision is a picture of an ideal future state. It should provide a purpose that will challenge
and motivate staff and stretch the firm’s capabilities. As will be developed in Chapter 6, firms
also need to establish a set of values to guide the behaviour of the organization’s members
Chapters 6, 7 (‰Chapter 6). These may be both implicit and explicit, and the former are typically more
important, since they are the de facto guides of behaviour. Developing strategy also necessitates
a mission, a statement that defines the scope of the firm, thereby delineating its boundaries.
Strategy describes the way in which the firm will accomplish the vision it has established
and, as noted earlier, is the theme incorporated in a set of strategic decisions (‰Chapters 7,
8, 9). These decisions affect the long-term well-being of the organization but are made in
the present. As the great business philosopher Peter Drucker put it:
One cannot make decisions for the future. Decisions are commitments to action. And
actions are always in the present, and in the present only. But actions in the present are
also the one and only way to make the future.
(Drucker, 1995)
28
Strategy in practice – RWE

RWE, a German company, is one of the largest European power generators. The pie
chart in Figure 1.9 shows RWE’s power plant capacity by type.
RWE is the biggest emitter of carbon dioxide in Europe. It is more heavily reliant
on coal than its competitors. RWE’s emissions per kilowatt hour of electricity are
above the European average. In the third phase of the European Union’s carbon
emissions scheme, which starts in 2013, all generators will have to buy all the
permits that they need at auction. The carbon-intense position of RWE threatens to
put it at significant competitive disadvantage. RWE strategy is to reduce its
dependency on coal. Therefore, unlike many other European generating companies,
it has not curtailed its investment programme. It is planning to invest €7 billion
annually, 40 per cent of which will go into lower carbon generation. In 2009, as a
part of this strategy, RWE acquired Essent of the Netherlands for $US13.7 billion
because of its significantly lower carbon intensity relative to RWE (Crooks, 2009).
Renewable energies
Other
Coal
Nuclear
Gas
Figure 1.9 RWE pie chart
Strategy in practice – Napster and the recording industry

In deciding to attack Napster and the activity of downloading and file sharing, the
recording industry unwittingly opened up opportunities for others. Some artists seized
the opportunity to sever links with traditional recording companies, and the computer
firm Apple became the leader in selling music over the Internet.
29
Thus, we must recognize that the future does not yet exist; it remains to be created by the
actions of many, be they politicians, executives, consumers or sports stars. We should
recognize that some of the decisions we make today will shape the future of the firm. These
decisions may be taken at different levels in the firm, sometimes unwittingly or without
understanding of their longer term impact.
Implementation
Strategic management is not just about generating strategy; it is also about getting strategy
implemented. For many firms, the challenge is implementation rather than generation. In a
strategic context, all company characteristics are considered variable. Managers can change
structure, culture, products and services, regions of the world in which the firm competes;
all are, at least in theory, under the control of management.
Chapters In Chapter 10 we explore the principles of how the firm can manage change (‰Chapter
10, 11 10). Most global firms are undertaking a number of strategic decisions simultaneously, so
strategic management includes an element of project management – managing several change
programmes at the same time. Strategic managers need to decide who is involved in these
programmes, what resources are available, what staff are used, will external consultants be
utilized? Implementation also involves the design of what we call the ‘organizational
architecture’ – the organizational structure, processes and human resource approach used
by the firm. Many of these elements and their inter-relationships may constitute intangible
assets, and are discussed at length in Chapter 11 (‰Chapter 11).
Performance
Strategic managers are responsible for the performance of the firm, in both financial and
non-financial terms. Financial markets expect a satisfactory return, as do other stakeholders
such as customers. Thus part of the strategic management challenge is to ensure that the
firm has a performance culture. Chapter 12 explores the issues involved in measuring the
Chapters performance of the firm (‰Chapter 12). We discuss a range of possible measures, financial
12, 13 and non-financial. The latter are often leading indicators of financial performance.
We must also appreciate that performance acts as a feedback element, reflecting the
iterative nature of strategic management. The firm’s performance will influence the vision,
etc. that can be adopted. So strategic management is not a linear process; instead, it is an
iterative, evolving and learning process.
In Chapter 13 we explore corporate governance, which has become a critical issue in
recent years (‰Chapter 13). Corporate collapses, deceptive accounting, auditing failures and
unethical behaviour by managers have all contributed to an intense public debate. Managerial
salaries, ‘perks’ and share options have likewise caused concern, and strategic managers need
a good understanding of governance, the role of the board, and how practices vary in
different countries of the world.
30

Some business commentators have suggested that strategy development, while
important, is subservient to strategy execution, actually getting change accomplished
within the firm, getting the ‘rubber to hit the road’. Does the relative importance of
each of these depend on the industries in which the firm competes, such as the rate
of change?
1.6 WHO ‘DOES’ STRATEGY?
There is no doubt that the primary responsibility for corporate strategy falls on the CEO,
top management, and, ultimately, the board of directors (‰Chapters 11, 13). Nonetheless, Chapters
in any successful firm many others are involved. Managers of major business units often have 11, 13
a role, while there may be a staff group supporting the strategic planning process. However,
developing strategy is a line responsibility, and cannot be delegated to a staff group.
CEOs must both manage today and be the architect of change for tomorrow, requiring
that they be both inductive and deductive, intuitive and analytical, incremental and
revolutionary. However, it is naïve to believe that the fountain of all wisdom is the CEO, for
new strategic ideas can come from anywhere within the firm. Hence, good CEOs recognize
they can neither do all the strategy work nor implement strategy without the support
of others. They actively encourage strategic thinking throughout the firm, leveraging their
personal time and effort by working through people, structure and processes. Of course, the
CEO carries primary responsibility for identifying where and how the company must change,
but to transform a firm, the CEO needs committed and courageous entrepreneurs.
The task of the CEO is extremely difficult. Strategy is more than an idea, it is also about
making that idea work. The CEO must perform in many roles – as change agent, com-
municator and public face of the company, decider, facilitator, teacher and mentor, as well
as learner – requiring an almost holographic capability. Garten (Garten, 2001) suggests that
the major factors complicating CEOs jobs are:
• Conflicting demands from financial markets and the need for long-term investments
in developing new capabilities and a talented workforce.
• Inability to predict rapidly changing geopolitical and technological developments.
• Emergence of new competition and markets which do not yet exist, yet require huge
investments if a sustainable position is to be attained.
• The fact that the CEO increasingly has to play many roles.
We describe our own views on the major factors affecting strategy development in the next
section of this chapter.
31
1.7 CHANGES AFFECTING STRATEGIC MANAGEMENT
Figure 1.10 summarizes major influences affecting strategic management. Although the
diagram suggests these influences are independent, they are all inter dependent. Many of the
changes we briefly review in this section recur throughout the book, and will be explored in
more detail later.
Globalization
Globalization and increased competition in product, capital and labour markets have been
long-term trends since World War II. Most of us are personally familiar with product-market
competition as we select from among domestically produced products and imports, between
foreign and domestic brands. However, as businesses become more knowledge-intensive, it
is also clear that competition for talent has erupted among countries as well as companies.
Top talent managers and staff are now much more mobile, changing companies, industries
and countries.
Corporate social
responsibility
Deregulation and
Globalization
privatization
Strategic
management
practice
Increased Knowledge
competition intensity
Technological
change
Figure 1.10 Changes affecting strategic management
32
Globalization in practice – emerging markets

Hindustan Lever developed a shampoo for the Indian market that was sold in single
sachets at the rupee equivalent of 2 America cents (a large proportion of the Indian
population cannot afford to buy larger sizes). Despite the low selling price, the
shampoo was a profitable success for the company.
GE is moving billions of dollars in research funds away from developing high-
specification medical equipment towards lower cost technology. Over the next six
years, GE Healthcare will devote half of its $1 billion R&D budget towards low-cost
products designed for use in emerging markets and remote areas, up from only 15
per cent today, John Rice, GE’s vice-president, said. The change in strategy comes
after a sharp downturn in health spending in the US and a profound change in the
political mood. Mr Rice said: ‘We cannot continue to live in a world where healthcare
costs go up 10 per cent per year. President Obama understands that.’ GE revealed
last month that profits from selling medical equipment had fallen by more than a fifth
in the first quarter after a 9 per cent dip in revenue (Mortished, 2009).
Following the 2008 global banking crisis, many firms faced liquidity problems, finding
it extremely difficult to raise new debt (‰Chapter 4). As a result, firms were competing for Chapter 4
funding globally. Large issues of government debt were swamping global credit markets, and
most firms were seeking to de-leverage their financial structures by becoming less debt-
dependent. At the same time, new financial instruments for managing interest and exchange
rate risk (generally referred to as derivatives) have been developed, and there is therefore
added complexity to financial decisions. National financial markets are now linked, and
trading occurs 24 hours per day.
There is also an international market for corporate control, with increasing numbers of
cross-border mergers and acquisitions. Institutional investors own some 60 per cent of shares
outstanding, with large pools of funds from insurance companies and pension funds. These
investors have become more assertive in pressuring for performance, which in turn has
driven the market for corporate control (Jensen, 1990).
The last part of the twentieth century also witnessed a coming of age for many emerging
markets. The majority of the world’s population, about six billion people, lives in such
markets. In the past, many multinationals sold products designed for the highly industrialized
and developed Western economies into these markets. Today, however, there is much more
widespread recognition that their needs are different, and they are increasingly seen as
prospective customers despite relatively low-income levels.
Increased competition
Most firms are facing increased competition in all markets, product, labour and capital.
Rapidly escalating competition based on price, quality and innovation characterizes many
markets, emphasizing the need for continual cost reductions to stay competitive. Squeezed
33
net margins and shortened product life cycles underline the need to innovate. Firms must
develop new competitive advantages and build required capabilities. They also have to cope
with increasingly unpredictable discontinuities, meaning greater emphasis on flexibility, as
well as developing a vision that balances short-term performance and longer term
requirements. Increased competition means successful strategies will have shorter lives. New
strategies must be invented, even if they destroy the validity of older strategies.
Industry The blurring of traditional industry boundaries has also increased competition. As a
A group of firms producing result of deregulation and technological change industries such as telecommunications,
essentially the same product media and computing are becoming hard to distinguish. Indicative of the change is talk of
using essentially the same the TCM (Telecommunications/Computing/Media) industry. Other new words, such as
production technology.
cosmeceuticals, edutainment and nutraceuticals, indicate that such changes are by no means
restricted to a few industries, but are more widespread. Such changes make it increasingly
difficult to identify competitors, suggesting that many firms will face a turbulent and less
predictable future.
The net result of many of the above changes is that industry structures have themselves
become variable. Increased outsourcing has locked many companies into cooperating
networks, while the growth of contract manufacturing cuts across traditional industry
boundaries. Information technology has both disintermediated some industries (reduced
the need for intermediaries such as travel agents), and also created new intermediaries such
Chapter 3 as Amazon and Yahoo! (‰Chapter 3).
Further, some companies are engineering their own dissolution through spin-offs, at
the same time that others are merging and acquiring. The term ‘structural competition’ has
been coined to alert executives to the fact that if they are not playing an active role in creating
structural change in their industries, others are likely to do it for them!
Technological change
Technology has had the most important impact on the conduct of management of any
change in the twentieth century. Though by no means restricted to information technology,
from the mid-twentieth century onwards, the computer and associated telecommunications
New competition in practice – YouTube

On 19 May 2010, its fifth birthday, YouTube, the video site owned by Google,
announced that more than two billion videos are being watched on its website every
day (DNA, 2010). It is about ten times more popular than its nearest competitor. But
Hunter Walk still thinks of it as an underdog.
For Mr Walk, director of product development at YouTube, the competition is not
other websites: it is TV.
‘Our average user spends 15 minutes a day on the site,’ he said. ‘They spend
about five hours in front of the television. People say, “YouTube is so big,” but I really
see that we have a ways to go’ (Helft, 2009).
34
Restructuring in practice
Typical of the many industries that have
undergone enormous restructuring in
recent years are banking, insurance,
aluminium, steel, pharmaceuticals,
defence and aerospace, airlines and
automobiles.
technologies began to have a profound impact. Companies implemented the automation of

their accounts, and then began linking with suppliers using EDI. In industries as diverse as
airlines (American Airlines Sabre reservations system, later divested), hospital supplies
(American Hospital Supply/Baxter Healthcare’s ASAP reorder terminals), drug distribution
(McKesson Robbins Economost) and package shipping (Fedex’s tracking system), mastering
the application of information technology to solving customer problems led firms to strong,
if not dominant positions in their industries. New brands proliferated: AOL, Yahoo!, Amazon,
MySpace, Facebook, eBay, Twitter, YouTube, Google and more, almost without exception
started by entrepreneurs, usually young, despite the presence of such media giants as News
Corporation, Time-Warner, Viacom, Bertelsmann and others.
Today, of course, we are all familiar with the Web, a worldwide information utility that
is revolutionizing the relationship between firms, their customers and their suppliers. The
Internet permits customers to access company manufacturing operations to track order
progress, and enables a two-way dialogue with customers. It increasingly allows co-design
of products, as part of a move to what is now called mass customization. The Internet allows
a person to ‘work’ in London while ‘living’ elsewhere. With its 24-hour access, virtually
infinite capacity and open standards, the Internet has reduced the cost of search for buyers
and sellers, with implications for firm boundaries. Transportation costs of such digital
products as music and many financial products are dramatically reduced, creating potential
for a major new distribution channel. Firms increasingly work together to build networks of
suppliers, distributors and partners to create customer value, in turn leading to more
outsourcing.
Dramatic reductions in the cost of computing power and storage, increasing bandwidth
and lowered telecommunications costs combine to create enormously powerful forces for
change. The scramble of media companies to position themselves for the age of high-speed
real-time downloading of audio and video products is indicative of the change that awaits
all who conduct business in products and services that can be digitized.
All industries have been affected by the information revolution to a greater or lesser
extent. The widespread availability of information technology has had and will continue to
35
have dramatic effects on which activities are performed inside and outside the firm, for
transaction costs will be changed. Similarly, the ease with which price information can be
obtained has already increased the competitiveness of product markets. Indeed, some
commentators alleged that the low inflation experienced at the turn of the century was a
direct result of these changes. One industry affected by these developments is publishing,
with consumers from around the world being able to buy books from Amazon and from
non-traditional sources such as India.
Knowledge intensity
Drucker and others describe advanced economies as ‘knowledge’ economies, since they are
becoming less materials and energy intensive all the time (Drucker, 1992). Traditional factors
of production – capital and skilled labour – are no longer the main determinants of the
Knowledge intensity power of an economy. Now economic potential is increasingly linked to the ability to control
The extent to which a product and manipulate information.
or activity is based on Knowledge intensity is increasing for most products. Direct labour is now a small
knowledge. proportion of total costs for manufactured products, and the market value of more and more
firms is becoming independent of the tangible assets on the balance sheet.
With increasing knowledge intensity, there is a commensurate shift in recognizing the
Chapter 5 relative importance of human capital versus traditional fixed capital (‰Chapter 5). The
economics of knowledge products are different. Knowledge-based products generally show
increasing returns to scale: the more widely they are used the more valuable they become
Increasing returns to a user.
to scale Social networking sites such as Facebook grow in value and importance with the number
When the benefit of a of users. The value of Windows is enhanced by the fact that it has many users, resulting in
product or service to an more people using it to write applications software programs, which again enhances its value.
individual user increases as The iPad’s enthusiastic acceptance was driven by the number of application programs available
the total number of users
to its users.
of that product or service
increases. With such products there can be substantial benefits to early market entry, establishing
the product as an industry standard. It may also be beneficial to share the product with
Corporate social others, forming alliances early on. We may not want to ‘hoard’ the product but get wide
responsibility application from others, including possible competitors. Note this is also a high-risk strategy,
When the firm takes requiring major investment in R&D to develop and launch such innovations.
responsibility for the impact
of its actions on the
environment, consumers, Corporate social responsibility and sustainability
employees and communities.
There has also been a major change in corporate behaviour with respect to corporate social
responsibility (CSR), the responsibility of business towards society (Pedersen, 2010), a topic
Chapter 13 we shall return to in Chapter 13 (‰Chapter 13).
Some firms, such as National Australia Bank, have published detailed reports on their
CSR commitments and performance (NAB, 2009), obviously sharing Heal’s view that such
behaviour has a favourable impact on a variety of relevant audiences (Heal, 2008).
36
Concerns over global warming have led many companies to examine their energy usage,
for example, and in turn to implement programmes to reduce carbon emissions. Some
airlines now ask customers, when they book their tickets, whether they would like to pay
extra for carbon offset schemes to ameliorate the carbon emissions associated with their
flights. Energy companies are particularly sensitive on the emission issue. The French oil
company Total, for example, has begun to make progress in reducing carbon emissions. Total
has a broad range of CSR activities, and has committed itself to a code of ethics and integrity,
employee health and safety, training and education, anti-discrimination, improving water
quality, biomass and solar technologies and a wide range of other activities (Total, 2008).
Governments are also taking a variety of approaches to encourage better CSR
performance. The British Upper House, for example, modified a climate change bill so as to
mandate the inclusion of greenhouse gas emissions data in company annual reports (Dickson,
2008). Indeed, the general trend is to hold firms increasingly accountable for what were once
regarded as ‘externalities’ (Pigou, 1962). These costs, traditionally borne by society as a
whole, must now be covered by the firm. Recycling of containers is now encouraged by
deposit legislation in some countries. In Europe, manufacturers of appliances and automobiles
must now code components to facilitate recycling and carry at least some of the costs
associated with this.
The sentiment of public opinion on these issues has become an important consideration
for firms, for those failing in their CSR performance attract negative publicity, as the ‘concept’
in practice below indicates.
Social responsibility in practice – emissions reporting

The UK magazine Marketing recently reported that Google, Burger King and the AA
were among 250 big name brands that failed to disclose carbon emissions
performance data. This is one of the key findings from Brand Emissions, the first
annual survey of the carbon performance of 600 of the UK’s biggest brands, which
was released today. Other brands that failed to report included Channel 4, Dyson
and Facebook.
At the other end of the scale were ‘Brand Emissions Leaders’, such as T-Mobile,
BMW, British Airways, Abbey and Dell.
The leaders, who also include all of the ‘big four’ supermarkets and Marks &
Spencer, were awarded the status for delivering carbon emissions reductions or
being top ranked on emissions intensity in their sector, having emissions targets
above the UK government’s climate change committee and reporting carbon emissions
in compliance with accepted international standards.
In other findings McDonald’s, Harvey Nichols and Porsche were revealed as
having no public emission reduction targets. Of those that reported their emissions,
122 (54 per cent), including Barclays, Sky and Ebay, increased them in 2008
(Charles, 2009).
37
Community responsibility in practice – Thomas Cook

We firmly believe we should play an active part in the communities where most of
our people live and work. Thomas Cook has a tradition of encouraging charitable
donations, and of supporting voluntary activity and fundraising by employees.
In May 2008, a pioneering new children’s hospital opened in London, thanks to
ongoing fundraising by Thomas Cook employees and customers. The £2.3m Thomas
Cook Children’s Critical Care Centre at Kings College Hospital is the first of its kind
in the UK, housing both Paediatric Intensive Care and Paediatric High Dependency
units.
(ThomasCook, 2009)
Of course, initial government attempts to encourage firms to change behaviour have not
always gone smoothly. Australia, for example, has had to retract its proposed carbon trading
scheme for the time being, while steel giant Arcelor-Mittal has received an estimated
£1 billion bonus from the EU for carbon credits that it will not be using (Leake & Pancevski,
2009).
Overall, however, most firms have changed behaviour in a positive direction with respect
to their CSR activities. Many, for example, have increased their emphasis on charitable
activities. Thomas Cook plc, mentioned earlier in the chapter, has a long-standing commit-
ment to such endeavours, covering cancer care, child care and health.
Deregulation and privatization

Privatization Deregulation and privatization has occurred in many industries around the world, as
The transfer or selling off of governments have concluded that they do not do a particularly good job of running a
state-owned firms and business, or that regulation has impeded consumer welfare.
organizations to private Industries such as electricity, gas, water supply, banking and finance, telecommunications,
ownership.
airlines, railroads and trucking have all witnessed significant change in many different
countries. In virtually every case there has been an increase in competition in these industries,
together with increased rates of innovation not only in the core products and services, but
also in such areas as pricing and customer service. Of course, after the global financial crisis
of 2008/09, new constraints were placed on the financial industry, but no one has suggested
re-regulating the many other industries that were freed from excessive regulation.
These changes have dramatically affected the pecking order in many industries, but
have also introduced many new players, who do not use the same ‘rules’. They have required
commensurate changes in supervision, for few governments are prepared to privatize
monopolies without safeguards for consumer welfare. Dealing with these arrangements has
often created a new arena of competition, with some firms notably more adept in coping
with the regulatory framework than others.
38

During the financial crisis of 2008/09 the role of governments in many countries
expanded considerably as they attempted to rescue their financial system and prevent
its collapse. Do you think that this means a much greater role for governments in
future, with governments adopting a more interventionist approach?
1.8 SUMMARY
The foregoing discussion is replete with implications for the practice of strategic management.
It is imperative that the firm adds value for shareholders and other stakeholders, but a new
managerial mindset will be required. Good strategic management will require much more
flexibility and creativity. As firms are becoming more knowledge-intensive, so the management
of intellectual (human) capital becomes critical. Managers must be skilled at developing
commitment – even passion – among their increasingly diverse workforce, for if human
capital is the key to future success, then marshalling and managing these capabilities to their
fullest potential will be essential.
New skills will be required to cope with the changing world. Creative strategic thinking
and learning will be central to developing new business strategies in a world in which firm
resources and capabilities are not fixed but must be continually developed.
Further, the very boundaries of firms and industries will be vague and changing.
Questions such as how these boundaries should evolve, which activities should the firm
engage in, which should be purchased from the market, what are the core activities of the
firm, what it does better than its competitors, will be ongoing challenges to managers. New
styles of organizations, emphasizing learning, anticipation and quick response, will
predominate. Processes, teamwork and external networks will be constantly reviewed.
An uncertain environment makes forecasting more difficult, increasing the need for
flexibility. The competitive landscape is complex and dynamic, and this too requires flexibility
as well as speed and innovation. Managers need to manage both stability and change: to
manage for the present and invest in the future at the same time.
Above all, we should recognize that strategic management is a process, and that this
process must incorporate ideas on motivation, structure, processes, incentives and leadership.
To neglect the human side of the enterprise and to focus solely on analytic tools is a crucial
mistake, given the prospective scenarios of the twenty-first century.
39
VIEW FROM THE TOP

ELECTROLUX
Hit by the worldwide recession, Electrolux results for 2008 were very disappointing.
In the words of Hans Stråberg, President and Chief Executive Officer, ‘We had
completed a very tough year and expected a continued challenging 2009. We had
just taken comprehensive measures to adapt our costs to the weak market demand
through decisions to decrease the number of employees. The difficult market was also
the reason the AGM decided not to distribute any dividend for 2008 to our
shareholders.’
Nonetheless, Stråberg was able to report that 2009 was ‘one of the best ever for
Electrolux . . . all our operations have improved their earnings and maintained their
sales at the same time as demand has dramatically declined.’ This improvement in
earnings happened despite the fact that in 2009 the North American market for core
appliances declined by 10 per cent and Europe by 7 per cent. Indeed, Stråberg
pointed out that the North American market had lost a quarter of its size since its
2006 peak while Europe was down 15 per cent since 2007.
How could Electrolux do so well in an environment that can be described as very
challenging, with increased competition at both the top end and the bottom end of
the market (Knudsen, 2006)? Stråberg’s answer was simple: ‘Our results show we
have the right strategy . . . the primary explanation for the strong development in
2009 is that we succeeded in areas that are strategically important for Electrolux: new
products, strong brands and cost efficiencies.’ He explained that a strong product
offering of more advanced and expensive products improved the mix. These innovative
products, combined with investments in the Electrolux brand and cost efficiencies,
paid off. He added: ‘after many years of continuously declining prices, we managed
to increase prices in Europe at the beginning of 2009, at the same time as we main-
tained our price position in the American market. There are many factors, both coinci-
dental and structural, that have contributed to this positive development, but it is
fundamentally crucial to have a strong brand to successfully implement price increases.’
Stråberg concluded by saying, ‘the result for 2009 is a proof that our strategy to
increase the pace of new product offers, invest in marketing and implement efficiencies
in our production is working even in an economic downturn. In 2010, we will further
strengthen the Electrolux brand position, which will lead to increased marketing
investments. We will continue to develop innovative products that consumers prefer
and are willing to pay higher prices for.
‘We still have more to do before we reach our target of an average operating
margin of 6 per cent over one business cycle, and the very strong cash flow for 2009
has provided us with a balance sheet that gives us opportunities to utilize future
business opportunities.’
The Electrolux example dramatically illustrates the power of strategy in determining
superior company performance. Stråberg demonstrated an understanding that success
40
depends not on one factor, but many. As CEO, he has demonstrated the ability to
both manage for today and for tomorrow. Reducing the number of employees or not
paying a dividend are not easy decisions. But decisions such as these are often
essential to maintain current financial viability. At the same time he is managing for
the future, continuing to invest in intangible assets such as brand equity and
strengthening R&D and new product development. Due to his vision and leadership
in strategy development and implementation, Electrolux seems well placed to succeed
in the future.
Sources: Electrolux Annual Reports, 2008, 2009 (Electrolux, 2010)
MTP LIMITED
Ravi Shastri, the CEO of MTP Ltd, a small Irish firm, was contemplating the future of his firm and what
strategy the firm should adopt. Ravi, together with two other partners, had founded MTP in Dublin in
2006, and revenue had grown to reach about €4 million in 2009. The future held promise, despite the
financial turbulence of the past few years, but here were some difficult decisions to be made. Ravi had
studied information technology at the Indian Institute of Technology in Bombay and then graduated with
an MBA, majoring in marketing and information technology at the Smurfit Graduate Business School at
University College Dublin. Following graduation, he then worked for ten years in the IT industry with
Oracle and in logistics with TNT (Ireland). While with TNT he became aware of the need for accurate
and timely temperature control in storage and transport to ensure chilled and frozen products did not
suffer from deterioration.
Supermarkets were concerned that such chilled and frozen products arrived at their outlets in good
condition, and this was an important element in the choice of a supermarket by consumers. Food
regulators were also concerned. They wanted a complete history of the product, including transport,
both to prevent any outbreak of disease and to provide a trail if disease did break out.
In conjunction with two friends from Dublin, Ravi developed an inexpensive system which enabled
this to be done. When the system was installed in a transport vehicle, all data could be transmitted to
a logistics centre, included data on the location of the vehicle via a GPS system, which aided in fleet
management.
After developing and testing a prototype, partly with the assistance of TNT, Ravi and his two partners
MINI-CASE
launched the firm in 2006. Initially they concentrated their efforts on food distributors, firms responsible
for transporting fresh, chilled and frozen foods in Ireland, providing a temperature record which was
valued by supermarkets and other retailers. With some funding from a local bank, in the form of a
personal loan, MTP recruited several staff responsible for sales and marketing and for technical develop-
ment. Their first staff member in sales and marketing, Sally Hill, had worked for a large Irish supermarket
chain, and was very familiar with the industry. Part of the MTP’s business strategy was to develop a ‘pull’
strategy, whereby supermarkets applied pressure on logistics firms to provide good data on temperature
control, which the supermarket in turn could use in discussions with various food regulators.
41
As they continued to grow in Ireland, Ravi was aware that there were opportunities to expand in the
wider EU, but thought that any decision on these could be delayed until they had reached saturation in
the Irish market. The necessity to reach a decision on this was heightened when Sally showed Ravi an
article in a major trade journal. The article reported that a major American firm, US Logistics, was
developing a similar system and undertaking field tests in the US, and that they expected to launch
globally within two years. Sally was very strong in her view that MTP had to enter the major EU countries
prior to this; otherwise they would be struggling to catch up with US Logistics. While Ravi could see the
logic in Sally’s argument, he was concerned about the funding – where would this come from? While
MTP was still not cash positive, it hoped to be so in two years’ time, when it would be easier to raise
additional capital.
As Ravi spent the next day thinking about the possibilities, fate intervened. He received a phone call
from Loire Systems, a small French consulting company that specialized in logistics, but with no
experience with temperature monitoring. Loire had become familiar with MTP, and was interested in
exploring a joint venture with them in Europe. Taking advantage of some cheap airfares, Ravi decided
to fly to Lyons to discuss a possible arrangement with Henri Vacroux, the CEO of Loire. They had a
successful discussion, basically explaining to each other the details of their respective firms, how they
could possibly cooperate in France, Germany and Italy, and what each would expect out of the joint
venture. Essentially MTP would provide technical support, requiring two to three staff members to be
located in Lyons, while Loire would be responsible for sales and marketing. However, there had not been
any detailed discussions on finances.
Ravi was in a very positive mood for his flight back to Dublin. However, this did not last for very long.
At a lay-over at De Gaulle airport, he ran into a classmate of his from UCD, Ned O’Reilly. After some
polite chit-chat, Ravi told Ned what he had been discussing in Lyons. After listening for a while, Ned
really took the floor. Ned wanted to know how much Ravi and his colleagues really knew about the
continental European market, who were the major customers and retailers, where they were located,
what were the regulations governing them? Did these vary from country to country? He then asked Ravi
whether any of his team had any knowledge of Loire and what experience they had in managing joint
ventures – to which Ravi had to reply in the negative. As his flight was being called, Ravi received a
call on his mobile phone from Sally – US Logistics had put out a press release indicating that they had
brought forward their plans to enter the EU market, including Ireland. They now expected to enter within
the next six months.
QUESTIONS
1 If you were Ravi, what would be your vision for MTP?

2 Should MTP attempt a strategic alliance, or should they instead concentrate on the Irish market?
3 How would such a European venture be funded?
4 What new skills and capabilities would be required in the firm should they proceed with the joint
venture?
5 Would Ravi be better off to approach US Logistics with an offer to sell the business to them?
42
REVIEW QUESTIONS
1 Identify the strategic decisions taken by a major firm with which you are familiar over the last
five years.
2 Compare and contrast the strategies of two firms from the same sector that you are familiar with. What are
the key differences? What was the impact of these differences on the performance of the firms?
3 Comment on the suggestion that management makes no difference to the economic performance of a firm.
4 Provide examples of ‘strategies for today’ and ‘strategies for tomorrow’ for a major firm with which you
are familiar.
5 What are the trends that could influence a firm to adopt a more ‘market-based’ form of economic
exchange?
6 Show how the strategic management concepts of context, strategy and firm characteristics have led to
superior economic performance for a global firm with which you are familiar.
7 Anthony Habgood, former CEO and Executive Chairman of Bunzl, a UK FTSE 100 company, defined
strategy as ‘fundamentally I believe that strategy is about “beating” the competition. It means getting
yourself into a position where you are fundamentally ahead. You know that you are winning if you are
gaining market share from your competitors whilst achieving better returns. If you can succeed in doing
that, you truly have some kind of competitive advantage. Strategy is also about getting into the right market
segments – there are no long-term benefits in beating a competitor in a dying market!’
In the text, we defined strategy as ‘the common theme underlying a set of strategic decisions’.
Which of these competing views do you find the most convincing? Why? What do you see as the limitations
of each?
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45
References
1 1. Managing strategically
Abell, D. F. (1999) Competing today while preparing for

tomorrow. Sloan Management Review, 40(3), 73–82.
Ailles, I. (2004) Revolutionising performance through

co-sourcing and transformation. Paper presented at the
OutsourceWorld.
www.outsource-world.com/london/conferenceprog_2004.htm.
Ambrosini, V., Bowman, C. & Collier, N. (2009) Dynamic

capabilities: An exploration of how firms renew their
resource base. British Journal of Management, 20, S9–S24.
Baghai, M., Coley, S. & White, D. (1999) The Alchemy of

Growth. London: Orion.
Baraldi, E. (2008) Strategy in industrial networks:

Experiences from IKEA. California Management Review, 50(4),
99–126.
Barney, J. B. (1991) Firm resources and sustained

competitive advantage. Journal of Management, Greenwich,
17(1), 99–120.
Bou, J. C. & Satorra, A. (2007) The persistence of

abnormal returns at industry and firm levels: Evidence from
Spain. Strategic Management Journal, 28(7), 707–722.
1 Identify the strategic decisions taken by a major firm

with which you are familiar over the last five years.
2 Compare and contrast the strategies of two firms from the

same sector that you are familiar with. What are the key
differences? What was the impact of these differences on
the performance of the firms?
3 Comment on the suggestion that management makes no

difference to the economic performance of a firm.
4 Provide examples of ‘strategies for today’ and

‘strategies for tomorrow’ for a major firm with which you
are familiar.
5 What are the trends that could influence a firm to adopt a

more ‘market-based’ form of economic exchange?
6 Show how the strategic management concepts of context,

strategy and firm characteristics have led to superior
economic performance for a global firm with which you are
familiar.
7 Anthony Habgood, former CEO and Executive Chairman of

Bunzl, a UK FTSE 100 company, defined strategy as
‘fundamentally I believe that strategy is about “beating”
the competition. It means getting yourself into a position
where you are fundamentally ahead. You know that you are
winning if you are gaining market share from your
competitors whilst achieving better returns. If you can
succeed in doing that, you truly have some kind of
competitive advantage. Strategy is also about getting into
the right market segments – there are no long-term benefits
in beating a competitor in a dying market!’ In the text, we
defined strategy as ‘the common theme underlying a set of
strategic decisions’. Which of these competing views do you
find the most convincing? Why? What do you see as the
limitations of each?
REVIEW QUESTIONS Bowman, E. H. & Helfat, C. E. (2001) Does

corporate strategy matter? Strategic Management Journal,
22(1), 1–23. Bryan, L. L. & Farrell, D. (2009) Leading
through uncertainty. Mckinsey Quarterly, (1), 24–42. Caves,
R. E. (1998) Industrial organisation and new findings on
the turnover and mobility of firms. Journal of Economic
Literature, 36(4), 1947–1983. Chandler, A. D. (1962)
Strategy and Structure: Chapters in the History of the
American Industrial Enterprise. Cambridge, MA: MIT Press.
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For a range of further resources supporting this chapter,

please visit the companion website

2 2. Strategic management fundamentals
1 Select a firm with which you are familiar. Describe the

strategic decisions made by the firm, its
strategy and the way that strategy has been managed over
the last five years. Has the performance
of the firm been satisfactory?
2 Describe the differences between an incremental strategy

and a revolutionary strategy, and the circumstances
when each may be used.
3 Select a firm with which you are familiar. Provide

examples of incremental and revolutionary strategies
adopted by the firm. Comment on the result achieved with

each.
4 Select a firm with which you are familiar and describe its
business model. Can you develop an alternative
business model for this firm?
5 Specify what you would regard as the strategic time

horizon for a national retail chain, a global resources
firm and a management consulting firm. What causes the

differences?
6 What is a stakeholder? Can a firm satisfy all stakeholders

simultaneously or does it have to be selective?
REVIEW QUESTIONS
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3 Give an example of a firm that appears to have failed to

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5 For a firm of your choice, carry out a full external

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3 How do leverage (gearing) and the contextual environment

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4 The return on government securities is generally assumed

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5 What are the limitations of the capital asset pricing

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6 Identify a firm which has had to dramatically modify its

strategy due to pressure from financial markets and explain
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7 Explain the value of derivatives in risk management.
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6 6. Creating future direction
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Table 6.4 Review question 7
Company Mission statement Source
Shimano To promote health and happiness through the

http://www.shimano.com/publish/content/ enjoyment of nature
and the world around us
global_corp/en/us/index/about_shimano/
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Sony Ericsson To establish Sony Ericsson as the most

attractive http://www.sonyericsson.com/cws/ and innovative
brand in the mobile handset corporate/common/searchresult
industry. We want to make things happen, to create the
spark between people, and to make Sony Ericsson open to
everyone. Our brand, and what it stands for, makes great
things happen in people’s lives
CEMEX To serve the global building needs of our

http://www.cemex.com/home/this-is-cemex customers and
build value for our stakeholders by becoming the world's
most efficient and profitable building materials company
Danone To bring health through food and beverages

http://www.danone.co.uk/ to a maximum number of people
Indesit To be the European leader, producing

http://www.indesitcompany.com technological solutions
compatible with the environment, to create quality of time
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ourpurpose/?WT.LHNAV=Our_purpose.


7 7. Business-level strategy
Abell, D. F. (1999) Competing today while preparing for

tomorrow. Sloan Management Review, 40(3), 73–82.
Ansoff, H. I. (1965) Corporate Strategy. New York:

McGraw-Hill.
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Saddle River, NJ: FT Press.
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Aesthetics and ephemerality: Observing and preserving the
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BrandDirectory (2010) Brands by brand value, 2010.

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the 21st Century. Upper Saddle River, NJ: Prentice Hall.
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21st Century. New York: Wessex Publishing.
Caputo, A. C. & Palumbo, M. (2005) Manufacturing

re-insourcing in the textile industry. Industrial
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Cascio, W. F. (2006) The high cost of low wages. Harvard

Business Review, (December), 23.
CGI (2008) CGI announces 5-year contract with Daimler

Financial Services. Retrieved 1 May 2008.
www.cgi.com/web/en/overview.htm.
Chakravarthy, B. & Lorange, P. (2008) Profit or Growth?:

Why you Don’t Have to Choose. Upper Saddle River, NJ:
Wharton School Publisher.
Chandra, C. & Ali, K. (2004) Mass Customization. New York:

Kluwer Academic.
Chocri (2010) Home page. www.createmychocolate.com/.
1 Select a global firm with which you are familiar. Provide

brief examples of strategies at the level of a business
unit implemented by this firm over the last five years.
2 Which industries do you believe face the greatest threat
of disintermediation by online Internet-based competition?
3 Give some examples of industries in which economies of

scale are changing. In these industries, are scale
economies getting larger or smaller? What are the
implications for firms in these industries?
4 Discuss the proposition that, with increasing competition

and knowledge intensity, outsourcing will become more
common.
5 Give examples of business units within global firms that

in your view are following a cost leadership strategy.
6 Do you believe that, in the future, combination

strategies – a combination of cost leadership and
differentiation – will become more important?
7 Discuss the proposition that, with intense levels of

competition, innovation is the only sustainable basis for
competitive advantage.
REVIEW QUESTIONS Christen, M. (1998) Does it pay to be a

pioneer? Financial Times, 19 October, p. 1. Christensen, C.
M. (2001) The past and future of competitive advantage.
Sloan Management Review, 42(2), 105–109. Collis, D. J. &
Rukstad, M. G. (2008) Can you say what your strategy is?
Harvard Business Review, (April), 82–90. Compal (2010)
About Compal. www.compal.com/index_En.htm. Crawford, P.,
Johnsen, K., Robb, J. & Sidebottom, P. (1999) World power
and light. McKinsey Quarterly, (1), 123–132. Díez-Vial, I.
(2007) Explaining vertical integration strategies: Market
power, transactional attributes and capabilities. Journal
of Management Studies, 44(6), 1017–1040. Dombey, D. (2002)
Low cost airlines. Financial Times, 12 December, p. 13.
EGO3D (2010) Home page. www.ego-3d.de/en/. Fernandez, Z. &
Usero, B. (2007) The erosion of pioneer advantage in the
European mobile telecommunications industry. Service
Business, (1), 195–210. FierceBiotech (2010) The speciality
pharma market outlook.
Kumar, N. (2006) Strategies to fight low-cost rivals.

Harvard Business Review, (December), 104–112.
Levitt, T. (1974) Managing for Business Growth. New York:

McGraw-Hill.
Lowe, K. B. (1998) Downsizing and firm performance: Panacea

or paradise lost? Academy of Management Executive, 12(4),
130–131.
Macmillan, I. C. & Selden, L. (2008) The incumbent’s

advantage. Harvard Business Review, (October), 111–121.
Marsh, P. (2002) Fired up to introduce new ideas. Financial

Times, 10 December, p. 13.
McIvor, R. (2008) What is the right outsourcing strategy

for your process. European Management Journal, 26(1),
24–34.
Mishra, K. E. (1998) Preserving employee morale during

downsizing. Sloan Management Review, 39(2), 83–96.
Montia, G. (2008) Dresdner’s acquisition by Commerzbank

puts 9,000 jobs at risk. Retrieved 1 September.
Porter, M. E. (1980) Competitive Strategy. New York: Free

Press.
Porter, M. E. (1985) Competitive Advantage. New York: Free

Press.
Porter, M. E. (1996) What is strategy? Harvard Business

Review, (November–December), 61–78.
Quinn, J. B. (1999) Strategic outsourcing: Leveraging

knowledge capabilities. Sloan Management Review, 40(4),
9–21.
RZB (2009) Semi Annual Report 2008.
Safizadeh, M. H., Field, J. M. & Ritzman, L. P. (2008)

Sourcing practices and boundaries of the firm in the
financial services industry. Strategic Management Journal,
29(1), 79–91.
Salvador, F., de Holan, P. M. & Piller, F. (2009) Cracking

the code of mass customization. Sloan Management Review,
50(3), 71–78.
Stuckey, J. & White, D. (1993) When and when not to

vertically integrate. Sloan Management Review, 34(3),
71–83.
Tata (2010) About us.

www.tata.com/aboutus/index.aspx?sectid=pihbI04W7W0=
The Economist (2010) Data, data everywhere. The Economist,
27 February, Special Report.
Thelin, A. (2009) Managing the downturn. Capital Markets

Day 2009, September. Retrieved 23 July 2010.
www3.sandvik.com/pdf/ir/capital/090903/Tooling CMD
2009.pdf.
Vaillant (2010) About Vaillant.

www.vaillant.com/about-vaillant/vaillant-group/.
Viguerie, P., Smit, S. & Baghai, M. (2008) The Granularity

of Growth. Hoboken, NJ: John Wiley & Sons.
Vose, D. (2000) Risk Analysis: A Quantitative Guide, 2nd

edn. New York: John Wiley.
Wachman, R. (2008) Bank merger to cost 1,200 City jobs. The

Observer, 31 August. www.guardian.co.uk/
business/2008/aug/31/europeanbanks.banking.
Wharton School Publishing (2007) Radiohead’s free for all.

7 November. www.whartonsp.com/articles/
article.aspx?p=1081503.
Wirtz, B. W., Mathieu, A. & Schilke, O. (2007) Strategy in

high-velocity environments. Long Range Planning, 40,
295–313.


8 8. Corporate-level strategy
1 Discuss the ways in which the corporate centre in a

multi-business firm can add value.
2 Select a global firm and obtain a copy of its vision

statement. Discuss how the firm’s strategy has
been influenced by the vision statement.
3 ‘The growth/share matrix is too naive to be useful in

developing strategy.’ Discuss this statement.
4 Select a global firm (or a group within a global firm).

Plot the business units of the firm on a matrix of your
choice. What implications are there for the corporate

strategy of the firm?
5 In the multi-factor portfolio model, what factors

contribute to an attractive environment for a business?
6 Explain the differences between related and unrelated

diversification.
7 Many managers justify their diversification decisions on

the basis of claimed ‘synergy’. Is this claim always
justified? Give examples of where you believe claimed

synergy did not exist.
8 Discuss some of the ways in which financial markets affect

corporate strategy.
9 Provide an example of a firm with a high-risk profile and

another with a low-risk profile. Illustrate by
discussing the strategies adopted by each firm.
REVIEW QUESTIONS
ElAmin, A. (2006) Unilever to exit European frozen foods,

while sales stagnate. Meat Process.

New York: Summit.

York: Doubleday.
Froud, J. & Williams, K. (2007) Private equity and the
culture of value extraction. New Political Economy, 12(3),
405–420.
FundingUniverse (2010) Philips. Company-histories.

Retrieved 2010. www.fundinguniverse.com/
Ginglinger, E. & Hamon, J. (2009) Share repurchase

regulations: Do firms play by the rules? International
Review of Law and Economics, 29(2), 81–86.
Goold, M. & Campbell, A. (1987) Strategies and Styles.

Oxford: Basil Blackwell.
Goold, M. & Campbell, A. (1998) Desperately seeking

synergy. Harvard Business Review, (September– October),
130–143.
Goold, M., Campbell, A. & Alexander, M. (1994) Corporate

Level Strategy. New York: Wiley.
Grinblatt, M. & Titman, S. (2002) Financial Markets and

Corporate Strategy, 2nd edn. Boston, MA: Irwin/McGraw-Hill.
Guillén, M. F. & García -Canal, E. (2009) The American

model of the multinational firm and the ‘new’
multinationals from emerging economies. Academy of
Management Perspectives, 23(2), 23–35.
Hambrick, D. C., MacMillan, I. C. & Day, D. L (1982)

Strategic attributes and performance in the BCG Matrix – A
PIMS-based analysis of industrial product businesses.
Academy of Management Journal, 25(September), 510–531.
Hamel, G. & Prahalad, C. K. (1994) Competing for the

future. Harvard Business Review, (July–August), 122–128.
Hammond, E. (2010) Bilfinger builds on reinvention trend.

European companies, 3 February.
Hancock, D. (2006) Wal-Mart’s German flop. CBS News

Business, 2 August. www.cbsnews.com/stories/
Hayward, M. & Hambrick, D. (1997) Explaining the premiums

paid for large acquisitions: Evidence of CEO hubris.
Administrative Science Quarterly, 42, 103–127.
Henkel (2010) Business sectors. Annual report 2009, 25

February. www.henkel.com/about-henkel/
business-sectors-11785.htm.
HMV_Group (2010) Investor relations. Retrieved September
14, 2010. www.hmvgroup.com/investors. aspx.
Jensen, M. C. (1989) Eclipse of the public corporation.

Harvard Business Review, (September–October 1989), 61–75.
Kaplan, S. N. & Stromberg, P. (2009) Leveraged buyouts and

private equity. Journal of Economic Perspectives, 23(1),
121–146.
Lawrence, P. & Lorsch, J. W. (1967) Organizations and

Environment. Boston, MA: Harvard University Press.
Lessard, D. R. (1997) Global competition and corporate

finance in the 1990’s. In H. Vernon-Wortzel & L. H. Wortzel
(eds), Strategic Management in the Global Economy. New
York: Wiley.
Magix (2009) Share buybacks, 30 June.
McGahan, A. M. & Porter, M. E. (1997) How much does

industry matter, really? Strategic Management Journal,
18(Special Issue), 15–30.
McLeod, K. & Stuckey, J. (2000) MACS: The market-activated

corporate strategy framework. McKinsey Quarterly, (3),
16–20. Ng, D. W. (2007) A modern resource based approach to
unrelated diversification. Journal of Management Studies,
44(8), 1481–1502. O’Regan, N. & Ghobadian, A. (2010) A
serial successful strategic transformer of a business: An
interview with Anthony Habgood. Journal of Strategy and
Management, 3(1), 72. Philips (2010) Company profile. About
Philips. Retrieved 15 March 2010. www.philips.com/
about/company/index.page. Reddeman, S., Basse, T. & von der
Schulenberg, J.-M. (2010) On the impact of the financial
crisis on the dividend policy of the European insurance
industry. The Geneva papers, 35(1), 53–62. Robins, J. A. &
Wiersema, M. F. (2003) The measurement of corporate
portfolio strategy: Analysis of the content validity of
related diversification indexes. Strategic Management
Journal, 24(1), 39–60. Roquebert, J. A., Phillips, R. L. &
Westfall, P. A. (1996) Markets vs. management: What
‘drives’ profit ability. Strategic Management Journal,
17(8), 653–664. Rumelt, R. P. (1977) Diversity and
Profitability (Paper prepared for the Annual Meeting of the
Western Region, Academy of Management, Sun Valley, Idaho
No. Paper MGL-51). Los Angeles: Managerial Studies Center,
Graduate School of Management, University of California.
Schultz, H. (2006) This is not America – Why Wal-Mart left
Germany. The Atlantic Times On-Line Archive. September.
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Blackstone Group (2010) Private equity.
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aam_privateequity.htm. The Carlyle Group (2010) Firm
profile. www.carlyle.com/Company/item1676.html. The
Economist (2008) Time to fix Siemens. The Economist, 8
July.
9 9. Managing innovation and the dynamic
scope of the firm
1 Do you agree that it is important for a firm to innovate?

If so, why?
2 Are the three types of innovation (structural,

organizational and scope) described in the chapter
equally important? When would each be adopted, and what

resources are required for each?
3 Discuss the relative merits of entering new markets by

internal development versus a merger or acquisition.
4 For a firm with which you are familiar, obtain data on

its changing scope over the last five years. Can you
identify the strategy behind these changes?
5 Using the Internet, explore a current acquisition.

Develop the strategic reasoning behind the acquisition,
and discuss whether or not you think it will be successful.
6 How do firms create synergy through mergers? Do you think

that this can ever be used to justify a merger?
7 Can a formal merger and acquisition process become a core

capability for a firm? Discuss.
8 Why is net present value used to calculate the value of a

merger? What difficulties are there with the use
of this tool?
9 Are restructuring strategies likely to create wealth for

shareholders? Discuss.
REVIEW QUESTIONS
Burgelman, R. A. & McKinney, W. (2006) Managing the

strategic dynamics of acquisition integration: Lessons from
HP and Compaq. California Management Review, 48(3), 6–27.
BusinessWeek (2009) VW takeover close as Porsche CEO

resigns. BusinessWeek, 23 July. www.
Capon, N., Farley, J. U. & Hoenig, S. (1996) Toward an

Integrative Explanation of Corporate Financial Performance.
Boston, MA: Kluwer Academic Publishers.
Capon, N., Farley, J. U., Lehmann, D. R. & Hulbert, J. M.

(1992) Profiles of product innovators among large U.S.
manufacturers. Management Science, 30(2), 157–166.
Cascio, W. F. (2002) Strategies for responsible

restructuring. Academy of Management Executive, 16(3),
80–91.
Christensen, C. M. (1997) The Innovator’s Dilemma. Boston,

MA: Harvard Business School Press.
Cohan, P. S. (1997) The Technology Leaders. San Francisco,

CA: Jossey-Bass.
Comes, S. & Berniker, L. (2008) Business model innovation.

In D. Pantaleo & N. Pal (eds), From Strategy to Execution
(pp. 65–86). Berlin: Springer-Verlag.
Day, G. S. (2007) Is it real? Can we win? Is it worth

doing? Harvard Business Review, (December), 110–120.
Decker, C. & Mellewigt, T. (2007) Thirty years after

Michael E. Porter: What do we know about business exit.
Academy of Management Perspectives, 21(2), 41–55.
Devine, M. (2002) Successful Mergers. London: Profile Books.
Dobbs, R., Huyett, B. & Koller, T. (2010) The CEO’s guide

to corporate finance. McKinsey Quarterly, (November).
Dodgson, M. (2000) The Management of Technological

Innovation. Oxford: Oxford University Press.
Dranikoff, L., Koller, T. & Schneider, A. (2002)

Divestiture: Strategy’s missing link. Harvard Business
Review, (May), 74–83.
Eccles, R. G., Lanes, K. L. & Wilson, T. C. (1999) Are you

paying too much for that acquisition? Harvard Business
Review, (July–August), 136–146.
Financial-Express (2009) Delta Lloyd IPO priced at Euro16

per share. Investigate, 3 November.
www.investigate.co.uk/Article.aspx?id=200911030700128311B.
FlexNews (2008) Nestlé acquisition of Kraft Foods Balaton

gets approved. FlexNews, 20 June
New York: Summit.

York: Doubleday.
Gaughan, P. A. (2002) Mergers, Acquisitions, and Corporate

Restructurings, 3rd edn. New York: Wiley.
Gaur, A. S. & Kumar, V. (2009) International

diversification, business group affiliation and firm
performance: Empirical evidence from India. British Journal
of Management, 20(2), 172–186.
Hagel, J. L. & Singer, M. (2000) Unbundling the

corporation. McKinsey Quarterly, (3), 148–161.
Hamel, G. & Prahalad, C. K. (1994) Competing for the

future. Harvard Business Review, (July–August), 122–128.
Hayward, M. & Hambrick, D. (1997) Explaining the premiums

paid for large acquisitions: Evidence of CEO hubris.
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STRATEGIC

ISBN: 978-0-415-56763-3 (hbk)

Typeset in Minion Pro and Futura

List of ﬁgures and tables xviii

Section 1 STRATEGIC MANAGEMENT CONCEPTS 1

2 Strategic management fundamentals 46

2.7 Stakeholders and organizational value 77

Section 2 STRATEGIC ANALYSIS 89

3 External analysis: the business environment 91

3.6 Summary 137

4 External analysis: the ﬁnancial environment 148

5 Internal analysis: managing capabilities, costs and

Section 3 STRATEGY DEVELOPMENT 249

6 Creating future direction 251

6.3 Values 264

7 Business-level strategy 292

7.6 How to compete 321

8 Corporate-level strategy 342

Share repurchases 383

9 Managing innovation and the dynamic scope of the ﬁrm 395

Section 4 STRATEGY IMPLEMENTATION 453

10 Leading organizational change 455

11 Designing organizational architecture 494

11.5 Summary 535

Section 5 ASSESSING STRATEGIC PERFORMANCE 545

12 Measuring organizational performance 547

13 Corporate governance and social responsibility 592

What is corporate governance? 594

0 Structure of the book xxvi

3.7 UK quarterly GDP 103

7.5 Illustrative value chains 306

11.7 Group organization of Bayer AG 510

1.1 Economic profit of selected US firms 14

4.3 Balance sheet 194

DEVELOPMENTS IN STRATEGIC MANAGEMENT OVER

Governance and ethics

ORGANIZATION OF THE TEXT

Assessing Strategic Strategic Analysis

Strategy Implementation Strategy Development

Figure 0 Structure of the book

Strategic management in practice opens each chapter by providing a short description of

The Challenge of strategic management questions are designed as discussion vehicles on

Learning aids for students

• Flashcard glossary, to test your knowledge of essential terms

Teaching aids for instructors

• Comprehensive testbank including multiple choice, true/false and short answer

Peter Fitzroy is a Professor in the MBA programme at Monash University in Melbourne,

Abby Ghobadian is Professor at Henley Business School, University of Reading. He has

Upon completing this chapter you should be able to:

1 Articulate the importance of strategic management to ﬁrm growth,

2 Distinguish between strategic decisions, strategy and strategic

3 Contrast the major theories which endeavour to explain ﬁrm success.

4 Recognize why ﬁrms exist as economic entities and be able to describe

6 Apply the model of strategic management and be aware of the major

Figure 1.1 Five-year common stock performance of News Corporation

(What to do) (Making it happen)

Strategic decisions in practice – ExxonMobil

Strategy in practice – IKEA

• in-house design capability