strategy, structure, and processes has positive effects

BASIC CONCEPTS OF STRATEGIC MANAGEMENT on the organization’s performance

 Strategic Management  Strategic planning is particularly effective at
identifying new opportunities for growth and in
o a set of managerial decisions and actions that
ensuring that all managers have the same goals.
determines the long run performance of a
corporation. IMPACT OF GLOBALIZATION
o Originally called business policy
 Globalization
PHASES OF STRATEGIC MANAGEMENT o the integrated internationalization of
markets and corporations
•based on company's budget
•Projects are proposed on the basis of very  As more industries become global, strategic
little analysis, with most information coming
from within the firm management is becoming an increasingly important
PHASE 1 •The time horizon is usually one year way to keep track of international developments and
position a company for long-term competitive
Basic FInancial
Planning advantage

IMPACT OF ENVIRONMENTAL SUSTAINABILITY

•Managers propose 5 year plan
•external + internal - In addition to internal  Environmental Sustainability
information, managers gather any available
environmental data—usually on an ad hoc o refers to the use of business practices to
PHASE 2 basis—and extrapolate current trends reduce a company’s impact upon the
five years into the future
Forecast-based natural, physical environment
Planning  The effects of climate change on industries and
companies throughout the world can be grouped into
six categories of risks:
•Planning is taken out of the hands of lower-level
managers and concentrated in a planning staff 1. Regulatory Risk
whose task is to develop strategic plans for 2. Supply Chain Risk
PHASE 3 the corporation.
3. Product and Technology Risk
•Top management typically develops
Externally five-year plans with help from consultants but 4. Litigation Risk
oriented minimal input from lower levels 5. Reputational Risk
(strategic) 6. Physical Risk
planning
CHALLENGES TO STRATE GIC MANAGEMENT
•Planning is typically interactive across levels
and is no longer top down. 1. Globalization
•Strategic plans at this point detail the 2. Innovation – new products, services and
implementation, evaluation, and control
PHASE 4 issues.
organizational approaches.
Strategic 3. Sustainability – triple bottom line (profit, community,
Management environment)

CREATING A LEARNING ORGANIZATION

 Strategic management has now evolved to the point

BENEFITS OF STRATEGIC MANAGEMENT that its primary value is in helping an organization operate
successfully in a dynamic, complex environment.
 Clearer sense of strategic vision for the firm
 To be competitive in dynamic environments,
 Sharper focus on what is strategically important corporations are becoming less bureaucratic and more flexible
 Improved understanding of a rapidly changing  Corporations must develop strategic flexibility—the
environment
ability to shift from one dominant strategy to another.
 Strategic management emphasizes long-term  strategic flexibility demands that the company
performance.
become a learning organization — an organization skilled at
 Research reveals that organizations that engage in creating, acquiring, and transferring knowledge and at
strategic management generally outperform those modifying its behaviour to reflect new knowledge and insights
that do not
 Organizational learning is a critical component of
 The attainment of an appropriate match, or “fit,” competitiveness in a dynamic environment. It is particularly
between an organization’s environment and its important to innovation and new product development.
zjrs
 Learning organizations are skilled at four main activities: -A mission statement may also include the firm’s values
and philosophy about how it does business and treats its
1. Solving problems systematically
employees
2. Experimenting with new approaches
Vision - describes what the organization would like to
3. Learning from their own experiences and past history become
as well as from the experiences of others
Objectives - the end results of planned activity.
4. Transferring knowledge quickly and efficiently
(Note: we consider a goal as an open ended statement of
throughout the organization
what one wants to accomplish, with no quantification of
BASIC MODEL OF STRAT EGIC MANAGEMENT what is to be achieved and no time criteria for
completion.)
Example:
Goal - “increased profitability”
Objective - “to increase the firm’s profitability in
2010 by 10% over 2009.”

I. ENVIRONMENTAL SCANNING - the monitoring,

evaluating, and disseminating of information from the
Strategies- Corporation forms a comprehensive master
external and internal environments to key people within
plan that states how the corporation will achieve its
the corporation
mission and objectives.
- Its purpose is to identify strategic factors—those
3 TYPES OF STRATEGY:
external and internal elements
1. Corporate Strategy - describes a company’s
- The simplest way to conduct environmental scanning is
overall direction in terms of its general
through SWOT analysis
attitude toward growth and the
-The external environment consists of variables management of its various businesses and
(Opportunities and Threats) that are outside the product lines’
organization and not typically within the short-run
2. Business Strategy - occurs at the business
control of top management
unit or product level, and it emphasizes
-internal environment of a corporation consists of improvement of the competitive position of
variables (Strengths and Weaknesses) that are within a corporation’s products or services in the
the organization itself and are not usually within the specific industry or market segment served
short-run control of top management by that business unit.
II. STRATEGY FORMULATION - the development of long- - Categories:
range plans for the effective management of
- Competitive strategy –differentiate
environmental opportunities and threats, in light of
itself from competitors
corporate strengths and weaknesses
- Cooperative strategy – alliance
- It includes defining the corporate mission, specifying
with another company to improve
achievable objectives, developing strategies, and setting
service
policy guidelines.
3. Functional Strategy - the approach taken by
a functional area to achieve corporate and
Mission - is the purpose or reason for the organization’s business unit objectives and strategies by
existence. maximizing resource productivity
zjrs
 - Examples of research and development irregular, discontinuous process, proceeding in fits and starts.
(R&D) functional strategies are There are periods of stability in strategy development, but
technological followership (imitation of the also there are periods of flux, of groping, of piecemeal change,
products of other companies) and and of global change.”
technological leadership (pioneering an
PUNCTUATED EQUILIBRIUM - Most large organizations tend
innovation)
to follow a particular strategic orientation for about 15 to
20 years before making a significant change in direction
HIERARCHY OF STRATEGY - grouping of strategy o Equilibrium periods - evolving through relatively
types by level in the organization long periods of stability
- Hierarchy of strategy is a nesting of one o Revolutionary periods - relatively short bursts of
strategy within another so that they complement and fundamental change
support one another. Functional strategies support
Triggering event - something that acts as a stimulus for a
business strategies, which, in turn, support the
change in strategy
corporate strategy(ies).

Policy - a broad guideline for decision making that links the STRATEGIC DECISION M AKING
formulation of a strategy with its implementation
- Companies use policies to make sure that employees
Three (3) Characteristics of Strategic Decision making:
throughout the firm make decisions and take actions that
support the corporation’s mission, objectives, and strategies 1. Rare- Strategic decisions are unusual and typically
have no precedent to follow.
2. Consequential - Strategic decisions commit
III. STRATEGY IMPLEMENTATION - a process by which
strategies and policies are put into action through the substantial resources and demand a great deal
development of programs, budgets, and procedures of commitment from people at all levels
3. Directive - Strategic decisions set precedents for
Programs - a process by which strategies and policies are put
lesser decisions and future actions throughout an
into action through the development of programs, budgets,
organization
and procedures
Budget - statement of a corporation’s programs in terms of MINTZBERG’S MODES OF STRATEGIC DECISION
dollars MAKING
Procedures - sometimes termed Standard Operating 1. Entrepreneurial mode - Strategy is made by one
Procedures (SOP), are a system of sequential steps or powerful individual. The focus is on opportunities;
techniques that describe in detail how a particular task or job
problems are secondary
is to be done
2. Adaptive mode - Sometimes referred to as “muddling
through,”
IV. EVALUATION AND CONTROL - a process in which - characterized by reactive solutions to
corporate activities and performance results are monitored so existing problems, rather than a proactive search for
that actual performance can be compared with desired new opportunities
performance. 3. Planning mode - It includes both the proactive
- Although evaluation and control is the final major search for new opportunities and the reactive
element of strategic management, it can also pinpoint solution of existing problems.
weaknesses in previously implemented strategic plans and - involves the systematic gathering of
thus stimulate the entire process to begin again appropriate information for situation analysis, the
Performance - the end result of activities generation of feasible alternative strategies, and the
rational selection of the most appropriate strategy
4. Logical incrementalism - a fourth decision-making
V. FEEDBACK/LEARNING PROCESS – revise/correct mode can be viewed as a synthesis of the planning,
decisions adaptive, and, to a lesser extent, the entrepreneurial
modes.

INITIATION OF STRATE GY: TRIGGERING EVENT S TYPES:

Henry Mintzberg discovered that strategy formulation is a. Autonomous action

typically not a regular, continuous process: “It is most often an b. Serendipity
zjrs
 c. Resource allocation process RESPONSIBILITIES OF THE BOARD OF DIRECTO RS

EIGHT STEPS OF STRATEGIC D ECISION-MAKING 1. Setting corporate strategy, overall direction, mission,
or vision
1. Evaluate current performance results in terms of (a)
2. Hiring and firing the CEO and top management
return on investment, profitability, and so forth, and
3. Controlling, monitoring, or supervising top
(b) the current mission, objectives, strategies, and
management
policies.
2. Review corporate governance—that is, the 4. Reviewing and approving the use of resources
performance of the firm’s board of directors 5. Caring for shareholder interests
and top management.
NOTE: In a legal sense, the board is required to direct
3. Scan and assess the external environment to
the affairs of the corporation but not to manage them.
determine the strategic factors that pose
Opportunities and Threats. It is charged by law to act with due care
4. Scan and assess the internal corporate environment
ROLE OF THE BOARD IN STRATEGIC MANAGEMENT
to determine the strategic factors that are Strengths
1. Monitor
(especially core competencies) and Weaknesses
5. Analyze strategic (SWOT) factors to (a) pinpoint 2. Evaluate and Influence
problem areas and (b) review and revise the 3. Initiate and determine
corporate mission and objectives, as necessary
6. Generate, evaluate, and select the best alternative
BOARD OF DIRECTORS CONTINUUM
strategy in light of the analysis conducted in step 5
7. Implement selected strategies via programs,
budgets, and procedures.
8. Evaluate implemented strategies via feedback
systems, and the control of activities to
ensure their minimum deviation from plans

ROLE OF THE BOARD OF DIRECTORS

Corporation - a mechanism established to allow different MEMBERS OF A BOARD O F DIRECTORS

parties to contribute capital, expertise, and labor for their The boards of most publicly owned corporations are
mutual benefit
composed of both inside and outside directors.
Investor/Shareholder - participates in the profits
of the enterprise without taking responsibility for the Inside directors (Management directors) - The boards of most
operations publicly owned corporations are composed of both inside and
outside directors.
Management - runs the company without being responsible
for personally providing the funds Outside directors (Non-management directors) - executives
Board of Directors - have a legal duty to represent the of other firms but are not employees of the board’s
shareholders and protect their interests corporation.
- have both the authority and the
responsibility to establish basic corporate policies and to People who favor a high proportion of outsiders state that
ensure that they are followed outside directors are less biased and more likely to evaluate
management’s performance objectively than are inside
NOTE: The board of directors has an obligation to approve all directors.
decisions that might affect the long-run performance of the
corporation. This means that the corporation is Agency theory – top management are “hired hands” who
fundamentally governed by the board of directors overseeing may very likely be more interested in their personal welfare
top management, with the concurrence of the shareholder. than that of the shareholders. Problems arise in corporations
because the agents (top management) are not willing to bear
Corporate Governance - refers to the relationship among responsibility for their decisions unless they own a substantial
these three groups (BOD, top mngt, shareholder) in amount of stock in the corporation. The theory suggests that a
determining the direction and performance of the corporation majority of a board needs to be from outside the firm so that

zjrs
top management is prevented from acting selfishly to company or are important suppliers (thus dependent on the
the detriment of the shareholders current management for a key part of their business). These
outsiders face a conflict of interest and are not likely to be
Agency theory is concerned with analyzing and resolving two
objective
problems:
Retired executive directors - who used to work for the
1. The agency problem that arises when (a) the desires
company, such as the past CEO who is partly responsible for
or objectives of the owners and the agents conflict
much of the corporation’s current strategy and who probably
or (b) it is difficult or expensive for the owners to
groomed the current CEO as his or her replacement
verify what the agent is actually doing.
2. The risk-sharing problem that arises when the owners Family directors - who are descendants of the founder and
and agents have different attitudes toward risk. own significant blocks of stock (with personal agendas based
Executives may not select risky strategies because on a family relationship with the current CEO)
they fear losing their jobs if the strategy fails

Codetermination - the inclusion of a corporation’s workers on

its board
According to agency theory, the likelihood that these
problems will occur increases when: direct interlocking directorate - occurs when two firms share
a director or when an executive of one firm sits on
o stock is widely held (that is, when no one shareholder
the board of a second firm.
owns more than a small percentage of the total
common stock) indirect interlock occurs when two corporations have
o the board of directors is composed of people who directors who also serve on the board of a third firm, such as a
know little of the company or who are personal bank.
friends of top management
o a high percentage of board members are inside Interlocking directorates are useful for gaining both inside
(management) directors information about an uncertain environment and objective
expertise about potential strategies and tactics.

NOMINATION AND ELECT ION OF BOARD OF

In contrast, those who prefer inside over outside directors DIRECTORS
contend that outside directors are less effective than are
Traditionally the CEO of a corporation decided whom to invite
insiders because the outsiders are less likely to have the
to board membership and merely asked the shareholders for
necessary interest, availability, or competency.
approval in the annual proxy statement. All nominees were
To better align the interests of the agents with those of the usually elected.
owners and to increase the corporation’s overall performance,
Many corporations whose directors serve terms of more than
agency theory suggests that top management have a
one year divides the board into classes and staggers elections
significant degree of ownership in the firm and/or have a
so that only a portion of the board stands for election each
strong financial stake in its long-term performance.
year. This is called a staggered board.
Stewardship theory - suggests that executives tend to be
more motivated to act in the best interests of the corporation CRITERIA OF A GOOD DIRECTOR
than in their own self-interests . . Whereas agency theory  Willing to challenge management when necessary
focuses on extrinsic rewards that serve the lower-level needs,
 Special expertise important to the company
such as pay and security, stewardship theory focuses on the
higher-order needs, such as achievement and self-actualization  Available outside meetings to advise management
Because of their long tenure with the corporation, insiders  Expertise on global business issues
(senior executives) tend to identify with the corporation and
 Understands the firm’s key technologies and
its success. Rather than use the firm for their own ends, these
processes
executives are thus most interested in guaranteeing the
continued life and success of the corporation  Brings external contacts that are potentially valuable
to the firm
 Has detailed knowledge of the firm’s industry
Affiliated directors - though not really employed by the Has high visibility in his or her field
corporation, handle the legal or insurance work for the
zjrs
  Is accomplished at representing the firm to the economic goal of profitability with the social
stakeholders needs of society

ORGANIZATION OF THE BOARD THE ROLE OF TOP MANA GEMENT

CEO - is supposed to concentrate on strategy, planning,
external relations, and responsibility to the board. RESPONSIBILITIES OF TOP MANAGEMENT
The CEO, with the support of the rest of the top management
Chairman - ensure that the board and its committees perform team, must successfully handle two primary responsibilities
their functions as stated in the board’s charter. that are crucial to the effective strategic management of the
Lead director - This person is consulted by the Chair/CEO corporation:
regarding board affairs and coordinates the annual evaluation (1) provide executive leadership and a strategic vision and
of the CEO (2) manage the strategic planning process
TRENDS IN CORPORATE GOVERNANCE Executive leadership - directing of activities toward the
 Boards are getting more involved not only in accomplishment of corporate objectives
reviewing and evaluating company strategy
but also in shaping it Strategic vision - a description of what the company is capable
 institutional investors, such as pension funds, mutual of becoming
funds, and insurance companies, are becoming active Transformational leaders - leaders who provide change and
on boards and are putting increasing pressure on top movement in an organization by providing a vision for that
management to improve corporate performance. change.
 Shareholders are demanding that directors and top
managers own more than token amounts of stock in
the corporation.
THREE KEY CHARACTERISTICS OF
 Non-affiliated outside (non-management) directors
are increasing their numbers and power in publicly TRANSFORMATIONAL LEADERS
held corporations as CEOs loosen their grip on 1. The CEO articulates a strategic vision for the
boards. corporation - The CEO envisions the
 Women and minorities are being increasingly company not as it currently is but as it can become.
represented on boards 2. The CEO presents a role for others to identify with
 Boards are establishing mandatory retirement ages and to follow
3. The CEO communicates high performance
for board members—typically around age 70
standards and also shows confidence in the
 Boards are evaluating not only their own overall
followers’ abilities to meet these standards
performance, but also that of individual directors
 Boards are getting smaller—partially because of the SOCIAL RESPONSIBILITY AND ETHICS IN
reduction in the number of insiders but also because
STRATEGIC MANAGEMENT
boards desire new directors to have specialized
knowledge and expertise instead of general Social responsibility - proposes that a private
experience corporation has responsibilities to society that extend
 Boards continue to take more control of board beyond making a profit.
functions by either splitting the combined Chair/CEO
into two separate positions or establishing a lead What are the responsibilities of a business firm and how
outside director position many of them must be fulfilled?
 As corporations become more global, they are
 Friedman’s Traditional View of Business
increasingly looking for board members with
Responsibility – “There is one and only one social
international experience
responsibility of business—to use its resources and engage
 Instead of merely being able to vote for or against in activities designed to increase its profits so long as it
directors nominated by the board’s nominating stays within the rules of the game, which is to say, engages
committee, shareholders may eventually be allowed in open and free competition without deception or fraud”
to nominate board members.
 Society, in the form of special interest groups,
increasingly expects boards of directors to balance

zjrs
  Carroll’s Four Responsibilities of Business  Their trustworthiness may help them generate
enduring relationships with suppliers and distributors
without requiring them to spend a lot of time and
money policing contracts.
 They can attract outstanding employees who prefer
working for a responsible firm (for example, Procter
& Gamble and Starbucks).
 They are more likely to be welcomed into a foreign
country (for example, Levi Strauss).
“A Three Dimensional Conceptual Model of Corporate  They can utilize the goodwill of public officials for
Performance” support in difficult times.
 They are more likely to attract capital infusions from
Economic responsibilities of a business organization’s
investors who view reputable companies as desirable
management are to produce goods and services of
long-term investments. For example, mutual funds
value to society so that the firm may repay its
investing only in socially responsible companies more
creditors and shareholders.
than doubled in size from 1995 to 2007 and
Legal responsibilities are defined by governments in
outperformed the S&P 500 list of stocks.
laws that management is expected to obey.
 corporate support of social causes helps earn their
Ethical responsibilities of an organization’s
loyalty.
management are to follow the generally held beliefs
 citizenship activities had led to (1) goodwill that
about behavior in a society. For example, society
opened doors in local communities and (2) an
generally expects firms to work with the employees
enhanced reputation with consumers
and the community in planning for layoffs, even
though no law may require this.
SUSTAINABILITY: MORE THAN ENVIRONMENTAL?
Discretionary responsibilities are the purely voluntary
obligations a corporation assumes.  sustainability may include more than just ecological
concerns and the natural environment.
Note: The difference between ethical and  In order for a business corporation to be sustainable,
discretionary responsibilities is that few people that is, to be successful over a long period of time, it
expect an organization to fulfill discretionary must satisfy all of its economic, legal, ethical, and
responsibilities, whereas many expect an discretionary responsibilities
organization to fulfill ethical ones.

Carroll lists these four responsibilities in order of priority. A

CORPORATE STAKEHOLDERS
business firm must first make a profit to satisfy its economic
responsibilities. To continue in existence, the firm must follow Stakeholders - large number of groups with interest in a
the laws, thus fulfilling its legal responsibilities. business organization’s activities
“Profits are merely a means to an end, not an end in itself” - they affect or are affected by the
Just as a person needs food to survive and grow, so does a achievement of the firm’s objectives.
business corporation need profits to survive and grow.
“Maximizing profits is like maximizing food.” Thus, contends In any one strategic decision, the interests of one stakeholder
Byron, maximization of profits cannot be the primary group can conflict with those of another.
obligation of business.
For example, a business firm’s decision to use only recycled
materials in its manufacturing process may have a positive
effect on environmental groups but a negative effect on
According to Porter and Kramer, “social and economic goals shareholder dividends. Which group’s interests should have
are not inherently conflicting, but integrally connected.”Being priority?
known as a socially responsible firm may provide a company In order to answer this question, the corporation may need to
with social capital, the goodwill of key stakeholders, that can craft an enterprise strategy—an overarching strategy that
be used for competitive advantage explicitly articulates the firm’s ethical relationship with its
stakeholders. This requires not only that management clearly
BENEFITS RECEIVED FROM BEING SOCIALLY RESPONSIBLE: state the firm’s key ethical values, but also that it understands
 Their environmental concerns may enable them to the firm’s societal context, and undertakes stakeholder
charge premium prices and gain brand loyalty (for analysis to identify the concerns and abilities of each
example, Ben & Jerry’s Ice Cream) stakeholder
zjrs
  Economic sustainability. This includes codes of
STAKEHOLDER ANALYSIS conduct and compliance, anti-corruption policies,
corporate governance, risk and crisis management,
 the identification and evaluation of corporate
strategic planning, quality and knowledge
stakeholders.
management, and supply chain management.
THREE STEP PROCESS:  Social sustainability. This includes corporate
1. Identify primary stakeholders. Those who have a citizenship, philanthropy, labor practices, human
direct connection with the corporation and who have capital development, social reporting, talent
sufficient bargaining power to directly affect corporate attraction and retention, and stakeholder dialogue.
activities.
- include customers (safe products and valued for ETHICAL DECISION MAKING
price paid), employees (fair day’s pay and fringe benefits),
Oxymoron - concept that combines opposite or contradictory
suppliers (predictable orders and bills paid), shareholders
ideas
(dividends and sock price appreciation), and creditors
(commitments to be met on time). The corporation SCANNING THE TASK ENVIRONMENT
systematically monitors these stakeholders because they are
a corporation’s scanning of the environment includes
important to a firm’s meeting its economic and legal
responsibilities. analyses of all the relevant elements in the task
environment.
2. Identify secondary stakeholders. Those who have
only an indirect stake in the corporation but who are also
affected by corporate activities.
- These usually include nongovernmental
organizations , activists, local communities, trade associations,
competitors, and governments.
- Aside from competitors, these secondary
stakeholders are not usually monitored by the corporation in
any systematic fashion

3. Estimate the effect on each stakeholder group from SOME REASONS FOR UNETHICAL BEHAVIOR
any particular strategic decision. Because the primary  It may be that the involved people are not even
decision criteria are typically economic, this is the point where aware that they are doing something questionable.
secondary stakeholders may be ignored or discounted as  There is no worldwide standard of conduct for
unimportant. business people.
- how much will specific stakeholder groups lose or  Cultural norms and values vary between countries
gain? What other alternatives do they have to replace what and even between different geographic regions and ethnic
may be lost? groups within a country
- Relationship-based countries tend to be less
 before making a strategic decision, strategic transparent and have a higher degree of corruption than do
managers should consider how each alternative will affect rule-based countries
various stakeholder groups. What seems at first to be the best  Differences in values between business people and
decision because it appears to be the most profitable may key stakeholders.
actually result in the worst set of consequences to the
corporation

THE DOW JONES SUSTAINABILITY INDEX

Dow Jones includes not only environmental, but also
economic and social criteria in its sustainability index.

 Environmental sustainability. This includes

environmental reporting, eco-design and efficiency,
environmental management systems, and executive
commitment to environmental issues.

zjrs
ENVIRONMENTAL SCANNING AND INDUSTRY PESTEL - Political, Economic, Sociocultural, Technological,
Ecological, and Legal forces
ANALYSIS
 Trends in the economic part of the societal
environment can have an obvious impact on
Environmental Scanning - the monitoring, evaluation, and business activity. e.g. Changes in the price of oil
dissemination of information from the external and internal have a similar impact upon multiple industries, from
environments to key people within the corporation. packaging and automobiles to hospitality and
shipping.
IDENTIFYING EXTERNAL ENVIRONMENTAL VARIABLES  Changes in the technological part of the societal
natural environment - includes physical resources, wildlife, environment can also have a great impact
and climate that are an inherent part of existence on Earth on multiple industries. E.g Digital technology allows
movies and music to be available instantly over the
societal environment - is mankind’s social system that Internet or through cable service, but it also means
includes general forces that do not directly touch on the short- falling fortunes for video rental shops such as the
run activities of the organization that can, and often do, Movie Gallery and CD stores such as Tower Records.
influence its long-run decisions.  Trends in the political–legal part of the societal
These factors affect multiple industries: environment have a significant impact not only
on the level of competition within an industry but
 Economic forces that regulate the exchange of also on which strategies might be successful.
materials, money, energy, and information.  Demographic trends are part of the sociocultural
 Technological forces that generate problem-solving aspect of the societal environment.
inventions.
 Political–legal forces that allocate power and provide IDENTIFYING EXTERNAL STRATEGIC FACTORS
constraining and protecting laws
and regulations.
 Sociocultural forces that regulate the values, mores, Strategic myopia - willingness to reject unfamiliar as well as
and customs of society. negative information

task environment - includes those elements or groups that One way to identify and analyze developments in the external
directly affect a corporation and, in turn, are affected by it. environment is to use the issues priority matrix:
These are governments, local communities, suppliers, 1. Identify a number of likely trends emerging in the
competitors, customers, creditors, employees/labor unions, natural, societal, and task environments. These are
special-interest groups, and trade associations. strategic environmental issues—those important
INDUSTRY ANALYSIS - (popularized by Michael Porter) refers trends that, if they occur, determine what the
to an in-depth examination of key factors within a industry or the world will look like in the near future.
corporation’s task environment. 2. Assess the probability of these trends actually
occurring, from low to medium to high.
SCANNING THE SOCIETAL ENVIRONMENT: 3. Attempt to ascertain the likely impact (from low to
PESTEL/STEEP ANALYSIS high) of each of these trends on the
corporation being examined.

zjrs
 2. RIVALRY AMONG EXISTING FIRMS
 Number of competitors
 Rate of industry growth
 Product or service characteristics
 Amount of fixed costs
 Capacity
 Height of exit barriers
 Diversity of rivals
3. THREAT OF SUBSTITUTE PRODUCTS/SERVICES
A substitute product is a product that appears to be different
but can satisfy the same need as another product
4. BARGAINING POWER OF BUYERS
Buyers affect an industry through their ability to force down
The issues priority matrix can then be used to help managers
prices, bargain for higher quality or more services, and play
decide which environmental trends should be merely scanned
competitors against each other
(low priority) and which should be monitored as strategic
factors (high priority) 5. BARGAINING POWER OF SUPPLIERS
Suppliers can affect an industry through their ability to raise
prices or reduce the quality of purchased goods and services
INDUSTRY ANALYSIS : ANALYZING THE TASK
6. RELATIVE POWER OF OTHER STAKEHOLDERS
ENVIRONMENT
Some of these groups are governments (if not explicitly
included elsewhere), local communities, creditors (if not
Industry - is a group of firms that produces a similar product included with suppliers), trade associations, special-interest
or service, such as soft drinks or financial services groups, unions (if not included with suppliers), shareholders,
and complementors
PORTER’S APPROACH TO INDUSTRY ANALYSIS Complementors-a company (e.g., Microsoft) or an industry
whose product works well with a firm’s (e.g., Intel’s)
product and without which the product would lose much of its
value.

INDUSTRY EVOLUTION
Fragmented industry - no firm has large market share, and
each firm serves only a small piece of the total market in
competition with others
Note: By the time an industry enters maturity, products tend
to become more like commodities
Consolidated industry - dominated by a few large firms, each
1. THREAT OF NEW ENTRANTS of which struggles to differentiate its products from those of
the competition
entry barrier - an obstruction that makes it difficult for a
company to enter an industry.
STRATEGIC GROUPS
 Economies of scale
 a set of business units or firms that “pursue similar
 Product differentiation strategies with similar resources.”
 Capital requirements
STRATEGIC TYPES
 Switching costs  a category of firms based on a common strategic
 Access to distribution channels orientation and a combination of structure, culture, and
processes consistent with that strategy
 Cost disadvantages independent of size
 Government policy
zjrs
 1. Defenders are companies with a limited product line 1. Why do your competitors exist? Do they exist to
that focus on improving the efficiency of their existing make profits or just to support another unit?
operations. 2. Where do they add customer value—higher quality,
2. Prospectors are companies with fairly broad product lower price, excellent credit terms, or better service?
lines that focus on product innovation and market 3. Which of your customers are the competitors most
opportunities interested in? Are they cherry-picking your best
3. Analyzers are corporations that operate in at least customers, picking the ones you don’t want, or going
two different product-market areas, one stable and one after all of them?
variable. 4. What is their cost base and liquidity? How much cash
4. Reactors are corporations that lack a consistent do they have? How do they get their supplies?
strategy-structure-culture relationship. 5. Are they less exposed with their suppliers than your
firm? Are their suppliers better than yours?
Note: Dividing the competition into these four categories enables the
strategic manager not only to monitor the effectiveness of certain
6. What do they intend to do in the future? Do they
strategic orientations, but also to develop scenarios of future have a strategic plan to target your market
industry developments segments? How committed are they to growth? Are
there any succession issues?
7. How will their activity affect your strategies? Should
COMPETITIVE INTELLIGENCE
you adjust your plans and operations?
 a formal program of gathering information on a
8. How much better than your competitor do you need
company’s competitors.
to be in order to win customers? Do either of you
 Often called business intelligence, it is one of the
have a competitive advantage in the marketplace?
fastest growing fields within strategic management.
9. Will new competitors or new ways of doing things
SOURCES OF COMPETITIVE INTELLIGENCE appear over the next few years? Who is a potential
 Most corporations use outside organizations to new entrant?
provide them with environmental data. 10. If you were a customer, would you choose your
 Firms such as A. C. Nielsen Co. provide subscribers product over those offered by your competitors?
with bimonthly data on brand share, retail prices, What irritates your current customers? What
percentages of stores stocking an item, and competitors solve these particular customer
percentages of stock-out stores. complaints?
 The Internet has changed the way strategists engage
in environmental scanning. It provides the quickest  Done right, competitive intelligence is a key input to
means to obtain data on almost any subject. strategic planning
Although the scope and quality of Internet
FORECASTING
information is increasing geometrically, it is also
littered with “noise,” misinformation, and utter Environmental scanning provides reasonably hard data on the
nonsense. present situation and current trends, but intuition and luck are
 Some companies choose to use industrial espionage needed to accurately predict whether these trends will
or other intelligence-gathering techniques to get continue. The resulting forecasts are, however, usually based
their information straight from their competitors. By on a set of assumptions that may or may not be valid.
using current or former competitors’ employees and
private contractors, some firms attempt to steal
DANGER OF ASSUMPTIONS
 Faulty underlying assumptions are the most frequent
trade secrets, technology, business plans, and pricing
cause of forecasting errors.
strategies.
 Many strategic plans are simply based on projections
MONITORING COMPETITORS FOR STRATEGIC of the current situation.
PLANNING  example, many banks made a number of
questionable mortgages based on the assumption
The primary activity of a competitive intelligence unit is to
that housing prices would continue to rise as they
monitor competitors—organizations that offer same, similar,
had in the past. When housing prices fell in 2007,
or substitutable products or services in the business area in
these “sub-prime” mortgages were almost
which a particular company operates.
worthless—causing a number of banks to sell out or
To understand a competitor, it is important to answer the fail in 2008.
following 10 questions:

zjrs
USEFUL FORECASTING TECHNIQUES workstation, the number of bugs in an application, or
Various techniques are used to forecast future situations. They a product usage patterns
do not tell the future; they merely state what can be, not what
Scenario writing
will be. As such, they can be used to form a set of reasonable
assumptions about the future. Each technique has its  the most widely used forecasting technique after
proponents and its critics trend extrapolation
 scenarios are focused descriptions of different likely
Extrapolation
futures presented in a narrative fashion.
 the extension of present trends into the future.
Industry scenario
 It rests on the assumption that the world is
reasonably consistent and changes slowly in the short  a forecasted description of a particular industry’s
run. likely future
 The basic problem with extrapolation is that a
historical trend is based on a series of patterns or The process may operate as follows:
1. Examine possible shifts in the natural environment and in
relationships among so many different variables that
societal variables globally.
a change in any one can drastically alter the future
direction of the trend 2. Identify uncertainties in each of the six forces of the task
environment (that is, potential entrants, competitors, likely
Brainstorming substitutes, buyers, suppliers, and other key stakeholders).

 a non-quantitative approach that requires simply the 3. Make a range of plausible assumptions about future trends.
presence of people with some knowledge of the 4. Combine assumptions about individual trends into
situation to be predicted. internally consistent scenarios.
 The basic ground rule is to propose ideas without first 5. Analyze the industry situation that would prevail under
mentally screening them. Wild” ideas are each scenario.
encouraged. Ideas should build on previous ideas
6. Determine the sources of competitive advantage under
until a consensus is reached.
each scenario.
Expert opinion 7. Predict competitors’ behavior under each scenario.
 a nonquantitative technique in which experts in a 8. Select the scenarios that are either most likely to occur or
particular area attempt to forecast likely most likely to have a strong impact on the future of the
developments. company. Use these scenarios as assumptions in strategy
formulation
Delphi technique

 separated experts independently assess the THE STRATEGIC AUDIT: A CHECKLIST FOR
likelihoods of specified events. These assessments ENVIRONMENTAL SCANNING
are combined and sent back to each expert for fine-
 One way of scanning the environment to identify
tuning until agreement is reached.
opportunities and threats is by using the Strategic
Statistical modelling Audit
 The audit provides a checklist of questions by area of
 a quantitative technique that attempts to discover concern. For example, Part III of the audit examines
causal or at least explanatory factors that link two or the natural, societal, and task environments. It looks
more time series together. at the societal environment in terms of economic,
 Examples of statistical modeling are regression technological, political-legal, and sociocultural forces.
analysis and other econometric methods. It also considers the task environment (industry) in
 As the patterns of relationships change, the accuracy terms of threat of new entrants, bargaining power of
of the forecast deteriorates buyers and suppliers, threat of substitute products,
Prediction markets rivalry among existing firms, and the relative power
of other stakeholders
 recent forecasting technique enabled by easy access
to the Internet.
 e small-scale electronic markets, frequently open to
any employee, that tie payoffs to measurable future
events, such as sales data for a computer
zjrs
SYNTHESIS OF EXTERNA L FACTORS – EFAS INTERNAL SCANNING: ORGANIZATIONAL
Using an EFAS (External Factors Analysis Summary) Table is ANALYSIS
one way to organize the external factors into the generally
accepted categories of opportunities and threats as well as to A RESOURCE-BASED APPROACH TO
analyze how well a particular company’s management (rating) ORGANIZATIONAL ANALY SIS
is responding to these specific factors in light of the perceived Scanning and analyzing the external environment for
importance (weight) of these factors to the company opportunities and threats is not enough to provide an
organization a competitive advantage. Analysts must also look
within the corporation itself to identify internal strategic
factors—critical strengths and weaknesses that are likely to
determine whether a firm will be able to take advantage of
opportunities while avoiding threats.

 This internal scanning, often referred to as

organizational analysis, is concerned with identifying
and developing an organization’s resources and
competencies.

CORE ANF DISTINCTIVE COMPETENCIES

 Resources are an organization’s assets and are thus
the basic building blocks of the organization. They
include tangible assets, such as its plant, equipment,
finances, and location, human assets, in terms of the
DISCUSSION QUESTIONS: number of employees, their skills, and motivation,
1. Discuss how a development in a corporation’s natural and intangible assets, such as its technology (patents
and societal environments can affect the corporation and copyrights), culture, and reputation.
through its task environment.  Capabilities refer to a corporation’s ability to exploit
2. According to Porter, what determines the level of its resources. They consist of business processes and
competitive intensity in an industry? routines that manage the interaction among
3. According to Porter’s discussion of industry analysis, resources to turn inputs into outputs.
is Pepsi Cola a substitute for Coca-Cola? - there are marketing capabilities, manufacturing
4. How can a decision maker identify strategic factors in capabilities, and human resource management
a corporation’s external international environment? capabilities. When these capabilities are constantly
5. Compare and contrast trend extrapolation with the being changed and reconfigured to make them more
writing of scenarios as forecasting techniques. adaptive to an uncertain environment, they are called
dynamic capabilities
SUMMARY  Competency is a cross-functional integration and
 Environmental scanning involves monitoring, coordination of capabilities
collecting, and evaluating information in order to  Core competency is a collection of competencies that
understand the current trends in the natural, societal, crosses divisional boundaries, is widespread within
and task environments. the corporation, and is something that the
 The information is then used to forecast whether corporation can do exceedingly well. Thus, new
these trends will continue or whether others will take product development is a core competency if it goes
their place. beyond one division
 We use this information to make certain assumptions
** company must continually reinvest in a core competency or
about the future— assumptions that are then used in
risk its becoming a core rigidity or deficiency, that is, a
strategic planning.
strength that over time matures and may become a weakness.
 In many ways, success in the business world is like ice
hockey: The key to winning is not to assume that your  Distinctive competencies - When core competencies
industry will continue as it is now but to assume that are superior to those of the competition
the industry will change and to make sure that your
company will be in position to take advantage of
those changes.

zjrs
Barney, in his VRIO framework of analysis, proposes four worked with a design firm to create the special
questions to evaluate a firm’s competencies: appeal of its personal computers and iPods.
4. It may be carefully built and accumulated over time
1. Value: Does it provide customer value and
within the company. For example, Honda carefully
competitive advantage?
extended its expertise in small motor manufacturing
2. Rareness: Do no other competitors possess it?
from motorcycles to autos and lawnmowers.
3. Imitability: Is it costly for others to imitate?
4. Organization: Is the firm organized to exploit the
 The desire to build or upgrade a core competency is
resource?
one reason entrepreneurial and other fast-growing
firms often tend to locate close to their competitors.
 If the answer to each of these questions is yes for a
They form clusters— geographic concentrations of
particular competency, it is considered to be a
interconnected companies and industries.
strength and thus a distinctive competence.
 Being close to one’s competitors makes it easier to
 It is important to evaluate the importance of a
measure and compare performance against rivals.
company’s resources, capabilities, and competencies
to ascertain whether they are internal strategic DETERMINING THE SUSTAINABILITY OF AN
factors—that is, particular strengths and weaknesses ADVANTAGE
that will help determine the future of the company.
Just because a firm is able to use its resources, capabilities,
This can be done by comparing measures of these
and competencies to develop a competitive advantage does
factors with measures of (1) the company’s past
not mean it will be able to sustain it. Two characteristics
performance, (2) the company’s key competitors, and
determine the sustainability of a firm’s distinctive
(3) the industry as a whole.
competency(ies): durability and imitability
USING RESOURCES TO GAIN COMPETITIVE DURABILITY:
ADVANTAGE
 the rate at which a firm’s underlying resources,
Grant proposes a five-step, resource-based approach to
capabilities, or core competencies depreciate or
strategy analysis
become obsolete.
1. Identify and classify the firm’s resources in terms of  New technology can make a company’s core
strengths and weaknesses. competency obsolete or irrelevant.
2. Combine the firm’s strengths into specific capabilities
IMITABILITY
and core competencies.
3. Appraise the profit potential of these capabilities and  the rate at which a firm’s underlying resources,
competencies in terms of their potential for capabilities, or core competencies can be duplicated
sustainable competitive advantage and the ability to by others.
harvest the profits resulting from their use. Are there
any distinctive competencies? A core competency can be easily imitated to the extent that it
4. Select the strategy that best exploits the firm’s is transparent, transferable, and replicable.
capabilities and competencies relative to external
 Transparency - the speed with which other firms can
opportunities.
understand the relationship of resources and
5. Identify resource gaps and invest in upgrading
capabilities supporting a successful firm’s strategy.
weaknesses
 Transferability - the ability of competitors to gather
Where do these competencies come from? A corporation can the resources and capabilities necessary to support a
gain access to a distinctive competency in four ways: competitive challenge.
 Replicability - the ability of competitors to use
1. It may be an asset endowment, such as a key patent, duplicated resources and capabilities to imitate the
coming from the founding of the company. For other firm’s success.
example, Xerox grew on the basis of its original
copying patent.  It is relatively easy to learn and imitate another
2. It may be acquired from someone else. For example, company’s core competency or capability if it comes
Whirlpool bought a worldwide distribution system from explicit knowledge, that is, knowledge that can
when it purchased Philips’s appliance division. be easily articulated and communicated. This is the
3. It may be shared with another business unit or type of knowledge that competitive intelligence
alliance partner. For example,Apple Computer activities can quickly identify and communicate.

zjrs
  Tacit knowledge, in contrast, is knowledge that is not margin entry point (Saturn’s basic sedans) and move
easily communicated because it is deeply rooted in them up to high-priced, high-margin products (SUVs
employee experience or in a corporation’s culture and pickup trucks) where the company makes its
 Tacit knowledge is more valuable and more likely to money.
lead to a sustainable competitive advantage than is  Multi-component system/installed base model:
explicit knowledge because it is much harder for Gillette invented this classic model to sell razors at
competitors to imitate. break-even pricing in order to make money on
higher-margin razor blades.
An organization’s resources and capabilities can be placed on
 Advertising model: Similar to the multi-component
a continuum to the extent they are durable and can’t be
system/installed base model, this model offers its
imitated (that is, aren’t transparent, transferable, or
basic product free in order to make money on
replicable) by another firm.
advertising. Originating in the newspaper industry,
this model is used heavily in commercial radio and
television. Internet-based firms, such as Google, offer
free services to users in order to expose them to the
advertising that pays the bills.
 Switchboard model: In this model a firm acts as an
intermediary to connect multiple sellers to multiple
buyers.
 At one extreme are slow-cycle resources , which are  Time model: Product R&D and speed are the keys to
sustainable because they are shielded by patents, success in the time model. Being the first to market
geography, strong brand names, or tacit knowledge. with a new innovation allows a pioneer like Sony to
These resources and capabilities are distinctive earn high margins. Once others enter the market
competencies because they provide a sustainable with process R&D and lower margins, it’s time to
competitive advantage. move on.
 The other extreme includes fast-cycle resources,  Efficiency model: In this model a company waits
which face the highest imitation pressures because until a product becomes standardized and then
they are based on a concept or technology that can enters the market with a low-priced, low-margin
be easily duplicated, such as Sony’s walkman. product that appeals to the mass market. This model
is used by Wal-Mart, Dell, and Southwest Airlines.
BUSINESS MODELS
 Blockbuster model: In some industries, such as
 A business model is a company’s method for making pharmaceuticals and motion picture studios,
money in the current business environment. profitability is driven by a few key products. The focus
A business model is usually composed of five elements: is on high investment in a few products with high
potential payoffs—especially if they can be protected
1. Who it serves by patents.
2. What it provides  Profit multiplier model: The idea of this model is to
3. How it makes money develop a concept that may or may not make money
4. How it differentiates and sustains competitive on its own but, through synergy, can spin off many
advantage profitable products. Walt Disney invented this
5. How it provides its product/service concept by using cartoon characters to develop high-
margin theme parks, merchandise, and licensing
The simplest business model is to provide a good or service
opportunities.
that can be sold so that revenues exceed costs and expenses.
 Entrepreneurial model: In this model, a company
Other models can be much more complicated. Some of the
offers specialized products/services to market niches
many possible business models are:
that are too small to be worthwhile to large
 Customer solutions model: IBM uses this model to competitors but have the potential to grow quickly.
make money not by selling IBM products, but by Small, local brew pubs have been very successful in a
selling its expertise to improve its customers’ mature industry dominated by Anheuser-Busch. This
operations. This is a consulting model. model has often been used by small high-tech firms
 Profit pyramid model: General Motors offers a full that develop innovative prototypes in order to sell off
line of automobiles in order to close out any niches the companies (without ever selling a product) to
where a competitor might find a position. The key is Microsoft or DuPont.
to get customers to buy in at the low-priced, low-
zjrs
  De Facto industry standard model: In this model, a CORPORATE VALUE-CHAIN ANALYSIS
company offers products free or at a very low price in Each corporation has its own internal value chain of activities.
order to saturate the market and become the See Figure 5–3 for an example of a corporate value chain
industry standard. Once users are locked in, the
company offers higher-margin products using this
standard. For example, Microsoft packaged Internet
Explorer free with its Windows software in order to
take market share from Netscape’s Web browser.

VALUE-CHAIN ANALYSIS
 A value chain is a linked set of value-creating
activities that begin with basic raw materials coming
from suppliers, moving on to a series of value-added
activities involved in producing and marketing a  Porter proposes that a manufacturing firm’s primary
product or service, and ending with distributors activities usually begin with inbound logistics (raw
getting the final goods into the hands of the ultimate materials handling and warehousing), go through an
consumer. operations process in which a product is
manufactured, and continue on to outbound logistics
(warehousing and distribution), to marketing and
sales, and finally to service (installation, repair, and
sale of parts).
 The focus of value-chain analysis is to examine the  Several support activities, such as procurement
corporation in the context of the overall chain of (purchasing), technology development (R&D), human
value-creating activities, of which the firm may be resource management, and firm infrastructure
only a small part. (accounting, finance, strategic planning), ensure that
the primary value chain activities operate effectively
INDUSTRY VALUE-CHAIN ANALYSIS
and efficiently.
The value chains of most industries can be split into two
 According to Porter, “Differences among competitor
segments, upstream and downstream segments.
value chains are a key source of competitive
 In the petroleum industry, for example, upstream advantage.”
refers to oil exploration, drilling, and moving of the  Corporate value chain analysis involves the following
crude oil to the refinery, and downstream refers to three steps:
refining the oil plus transporting and marketing 1. Examine each product line’s value chain in
gasoline and refined oil to distributors and gas station terms of the various activities involved in
retailers. producing that product or service
 An industry can be analyzed in terms of the profit 2. Examine the “linkages” within each product
margin available at any point along the value chain. line’s value chain. Linkages are the
 In analyzing the complete value chain of a product, connections between the way one value
note that even if a firm operates up and down the activity (for example, marketing) is
entire industry chain, it usually has an area of performed and the cost of performance of
expertise where its primary activities lie. another activity (for example, quality
 A company’s center of gravity is the part of the chain control).
that is most important to the company and the point 3. Examine the potential synergies among the
where its greatest expertise and capabilities lie—its value chains of different product lines or
core competencies business units
-economies of scope, which result when the
value chains of two separate products or
services share activities, such as the same
marketing channels or manufacturing
facilities. The cost of joint production of
multiple products can be lower than the cost
of separate production.

zjrs
SCANNING FUNCTIONAL RESOURCES AND responsibility and authority for the management of
CAPABILITIES their own functional areas
- An SBU may be of any size or level, but it must have
The simplest way to begin an analysis of a corporation’s value
(1) a unique mission, (2) identifiable competitors, (3)
chain is by carefully examining its traditional functional areas
an external market focus, and (4) control of its
for potential strengths and weaknesses. If used properly,
business functions
these resources and capabilities serve as strengths to carry out
-Stage III
value-added activities and support strategic decisions.
 Conglomerate Structure - appropriate for a large
BASIC ORGANIZATIONAL STRUCTURES corporation with many product lines in several
unrelated industries.
- A variant of the divisional structure, the
conglomerate structure (sometimes called a holding
company) is typically an assemblage of legally
independent firms (subsidiaries) operating under one
corporate umbrella but controlled through the
subsidiaries’ boards of directors.
-Stage III

CORPORATE CULTURE: THE COMPANY WAY

In most organizations, the “company way” is derived from the
corporation’s culture.

 Corporate culture is the collection of beliefs,

expectations, and values learned and shared by a
corporation’s members and transmitted from one
generation of employees to another.
 The corporate culture generally reflects the values of
Three Basic Organizational Structures the founder(s) and the mission of the firm.
 It gives a company a sense of identity: “This is who
 Simple Structure - has no functional or product we are. This is what we do. This is what we stand for.”
categories and is appropriate for a small,
entrepreneur-dominated company with one or two Corporate culture has two distinct attributes, intensity and
product lines that operates in a reasonably small, integration.
easily identifiable market niche.
1. Cultural intensity is the degree to which members of
- Employees tend to be generalists and jacks-of-all-
a unit accept the norms, values, or other culture
trades
content associated with the unit. This shows the
- In terms of stages of development (to be discussed
culture’s depth
in Chapter 9), this is a Stage I company
2. Cultural integration is the extent to which units
 Functional Structure - appropriate for a medium-
throughout an organization share a common culture.
sized firm with several product lines in one industry.
This is the culture’s breadth.
- Employees tend to be specialists in the business
functions that are important to that industry, such as Corporate culture fulfills several important functions in an
manufacturing, marketing, finance, and human organization:
resources.
1. Conveys a sense of identity for employees.
-Stage II company
2. Helps generate employee commitment to something
 Divisional Structure - appropriate for a large
greater than themselves.
corporation with many product lines in several
3. Adds to the stability of the organization as a social
related industries.
system.
- Employees tend to be functional specialists
4. Serves as a frame of reference for employees to use
organized according to product/market distinctions
to make sense of organizational activities and to use
-Stage III company
as a guide for appropriate behavior.
 Strategic Business Units (SBUs) - a modification of
the divisional structure. SBUs are divisions or groups
 Corporate culture shapes the behavior of people in a
of divisions composed of independent product-
corporation, thus affecting corporate performance.
market segments that are given primary
For example, corporate cultures that emphasize the
zjrs
 socialization of new employees have less employee
turnover, leading to lower costs.
 A change in mission, objectives, strategies, or policies
is not likely to be successful if it is in opposition to the
accepted culture of a firm. Foot-dragging and even
sabotage may result, as employees fight to resist a
radical change in corporate philosophy.
 Corporate culture is also important when considering
an acquisition. The merging of two dissimilar cultures,
if not handled wisely, can create some serious
internal conflicts.

STRATEGIC MARKETING ISSUES

The marketing manager is a company’s primary link to the
customer and the competition. The manager, therefore, must
be especially concerned with the market position and
marketing mix of the firm as well as with the overall BRAND AND CORPORATE REPUTATION
reputation of the company and its brands.
 A brand is a name given to a company’s product
MARKET POSITION AND SEGMENTATION which identifies that item in the mind of the
consumer.
 Market position deals with the question, “Who are
 A corporate brand is a type of brand in which the
our customers?” It refers to the selection of specific
company’s name serves as the brand. The value of a
areas for marketing concentration and can be
corporate brand is that it typically stands for
expressed in terms of market, product, and
consumers’ impressions of a company and can thus
geographic locations
be extended onto products not currently offered—
 Through market research, corporations are able to
regardless of the company’s actual expertise.
practice market segmentation with various products
 A corporate reputation is a widely held perception of
or services so that managers can discover what
a company by the general public. It consists of two
niches to seek, which new types of products to
attributes: (1) stakeholders’ perceptions of a
develop, and how to ensure that a company’s many
corporation’s ability to produce quality goods and (2)
products do not directly compete with one another.
a corporation’s prominence in the minds of
MARKETING MIX stakeholders.
-It can serve in marketing as both a signal and an
 refers to the particular combination of key variables entry barrier. It contributes to its goods having a
under a corporation’s control that can be used to price premium.
affect demand and to gain competitive advantage. - Like tacit knowledge, reputation tends to be long-
These variables are product, place, promotion, and lasting and hard for others to duplicate—thus
price. providing sustainable competitive advantage
 Research reveals a positive relationship between
corporate reputation and financial performance

STRATEGIC FINANCIAL ISSUES

A financial manager must ascertain the best sources of funds,
uses of funds, and control of funds. All strategic issues have
financial implications.
PRODUCT LIFE CYCLE
FINANCIAL LEVERAGE
 the product life cycle is a graph showing time plotted
 The concept of financial leverage (the ratio of total
against the monetary sales of a product as it moves
debt to total assets) is helpful in describing how debt
from introduction through growth and maturity to
is used to increase the earnings available to common
decline. This concept enables a marketing manager to
shareholders.
examine the marketing mix of a particular product or
 When the company finances its activities by sales of
group of products in terms of its position in its life
bonds or notes instead of through stock, the earnings
cycle.

zjrs
 per share are boosted: the interest paid on the debt  A company’s R&D unit should be evaluated for
reduces taxable income, technological competence in both the development
 but fewer shareholders share the profits than if the and the use of innovative technology.
company had sold more stock to finance its activities  A company should also be proficient in technology
 High leverage may therefore be perceived as a transfer, the process of taking a new technology from
corporate strength in times of prosperity and ever- the laboratory to the marketplace.
increasing sales
R&D MIX
 or as a weakness in times of a recession and falling
sales  Basic R&D is conducted by scientists in well-equipped
 Research indicates that greater leverage has a laboratories where the focus is on theoretical
positive impact on performance for firms in stable problem areas. The best indicators of a company’s
environments, but a negative impact for firms in capability in this area are its patents and research
dynamic environments. publications.
 Product R&D concentrates on marketing and is
CAPITAL BUDGETING
concerned with product or product-packaging
 Capital budgeting is the analyzing and ranking of improvements. The best measurements of ability in
possible investments in fixed assets such as land, this area are the number of successful new products
buildings, and equipment in terms of the additional introduced and the percentage of total sales and
outlays and additional receipts that will result from profits coming from products introduced within the
each investment past five years
 A good finance department will be able to prepare  Engineering (or process) R&D is concerned with
such capital budgets and to rank them on the basis of engineering, concentrating on quality control, and
some accepted criteria or hurdle rate (for example, the development of design specifications and
years to pay back investment, rate of return, or time improved production equipment. A company’s
to break-even point) for the purpose of strategic capability in this area can be measured by consistent
decision making. reductions in unit manufacturing costs and by the
 Projects with high strategic significance, such as number of product defects.
entering new markets or defending market share, will  Most corporations will have a mix of basic, product,
often have low hurdle rates and process R&D, which varies by industry, company,
and product line. The balance of these types of
STRATEGIC RESEARCH AND DEVELOPMENT (R&D) research is known as the R&D mix and should be
ISSUES appropriate to the strategy being considered and to
The R&D manager is responsible for suggesting and each product’s life cycle.
implementing a company’s technological strategy in light of its
IMPACT OF TECHNOLOGICAL DISCONTINUITY ON STRATEGY
corporate objectives and policies.
The R&D manager must determine when to abandon present
 The manager’s job, therefore, involves
technology and when to develop or adopt new technology
(1) choosing among alternative new technologies to
use within the corporation  Richard Foster of McKinsey and Company states that
(2) developing methods of embodying the new the displacement of one technology by another
technology in new products and processes (technological discontinuity) is a frequent and
(3) deploying resources so that the new technology strategically important phenomenon.
can be successfully implemented.  For each technology within a given field or industry,
according to Foster, the plotting of product
R&D INTENSITY, TECHNOLOGICAL COMPETENCE, AND
performance against research effort/expenditures on
TECHNOLOGY TRANSFER
a graph results in an S-shaped curve.
 A company’s R&D intensity (its spending on R&D as a  Computerized information technology is currently on
percentage of sales revenue) is a principal means of the steep upward slope of its S-curve in which
gaining market share in global competition. relatively small increments in R&D effort result in
 A good rule of thumb for R&D spending is that a significant improvement in performance.
corporation should spend at a “normal” rate for that
particular industry unless its strategic plan calls for
unusual expenditures.

zjrs
 at low levels and still be profitable.
- In terms of strategy, this firm should look for a niche
in the marketplace for which it can produce and sell a
reasonably small quantity of custom-made goods.
 In contrast, continuous systems are those laid out as
lines on which products can be continuously
assembled or processed.
- A firm using continuous systems invests heavily in
fixed investments such as automated processes and
highly sophisticated machinery. Its labor force,
relatively small but highly skilled, earns salaries rather
than piece-rate wages.
-High fixed cost
 operating leverage - the impact of a specific change
in sales volume on net operating income.
 The advantage of high operating leverage is that once
the firm reaches break-even, its profits rise faster
than do those of less automated firms having lower
operating leverage.
 However, a firm with high operating leverage is likely
to suffer huge losses during a recession.
 This reluctance to switch technologies (even when
 In terms of strategy, this firm needs to find a high-
the firm is aware of the new technology and may
demand niche in the marketplace for which it can
have even invented it!) is because the resource
produce and sell a large quantity of goods
allocation process in most companies gives priority to
those projects (typically based on the old technology) EXPERIENCE CURVE
with the greatest likelihood of generating a good
 The experience curve suggests that unit production
return on investment—those projects appealing to
costs decline by some fixed percentage (commonly
the firm’s current customers (whose products are
20%–30%) each time the total accumulated volume
also based on the characteristics of the old
of production in units doubles.
technology).
 Management commonly uses the experience curve in
 The new technology is generally riskier and of little
estimating the production costs of (1) a product
appeal to the current customers of established firms.
never before made with the present techniques and
 New entrepreneurial firms are typically more
processes or (2) current products produced by newly
interested in the new technology because it is one
introduced techniques or processes.
way to appeal to a developing market niche in a
 Although many firms have used experience curves
market currently dominated by established
extensively, an unquestioning acceptance of the
companies.
industry norm (such as 80% for the airframe industry
STRATEGIC OPERATION ISSUES or 70% for integrated circuits) is very risky. The
The primary task of the operations (manufacturing or service) experience curve of the industry as a whole might not
manager is to develop and operate a system that will produce hold true for a particular company for a variety of
the required number of products or services, with a certain reasons
quality, at a given cost, within an allotted time.
FLEXIBLE MANUFACTURING FOR MASS CUSTOMIZATION
In very general terms, manufacturing can be intermittent or
 The use of Computer-Assisted Design and Computer
continuous.
Assisted Manufacturing (CAD/CAM) and robot
 In intermittent systems (job shops), the item is technology means that learning times are shorter and
normally processed sequentially, but the work and products can be economically manufactured in small,
sequence of the process vary. customized batches in a process called mass
- Because most of the costs associated with the customization—the low-cost production of
product are variable (many employees earn piece- individually customized goods and services.
rate wages), a job shop’s variable costs are higher  Economies of scope (in which common parts of the
than those of automated firms manufacturing activities of various products are
- Its advantage over other firms is that it can operate combined to gain economies even though small
zjrs
 numbers of each product are made) replace making
Economies of scale (in which unit costs are reduced 4. Higher knowledge requirements derived from a greater
by making large numbers of the same product) in emphasis on service
flexible manufacturing 5. Increasing globalization of trade and corporate activity
 Flexible manufacturing permits the low-volume
output of custom-tailored products at relatively low
unit costs through economies of scope.

STRATEGIC HUMAN RESOURCE (HRM) ISSUES

UNION RELATIONS AND TEMPORARY/PART-TIME WORKERS
The primary task of the manager of human resources is to
improve the match between individuals and jobs If the corporation is unionized, a good human resource
manager should be able to work closely with the union.
 Research indicates that companies with good HRM
practices have higher profits and a better survival  To save jobs, U.S. unions are increasingly willing to
rate than do firms without these practices. support new strategic initiatives and employee
involvement programs.
INCREASING USE OF TEAMS
 European unions tend to be militant, politically
 Management is beginning to realize that it must be oriented, and much less interested in working with
more flexible in its utilization of employees in order management to increase efficiency. Nationwide
for human resources to be classified as a strength. strikes can occur quickly. In contrast, Japanese unions
 Human resource managers, therefore, need to be are typically tied to individual companies and are
knowledgeable about work options such as part-time usually supportive of management. These differences
work, job sharing, flex-time, extended leaves, and among countries have significant implications for the
contract work, and especially about the proper use of management of multinational corporations
teams.
QUALITY OF WORK LIFE AND HUMAN DIVERSITY
 Over two-thirds of large U.S. companies are
successfully using autonomous (self-managing) work Human resource departments have found that to reduce
teams in which a group of people work together employee dissatisfaction and unionization efforts (or,
without a supervisor to plan, coordinate, and conversely, to improve employee satisfaction and existing
evaluate their own work union relations), they must consider the quality of work life in
 cross-functional work teams - Instead of developing the design of jobs
products in a series of steps—beginning with a
 The knowledgeable human resource manager,
request from sales, which leads to design, then to
engineering and on to purchasing, and finally to therefore, should be able to improve the
manufacturing)—companies are tearing down the corporation’s quality of work life by
traditional walls separating the departments so that (1) introducing participative problem solving,
(2) restructuring work,
people from each discipline can get involved in
(3) introducing innovative reward systems, and
projects early on.
 concurrent engineering - the once-isolated specialists (4) improving the work environment.
now work side by side and compare notes constantly  Companies are also discovering that by redesigning
their plants and offices for improved energy
in an effort to design cost-effective products with
efficiency, they can receive a side effect of improving
features customers want.
 Virtual teams are groups of geographically and/or their employees’ quality of work life—thus raising
organizationally dispersed co-workers that are labor productivity.
assembled using a combination of  Human diversity refers to the mix in the workplace of
people from different races, cultures, and
telecommunications and information technologies to
backgrounds.
accomplish an organizational task.
 Research does indicate that an increase in racial
The use of virtual teams to replace traditional face-to-face diversity leads to an increase in firm performance.
work groups is being driven by five trends:  Good human resource managers should be working
to ensure that people are treated fairly on the job
1. Flatter organizational structures with increasing cross-
and not harassed by prejudiced co-workers or
functional coordination need
managers.
2. Turbulent environments requiring more inter-organizational
 Research does reveal that competitive strategies are
cooperation
more successfully executed in those companies with
3. Increasing employee autonomy and participation in decision
zjrs
 a high level of commitment to their employees than Simple Syndication), social networks (e.g., MySpace and
in those firms with less commitment Facebook), podcasts, and mash-ups through company Web
sites to forge tighter links with customers and suppliers and to
STRATEGIC INFORMATION SYSTEMS/TECHNOLOGY engage employees more successfully.
ISSUES
The primary task of the manager of information
systems/technology is to design and manage the flow of SUPPLY CHAIN MANAGEMENT
information in an organization in ways that improve
productivity and decision making. The expansion of the marketing-oriented Internet into
intranets and extranets is making significant contributions to
IMPACT ON PERFORMANCE organizational performance through supply chain
management.
Information systems/technology offers four main
contributions to corporate performance.  Supply chain management is the forming of
networks for sourcing raw materials, manufacturing
1. First,(beginning in the 1970s with mainframe
products or creating services, storing and distributing
computers) it is used to automate existing back-office
the goods, and delivering them to customers and
processes, such as payroll, human resource records,
consumers.
accounts payable and receivable, and to establish
 A survey of global executives revealed that their
huge databases.
interest in supply chains was first to reduce costs, and
2. Second, (beginning in the 1980s) it is used to
then to improve customer service and get new
automate individual tasks, such as keeping track of
products to market faster.
clients and expenses, through the use of personal
 Industry leaders are integrating modern information
computers with word processing and spreadsheet
systems into their corporate value chains to
software.
harmonize companywide efforts and to achieve
These first two contributions tend to focus on reducing costs. competitive advantage.
 Radio-frequency identification (RFID) tags containing
3. Third, (beginning in the 1990s) it is used to enhance
product information is used to track goods through
key business functions, such as marketing and
inventory and distribution channels.
operations. This third contribution focuses on
productivity improvements. The system provides SYNTHESIS OF INTERNAL FACTORS
customer support and help in distribution and
After strategists have scanned the internal organizational
logistics.
environment and identified factors for their particular
4. Fourth, (beginning in 2000) it is used to develop
corporation, they may want to summarize their analysis of
competitive advantage.
these factors using a form such as that given in Table 5–2.
A current trend in corporate information systems/technology
is the increasing use of the Internet for marketing, intranets
for internal communication, and extranets for logistics and
distribution.

 An intranet is an information network within an

organization that also has access to the external
worldwide Internet. Intranets typically begin as ways
to provide employees with company information
such as lists of product prices, fringe benefits, and
company policies.
 An extranet is an information network within an
organization that is available to key suppliers and
customers. The key issue in building an extranet is
the creation of “fire walls” to block extranet users
from accessing the firm’s or other users’ confidential
data.  This IFAS (Internal Factor Analysis Summary) Table is
one way to organize the internal factors into the
generally accepted categories of strengths and
A recent development in information systems/technology is weaknesses as well as to analyze how well a
Web 2.0. Web 2.0 refers to the use of wikis, blogs, RSS (Really
zjrs
 particular company’s management is responding to
these specific factors in light of the perceived
importance of these factors to the company
 Use the VRIO framework (Value, Rareness,
Imitability, & Organization) to assess the importance
of each of the factors that might be considered
strengths.

DISCUSSION QUESTIONS:
1. What is the relevance of the resource-based view of
the firm to strategic management in a global
environment?
2. How can value-chain analysis help identify a
company’s strengths and weaknesses?
3. In what ways can a corporation’s structure and
culture be internal strengths or weaknesses?
4. What are the pros and cons of management’s using
the experience curve to determine strategy?
5. How might a firm’s management decide whether it
should continue to invest in current known
technology or in new, but untested technology?
What factors might encourage or discourage such a
shift?

SUMMARY

zjrs
STRATEGY FORMULATION: SITUATION ANALYSIS Note: A niche is propitious to the extent that it currently is just
large enough for one firm to satisfy its demand. After a firm
& BUSINESS STRATEGY
has found and filled that niche, it is not worth a potential
 Often referred to as strategic planning or long-range competitor’s time or money to also go after the same niche.
planning, is concerned with developing a Such a niche may also be called a strategic sweet spot
corporation’s mission, objectives, strategies, and
policies. Strategic window - a unique market opportunity that is
available only for a particular time.
SWOT ANALYSIS - An acronym used to describe the
particular Strengths, Weaknesses, Opportunities, and Threats
that are strategic factors for a specific company

Primary criticisms of SWOT:

 It generates lengthy lists.

 It uses no weights to reflect priorities.
 It uses ambiguous words and phrases.
 The same factor can be placed in two categories (e.g.,
a strength may also be a weakness).
 There is no obligation to verify opinions with data or
analysis.
 It requires only a single level of analysis.
 There is no logical link to strategy implementation

GENERATING SFAS MATR IX

 summarizes an organization’s strategic factors
by combining the external factors from the EFAS
Table with the internal factors from the IFAS REVIEW OF MISSION AN D OBJECTIVES
Table A reexamination of an organization’s current mission and
objectives must be made before alternative strategies can be
generated and evaluated

 If the mission does not provide a common thread (a

unifying theme) for a corporation’s businesses,
managers may be unclear about where the company
is heading.
 A company’s objectives can also be inappropriately
stated. They can either focus too much
on short-term operational goals or be so general that
they provide little real guidance

TOWS MATRIX
 illustrates how the external opportunities and
threats facing a particular corporation can be
matched with that company’s internal strengths
and weaknesses to result in four sets of possible
strategic alternatives.

FINDING A PROPITIOUS NICHE

 an extremely favorable niche—that is so well suited
to the firm’s internal and external environment that
other corporations are not likely to challenge or
dislodge it.

Niche - a need in the marketplace that is currently unsatisfied.

zjrs
 FOUR VARIATIONS OF GENERIC STRATEGIES
1. COST LEADERSHIP - is a lower-cost competitive
strategy that aims at the broad mass market
- charge a lower price for its products
than its competitors and still make a satisfactory
profit.
- Its low price will also serve as a
barrier to entry because few new entrants will be
able to match the leader’s cost advantage
- Cost leaders are likely to earn
above-average returns on investment
- Its high market share means that it
BUSINESS STRATEGIES will have high bargaining power relative to its
 focuses on improving the competitive position of a suppliers (because it buys in large quantities)
company’s or business unit’s products or services within the  aggressive construction of efficient-scale
specific industry or market segment that the company or facilities
business unit serves.  vigorous pursuit of cost reductions from
experience
TWO TYPES OF BUSINESS STRATEGY:
 tight cost and overhead control
1. Competitive Strategy - battling against all  avoidance of marginal customer accounts
competitors for advantage  cost minimization in areas like R&D, service,
2. Cooperative strategy - working with one or more sales force, advertising, etc.
companies to gain advantage against other
RISKS:
competitors
 Competitors imitate
PORTER’S COMPETITIVE STRATEGIES  Technology changes
 Should we compete on the basis of lower cost (and  Other bases for cost leadership erodes
thus price), or should we differentiate our products or  Proximity in differentiation is lost
services on some basis other than cost, such as  Cost focusers achieve even lower cost in segments
quality or service?
 Should we compete head to head with our major 2. DIFFERENTIATION - aimed at the broad mass market
competitors for the biggest but most and involves the creation of a product or service that
sought-after share of the market, or should we focus is perceived throughout its industry as unique.
on a niche in which we can satisfy a - The company or business unit may
less sought-after but also profitable segment of the then charge a premium for its product
market? - The company or business unit may
then charge a premium for its product
TWO “GENERIC” COMPETITIVE STRATEGIES
- Increased costs can usually be
1. Lower cost strategy - the ability of a company or a
passed on to the buyers
business unit to design, produce, and market a
- Increased costs can usually be
comparable product more efficiently than its
passed on to the buyers
competitors
2. Differentiation strategy - the ability of a company to RISKS:
provide unique and superior value to the buyer in
terms of product quality, special features, or after-  Competitors imitate
sale service  Bases for differentiation become less important to
buyers
 Cost proximity is lost
 Differentiation focusers achieve even greater
COMPETITIVE SCOPE - the breadth of the company’s or
differentiation in segments
business unit’s target market.

1. Broad target - aim at the middle of the mass market

2. Narrow target - aim at a market niche NOTE: differentiation strategy is more likely to generate higher
profits than does a low-cost strategy because differentiation

zjrs
creates a better entry barrier. A low-cost strategy is more 6. Serviceability - Product’s ease of repair
likely, however, to generate increases in market share. 7. Aesthetics - How a product looks, feels, sounds,
tastes, or smells
3. COST FOCUS - a low-cost competitive strategy that
8. Perceived Quality - Product’s overall reputation.
focuses on a particular buyer group or geographic
market and attempts to serve only this niche. INDUSTRY STRUCTURE A ND COMPETITIVE STRAT EGY
4. DIFFERENTIATION FOCUS - like cost focus,
Fragmented industry - many small- and medium-sized local
concentrates on a particular buyer group, product
companies compete for relatively small shares of the total
line segment, or geographic market
market, focus strategies will likely predominate
- a company or business
unit seeks differentiation in a targeted market - Fragmented industries are typical
segment. for products in the early stages of their life cycles.
- This strategy is valued by those who - If few economies are to be
believe that a company or a unit that focuses its gained through size, no large firms will emerge and entry
efforts is better able to serve the special needs barriers will be low—allowing a stream of new entrants into
of a narrow strategic target more effectively than can the industry.
its competition
Consolidated industry - dominated by a few large companies

RISKS: (FOCUS) - market boundaries often increase

the market share of a few companies
 The focus strategy is imitated - competition shifts to a greater
 The target segment becomes structurally unattractive emphasis on cost and service.
 Structure erodes
 Demand disappears REQUIREMENTS FOR GEN ERIC COMPETITIVE
 Broadly targeted competitors overwhelm the STRATEGIES
segment:
 The segment’s differences from other
 segments narrow
 The advantages of a broad line increase
 New focusers subsegment the industry

ISSUES IN COMPETITVE STRATEGIES

Porter argues that to be successful, a company or business
unit must achieve one of the previously mentioned generic
competitive strategies. Otherwise, the company or business
unit is stuck in the middle of the competitive marketplace
with no competitive advantage and is doomed to below- COMPETITIVE TACTICS
average performance. Tactic - a specific operating plan that details how a strategy is
Although Porter agrees that it is possible for a company or a to be implemented in terms of when and where it is to be put
into action
business unit to achieve low cost and differentiation
simultaneously, he continues to argue that this state is often -tactics are narrower in scope and shorter in time horizon than
temporary. are strategies
-link between the formulation and implementation of strategy

THE EIGHT DIMENSIONS OF QUALITY

1. Performance - Primary operating characteristics,
TIMING TACTICS: WHEN TO COMPETE?
2. Features - supplement the basic functions Timing tactics - deals with when a company implements a
3. Reliability - Probability that the product will continue strategy
functioning without any significant maintenance First mover (pioneer) - first company to manufacture and sell
4. Conformance - Degree to which a product meets a new product or service
standards
ADVANTAGES OF FIRST MOVER:
5. Durability - Number of years of service a consumer
can expect from a product before it significantly  the company is able to establish a reputation as an
deteriorates. industry leader

zjrs
  move down the learning curve to assume the cost- handheld computer market, Apple introduced the
leader position iPod as a personal digital music player
 earn temporarily high profits from buyers who value  Encirclement - encirclement occurs as an attacking
the product or service very highly company or unit encircles the competitor’s position
in terms of products or markets or both.
 set the standard for all subsequent products in the
- For example, Steinway was a major
industry
manufacturer of pianos in the United States until
NOTE: Research does indicate that moving first or second into Yamaha entered the market with a broader range of
a new industry or foreign country results in greater market pianos, keyboards, and other musical instruments.
share and shareholder wealth than does moving later. Being  Guerrilla warfare - characterized by the use of small,
first provides a company profit advantages for about 10 years
intermittent assaults on different market segments
in consumer goods and about 12 years in industrial goods. This
held by the competitor.
is true, however, only if the first mover has sufficient resources
- Avoids retaliation from established competitor
to both exploit the new market and to defend its position
against later arrivals with greater resources. b. Defensive tactic - According to Porter, defensive tactics aim
to lower the probability of attack, divert attacks to less
ADVANTAGES OF LATE MOVER: (DISADVANTAGES FOR FIRST threatening avenues, or lessen the intensity of an attack
MOVER)  Raise structural barriers - Entry barriers act to block a
 may be able to imitate the technological advances of challenger’s logical avenues of attack.
others (and thus keep R&D costs low) o Offer a full line of products in every profitable
 keep risks down by waiting until a new technological market segment
standard or market is established o Block channel access by signing exclusive
agreements with distributors
 take advantage of the first mover’s natural inclination
o Raise buyer switching costs by offering low-cost
to ignore market segments
NOTE: Research indicates that successful late movers tend to training to users
be large firms with considerable resources and related o Low prices on items new users are most likely to
purchase
experience
o Increase scale economies to reduce unit costs
MARKET LOCATION TACTICS: WHERE TO COMPETE? o Foreclose alternative technologies through
Market Location Tactic - where a company implements a patenting or licensing
strategy. o Limit outside access to facilities and personnel
o Tie up suppliers by obtaining exclusive contracts
a. Offensive tactic - usually takes place in an established or purchasing key locations
competitor’s market location o Avoid suppliers that also serve competitors
 Frontal Assault - The attacking firm goes head to o Encourage the government to raise barriers,
head with its competitor. To be successful, the such as safety and pollution standards or
attacker must have not only superior resources, but favorable trade policies
also the willingness to persevere.  Increase expected retaliation - This tactic is any
- Very expensive tactic action that increases the perceived threat of
 Flanking maneuver - Rather than going straight for a retaliation for an attack.
competitor’s position of strength with a frontal o For example, management may strongly defend
assault, a firm may attack a part of the market where any erosion of market share by drastically
the competitor is weak. cutting prices or matching a challenger’s
- Texas Instruments, for example, avoided promotion through a policy of accepting any
competing directly with Intel by developing price-reduction coupons for a competitor’s
microprocessors for consumer electronics, cell product
phones, and medical devices instead of computers  Lower the inducement for attack - A third type of
 Bypass attack – This tactic attempts to cut the defensive tactic is to reduce a challenger’s
market out from under the established defender by expectations of future profits in the industry
offering a new type of product that makes the
COOPERATIVE STRATEGIES
competitor’s product unnecessary
- gain competitive advantage within an industry by
- instead of competing directly
working with other firms.
against Microsoft’s Pocket PC and Palm Pilot for the

zjrs
TWO “GENERAL TYPES” OF STRATEGIES CONTINUUM OF STRATEGIC ALLIANCES
1. Collusion - the active cooperation of firms within an
industry to reduce output and raise prices in order to
get around the normal economic law of supply and
demand.
a. Explicit - firms cooperate through direct 1. Mutual Service Consortia. A mutual service consortium
communication and negotiation (illegal in is a partnership of similar companies in similar industries
most countries) that pool their resources to gain a benefit that is too
b. Tacit - firms cooperate indirectly through an expensive to develop alone, such as access to advanced
informal system of signals (can be illegal in technology.
some circumstances ex: GE and - The mutual service consortia is a fairly weak and distant
Westinghouse both sued for engaging in alliance—appropriate for partners that wish to work
“conscious parallelism” (following each together but not share their core competencies.
other’s lead to reduce the level of
- There is very little interaction or communication among
competition) in order to reduce the partners.
competition.
According to Barney, tacit collusion would be 2. Joint Venture. A joint venture is a “cooperative business
activity, formed by two or more separate organizations
successful if:
for strategic purposes, that creates an independent
(1) there are a small number of identifiable
business entity and allocates ownership, operational
competitors responsibilities, and financial risks and rewards to each
(2) costs are similar among firms member, while preserving their separate
(3) one firm tends to act as the price leader identity/autonomy.
(4) there is a common industry culture that accepts
- Joint ventures provide a way to temporarily combine
cooperation
the different strengths of partners to achieve an
(5) sales are characterized by a high frequency of outcome of value to all.
small orders
(6) large inventories and order backlogs are normal - Disadvantages of joint ventures include loss of
control, lower profits, probability of conflicts with
ways of dealing with fluctuations in demand, and
partners, and the likely transfer of technological
(7) there are high entry barriers to keep out new
advantage to the partner.
competitors
2. Strategic Alliance - long-term cooperative 3. Licensing Arrangements- an agreement in which the
arrangement between two or more independent licensing firm grants rights to another firm in another
country or market to produce and/or sell a product.
firms or business units that engage in business
activities for mutual economic gain - The licensee pays compensation to the licensing firm
in return for technical expertise.
- Companies or business units may form a strategic
- The danger always exists, however, that the licensee
alliance for a number of reasons, including:
might develop its competence to the point that it
1. To obtain or learn new capabilities. Alliances are becomes a competitor to the licensing firm.
especially useful if the desired knowledge or - The danger always exists, however, that the licensee
capability is based on tacit knowledge or on new might develop its competence to the point that it
poorly-understood technology. becomes a competitor to the licensing firm.
2. To obtain access to specific markets. In a survey 4. Value-Chain Partnerships - A value-chain partnership
by the Economist Intelligence Unit, 59% of is a strong and close alliance in which one company
executives stated that their primary reason for or unit forms a long-term arrangement with a key
engaging in alliances was the need for fast and low- supplier or distributor for mutual advantage.
cost expansion into new markets.
DISCUSSION QUESTIONS:
3. To reduce financial risk. Alliances take less 1. What industry forces might cause a propitious
financial resources than do acquisitions or niche to disappear?
going it alone and are easier to exit if necessary
2. Is it possible for a company or business unit to
4. To reduce political risk. : Forming alliances with follow a cost leadership strategy and a
local partners is a good way to overcome eficiencies
differentiation strategy simultaneously? Why or
in resources and capabilities when expanding into
international markets. why not?

zjrs
 3. Is it possible for a company to have a sustainable grow externally through mergers, acquisitions, and
competitive advantage when its industry strategic alliances.
becomes hypercompetitive?  MERGER - transaction involving two or more
4. What are the advantages and disadvantages of corporations in which stock is exchanged but in which
only one corporation survives.
being a first mover in an industry? Give some
- usually occur between firms of somewhat
examples of first mover and late mover firms.
similar size and are usually “friendly.”
Were they successful? - The resulting firm is likely to have a name
5. Why are many strategic alliances temporary? derived from its composite firms.
- Ex: Allied Corporation and Signal Companies
= Allied Signal
STRATEGY FORMULATION: CORPORATE  ACQUISITION - the purchase of a company that is
STRATEGY completely absorbed as an operating subsidiary or
division of the acquiring corporation.
Corporate strategy deals with three key issues facing the - usually occur between firms of different
corporation as a whole: sizes and can be either friendly or hostile (takeovers).
1. The firm’s overall orientation toward growth, stability, or
TWO KEY REASONS WHY GROWTH IS A VERY ATTRACTIVE
retrenchment (directional strategy)
STRATEGY:
2. The industries or markets in which the firm competes
through its products and business units (portfolio analysis) 1. Growth based on increasing market demand may
3. The manner in which management coordinates activities mask flaws in a company—flaws that would be
and transfers resources and cultivates capabilities among immediately evident in a stable or declining market.
product lines and business units (parenting strategy) 2. A growing firm offers more opportunities for
advancement, promotion, and interesting jobs.

Corporate strategy is primarily about the choice of direction TWO BASIC GROWTH STRATEGIES: concentration on the
for a firm as a whole and the management of its business or current product line(s) in one industry and diversification into
product portfolio. other product lines in other industries.

DIRECTIONAL STRATEGY 1. CONCENTRATION - If a company’s current product lines

have real growth potential, concentration of resources
on those product lines makes sense as a strategy for
growth.
a. Vertical growth - can be achieved by taking over a
function previously provided by a supplier or by a
distributor.
A corporation’s directional strategy is composed of three - This may be done in order to reduce costs,
general orientations (sometimes called grand strategies): gain control over a scarce resource, guarantee
1. Growth strategies expand the company’s activities. quality of a key input, or obtain access to
potential customers.
2. Stability strategies make no change to the company’s - can be achieved either internally by
current activities.
expanding current operations or externally
3. Retrenchment strategies reduce the company’s level through acquisitions.
of activities - Vertical growth results in vertical
integration—the degree to which a firm operates
vertically in multiple locations on an industry’s
GROWTH STRATEGIES
value chain from extracting raw materials to
 By far the most widely pursued corporate directional
manufacturing to retailing. More specifically,
strategies are those designed to achieve growth in
assuming a function previously provided by a
sales, assets, profits, or some combination.
supplier is called backward integration (going
Companies that do business in expanding industries
backward on an industry’s value chain). Assuming
must grow to survive.
a function previously provided by a distributor is
 A corporation can grow internally by expanding its
labeled forward integration (going forward on an
operations both globally and domestically, or it can
industry’s value chain).

zjrs
 - Transaction cost economics - proposes that - Exporting - A good way to minimize risk and
vertical integration is more efficient than experiment with a specific product is
contracting for goods and services in the exporting, shipping goods produced in the
marketplace when the transaction costs of buying company’s home country to other countries
goods on the open market become too great. for marketing.
- Licensing - Under a licensing agreement, the
licensing firm grants rights to another firm in
the host country to produce and/or sell a
product. The licensee pays compensation to
Harrigan proposes that a company’s degree of vertical the licensing firm in return for technical
integration can range from total ownership of the value expertise.
chain needed to make and sell a product to no ownership - Franchising - Under a franchising agreement,
at all the franchiser grants rights to another
company to open a retail store using the
- Under full integration, a firm internally franchiser’s name and operating system. In
makes 100% of its key supplies and exchange, the franchisee pays the franchiser
completely controls its distributors. a percentage of its sales as a royalty.
- With taper integration (also called - Joint ventures - Forming a joint venture
concurrent sourcing), a firm internally between a foreign corporation and a
produces less than half of its own domestic company is the most popular
requirements and buys the rest from outside strategy used to enter a new country.
suppliers (backward taper integration). In Companies often form joint ventures to
terms of forward taper integration, a firm combine the resources and expertise needed
sells part of its goods through company- to develop new products or technologies.
owned stores and the rest through general - Acquisitions - A relatively quick way to move
wholesalers into an international area is through
- With quasi-integration, a company does not acquisitions—purchasing another company
make any of its key supplies but purchases already operating in that area.
most of its requirements from outside - Green-Field Development - a company
suppliers that are under its partial control doesn’t want to purchase another company’s
(backward problems along with its assets, it may choose
- Long-term contracts are agreements green-field development and build its own
between two firms to provide agreed-upon manufacturing plant and distribution system.
goods and services to each other for a - Production sharing - means the process of
specified period of time. This cannot really combining the higher labor skills and
be considered to be vertical integration technology available in developed countries
unless it is an exclusive contract that with the lower-cost labor available in
specifies that the supplier or distributor developing countries. (outsourcing)
cannot have a similar relationship with a - Turnkey operations - are typically contracts
competitive firm. for the construction of operating facilities in
b. Horizontal growth - expanding its operations into exchange for a fee. The facilities are
other geographic locations and/or by increasing transferred to the host country or firm when
the range of products and services offered to they are complete. MNCs that perform
current markets. turnkey operations are frequently industrial
- Horizontal growth results in horizontal equipment manufacturers that supply some
integration—the degree to which a firm of their own equipment for the project and
operates in multiple geographic locations at that commonly sell replacement parts and
the same point on an industry’s value chain. maintenance services to the host country.
- Horizontal growth results in horizontal - The term turnkey is based on the
integration—the degree to which a firm concept of only needing to turn the key to
operates in multiple geographic locations at unlock the doors to begin
the same point on an industry’s value chain. - BOT Concept (Build, Operate, Transfer) -
INTERNATIONAL ENTRY OPTIONS FOR variation of the turnkey operation. Instead of
HORIZONTAL GROWTH turning the facility (usually a power plant or

zjrs
 toll road) over to the host country when CONTROVERSIES IN DIRECTIONAL GROWTH STRATEGIES
completed, the company operates the - Research reveals that companies following a related
facility for a fixed period of time during diversification strategy appear to be higher performers
which it earns back its investment plus a and survive longer than do companies with narrower
profit. It then turns the facility over to the scope following a pure concentration strategy
government at little or no cost to the host - growth into areas related to a company’s current
country. product lines is generally more successful than is
- Management Contracts - offer a means growth into completely unrelated areas
through which a corporation can use some of - In terms of diversification strategies, research suggests
its personnel to assist a firm in a host that the relationship between relatedness and
country for a specified fee and period of performance is curvilinear in the shape of an inverted
time. U-shaped curve.
2. DIVERSIFICATION STRATEGY - According to strategist - If a new business is very similar to that of the acquiring
Richard Rumelt, companies begin thinking about firm, it adds little new to the corporation and only
diversification when their growth has plateaued and marginally improves performance. If the new business
opportunities for growth in the original business have is completely different from the acquiring company’s
been depleted. Unless the competitors are able to businesses, there may be very little potential for any
expand internationally into less mature markets, they synergy.
may have no choice but to diversify into different - If the new business provides new resources and
industries if they want to continue growing. capabilities in a different, but similar, business, the
a. Concentric (Related) Diversification - likelihood of a significant performance improvement is
diversification into a related industry may be a high.
very appropriate corporate strategy when a firm - What can improve acquisition performance? For one
has a strong competitive position but industry thing, the acquisition should be linked to strategic
attractiveness is low. objectives and support corporate strategy. In addition,
- Research indicates that the probability of a corporation must be prepared to identify roughly 100
succeeding by moving into a related business is a candidates and conduct due diligence investigation on
function of a company’s position in its core around 40 companies in order to ultimately purchase
business. 10 companies.
- The firm attempts to secure strategic fit in a new - Cisco uses three criteria to judge whether a company is
industry where the firm’s product knowledge, its a suitable candidate for takeover:
manufacturing capabilities, and the marketing 1. It must be relatively small.
skills it used so effectively in the original industry 2. It must be comparable in organizational culture.
can be put to good use 3. It must be physically close to one of the existing
-synergy - the concept that two businesses will affiliates.
generate more profits together than they could
separately.
STABILITY STRATEGIES
b. Conglomerate (Unrelated) Diversification - .  A corporation may choose stability over growth by
When management realizes that the current industry continuing its current activities without any
is unattractive and that the firm lacks outstanding significant change in direction.
abilities or skills that it could easily transfer to related  can be appropriate for a successful corporation
products or services in other industries, the most operating in a reasonably predictable environment.
likely strategy is conglomerate diversification  popular with small business owners who have found a
diversifying into an industry unrelated to its current niche and are happy with their success and the
one manageable size of their firms.
- The emphasis in conglomerate diversification is on  Stability strategies can be very useful in the short run,
sound investment and value-oriented management but they can be dangerous if followed for too long
rather than on the product-market synergy common
to concentric diversification. 1. PAUSE/PROCEED WITH CAUTION STRATEGY - a
- Another instance of conglomerate diversification timeout—an opportunity to rest before continuing a
might be when a company with a seasonal and, growth or retrenchment strategy. It is typically
therefore, uneven cash flow purchases a firm in an conceived as a temporary strategy to be used until
unrelated industry with complementing seasonal the environment becomes more hospitable or to
sales that will level out the cash flow enable a company to consolidate its resources after
prolonged rapid growth.
zjrs
 -
This was the strategy Dell followed after its growth from this retrenchment period a much stronger and
strategy had resulted in more growth than it could better-organized company.
handle.
2. NO-CHANGE STRATEGY - a decision to do nothing 2. CAPTIVE COMPANY STRATEGY - involves giving up
new—a choice to continue current operations and independence in exchange for security.
policies for the foreseeable future. -Management desperately searches for an “angel” by
- The relative stability created by the firm’s modest offering to be a captive company to one of its larger
competitive position in an industry facing little or no customers in order to guarantee the company’s continued
growth encourages the company to continue on its existence with a long-term contract.
current course, making only small adjustments for - The weaker company gains certainty of sales and
inflation in its sales and profit objectives. production in return for becoming heavily dependent on
-no obvious opportunities or threats, nor is there another firm for at least 75% of its sales
much in the way of significant strengths or 3. SELL-OUT/DIVESTMENT STRATEGY - If a corporation with
weaknesses a weak competitive position in an industry is unable
- the future is expected to continue as an extension of either to pull itself up by its bootstraps or to find a
the present. customer to which it can become a captive company, it
3. PROFIT STRATEGY - a decision to do nothing new in a may have no choice but to sell out.
worsening situation but instead to act as though the -The sell-out strategy makes sense if management can
company’s problems are only temporary. still obtain a good price for its shareholders and the
- The profit strategy is an attempt to artificially employees can keep their jobs by selling the entire
support profits when a company’s sales are declining company to another firm.
by reducing investment and shortterm discretionary - If the corporation has multiple business lines and it
expenditures. chooses to sell off a division with low growth potential,
- useful only to help a company get through a this is called divestment. This was the strategy Ford used
temporary difficulty when it sold its struggling Jaguar and Land Rover units to
- a way to boost the value of a company in Tata Motors in 2008 for $2 billion. Divestment was also a
preparation for going public via an initial public key part of Lego’s turnaround strategy when
offering (IPO). management decided to divest its theme parks to
- the strategy is seductive and if continued long concentrate more on its core business of making toys
enough it will lead to a serious deterioration in a 4. BANKRUPTCY/LIQUIDATION STRATEGY -
corporation’s competitive position - Bankruptcy involves giving up management of the firm
*it is often better to face the problem directly by to the courts in return for some settlement of the
choosing a retrenchment strategy corporation’s obligations.
-In contrast to bankruptcy, which seeks to perpetuate a
corporation, liquidation is the termination of the firm.
RETRENCHMENT STRATEGIES When the industry is unattractive and the company too
 A company may pursue retrenchment strategies weak to be sold as a going concern, management may
when it has a weak competitive position in some or choose to convert as many saleable assets as possible to
all of its product lines resulting in poor cash, which is then distributed to the shareholders after
Performance—sales are down and profits are all obligations are paid.
becoming losses. - At times, top management must be willing to select one
1. TURNAROUND STRATEGY - Emphasizes the of these less desirable retrenchment strategies.
improvement of operational efficiency and is Unfortunately, many top managers are unwilling to
probably most appropriate when a corporation’s admit that their company has serious weaknesses for
problems are pervasive but not yet critical. fear that they may be personally blamed.
- TWO BASIC PHASES OF A TURNAROUND STRATEGY - Top management enters a cycle of decline, in which it
1. CONTRACTION – the initial effort to quickly “stop goes through a process of secrecy and denial, followed
the bleeding” with a general, across-the-board cutback in by blame and scorn, avoidance and turf protection,
size and costs. ending with passivity and helplessness.
2. CONSOLIDATION - implements a program to
stabilize the now leaner corporation. To streamline the
company, plans are developed to reduce unnecessary
overhead and to make functional activities cost-justified.
-If all employees are encouraged to get involved in
productivity improvements, the firm is likely to emerge
zjrs
PORTFOLIO ANALYSIS - This is a “fish or cut bait” decision - management must
decide if the business is worth the investment needed.
- deals with how individual product lines and business
units can gain competitive advantage in the marketplace -For example, after years of fruitlessly experimenting with an
by using competitive and cooperative strategies. electric car, General Motors finally decided in 2006 to take a
chance on developing the Chevrolet Volt.
- top management views its product lines and business
units as a series of investments from which it expects a 2. STARS – market leaders that are typically at the peak of
their product life cycle
profitable return.
-generate enough cash to maintain their high share of the
BCG (BOSTON CONSULTING GROUP) GROWTH-SHARE
market and contribute to the company’s profits
MATRIX
-When a star’s market growth rate slows, it becomes a cash
cow.

-HP’s printer business has been called HP’s “crown jewel”

because of its 41% market share in printers and its control of
the replacement cartridge market.

3. CASH COWS – typically bring in far more money than is

needed to maintain their market share.

-In this declining stage of their life cycle, these products are
“milked” for cash that will be invested in new question marks.

-Expenses such as advertising and R&D are reduced.

-Panasonic’s video cassette recorders (VCRs) moved to this

category when sales declined and DVD player/recorders
replaced them

4. DOGS – have low market share and do not have the

-Each of the corporation’s product lines or business units potential (because they are in an unattractive industry) to
is plotted on the matrix according to both the growth bring in much cash.
rate of the industry in which it competes and its relative -dogs should be either sold off or managed carefully for the
market share. small amount of cash they can generate.

-unit’s relative competitive composition = market -DuPont, the inventor of nylon, sold its textiles unit in 2003
share(in the industry) ÷ largest other competitor because the company wanted to eliminate its low-margin
products and focus more on its growing biotech business.
- a relative market share above 1.0 belongs to the
market leader  The BCG Growth-Share Matrix is a very well-known portfolio
concept with some clear advantages. It is quantifiable and
- business growth rate = percentage of market growth easy to use. Cash cow, dog, question mark, and star are
(the percentage by which sales of a particular business easy-to-remember terms for referring to a corporation’s
unit classification of products have increased) business units or products.
 LIMITATIONS:
- The matrix assumes that, other things being equal, a o The use of highs and lows to form four categories is too
growing market is attractive. simplistic.
o The link between market share and profitability is
1. QUESTION MARKS – (sometimes called “problem children” questionable.79 Low-share businesses can also be
or “wild cats) are new products with the potential for success, profitable.
but they need a lot of cash for development o Growth rate is only one aspect of industry attractiveness.
-to gain enough market share to become a market leader and o Product lines or business units are considered only in
thus a star, money must be taken from more mature products relation to one competitor: the market leader. Small
and spent on the question mark competitors with fast-growing market shares are ignored.

zjrs
 o Market share is only one aspect of overall competitive the corporation’s current mission, objectives, strategies, and
position. policies.

GE BUSINESS SCREEN Advantages:

-The GE Business Screen considers many more variables and
does not lead to such simplistic conclusions
- that the attractiveness of an industry can be assessed in
many different ways (other than simply using growth rate)
-allows users to select whatever criteria they feel are most
appropriate to their situation.

Disadvantages
-It can get quite complicated and cumbersome.
- The numerical estimates of industry attractiveness and
business strength/competitive position give the appearance of
objectivity, but they are in reality subjective judgments that
may vary from one person to another.
- It cannot effectively depict the positions of new products or
business units in developing industries.

ADVANTAGES AND LIMITATIONS OF PORTFOLIO ANALYSIS

ADVANTAGES:
- includes nine cells based on long-term industry
attractiveness and business strength competitive position  It encourages top management to evaluate each of
the corporation’s businesses individually and to set
- industry attractiveness includes market growth rate, objectives and allocate resources for each.
industry profitability, size, and pricing practices, among other  It stimulates the use of externally oriented data to
possible opportunities and threats. supplement management’s judgment.
 It raises the issue of cash-flow availability for use in
- Business strength or competitive position includes market
expansion and growth.
share as well as technological position, profitability, and size,
 Its graphic depiction facilitates communication.
among other possible strengths and weaknesses
LIMITATIONS
-The individual product lines or business units are identified by
a letter and plotted as circles on the GE Business Screen. The  Defining product/market segments is difficult.
area of each circle is in proportion to the size of the industry in  It suggests the use of standard strategies that can
terms of sales. The pie slices within the circles depict the miss opportunities or be impractical.
market shares of the product lines or business units.  It provides an illusion of scientific rigor when in
reality positions are based on subjective judgments.
STEPS:
 Its value-laden terms such as cash cow and dog
1. Select criteria to rate the industry for each product line or
 It is not always clear what makes an industry
business unit. Assess overall industry attractiveness for each
attractive or where a product is in its life cycle.
product line or business unit on a scale from 1 (very
 Naively following the prescriptions of a portfolio
unattractive) to 5 (very attractive).
model may actually reduce corporate profits if they
2. Select the key factors needed for success in each product are used inappropriately.
line or business unit. Assess business strength/competitive
position for each product line or business unit on a scale of 1 MANAGING A STRATEGIC ALLIANCE PORTFOLIO
(very weak) to 5 (very strong).
A study of 25 leading European corporations found four tasks
3. Plot each product line’s or business unit’s current position of multi-alliance management that are necessary for
on a matrix successful alliance portfolio management:
4. Plot the firm’s future portfolio, assuming that present 1. Developing and implementing a portfolio strategy for
corporate and business strategies remain unchanged. Is there each business unit and a corporate policy for
a performance gap between projected and desired portfolios? managing all the alliances of the entire company
If so, this gap should serve as a stimulus to seriously review

zjrs
 2. Monitoring the alliance portfolio in terms of 2. What are the tradeoffs between an internal and an external
implementing business unit strategies and corporate growth strategy? Which approach is best as an international
strategy and policies entry strategy?
3. Coordinating the portfolio to obtain synergies and
3. Is stability really a strategy or just a term for no strategy?
avoid conflicts among alliances
4. Establishing an alliance management system to 4. Compare and contrast SWOT analysis with portfolio
support other tasks of multi-alliance management analysis.

CORPORATE PARENTING 5. How is corporate parenting different from portfolio

 views a corporation in terms of resources and analysis? How is it alike? Is it a useful concept in a global
capabilities that can be used to build business unit industry?
value as well as generate synergies across business
units.
 generates corporate strategy by focusing on the core STRATEGY FORMULATION:FUNCTIONAL
competencies of the parent corporation and on the STRATEGY AND STRATEGIC CHOICE
value created from the relationship between the
parent and its businesses. FUNCTIONAL STRATEGY
 The primary job of corporate headquarters is to
 the approach a functional area takes to achieve
obtain synergy among the business units by providing
corporate and business unit objectives and strategies
needed resources to units, transferring skills and
by maximizing resource productivity.
capabilities among the units, and coordinating the
 The orientation of a functional strategy is dictated by
activities of shared unit functions to attain economies
its parent business unit’s strategy
of scope (as in centralized purchasing)

DEVELOPING A CORPORATE PARENTING STRATEGY MARKETING STRATEGY

 deals with pricing, selling, and distributing a product
1. Examine each business unit (or target firm in the case
 Using a market development strategy, a company or
of acquisition) in terms of its strategic factors
business unit can
Center of excellence - “an organizational unit that
(1) capture a larger share of an existing market for
embodies a set of capabilities that has been explicitly
current products through market saturation and
recognized by the firm as an important source of
market penetration or
value creation, with the intention that these
(2) develop new uses and/or markets for current
capabilities be leveraged by and/or disseminated to
products.
other parts of the firm.”
 P&G, Colgate, Palmolive, and Unilever are able to
2. Examine each business unit (or target firm) in terms
extend product life almost indefinitely through “new
of areas in which performance can be improved
and improved” variations of product and packaging
3. Analyze how well the parent corporation fits with the
that appeal to most market niches. (they use
business unit (or target firm)
advertising and promotion to implement a market
HORIZONTAL STRATEGY AND MULTIPOINT saturation/penetration strategy)
COMPETITION A company, such as Arm & Hammer, follows the
second market development strategy by finding new
HORIZONTAL STRATEGY - is a corporate strategy that cuts
uses for its successful current product, baking soda.
across business unit boundaries to build synergy across
 Product development strategy
business units and to improve the competitive position of one
or more business units. (1) develop new products for existing markets or
(2) develop new products for new markets
MULTIPOINT COMPETITION - is a corporate strategy that cuts
across business unit boundaries to build synergy across  Brand extension - using a successful brand name to
business units and to improve the competitive position of one market other products
or more business units.  Push strategy - spending a large amount of money
on trade promotion in order to gain or hold shelf
DISCUSSION QUESTIONS:
space in retail outlets. Trade promotion includes
1. How does horizontal growth differ from vertical
discounts, in-store special offers, and advertising
growth as a corporate strategy? From concentric
allowances designed to “push” products through the
diversification?
distribution system

zjrs
  Pull strategy - advertising “pulls” the products  Stock buybacks - instead of raising dividends when
through the distribution channels. . The company profits are high, a popular financial strategy is to use
now spends more money on consumer advertising excess cash (or even use debt) to buy back a
designed to build brand awareness so that shoppers company’s own shares of stock
will ask for the products. - Such buybacks do signal, however, that either
management may not have been able to find any
When pricing a new product, a company or business unit can
profitable investment opportunities for the company
follow one of two strategies
or that it is anticipating reduced future earnings
 Skim pricing - offers the opportunity to “skim the  Reverse stock split - an investor’s shares are split in
cream” from the top of the demand curve with a high half for the same total amount of money (with each
price while the product is novel and competitors are share now being worth twice as much)
few - A reverse stock split may successfully raise a
 Penetration pricing - attempts to hasten market company’s stock price, but it does not solve
development and offers the pioneer the opportunity underlying problems.
to use the experience curve to gain market share  Stock split - an investor receives an additional share
with a low price and then dominate the industry. for every share owned (with each share being worth
only half as much)
**Penetration pricing is more likely than skim pricing to raise a  Selling of a company’s patent - A rather novel
unit’s operating profit in the long term financial strategy. Companies such as AT&T,
Bellsouth, American Express, Kimberly Clark, and
 The use of the Internet to market goods directly to
3Com have been selling patents for products that
consumers allows a company to use dynamic pricing,
they no longer wish to commercialize or are not a
a practice in which prices vary frequently based upon
part of their core business.
demand, market segment, and product availability

FINANCIAL STRATEGY RESEARCH AND DEVELOPMENT (R&D) STRATEGY

 deals with product and process innovation and
 examines the financial implications of corporate and
improvement
business-level strategic options and identifies the
 deals with the appropriate mix of different types of
best financial course of action.
R&D (basic, product, or process) and with the
 attempts to maximize the financial value of a firm
question of how new technology should be
 Leveraged buyout - a company is acquired in a
accessed—through internal development, external
transaction financed largely by debt, usually obtained
acquisition, or strategic alliances.
from a third party, such as an insurance company or
 One of the R&D choices is to be either a
an investment banker. Ultimately the debt is paid
technological leader, pioneering an innovation, or a
with money generated from the acquired company’s
technological follower, imitating the products of
operations or by sales of its assets.
competitors.
- One study of LBOs (also called MBOs—Management
- One example of an effective use of the leader R&D
BuyOuts) revealed that the financial performance of
functional strategy to achieve a differentiation
the typical LBO usually falls below the industry
competitive advantage is Nike, Inc. Nike spends more
average in the fourth year after the buyout. The firm
than most in the industry on R&D to differentiate the
declines because of inflated expectations, utilization
performance of its athletic shoes from that of its
of all slack, management burnout, and a lack of
competitors.
strategic management.
- An example of the use of the follower R&D
The management of dividends and stock price is an important functional strategy to achieve a low-cost competitive
part of a corporation’s financial strategy. advantage is Dean Foods Company.

 Corporations in fast-growing industries such as

computers and computer software often do not
declare dividends. They use the money they might
have spent on dividends to finance rapid growth
(higher stock price)
 Other corporations that do not face rapid growth,  Open innovation - firm uses alliances and
must support the value of their stock by offering connections with corporate, government, academic
consistent dividends. labs, and even consumers to develop new products
and processes. . P&G instituted the use of technology

zjrs
 scouts to search beyond the company for promising ** Because continuous improvement enables firms to use the
innovations. . P&G instituted the use of technology same low-cost competitive strategy as do mass-production
scouts to search beyond the company for promising firms but at a significantly higher level of quality, it is rapidly
innovations. replacing mass production as an operations strategy.
 Corporate venture capital - purchase minority stakes
 Modular manufacturing - preassembled
in relatively new high-tech entrepreneurial ventures
subassemblies are delivered as they are needed (i.e.,
that need capital to continue operation.
Justin-Time) to a company’s assembly-line workers,
- one way to gain access to promising innovations at a
who quickly piece the modules together into a
lower cost than by developing them internally
finished product.
OPERATIONS STRATEGY  Mass customization - requires that people,
 determines how and where a product or service is to processes, units, and technology reconfigure
be manufactured, the level of vertical integration in themselves to give customers exactly what they
the production process, the deployment of physical want, when they want it.
resources, and relationships with suppliers. - In contrast to continuous improvement, mass
 Advanced Manufacturing Technology (AMT) is customization requires flexibility and quick
revolutionizing operations worldwide and should responsiveness. Managers coordinate independent,
continue to have a major impact as corporations capable individuals.
strive to integrate diverse business activities by using - The result is low-cost, high-quality, customized
computer assisted design and manufacturing goods and services appropriate for a large number of
(CAD/CAM) principles market niches
 A firm’s manufacturing strategy is often affected by a
PURCHASING STRATEGY
product’s life cycle. As the sales of a product increase,
 deals with obtaining the raw materials, parts, and
there will be an increase in production volume
supplies needed to perform the operations function.
ranging from lot sizes as low as one in a
-job shop - one-of-a-kind production using skilled BASIC PURCHASING CHOICES
labor
-connected line batch flow - components are 1. Multiple sourcing – the purchasing company orders a
standardized; each machine functions such as a job particular part from several vendors.
shop but is positioned in the same order as the parts - considered superior to other purchasing approaches
are processed because (1) it forces suppliers to compete for the
to lot sizes as high as 100,000 or more per year for business of an important buyer, thus reducing
- flexible manufacturing systems - parts are purchasing costs, and (2) if one supplier cannot
grouped into manufacturing families to produce a deliver, another usually can, thus guaranteeing that
wide variety of mass-produced items parts and supplies are always on hand when needed.
- dedicated transfer lines - highly automated 2. Sole sourcing - relies on only one supplier for a
assembly lines making one mass-produced product particular part
using little human labor - W. Edward Deming, a well-known management
 Mass production system - an excellent method to consultant, strongly recommended sole sourcing as
produce a large number of low-cost, standard goods the only manageable way to obtain high supplier
and services. Employees worked on narrowly defined quality.
repetitious tasks under close supervision in a - This reduces both cost and time spent on product
bureaucratic and hierarchical structure. Quality, design and it also improves quality.
however, often tended to be fairly low. - simplify the purchasing company’s production
 Continuous improvement - empowered cross- process by using the Just-In-Time (JIT) concept
functional teams strive constantly to improve -JIT II - Developed by Lance Dixon at Bose
production processes. Managers are more like Corporation. Vendor sales representatives actually
coaches than like bosses. The result is a large have desks next to the purchasing company’s factory
quantity of low-cost, standard goods and services, floor, attend production status meetings, visit the
but with high quality. R&D lab, and analyze the purchasing company’s sales
- e key to continuous improvement is the forecasts. These in-house suppliers then write sales
acknowledgment that workers’ experience and orders for which the purchasing company is billed.
knowledge can help managers solve production -LIMITATIONS: If a supplier is unable to deliver
problems and contribute to tightening variances and
reducing errors.
zjrs
 a part, the purchaser has no alternative but to delay follow-the-sun management, in which project team
production. members living in one country can pass their work to
team members in another country in which the work
** The limitations of sole sourcing have led to the day is just beginning. Thus, night shifts are no longer
development of parallel sourcing needed.
 The development of instant translation software is
3. Parallel sourcing - two suppliers are the sole
also enabling workers to have online communication
suppliers of two different parts, but they are also
with co-workers in other countries who use a
backup suppliers for each other’s parts.
different language.
LOGISTICS STRATEGY
THE SOURCING DECISION:LOCATION OF FUNCTI ONS
 deals with the flow of products into and out of the
manufacturing If a corporation does not have a distinctive competency in a
 Three trends related to this strategy are evident: particular functional area, that functional area could be a
centralization, outsourcing, and the use of the candidate for outsourcing.
Internet.
 To gain logistical synergies across business units, Outsourcing - purchasing from someone else a product or
corporations began centralizing logistics in the service that had been previously provided internally. The
headquarters group. This centralized logistics group reverse of vertical integration.
usually contains specialists with expertise in different - Outsourcing is becoming an increasingly important part of
transportation modes such as rail or trucking. They strategic decision making and an important way to increase
work to aggregate shipping volumes across the entire efficiency and often quality.
corporation to gain better contracts with shippers. Offshoring - the outsourcing of an activity or a function to a
 Many companies have found that outsourcing wholly owned company or an independent provider in
logistics reduces costs and improves delivery time. another country.
 Many companies are using the Internet to simplify
- Although India currently has 70% of the offshoring market,
their logistical system. For example, Ace Hardware
countries such as Brazil, China, Russia, the Philippines,
created an online system for its retailers and
Malaysia, Hungary, the Czech Republic, and Israel are growing
suppliers.
in importance. These countries have low-cost qualified labor
HUMAN RESOURCE MANAGEMENT (HRM) STRATEGY and an educated workforce.
 addresses the issue of whether a company or
DISADVANTAGES:
business unit should hire a large number of low-
skilled employees who receive low pay, perform  Complaints
repetitive jobs, and are most likely quit after a short  Delays
time (the McDonald’s restaurant strategy) or hire  Some companies have found themselves locked into
skilled employees who receive relatively high pay and long-term contracts with outside suppliers that were
are cross-trained to participate in self managing work no longer competitive.
teams.  Some authorities propose that the cumulative effects
 Research indicates that the use of work teams leads of continued outsourcing steadily reduces a firm’s
to increased quality and productivity as well as to ability to learn new skills and to develop new core
higher employee satisfaction and commitment. competencies.
 Companies are finding that having a diverse  One survey of 129 outsourcing firms revealed that
workforce can be a competitive advantage. half the outsourcing projects undertaken in one year
 Research reveals that firms with a high degree of failed to deliver anticipated savings
racial diversity following a growth strategy have
higher productivity than do firms with less racial A study of 91 outsourcing efforts conducted by European and
diversity North American firms found seven major errors that should be
avoided:
INFORMATION TECHNOLOGY STRATEGY 1. Outsourcing activities that should not be outsourced:
Corporations are increasingly using information technology Companies failed to keep core activities in-house.
strategy to provide business units with competitive
advantage. 2. Selecting the wrong vendor: Vendors were not trustworthy
or lacked state-of-the-art processes.
 Multinational corporations are finding that having a
sophisticated intranet allows employees to practice
zjrs
3. Writing a poor contract: Companies failed to establish a that activity has the potential for providing the
balance of power in the relationship. company some competitive advantage
 full vertical integration should be considered only
4. Overlooking personnel issues: Employees lost commitment
when that activity or function adds significant value
to the firm.
to the company’s products or services in addition to
5. Losing control over the outsourced activity: Qualified providing competitive advantage.
managers failed to manage the outsourced activity.
STRATEGIES TO AVOID
6. Overlooking the hidden costs of outsourcing: Transaction  FOLLOW THE LEADER - Imitating a leading competitor’s
costs overwhelmed other savings. strategy might seem to be a good idea, but it ignores a
7. Failing to plan an exit strategy: Companies failed to build firm’s particular strengths and weaknesses and the
reversibility clauses into the contract. possibility that the leader may be wrong.

** The key to outsourcing is to purchase from outside only  HIT ANOTHER HOME RUN - if a company is successful
those activities that are not key to the company’s distinctive because it pioneered an extremely successful product, it
competencies tends to search for another super product that will ensure
growth and prosperity. Polaroid spent a lot of money
In determining functional strategy, the strategist must:
developing an “instant” movie camera, but the public
1. Identify the company’s or business unit’s core ignored it in favor of the camcorder
competencies
2. Ensure that the competencies are continually being  ARMS RACE - Entering into a spirited battle with another
strengthened firm for increased market share might increase sales
3. Manage the competencies in such a way that best revenue, but that increase will probably be more than
preserves the competitive advantage they create offset by increases in advertising, promotion, R&D, and
manufacturing costs.
OUTSOURCING MATRIX:
 DO EVERYTHING - When faced with several interesting
opportunities, management might tend to leap at all of
them.

 LOSING HAND - A corporation might have invested so

much in a particular strategy that top management is
unwilling to accept its failure. Believing that it has too
much invested to quit, management may continue to
throw “good money after bad.”

STRATEGIC CHOICE: SE LECTING THE BEST STR ATEGY

How is the best strategy determined?

 Perhaps the most important criterion is the capability

of the proposed strategy to deal with the specific
strategic factors developed earlier, in the SWOT
analysis. If the alternative doesn’t take advantage of
environmental opportunities and corporate
 If that activity constitutes only a small part of the strengths/competencies, and lead away from
total value of the firm’s products or services, it should environmental threats and corporate weaknesses, it
be purchased on the open market (assuming that will probably fail
quality providers of the activity are plentiful).  the ability of each alternative to satisfy agreed-on
 If the activity contributes highly to the company’s objectives with the least resources and the fewest
products or services, the firm should purchase it negative side effects.
through long-term contracts with trusted suppliers or
distributors.
CONSTRUCTING CORPORATE SCENARIOS
 A firm should always produce at least some of the  CORPORATE SCENARIOS - are pro forma (estimated
activity or function (i.e., taper vertical integration) if future) balance sheets and income statements that
forecast the effect each alternative strategy and its
zjrs
 various programs will likely have on division and d. Do the same with the most likely figures.
corporate return on investment. e. Develop a similar set of optimistic (O), pessimistic
- Using three sets of estimated sales figures (P), and most likely (ML) pro forma statements for
(Optimistic, Pessimistic, and Most Likely) for the new the second strategic alternative. This process
products over the next five years, the two generates six different pro forma scenarios reflecting
alternatives can be evaluated in terms of their effect three different situations (O, P, and ML) for two
on future company performance as reflected in the strategic alternatives.
company’s probable future financial statements. f. Calculate financial ratios and common-size income
statements, and create balance sheets to accompany
STEPS TO CONSTRUCT A CORPORATE SCENARIO:
the pro forma statements.
1. Use industry scenarios to develop a set of g. Compare the assumptions underlying the scenarios
assumptions about the task environment (in the with the financial statements and ratios to determine
specific country under consideration). the feasibility of the scenarios. For example, if cost of
2. Develop common-size financial statements (as goods sold drops from 70% to 50% of total sales
discussed in Chapter 12) for the company’s or revenue in the pro forma income statements, this
business unit’s previous years, to serve as the basis drop should result from a change in the production
for the trend analysis projections of pro forma process or a shift to cheaper raw materials or labor
financial statements. costs rather than from a failure to keep the cost of
a. Use the historical common-size percentages to goods sold in its usual percentage relationship to
estimate the level of revenues, expenses, and other sales revenue when the predicted statement was
categories in estimated pro forma statements for developed
future years.
b. Develop for each strategic alternative a set of
Optimistic(O), Pessimistic(P), and Most Likely(ML)
assumptions about the impact of key variables on the
company’s future financial statements.
c. Forecast three sets of sales and cost of goods sold
figures for at least five years into the future.
d. Analyze historical data and make adjustments
based on the environmental assumptions listed
earlier. Do the same for other figures that can vary
significantly
e.Assume for other figures that they will continue in
their historical relationship to sales or some other key The result of this detailed scenario construction should be
determining factor. Plug in expected inventory levels, anticipated net profits, cash flow, and net working capital for
accounts receivable, accounts payable, R&D each of three versions of the two alternatives for five years
expenses, advertising and promotion expenses, into the future.
capital expenditures, and debt payments (assuming
that debt is used to finance the strategy), among Regardless of the quantifiable pros and cons of each
others. alternative, the actual decision will probably be influenced by
f. Consider not only historical trends but also several subjective factors such as those described in the
programs that might be needed to implement each following sections.
alternative strategy (such as building a new
Management’s Attitude Toward Risk
manufacturing facility or expanding the sales force).
-RISK is composed not only of the probability that the strategy
3. Construct detailed pro forma financial statements for will be effective but also of the amount of assets the
each strategic alternative: corporation must allocate to that strategy and the length of
a. List the actual figures from this year’s financial time the assets will be unavailable for other uses.
statements in the left column of the spreadsheet.
b. List to the right of this column the optimistic  Because of variation among countries in terms of
figures for years 1 through 5. customs, regulations, and resources, companies
c. Go through this same process with the same operating in global industries must deal with a
strategic alternative, but now list the pessimistic greater amount of risk than firms operating only in
figures for the next five years. one country.

zjrs
  Research indicates that managers who own a  Top management can also propose a political
significant amount of stock in their firms are more strategy (ex: constituency building, political action
likely to engage in risk taking actions than are committee contributions, advocacy advertising,
managers with no stock lobbying, and coalition building) to influence its key
 A new approach to evaluating alternatives under stakeholders. A political strategy is a plan to bring
conditions of high environmental uncertainty is to stakeholders into agreement with a corporation’s
use real-options theory. According to the real- actions
options approach, when the future is highly  Political support can be critical in entering a new
uncertain, it pays to have a broad range of options international market, especially in transition
open. Management allocates a small amount of economies where free market competition did not
funding to initiate multiple projects, monitors their previously exist
development, and then cancels the projects that
Pressures from the Corporate Culture
aren’t successful and funds those that are doing well.
 If a strategy is incompatible with a company’s
Pressures from Stakeholders
corporate culture, the likelihood of its success is very
 The attractiveness of a strategic alternative is low.
affected by its perceived compatibility with the key  In evaluating a strategic alternative, strategy makers
stakeholders in a corporation’s task environment must consider pressures from the corporate culture
 Stakeholder Priority Matrix - Stakeholders can be and assess a strategy’s compatibility with that
categorized in terms of their (1) interest in the culture. If there is little fit, management must decide
corporation’s activities and (2) relative power to if it should:
influence the corporation’s activities.  Take a chance on ignoring the culture
 Manage around the culture and change the
implementation plan
 Try to change the culture to fit the strategy
 Change the strategy to fit the culture

Needs and Desires of Key Managers

 Even the most attractive alternative might not be

selected if it is contrary to the needs and desires of
important top managers.

PROCESS OF STRATEGIC CHOICE

Strategic choice - is the evaluation of alternative strategies
and selection of the best alternative.

 After analyzing 400 decisions, Paul Nutt found that

failure almost always stems from the actions of the
decision maker, not from bad luck or situational
limitations.
 In these instances, managers commit one or more
 Strategic managers should ask four questions to key blunders:
assess the importance of stakeholder concerns in a (1) their desire for speedy actions leads to a rush to
particular decision: judgment,
1. How will this decision affect each stakeholder, (2) they apply failure-prone decision-making practices
especially those given high and medium priority? such as adopting the claim of an influential
2. How much of what each stakeholder wants is he or stakeholder, and
she likely to get under this alternative? (3) they make poor use of resources by investigating
3. What are the stakeholders likely to do if they don’t only one or two options.
get what they want?  There is mounting evidence that when an
4. What is the probability that they will do it? organization is facing a dynamic environment, the
 Strategy makers should choose strategic alternatives best strategic decisions are not arrived at through
that minimize external pressures and maximize the consensus when everyone agrees on one alternative.
probability of gaining stakeholder support

zjrs
 They actually involve a certain amount of heated the organization. They are the principles under which the
disagreement, and even conflict. corporation operates on a day-to-day basis.

Two techniques help strategic managers avoid the consensus  When crafted correctly, an effective policy
trap that Alfred Sloan found: accomplishes three things:
1. It forces trade-offs between competing resource
1. Devil’s advocate - The idea of the devil’s advocate
demands.
originated in the medieval Roman Catholic Church as
2. It tests the strategic soundness of a particular
a way of ensuring that impostors were not canonized
action.
as saints.
3. It sets clear boundaries within which employees
- When applied to strategic decision making, a devil’s
must operate while granting them freedom to
advocate (who may be an individual or a group) is
experiment within those constraints.
assigned to identify potential pitfalls and problems
 Policies tend to be rather long lived and can even
with a proposed alternative strategy in a formal
outlast the particular strategy that created them.
presentation.
 a change in strategy should be followed quickly by a
2. Dialectical inquiry - The dialectical philosophy, which
change in policies.
can be traced back to Plato and Aristotle and more
 Managing policy is one way to manage the corporate
recently to Hegel, involves combining two conflicting
culture.
views—the thesis and the antithesis—into a
synthesis. DISCUSSION QUESTIONS:
- When applied to strategic decision making, 1. Are functional strategies interdependent, or can they
dialectical inquiry requires that two proposals using be formulated independently of other functions?
different assumptions be generated for each 2. Why is penetration pricing more likely than skim
alternative strategy under consideration. After pricing to raise a company’s or a business unit’s
advocates of each position present and debate the operating profit in the long run?
merits of their arguments before key decision 3. How does mass customization support a business
makers, either one of the alternatives or a new unit’s competitive strategy?
compromise alternative is selected as the strategy to 4. When should a corporation or business unit
be implemented. outsource a function or an activity?
5. What is the relationship of policies to strategies?
** Research generally supports the conclusion that the devil’s
advocate and dialectical inquiry methods are equally superior SUMMARY
to consensus in decision making, especially when the firm’s
 Functional strategies must be formulated to support
environment is dynamic
business and corporate strategies; otherwise, the
 Regardless of the process used to generate strategic company will move in multiple directions and
alternatives, each resulting alternative must be eventually pull itself apart.
rigorously evaluated in terms of its ability to meet  For a functional strategy to have the best chance of
four criteria: success, it should be built on a distinctive
1. Mutual Exclusivity: Doing any one alternative competency residing within that functional area.
would preclude doing any other.  If a corporation does not have a distinctive
2. Success: It must be feasible and have a good competency in a particular functional area, that
probability of success. functional area could be a candidate for outsourcing.
3. Completeness: It must take into account all the key  When evaluating a strategic alternative, the most
strategic issues. important criterion is the ability of the proposed
4. Internal Consistency: It must make sense on its strategy to deal with the specific strategic factors
own as a strategic decision for the entire firm and not developed earlier, in the SWOT analysis.
contradict key goals, policies, and strategies currently  If the alternative doesn’t take advantage of
being pursued by the firm or its units. environmental opportunities and corporate
strengths/competencies, and lead away from
DEVELOPING POLICIES environmental threats and corporate weaknesses, it
The selection of the best strategic alternative is not the end of will probably fail.
strategy formulation. The organization must then engage in  Developing corporate scenarios and pro forma
developing policies. Policies define the broad guidelines for projections for each alternative are rational aids for
implementation. Flowing from the selected strategy, policies strategic decision making.
provide guidance for decision making and actions throughout
zjrs
  Nevertheless, some strategic decisions are inherently  How is everyone going to work together to do what
risky and may be resolved on the basis of one is needed?
person’s “gut feel.”
A survey of 93 Fortune 500 firms revealed that more than half
STRATEGY IMPLEMENTATION AND CONTROL of the corporations experienced the following 10 problems
when they attempted to implement a strategic change. These
Microsoft, whose software had grown to dominate personal
problems are listed in order of frequency:
computers worldwide, saw its revenue growth slow to just 8%
in 2005. The company’s stock price had been flat since 2002, 1. Implementation took more time than originally
an indication that investors no longer perceived Microsoft as a planned.
growth company. What had happened to these two successful 2. Unanticipated major problems arose.
companies? Was this an isolated phenomenon? What could 3. Activities were ineffectively coordinated.
be done, if anything, to reinvigorate these giants? 4. Competing activities and crises took attention away
from implementation.
According to Olson, van Bever, and Verry, these stall points
5. The involved employees had insufficient capabilities
occurred primarily because of a poor choice in strategy or
to perform their jobs.
organizational design. The root causes fell into four categories:
6. Lower-level employees were inadequately trained.
1. Premium position backfires: This happens to a firm 7. Uncontrollable external environmental factors
that has developed a premium position in the created problems.
market, but is unable to respond effectively to new, 8. Departmental managers provided inadequate
low-cost competitors or a shift in customer valuation leadership and direction.
of product features. Management teams go through 9. Key implementation tasks and activities were poorly
a process of disdain, denial, and rationalization that defined.
precedes the fall. 10. The information system inadequately monitored
2. Innovation management breaks down: Management activities.
processes for updating existing products and creating
new ones falter and become systemic inefficiencies. WHO IMPLEMENT STRATEGY?
3. Core business abandoned: Management fails to  In most large, multi-industry corporations, the
exploit growth opportunities in existing core implementers are everyone in the organization.
businesses and instead engages in growth initiatives  Unless changes in mission, objectives, strategies, and
in areas remote from existing customers, products, policies and their importance to the company are
and distribution channels. communicated clearly to all operational managers,
4. Talent and capabilities run short: Strategies are not there can be a lot of resistance and foot-dragging.
executed properly because of a lack of managers and Managers might hope to influence top management
staff with the skills and capabilities needed for into abandoning its new plans and returning to its old
strategy implementation. Often supported by ways.
promote-from-within policies, top management has a  This is one reason why involving people from all
narrow experience base, which too often replicates organizational levels in the formulation and
the skill set of past top managers. implementation of strategy tends to result in better
organizational performance.
STRATEGY IMPLEMENTAT ION
 the sum total of the activities and choices required WHAT MUST BE DONE?
for the execution of a strategic plan.  the managers of divisions and functional areas work
 the process by which objectives, strategies, and with their fellow managers to develop programs,
policies are put into action through the development budgets, and procedures for the implementation of
of programs, budgets, and procedures. strategy

To begin the implementation process, strategy makers must DEVELOPING PROGRAMS, BUDGETS AND
consider these questions: PROCEDURES
 Who are the people who will carry out the strategic  Strategy implementation involves establishing
plan? programs to create a series of new
 What must be done to align the company’s organizational activities, budgets to allocate
operations in the new intended direction? funds to the new activities, and procedures to
handle the day-to-day details.

zjrs
Programs

The purpose of a program is to make a strategy action The matrix of change can be used to address the following
oriented. types of questions:

 For example, when Xerox Corporation undertook a Feasibility: Do the proposed programs and activities
turnaround strategy, it needed to significantly reduce constitute a coherent, stable system? Are the current activities
its costs and expenses. Management introduced a coherent and stable? Is the transition likely to be difficult?
program called Lean Six Sigma. This program was Sequence of execution: Where should the change begin?
developed to identify and improve a poorly How does the sequence affect success? Are there reasonable
performing process. stopping points?
 One way to examine the likely impact new programs
will have on an existing organization is to compare Location: Are we better off instituting the new programs at a
proposed programs and activities with current new site, or can we reorganize the existing facilities at a
programs and activities. Brynjolfsson, Renshaw, and reasonable cost?
Van Alstyne proposed a matrix of change to help
Pace and nature of change: Should the change be slow or
managers decide how quickly change should proceed,
fast, incremental or radical? Which blocks of current activities
in what order changes should take place, whether to
must be changed at the same time?
start at a new site, and whether the proposed
systems are stable and coherent. Stakeholder evaluations: Have we overlooked any important
activities or interactions? Should we get further input from
Use the following steps to create the matrix:
interested stakeholders? Which new programs and current
1. Compare the new programs/target practices with each activities offer the greatest sources of value?
other to see if they are complementary (+), interfering (-), or
have no effect on each other (leave blank).
Budgets
2. Examine existing practices/activities for their interactions  Planning a budget is the last real check a corporation
with each other using the same symbols as in step 1 has on the feasibility of its selected strategy.
3. Compare each new program/target practice with each  An ideal strategy might be found to be completely
existing practice/activity for any interaction effects. Place the impractical only after specific implementation
appropriate symbols in the cells in the lower-right part of the programs are costed in detail.
matrix.
4. Evaluate each program/activity in terms of its relative Procedures
importance to achieving the strategy or getting the job
 After the program, divisional, and corporate budgets
accomplished.
are approved, procedures must be developed.
5. Examine the overall matrix to identify problem areas where
 Standard Operating Procedures (SOPs) - they
proposed programs are likely to either interfere with each
typically detail the various activities that must be
other or with existing practices/activities.
carried out to complete a corporation’s programs.
 Also known as organizational routines, procedures
are the primary means by which organizations
accomplish much of what they do.
 Once in place, procedures must be updated to reflect
any changes in technology as well as in strategy

ACHIEVING SYNERGY
One of the goals to be achieved in strategy implementation is
synergy between and among functions and business units.

Synergy is said to exist for a divisional corporation if the return

on investment (ROI) of each division is greater than what the
return would be if each division were an independent
business.

According to Goold and Campbell, synergy can take place in

one of six forms:
1. Shared know-how: Combined units often benefit from

zjrs
sharing knowledge or skills. This is a leveraging of core 4. New appropriate structure is invented.
competencies. 5. Profit returns to its previous level.
 Strategy, structure, and the environment need to be
2. Coordinated strategies: Aligning the business strategies of
closely aligned; otherwise, organizational
two or more business units may provide a corporation
performance will likely suffer.
significant advantage by reducing inter-unit competition and
 The general conclusion seems to be that firms
developing a coordinated response to common competitors
following similar strategies in similar industries tend
(horizontal strategy).
to adopt similar structures.
3. Shared tangible resources: Combined units can sometimes
STAGES OF CORPORATE DEVELOPMENT
save money by sharing resources, such as a common
 Successful corporations tend to follow a pattern of
manufacturing facility or R&D lab.
structural development as they grow and expand.
4. Economies of scale or scope: Coordinating the flow of  Beginning with the simple structure of the
products or services of one unit with that of another unit can entrepreneurial firm (in which everybody does
reduce inventory, increase capacity utilization, and improve everything), successful corporations usually get larger
market access. and organize along functional lines, with marketing,
production, and finance departments.
5. Pooled negotiating power: Combined units can combine
their purchasing to gain bargaining power over common
suppliers to reduce costs and improve quality. The same can
be done with common distributors.

6. New business creation: Exchanging knowledge and skills

can facilitate new products or services by extracting discrete
activities from various units and combining them in a new unit
or by establishing joint ventures among internal business
units.

HOW IS STRATEGY TO B E IMPLEMENTED?

ORGANIZING FOR ACTIO N
Before plans can lead to actual performance, a corporation
should be appropriately organized, programs should be
adequately staffed, and activities should be directed toward
achieving desired objectives.

 Any change in corporate strategy is very likely to

require some sort of change in the way an
organization is structured and in the kind of skills
needed in particular positions.
 Managers must, therefore, closely examine the way
their company is structured in order to decide what,
Stage I: Simple Structure
if any, changes should be made in the way work is
accomplished.  Stage I is typified by the entrepreneur, who founds a
company to promote an idea (a product or a service).
STRUCTURE FOLLOWS STRATEGY  The entrepreneur tends to make all the important
 changes in corporate strategy lead to changes in decisions personally and is involved in every detail
organizational structure and phase of the organization.
 these structural changes occur because the old  The greatest strengths of a Stage I corporation are its
structure, having been pushed too far, has caused flexibility and dynamism.
inefficiencies that have become too obviously  The drive of the entrepreneur energizes the
detrimental to bear. organization in its struggle for growth.
 Alfred Chandler proposed the following as the  Its greatest weakness is its extreme reliance on the
sequence of what occurs: entrepreneur to decide general strategies as well as
1. New strategy is created. detailed procedures
2. New administrative problems emerge.
3. Economic performance declines.
zjrs
  Crisis of leadership - If the entrepreneur falters, the emphasis on multi-industry competitive strategy, and
company usually flounders. (5) a more educated cadre of managers and
employees, new advanced forms of organizational
Stage II: Functional Structure
structure are emerging.
 Stage II is the point when the entrepreneur is  These structures emphasize collaboration over
replaced by a team of managers who have functional competition in the managing of an organization’s
specializations. multiple overlapping projects and developing
 In Stage II, the corporate strategy favors businesses.
protectionism through dominance of the industry,  According to Greiner, it is likely that this stage of
often through vertical and horizontal growth. development will have its own crisis as well—a sort of
 The great strength of a Stage II corporation lies in its pressure-cooker crisis. He predicts that employees in
concentration and specialization in one industry. these collaborative organizations will eventually grow
 Its great weakness is that all its eggs are in one emotionally and physically exhausted from the
basket intensity of teamwork and the heavy pressure for
 Once a functionally structured firm diversifies into innovative solutions
other products in different industries, however, the
BLOCKS TO CHANGINGS STAGES
advantages of the functional structure break down. A
crisis of autonomy can now develop. Corporations often find themselves in difficulty because they
 Crisis of autonomy - people managing diversified are blocked from moving into the next logical stage of
product lines need more decision-making freedom development.
than top management is willing to delegate to them.
 Blocks to development may be internal (such as lack
Stage III: Divisional Structure of resources, lack of ability, or refusal of top
management to delegate decision making to others)
 Stage III is typified by the corporation’s managing
or external (such as economic conditions, labor
diverse product lines in numerous industries; it
shortages, and lack of market growth)
decentralizes the decision-making authority.
 Entrepreneurs who start businesses generally have
 Stage III organizations grow by diversifying their
four tendencies that work very well for small new
product lines and expanding to cover wider
ventures but become Achilles’ heels for these same
geographical areas.
individuals when they try to manage a larger firm
 Crisis of control - the various units act to optimize
with diverse needs, departments, priorities, and
their own sales and profits without regard to the
constituencies:
overall corporation, whose headquarters seems far
 Loyalty to comrades: This is good at the
away and almost irrelevant.
beginning but soon becomes a liability as
 The greatest strength of a Stage III corporation is its
“favoritism.”
almost unlimited resources.
 Task oriented: Focusing on the job is critical
 Its most significant weakness is that it is usually so
at first but then becomes excessive attention
large and complex that it tends to become relatively
to detail.
inflexible.
 Single-mindedness: A grand vision is
Stage IV: Beyond SBUs needed to introduce a new product but can
become tunnel vision as the company grows
Even with its evolution into SBUs during the 1970s and 1980s, into more markets and products.
the divisional structure is not the last word in organization  Working in isolation: This is good for a
structure. brilliant scientist but disastrous for a CEO
 The use of SBUs may result in a red tape crisis in with multiple constituencies.
which the corporation has grown too large and  This difficulty in moving to a new stage is
complex to be managed through formal programs compounded by the founder’s tendency to maneuver
and rigid systems, and procedures take precedence around the need to delegate by carefully hiring,
over problem solving. training, and grooming his or her own team of
 Under conditions of (1) increasing environmental managers
uncertainty, (2) greater use of sophisticated  Although this may often be an organization’s
technological production methods and information strength, it may also be a weakness—to the extent
systems, (3) the increasing size and scope of that the culture supports the status quo and blocks
worldwide business corporations, (4) a greater needed change.

zjrs
ORGANIZATIONAL LIFE CYCLE characteristics than the traditional functional or divisional
structure can offer.

Although many variations and hybrid structures contain these

characteristics, two forms stand out: the matrix structure and
the network structure.

MATRIX STRUCTURE
Instead of considering stages of development in terms of
 functional and product forms are combined
structure, the organizational life cycle approach places the
simultaneously at the same level of the organization
primary emphasis on the dominant issue facing the
corporation.

 The organizational life cycle describes how

organizations grow, develop, and eventually decline.
 Note that the first three stages of the organizational
life cycle are similar to the three commonly accepted
stages of corporate development mentioned
previously. The only significant difference is the
addition of the Decline and Death stages to complete
the cycle.
 core competencies become core rigidities that are no
longer able to adapt to changing conditions—thus
the company moves into Decline
 Movement from Growth to Maturity to Decline and
finally to Death is not inevitable. A Revival phase may
occur sometime during the Maturity or Decline stages  Employees have two superiors, a product or project
 The corporation’s life cycle can be extended by manager, and a functional manager.
managerial and product innovations.  The “home” department—that is, engineering,
 Developing new combinations of existing resources manufacturing, or sales—is usually functional and is
to introduce new products or acquiring new reasonably permanent.
resources through acquisitions can enable firms with  People from these functional units are often assigned
declining performance to regain growth—so long as temporarily to one or more product units or projects.
the action is valuable and difficult to imitate  The product units or projects are usually temporary
 the fact that firms in decline are less likely to search and act like divisions in that they are differentiated
for new technologies suggests that it is difficult to on a product-market basis
revive a company in decline  The matrix structure is very useful when the external
 Unless a company is able to resolve the critical issues environment (especially its technological and market
facing it in the Decline stage, it is likely to move into aspects) is very complex and changeable.
Stage V, Death—also known as bankruptcy.  It does, however, produce conflicts revolving around
 Few corporations will move through these five stages duties, authority, and resource allocation
in order. Some corporations, for example, might
The matrix structure is often found in an organization or SBU
never move past Stage II. Others, such as General
when the following three conditions exist:
Motors, might go directly from Stage I to Stage III.
1. Ideas need to be cross-fertilized across projects or
**The key is to be able to identify indications that a firm is in
products.
the process of changing stages and to make the appropriate
2. Resources are scarce.
strategic and structural adjustments to ensure that corporate
3. Abilities to process information and to make
performance is maintained or even improved.
decisions need to be improved.
ADVANCED TYPES OF ORGANIZATIONAL STRUCTURES Davis and Lawrence, authorities on the matrix form of
The basic structures (simple, functional, divisional, and organization, propose that three distinct phases exist in the
conglomerate) are discussed in Chapter 5 and summarized development of the matrix structure:
under the first three stages of corporate development in this
chapter. A new strategy may require more flexible 1. Temporary cross-functional task forces: These are
initially used when a new product line is being

zjrs
 introduced. A project manager is in charge as the key technological change and shifting patterns of
horizontal link. international trade and competition.
2. Product/brand management: If the cross-functional  allows a company to concentrate on its
task forces become more permanent, the project distinctive competencies
manager becomes a product or brand manager and a  Disadvantages
second phase begins. In this arrangement, function is  only a transitional structure because it is
still the primary organizational structure, but product inherently unstable and subject to tensions
or brand managers act as the integrators of semi-  The availability of numerous potential
permanent products or brands partners can be a source of trouble.
3. Mature matrix: The third and final phase of matrix  Contracting out individual activities to
development involves a true dual authority structure. separate suppliers/distributors may keep the
Both the functional and product structures are firm from discovering any internal synergies
permanent. All employees are connected to both a by combining these activities.
vertical functional superior and a horizontal product  If a particular firm overspecializes on only a
manager. Functional and product managers have few functions, it runs the risk of choosing the
equal authority and must work well together to wrong functions and thus becoming
resolve disagreements over resources and priorities. noncompetitive
NETWORK STRUCTURE – THE VIRTUAL ORGANIZATION
CELLULAR/MODULAR ORGANIZATION: A NEW TYPE OF
 an example of what could be termed a “non-
STRUCTURE?
structure” because of its virtual elimination of in-
house business functions. Many activities are Some authorities in the field propose that the evolution of
outsourced. organizational forms is leading from the matrix and the
 often called a virtual organization because it is network to the cellular (also called modular) organizational
composed of a series of project groups or form.
collaborations linked by constantly changing
nonhierarchical, cobweb-like electronic networks.  composed of cells (self-managing teams, autonomous
business units, etc.) which can operate alone but
which can interact with other cells to produce a more
potent and competent business mechanism.”
 The cellular/modular form includes the dispersed
entrepreneurship of the divisional structure,
customer responsiveness of the matrix, and self-
organizing knowledge and asset sharing of the
network.
 The cellular/modular structure is used when it is
possible to break up a company’s products into self-
contained modules or cells and where interfaces can
be specified such that the cells/modules work when
they are joined together.
 The network structure becomes most useful when
the environment of a firm is unstable and is expected REENGINEERING AND STRATEGY IMPLEMENTATION
to remain so  Reengineering is the radical redesign of business
 Long-term contracts with suppliers and distributors processes to achieve major gains in cost, service, or
replace services that the company could provide for time.
itself through vertical integration.  Business process reengineering strives to break away
 In its ultimate form, a network organization is a series from the old rules and procedures that develop and
of independent firms or business units linked become ingrained in every organization over the
together by computers in an information system that years.
designs, produces, and markets a product or service.  Michael Hammer, who popularized the concept of
 Entrepreneurial ventures often start out as network reengineering, suggests the following principles for
organizations reengineering:
 Advantages:  Organize around outcomes, not tasks:
 provides an organization with increased Design a person’s or a department’s job
flexibility and adaptability to cope with rapid
zjrs
 around an objective or outcome instead of a  The process of Six Sigma encompasses five steps.
single task or series of tasks. 1. Define a process where results are poorer
 Have those who use the output of the than average.
process perform the process: With 2. Measure the process to determine exact
computer based information systems, current performance.
processes can now be reengineered so that 3. Analyze the information to pinpoint where
the people who need the result of the things are going wrong.
process can do it themselves. 4. Improve the process and eliminate the error.
 Subsume information-processing work into 5. Establish controls to prevent future defects
the real work that produces the from occurring
information: People or departments that  Savings attributed to Six Sigma programs have ranged
produce information can also process it for from 1.2% to 4.5% of annual revenue for a number of
use instead of just sending raw data to Fortune 500 firms
others in the organization to interpret.
DISADVANTAGE
 Treat geographically dispersed resources as
though they were centralized: With modern  Training costs in the beginning may outweigh any
information systems, companies can provide savings.
flexible service locally while keeping the  The expense of compiling and analyzing data,
actual resources in a centralized location for especially in areas where a process cannot be easily
coordination purposes. standardized, may exceed what is saved
 Link parallel activities instead of  can lead to less-risky incremental innovation based
integrating their results: Instead of having on previous work than on riskier “blue-sky” projects.
separate units perform different activities  A new program called Lean Six Sigma is becoming
that must eventually come together, have increasingly popular in companies. Like
them communicate while they work so that reengineering, it includes the removal of unnecessary
they can do the integrating. steps in any process and fixing those that remain. This
 Put the decision point where the work is is the “lean” addition to Six Sigma.
performed and build control into the
process: The people who do the work should DESIGNING JOBS TO IMPLEMENT STRATEGY
make the decisions and be self-controlling.  Job design refers to the study of individual tasks in an
 Capture information once and at the attempt to make them more relevant to the company
source: Instead of having each unit develop and to the employee(s)
its own database and information processing
To minimize some of the adverse consequences of task
activities, the information can be put on a
specialization, corporations have turned to new job design
network so that all can access it.
techniques:
 A study of 134 large and small Canadian companies
found that reengineering programs resulted in (1) an  job enlargement - combining tasks to give a worker
increase in productivity and product quality, (2) cost more of the same type of duties to perform
reductions, and (3) an increase in overall organization  job rotation - moving workers through several jobs to
quality, for both large and small firms. increase variety
 Other studies report, however, that anywhere from  job enrichment - altering the jobs by giving the
50% to 70% of reengineering programs fail to achieve worker more autonomy and control over activities
their objectives
INTERNATIONAL ISSUES IN STRATEGY
** Reengineering thus appears to be more useful for IMPLEMENTATION
redesigning specific processes like order entry, than for
changing an entire organization  An international company is one that engages in
any combination of activities, from
SIX SIGMA exporting/importing to full-scale manufacturing,
Originally conceived by Motorola as a quality improvement in foreign countries
program in the mid-1980s, Six Sigma has become a cost-saving  multinational corporation (MNC) - a highly
program for all types of manufacturers. developed international company with a deep
 an analytical method for achieving near-perfect involvement throughout the world, plus a
results on a production line.

zjrs
 worldwide perspective in its management and  Alliance strategy must be derived from
decision making. business, corporate, and functional strategy.
 For an MNC to be considered global, it must  The alliance must be important to both
manage its worldwide operations as if they were partners, especially to top management.
totally interconnected.  Partners must be mutually dependent for
achieving clear and realistic objectives
 this approach works best when the industry has
 Joint activities must have added value for
moved from being multidomestic (each
customers and the partners.
country’s industry is essentially separate from
 The alliance must be accepted by key
the same industry in other countries) to global stakeholders.
(each country is a part of one worldwide  Partners contribute key strengths but
industry) protect core competencies.
 According to Spulber in his book, Global
Competitive Strategy, the forces pushing for STAGES OF INTERNATIONAL DEVELOPMENT
standardization are:  Stage 1 (Domestic company): The primarily domestic
company exports some of its products through local
 Convergence in customer preferences
dealers and distributors in the foreign countries. The
and income across target countries.
impact on the organization’s structure is minimal
 Competition from successful global because an export department at corporate
products. headquarters handles everything.
 Growing customer awareness of  Stage 2 (Domestic company with export division):
international brands. Success in Stage 1 leads the company to establish its
 Economies of scale. own sales company with offices in other countries to
 Falling trading costs across countries. eliminate the middlemen and to better control
marketing. Because exports have now become more
 Cultural exchange and business
important, the company establishes an export
interactions among countries.
division to oversee foreign sales offices.
 The forces pushing for customization to local  Stage 3 (Primarily domestic company with
markets are: international division): Success in earlier stages leads
 Persistent differences in customer the company to establish manufacturing facilities in
preferences. addition to sales and service offices in key countries.
 Persistent differences in customer The company now adds an international division with
incomes. responsibilities for most of the business functions
conducted in other countries.
 The need to build local brand
 Stage 4 (Multinational corporation with
reputation.
multidomestic emphasis): Now a full-fledged MNC,
 Competition from successful, innovative the company increases its investments in other
domestic companies. countries. The company establishes a local operating
 Variations in trading costs across division or company in the host country, such as Ford
countries. of Britain, to better serve the market. The product
 Local regulatory requirements. line is expanded, and local manufacturing capacity is
established. Managerial functions (product
INTERNATIONAL STRATEGIC ALLIANCES development, finance, marketing, and so on) are
 Strategic alliances, such as joint ventures and organized locally. Over time, the parent company
licensing agreements, between an MNC and a local acquires other related businesses, broadening the
partner in a host country are becoming increasingly base of the local operating division. As the subsidiary
popular as a means by which a corporation can gain in the host country successfully develops a strong
entry into other countries, especially less developed regional presence, it achieves greater autonomy and
countries. self-sufficiency. The operations in each country are,
 Key drivers for strategic fit between alliance partners nevertheless, managed separately as if each is a
are the following: domestic company.
 Partners must agree on fundamental values  Stage 5 (MNC with global emphasis): The most
and have a shared vision about the potential successful MNCs move into a fifth stage in which they
for joint value creation. have worldwide human resources, R&D, and

zjrs
 financing strategies. Typically operating in a global  The geographic-area structure of Nestlé, in contrast,
industry, the MNC denationalizes its operations and allows the company to tailor products to regional
plans product design, manufacturing, and marketing differences and to achieve regional coordination
around worldwide considerations. Global  “think globally, act locally” - Companies are
considerations now dominate organizational design. attempting to decentralize those operations that are
The global MNC structures itself in a matrix form culturally oriented and closest to the customers—
around some combination of geographic areas, manufacturing, marketing, and human resources. At
product lines, and functions. All managers are the same time, the companies are consolidating less
responsible for dealing with international as well as visible internal functions, such as research and
domestic issues. development, finance, and information systems,
where there can be significant economies of scale.
** Research provides some support for stages of international
development, but it does not necessarily support the DISCUSSION QUESTIONS:
preceding sequence of stages. 1. How should a corporation attempt to achieve synergy
among functions and business units?
CENTRALIZATION VS DECENTRALIZATION 2. How should an owner-manager prepare a company for
 A basic dilemma an MNC faces is how to organize its movement from Stage I to Stage II?
authority centrally so that it operates as a vast 3. How can a corporation keep from sliding into the
interlocking system that achieves synergy and at the Decline stage of the organizational life cycle?
same time decentralize authority so that local 4. Is reengineering just another management fad, or does
managers can make the decisions necessary to meet it offer something of lasting value?
the demands of the local market or host government. 5. How is the cellular/modular structure different from
 Two examples of the usual international structure are the network structure?
Nestlé and American Cyanamid. Nestlé’s structure is
one in which significant power and authority have SUMMARY
been decentralized to geographic entities.
 Strategy implementation is where “the rubber hits
 To depict Cyanamid’s structure, the geographical
the road.” Environmental scanning and strategy
entities in figure below would have to be replaced by
formulation are crucial to strategic management but
product groups or SBUs.
are only the beginning of the process. The failure to
 Geographic Area Structure of an MNC - each
carry a strategic plan into the day-to-day operations
geographic set of operating companies has a
of the workplace is a major reason why strategic
different group of products.
planning often fails to achieve its objectives
 For a strategy to be successfully implemented, it
must be made action oriented. This is done through a
series of programs that are funded through specific
budgets and contain new detailed procedures

 The product-group structure of American Cyanamid

enables the company to introduce and manage a
similar line of products around the world. This
enables the corporation to centralize decision making
along product lines and to reduce costs

zjrs
STRATEGY IMPLEMENTATION: STAFFING AND  Training is also important when implementing a
retrenchment strategy. As suggested earlier,
DIRECTING
successful downsizing means that a company has to
invest in its remaining employees.
STAFFING
 The implementation of new strategies and policies Matching the Manager to the Strategy
often calls for new human resource management  Executive characteristics influence strategic
priorities and a different use of personnel. outcomes for a corporation. It is possible that a
 Such staffing issues can involve hiring new people current CEO may not be appropriate to implement a
with new skills, firing people with inappropriate or new strategy.
substandard skills, and/or training existing employees
career life cycle for top executives:
to learn new skills.
 It is one thing to lose excess employees after a  Learning stage - During the early years of executives’
merger, but it is something else to lose highly skilled tenure, for example, they tend to experiment
people who are difficult to replace. intensively with product lines to learn about their
 To deal with integration issues such as these, some business
companies are appointing special integration  Harvest stage - their accumulated knowledge allows
managers to shepherd companies through the them to reduce experimentation and increase
implementation process. performance
 The job of the integrator is to prepare a competitive  Decline stage – in their later years, when they reduce
profile of the combined company in terms of its experimentation still further, and performance
strengths and weaknesses, draft an ideal profile of declines.
what the combined company should look like,
develop action plans to close the gap between the ** there is an inverted U-shaped relationship between top
actuality and the ideal, and establish training executive tenure and the firm’s financial performance.
programs to unite the combined company and to
make it more competitive
 To be a successful integration manager, a person Executives with a particular mix of skills and experiences may
should have be classified as an executive type and paired with a specific
1. a deep knowledge of the acquiring company corporate strategy.
2. A flexible management style
3. ability to work in cross-functional project  Dynamic industry expert - a corporation following a
teams concentration strategy emphasizing vertical or
4. willingness to work independently horizontal growth would probably want an aggressive
5. sufficient emotional and cultural intelligence new chief executive with a great deal of experience in
to work well with people from all that particular industry
backgrounds.  Analytical portfolio manager - A diversification
strategy, in contrast, might call for someone with an
STAFFING FOLLOWS STRATEGY analytical mind who is highly knowledgeable in other
As in the case of structure, staffing requirements are likely to industries and can manage diverse product lines
follow a change in strategy. For example, promotions should  Cautious profit planner - A corporation choosing to
be based not only on current job performance but also on follow a stability strategy would probably want as its
whether a person has the skills and abilities to do what is CEO a person with a conservative style, a production
needed to implement the new strategy or engineering background, and experience with
controlling budgets, capital expenditures, inventories,
Changing Hiring and Training Requirements and standardization procedures
 Having formulated a new strategy, a corporation may  Turnaround specialist - Weak companies in a
find that it needs to either hire different people or relatively attractive industry tend to turn to a type of
retrain current employees to implement the new challenge oriented executive to save the company
strategy.  If a company cannot be saved, a professional
 One way to implement a company’s business liquidator might be called on by a bankruptcy court
strategy, such as overall low cost, is through training to close the firm and liquidate its assets.
and development.
 Training is especially important for a differentiation
strategy emphasizing quality or customer service.

zjrs
** Research tends to support the conclusion that as a firm’s  Firms in trouble, however, overwhelmingly choose
environment changes, it tends to change the type of top outsiders to lead them.
executive to implement a new strategy  The probability of an outsider being chosen to lead a
firm in difficulty increases if there is no internal heir
 Because priorities certainly change over an
apparent, if the last CEO was fired, and if the board of
organization’s life, successful corporations need to
directors is composed of a large percentage of
select managers who have skills and characteristics
outsiders
appropriate to the organization’s particular stage of
development and position in its life cycle ** Boards realize that the best way to force a change in
 Other studies have found a link between the type of strategy is to hire a new CEO who has no connections to the
CEO and a firm’s overall strategic type. current strategy.
 successful prospector firms tended to be
headed by CEOs from research/engineering Identifying Abilities and Potential
and general management backgrounds A company can identify and prepare its people for important
positions in several ways
 High performance defenders tended to have
CEOs with accounting/finance,  performance appraisal system - identify good
manufacturing/production, and general performers with promotion potential.
management experience.  Assessment centers - to evaluate a person’s
 Analyzers tended to have CEOs with a suitability for an advanced position. They use special
marketing/sales background. interviews, management games, in-basket exercises,
leaderless group discussions, case analyses, decision-
SELECTION AND MANAGEMENT DEVELOPMENT making exercises, and oral presentations to assess
Selection and development are important not only to ensure
the potential of employees for specific positions.
that people with the right mix of skills and experiences are
 Job rotation - moving people from one job to
initially hired but also to help them grow on the job so that
another—is also used in many large corporations to
they might be prepared for future promotions.
ensure that employees are gaining the appropriate
Executive Succession: Insider versus Outsiders mix of experiences to prepare them for future
 Executive succession is the process of replacing a key responsibilities.
top manager.
PROBLEMS IN RETRENCHMENT
 It is especially important for a company that usually
 Downsizing - (sometimes called “rightsizing” or
promotes from within to prepare its current
“resizing”) refers to the planned elimination of
managers for promotion
positions or jobs.
 For example, companies using relay executive
- often used to implement retrenchment strategies
succession, in which a candidate is groomed to take
 What can happen during a downsizing?
over the CEO position, have significantly higher
 After the layoffs, the remaining employees had
performance than those that hire someone from the
to do not only their work but also the work of the
outside or hold a competition between internal
people who had gone. Because the survivors
candidates.
often didn’t know how to do the departeds’
 Some of the best practices for top management
work, morale and productivity plummeted.
succession are encouraging boards to help the CEO
 Creativity drops significantly (affecting new
create a succession plan, identifying succession
product development), and it becomes very
candidates below the top layer, measuring internal
difficult to keep high performers from leaving the
candidates against outside candidates to ensure the
company.
development of a comprehensive set of skills, and
 cost-conscious executives tend to defer
providing appropriate financial incentives.
maintenance, skimp on training, delay new
 Prosperous firms tend to look outside for CEO
product introductions, and avoid risky new
candidates only if they have no obvious internal
businesses—all of which leads to lower sales and
candidates.
eventually to lower profits
 Hiring an outsider to be a CEO is a risky gamble. CEOs
from the outside tend to introduce significant change ** In contrast, successful downsizing firms undertake a
and high turnover among the current top strategic reorientation, not just a bloodletting of employees.
management. Research shows that when companies use downsizing as part
 The outsiders tended to perform slightly worse than of a larger restructuring program to narrow company focus,
insiders but had a very high variance in performance they enjoy better performance.
zjrs
Consider the following guidelines that have been proposed for  Because of cultural differences, managerial style and
successful downsizing: human resource practices must be tailored to fit the
particular situations in other countries.
 Eliminate unnecessary work instead of making  A lack of knowledge of national and ethnic
across-the-board cuts: Spend the time to research differences can make managing an international
where money is going and eliminate the task, not the operation extremely difficult.
workers, if it doesn’t add value to what the firm is  Because of the importance of cultural distinctions
producing. Reduce the number of administrative such as these, multinational corporations (MNCs) are
levels rather than the number of individual positions. now putting more emphasis on intercultural training
Look for interdependent relationships before for managers being sent on an assignment to a
eliminating activities. Identify and protect core foreign country.
competencies  To improve organizational learning, many MNCs are
 Contract out work that others can do cheaper: providing their managers with international
Outsourcing may be cheaper than vertical assignments lasting as long as five years.
integration.  Research indicates that an MNC performs at a higher
 Plan for long-run efficiencies: Don’t simply eliminate level when its CEO has international experience
all postponable expenses, such as maintenance, R&D,  The perceived lack of organizational support for
and advertising, in the unjustifiable hope that the international assignments increases the likelihood
environment will become more supportive. Continue that an expatriate will return home early
to hire, grow, and develop—particularly in critical
areas. From their study of 750 U.S., Japanese, and European
 Communicate the reasons for actions: Tell companies, Black and Gregersen found that the companies
employees not only why the company is downsizing that do a good job of managing foreign assignments follow
but also what the company is trying to achieve. three general practices:
Promote educational programs.
1. When making international assignments, they focus
 Invest in the remaining employees: Because most
on transferring knowledge and developing global
“survivors” in a corporate downsizing will probably be
leadership.
doing different tasks from what they were doing
2. They make foreign assignments to people whose
before the change, firms need to draft new job
technical skills are matched or exceeded by their
specifications, performance standards, appraisal
cross-cultural abilities.
techniques, and compensation packages. Additional
3. They end foreign assignments with a deliberate
training is needed to ensure that everyone has the
repatriation process, with career guidance and jobs
proper skills to deal with expanded jobs and
where the employees can apply what they learned in
responsibilities. Empower key individuals/ groups and
their assignments.
emphasize team building. Identify, protect, and
mentor people who have leadership talent.
 Once a corporation has established itself in another
 Develop value-added jobs to balance out job country, it hires and promotes people from the host
elimination: When no other jobs are currently country into higher-level positions. This policy serves
available within the organization to transfer to placate nationalistic governments and to better
employees to, management must consider other attune management practices to the host country’s
staffing alternatives. culture. The danger in using primarily foreign
nationals to staff managerial positions in subsidiaries
INTERNATIONAL ISSUES IN STAFFING
is the increased likelihood of suboptimization (the
Implementing a strategy of international expansion takes a lot
local subsidiary ignores the needs of the larger parent
of planning and can be very expensive
corporation). Communication and coordination across
 between 10% and 20% of all U.S. managers sent subsidiaries become more difficult.
abroad returned early because of job dissatisfaction  Another approach to staffing the managerial
or difficulties in adjusting to a foreign country. Of positions of MNCs is to use people with an
those who stayed for the duration of their “international” orientation, regardless of their
assignment, nearly one-third did not perform as well country of origin or host country assignment. For
as expected. One-fourth of those completing an example, Electrolux, a Swedish firm, had a French
assignment left their company within one year of director in its Singapore factory.
returning home—often leaving to join a competitor  Some corporations take advantage of immigrants
and their children to staff key positions when

zjrs
 negotiating entry into another country and when
selecting an executive to manage the company’s new
foreign operations
 Research reveals that corporations using cross-
national teams, whose members have international
experience and communicate frequently with
overseas managers, have greater product
development capabilities than others
 Stealth expatriates - managers and other mobile
workers who are either cross-border commuters
(especially in the EU) or the accidental expatriate
who goes on many business trips or temporary
assignments due to offshoring and/or international
joint ventures

LEADING
Implementation also involves leading through coaching people
to use their abilities and skills most effectively and efficiently Managing Cultural Change Through Communication
to achieve organizational objectives. Without direction, Communication is key to the effective management of
people tend to do their work according to their personal view change.
of what tasks should be done, how, and in what order.
 Rationale for strategic changes should be
MANAGING CORPORATE CULTURE communicated to workers not only in newsletters
 Because an organization’s culture can exert a and speeches, but also in training and development
powerful influence on the behavior of all employees, programs.
it can strongly affect a company’s ability to shift its
strategic direction. Companies in which major cultural changes have successfully
 Corporate culture has a strong tendency to resist taken place had the following characteristics in common:
change because its very reason for existence often
 The CEO and other top managers had a strategic
rests on preserving stable relationships and patterns
vision of what the company could become and
of behavior.
communicated that vision to employees at all levels.
 An optimal culture is one that best supports the
The current performance of the company was
mission and strategy of the company of which it is a
compared to that of its competition and constantly
part. This means that corporate culture should
updated
support the strategy.
 The vision was translated into the key elements
** A key job of management involves managing corporate necessary to accomplish that vision. For example, if
culture. In doing so, management must evaluate what a the vision called for the company to become a leader
particular change in strategy means to the corporate culture, in quality or service, aspects of quality and service
assess whether a change in culture is needed, and decide were pinpointed for improvement, and appropriate
whether an attempt to change the culture is worth the likely measurement systems were developed to monitor
costs. them. These measures were communicated widely
through contests, formal and informal recognition,
and monetary rewards, among other devices

Managing Diverse Cultures Following an Acquisition

When merging with or acquiring another company, top
management must give some consideration to a potential
clash of corporate cultures.

 The greater the gap between the cultures of the

acquired firm and the acquiring firm, the faster
executives in the acquired firm quit their jobs and
valuable talent is lost. Conversely, when corporate
cultures are similar, performance problems are
minimized
zjrs
  Methods of Managing the Culture of a Firm ACTION PLANNING
 Activities can be directed toward accomplishing
strategic goals through action planning.
 Action Plan - states what actions are going to be
taken, by whom, during what time frame, and with
what expected results.
 After a program has been selected to implement a
particular strategy, an action plan should be
developed to put the program in place.

Ex: The resulting action plan to develop a new advertising

program should include much of the following information:

 Specific actions to be taken to make the program

operational:
There are four general methods of managing two
 Dates to begin and end each action
different cultures. The choice of which method to use  Person (identified by name and title) responsible for
should be based on (1) how much members of the carrying out each action
acquired firm value preserving their own culture and (2)  Person responsible for monitoring the timeliness and
how attractive they perceive the culture of the acquirer effectiveness of each action
to be.  Expected financial and physical consequences of each
action
1. Integration involves a relatively balanced give-and-  Contingency plans
take of cultural and managerial practices between
the merger partners, and no strong imposition of IMPORTANCE OF ACTION PLANS:
cultural change on either company. It merges the  Serve as a link between strategy formulation and
two cultures in such a way that the separate evaluation and control
cultures of both firms are preserved in the resulting  specifies what needs to be done differently from the
culture. way operations are currently carried out
2. Assimilation involves the domination of one  during the evaluation and control process that comes
organization over the other. The domination is not later, an action plan helps in both the appraisal of
performance and in the identification of any remedial
forced, but it is welcomed by members of the
actions, as needed
acquired firm, who may feel for many reasons that
 the explicit assignment of responsibilities for
their culture and managerial practices have not implementing and monitoring the programs may
produced success. The acquired firm surrenders its contribute to better motivation
culture and adopts the culture of the acquiring
company. MANAGEMENT BY OBJECTIVES
3. Separation is characterized by a separation of the  Management By Objectives (MBO) is a technique
two companies’ cultures. They are structurally that encourages participative decision making
separated, without cultural exchange. through shared goal setting at all organizational
levels and performance assessment based on the
4. Deculturation involves the disintegration of one
achievement of stated objectives
company’s culture resulting from unwanted and
extreme pressure from the other to impose its The MBO process involves:
culture and practices. This is the most common and
1. Establishing and communicating organizational
most destructive method of dealing with two objectives.
different cultures. It is often accompanied by much 2. Setting individual objectives (through superior-
confusion, conflict, resentment, and stress. subordinate interaction) that help implement
organizational ones.
3. Developing an action plan of activities needed to
achieve the objectives.
4. Periodically (at least quarterly) reviewing
performance as it relates to the objectives and

zjrs
 including the results in the annual performance departments) understands that their jobs exist only
appraisal because of customer needs.
 Internal as well as external customers: An employee
 MBO provides an opportunity for the corporation to in the shipping department may be the internal
connect the objectives of people at each level to customer of another employee who completes the
those at the next higher level. MBO, therefore, acts assembly of a product, just as a person who buys the
to tie together corporate, business, and functional product is a customer of the entire company
objectives, as well as the strategies developed to  Accurate measurement of every critical variable in a
achieve them. company’s operations: This means that employees
 One of the real benefits of MBO is that it can reduce have to be trained in what to measure, how to
the amount of internal politics operating within a measure, and how to interpret the data. A rule of
large corporation. TQM is that you only improve what you measure.
 Political actions within a firm can cause conflict and  Continuous improvement of products and services:
create divisions between the very people and groups Everyone realizes that operations need to be
who should be working together to implement continuously monitored to find ways to improve
strategy. People are less likely to jockey for position if products and services.
the company’s mission and objectives are clear and  New work relationships based on trust and
they know that the reward system is based not on teamwork: Important is the idea of empowerment—
game playing, but on achieving clearly giving employees wide latitude in how they go about
communicated, measurable objectives achieving the company’s goals.

TOTAL QUALITY MANAGEMENT INTERNATIONAL CONSIDERATIONS IN LEADING

 Total Quality Management (TQM) is an operational In a study of 53 different national cultures, Hofstede found
philosophy committed to customer satisfaction and that each nation’s unique culture could be identified using five
continuous improvement. dimensions. In measuring the differences among these
 TQM is committed to quality/excellence and to being dimensions of national culture from country to country, he
the best in all functions. Because TQM aims to reduce was able to explain why a certain management practice might
costs and improve quality, it can be used as a be successful in one nation but fail in another:
program to implement an overall low-cost or a
differentiation business strategy. 1. Power distance (PD) is the extent to which a society
 Successful TQM programs occur in those companies accepts an unequal distribution of power in
in which “top managers move beyond defensive and organizations. People in those countries scoring high
tactical orientations to embrace a developmental on this dimension tend to prefer autocratic to more
orientation.” participative managers.
2. Uncertainty avoidance (UA) is the extent to which a
FOUR OBJECTIVES OF TQM: society feels threatened by uncertain and ambiguous
situations. . People in those nations scoring high on
1. Better, less variable quality of the product and service
this dimension tend to want career stability, formal
2. Quicker, less variable response in processes to
rules, and clear-cut measures of performance.
customer needs
3. Individualism-collectivism (I-C) is the extent to which
3. Greater flexibility in adjusting to customers’ shifting
a society values individual freedom and
requirements
independence of action compared with a tight social
4. Lower cost through quality improvement and
framework and loyalty to the group. People in
elimination of non-value-adding work
nations scoring high on individualism tend to value
individual success through competition, whereas
 According to TQM, faulty processes, not poorly
people scoring low on individualism (thus high on
motivated employees, are the cause of defects in
collectivism) tend to value group success through
quality.
collective cooperation.
 Inspection for quality still takes place, but the
4. Masculinity-femininity (M-F) is the extent to which
emphasis is on improving the process to prevent
society is oriented toward money and things (which
errors and deficiencies.
Hofstede labels masculine) or toward people (which
TQM’S ESSENTIAL INGREDIENTS: Hofstede labels feminine). eople in nations scoring
high on masculinity tend to value clearly defined sex
 An intense focus on customer satisfaction: Everyone roles where men dominate, and to emphasize
(not just people in the sales and marketing performance and independence, whereas people
zjrs
 scoring low on masculinity (and thus high on  Research on executive succession reveals that it is
femininity) tend to value equality of the sexes where very risky to hire new top managers from outside the
power is shared, and to emphasize the quality of life corporation.
and interdependence.  An in-depth study of 1,052 stock analysts at 78
5. Long-term orientation (LT) is the extent to which investment banks revealed that hiring a star (an
society is oriented toward the longversus the short- outstanding performer) from another company did
term. A long-term time orientation emphasizes the not improve the hiring company’s performance. This
importance of hard work, education, and persistence phenomenon occurs not because a star doesn’t
as well as the importance of thrift. Nations with a suddenly become less intelligent when switching
long-term time orientation tend to value strategic firms, but because the star cannot take to the new
planning and other management techniques with a firm the firm-specific resources that contributed to
long-term payback her or his achievements at the previous company.
 It is important to not ignore the 75% of the workforce
 MNCs must pay attention to the many differences in who, while not being stars, are the solid performers
cultural dimensions around the world and adjust their that keep a company going over the years. An undue
management practices accordingly emphasis on attracting stars wastes money and
 When conducting strategic planning in an MNC, top destroys morale.
management must be aware that the process will
vary based upon the national culture where a EVALUATION AND CONTROL
subsidiary is located.
 Hofstede and Bond conclude: “Whether they like it or EVALUATION AND CONTR OL IN STRATEGIC
not, the headquarters of multinationals are in the MANAGEMENT
business of multicultural management.”  The evaluation and control process ensures that a
company is achieving what it set out to accomplish. It
DISCUSSION QUESTIONS:
compares performance with desired results and
1. What skills should a person have for managing a
provides the feedback necessary for management to
business unit following a differentiation strategy?
evaluate results and take corrective action, as needed
Why? What should a company do if no one is
available internally and the company has a policy of EVALUATION AND CONTROL PROCESS (FIVE-STEP FEEDBACK
promotion from within? MODEL)
2. Whe n should someone from outside a company be
hired to manage the company or one of its business
units?
3. What are some ways to implement a retrenchment
strategy without creating a lot of resentment and
conflict with labor unions?
4. How can corporate culture be changed?
Why is an understanding of national cultures
important in strategic management?

SUMMARY 1. Determine what to measure. The processes and

results must be capable of being measured in a
 Strategy is implemented by modifying structure
reasonably objective and consistent manner. The
(organizing), selecting the appropriate people to carry
focus should be on the most significant elements in a
out the strategy (staffing), and communicating clearly
process—the ones that account for the highest
how the strategy can be put into action (leading).
proportion of expense or the greatest number of
 A number of programs, such as organizational and
problems.
job design, reengineering, Six Sigma, MBO, TQM, and
2. Establish standards of performance. Standards used
action planning, can be used to implement a new
to measure performance are detailed expressions of
strategy.
strategic objectives.
 Executives must manage the corporate culture and
3. Measure actual performance. Measurements must
find the right mix of qualified people to put a strategy
be made at predetermined times
in place.
4. Compare actual performance with the standard. If
actual performance results are within the desired
zjrs
 tolerance range, the measurement process stops  It provides strategic managers with a series of
here. questions to use in evaluating an implemented
5. Take corrective action. If actual results fall outside strategy. After answering the proposed set of
the desired tolerance range, action must be taken to questions, a manager should have a good idea of
correct the deviation. The following questions must where the problem originated and what must be
be answered: done to correct the situation.
a. Is the deviation only a chance fluctuation?
b. Are the processes being carried out incorrectly?
c. Are the processes appropriate to the achievement MEASURING PERFORMANCE
of the desired standard? Action must be taken that  steering controls - they measure variables that
will not only correct the deviation but also prevent its influence future profitability
happening again. Examples:
d. Who is the best person to take corrective action?  Inventory turnover ratio – This measure
shows how hard an investment in inventory
is working; the higher the ratio, the better.
 Evaluation and control information consists of Not only does quicker moving inventory tie
performance data and activity reports (gathered in up less cash in inventories, it also reduces
Step 3). If undesired performance results because the the risk that the goods will grow obsolete
strategic management processes were before they’re sold—a crucial measure for
inappropriately used, operational managers must computers and other technology items.
know about it so that they can correct the employee  Customer satisfaction - A change in a firm’s
activity. customer satisfaction typically works its way
 If, however, undesired performance results from the through a firm’s value chain and is
processes themselves, top managers, as well as eventually reflected in quarterly profits
operational managers, must know about it so that
they can develop new implementation programs or TYPES OF CONTROLS
procedures. Controls can be established to focus on actual performance
results (output), the activities that generate the performance
(behavior), or on resources that are used in performance
(input)

 Output Controls - specify what is to be accomplished

by focusing on the end result of the behaviors
through the use of objectives and performance
targets or milestones.
- most appropriate when specific output measures
have been agreed on but the cause–effect connection
between activities and results is not clear
Example: sales quotas, specific cost-reduction or
profit objectives, and surveys of customer satisfaction
 Behavior controls - specify how something is to be
done through policies, rules, standard operating
procedures, and orders from a superior
- are most appropriate when performance results are
hard to measure, but the cause–effect connection
between activities and results is clear
Example: following company procedures, making
sales calls to potential customers, and getting to work
on time
 Input controls - emphasize resources, such as
knowledge, skills, abilities, values, and motives of
employees
- are most appropriate when output is difficult to
measure and there is no clear cause–effect
relationship between behavior and performance
zjrs
 (such as in college teaching) 2. Rank the risks, using some scale of impact and
Example: number of years of education and likelihood.
experience 3. Measure the risks, using some agreed-upon standard

 Corporations following the strategy of conglomerate  some companies are using value at risk, or VAR
diversification tend to emphasize output controls (effect of unlikely events in normal markets), and
with their divisions and subsidiaries (presumably stress testing (effect of plausible events in abnormal
because they are managed independently of each markets) methodologies to measure the potential
other), whereas, corporations following concentric impact of the financial risks they face. DuPont uses
diversification use all three types of controls earnings at risk (EAR) measuring tools to measure the
(presumably because synergy is desired). effect of risk on reported earnings.
 Even if all three types of control are used, one or two
of them may be emphasized more than another PRIMARY MEASURES OF CORPORATE PERFORMANCE
depending on the circumstances. The days when simple financial measures such as ROI or EPS
 Examples of increasingly popular behavior controls were used alone to assess overall corporate performance are
are the ISO 9000 and 14000 Standards Series on coming to an end. Analysts now recommend a broad range of
quality and environmental assurance, developed by methods to evaluate the success or failure of a strategy.
the International Standards Association of Geneva,
TRADITIONAL FINANCIAL MEASURES
Switzerland. Another example of a behavior control is
a company’s monitoring of employee phone calls and  Return on Investment (ROI)- It is simply the result of
PCs to ensure that employees are behaving according dividing net income before taxes by the total amount
to company guidelines invested in the company

ACTIVITY-BASED COSTING
 Activity-based costing (ABC) is a recently developed
accounting method for allocating indirect and fixed
costs to individual products or product lines based on
the value-added activities going into that product
 Traditional cost accounting, in contrast, focuses on
valuing a company’s inventory for financial reporting
purposes
- useful when direct labor accounts for most of total
costs and a company produces just a few products
requiring the same processes.
 This may have been true of companies during the
early part of the twentieth century, but it is no longer
relevant today, when overhead may account for as
much as 70% of manufacturing costs.
 Earnings Per Share (EPS), which involves dividing net
 ABC accounting allows accountants to charge costs
earnings by the amount of common stock, also has
more accurately than the traditional method because
several deficiencies as an evaluation of past and
it allocates overhead far more precisely.
future performance. EPS does not consider the time
ENTERPRISE RISK MANAGEMENT value of money.
 Enterprise Risk Management (ERM) is a  Return On Equity (ROE), which involves dividing net
corporatewide, integrated process for managing the income by total equity, also has limitations because it
uncertainties that could negatively or positively is also derived from accounting-based data.
influence the achievement of the corporation’s  Operating cash flow, the amount of money
objectives. generated by a company before the cost of financing
 ERM is being adopted because of the increasing and taxes, is a broad measure of a company’s funds.
amount of environmental uncertainty that can affect This is the company’s net income plus depreciation,
an entire corporation. depletion, amortization, interest expense, and
income tax expense.
The process of rating risks involves three steps:  Free cash flow - he amount of money a new owner
can take out of the firm without harming the
1. Identify the risks using scenario analysis or
business. This is net income plus depreciation,
brainstorming or by performing risk self-assessments.
zjrs
 depletion, and amortization less capital expenditures estimate of the net present value of a firm’s past and
and dividends. The free cash flow ratio is very useful expected capital investment projects.
in evaluating the stability of an entrepreneurial To calculate MVA,
venture
1. Add all the capital that has been put into a
- Although cash flow may be harder to manipulate
company—from shareholders, bondholders, and
than earnings, the number can be increased by selling
retained earnings.
accounts receivable, classifying outstanding checks as
2. Reclassify certain accounting expenses, such as R&D,
accounts payable, trading securities, and capitalizing
to reflect that they are actually investments in future
certain expenses, such as direct-response advertising.
earnings. This provides the firm’s total capital. So far,
 Because of these and other limitations, ROI, EPS,
this is the same approach taken in calculating EVA.
ROE, and operating cash flow are not by themselves
3. Using the current stock price, total the value of all
adequate measures of corporate performance.
outstanding stock, adding it to the company’s debt.
STAKEHOLDER MEASURES This is the company’s market value.

 Each stakeholder has its own set of criteria to **If the company’s market value is greater than all the capital
determine how well the corporation is performing. invested in it, the firm has a positive MVA—meaning that
These criteria typically deal with the direct and management (and the strategy it is following) has created
indirect impacts of corporate activities on wealth. In some cases, however, the market value of the
stakeholder interests. company is actually less than the capital put into it, which
means shareholder wealth is being destroyed
SHAREHOLDER VALUE
 Studies have shown that EVA is a predictor of MVA.
 can be defined as the present value of the anticipated Consecutive years of positive EVA generally lead to a
future stream of cash flows from the business plus soaring MVA.
the value of the company if liquidated.  EVA and MVA may be more appropriate measures of
 The New York consulting firm Stern Stewart & the market’s evaluation of a firm’s strategy and its
Company devised and popularized two shareholder management than are the traditional measures of
value measures: economic value added (EVA) and corporate performance. Nevertheless, these
market value added (MVA). measures consider only the financial interests of the
 EVA measures the difference between the shareholder and ignore other stakeholders, such as
prestrategy and post-strategy values for the business. environmentalists and employees
It has become an extremely popular shareholder
value method of measuring corporate and divisional Balanced Scorecard Approach: Using Key Performance
performance and may be on its way to replacing ROI Measures
as the standard performance measure.
 The balanced scorecard combines financial measures
EVA = after tax operating income - (investment in assets x that tell the results of actions already taken with
operational measures on customer satisfaction,
weighted average cost of capital)
internal processes, and the corporation’s innovation
** If the difference is positive, the strategy (and the and improvement activities—the drivers of future
management employing it) is generating value for the financial performance. Thus steering controls are
shareholders. If it is negative, the strategy is destroying combined with output controls.
shareholder value
In the balanced scorecard, management develops goals or
 Managers can improve their company’s or business objectives in each of four areas:
unit’s EVA by: (1) earning more rofit without using
more capital, (2) using less capital, and (3) investing 1. Financial: How do we appear to shareholders?
capital in high-return projects. 2. Customer: How do customers view us?
 Limitations: it does not control for size differences 3. Internal business perspective: What must we excel
across plants or divisions, EVA is an after-the-fact at?
measure and cannot be used like a steering control 4. Innovation and learning: Can we continue to improve
and create value?
 Market Value Added (MVA) is the difference
between the market value of a corporation and the  Each goal in each area (for example, avoiding
capital contributed by shareholders and lenders. Like bankruptcy in the financial area) is then assigned one
net present value, it measures the stock market’s or more measures, as well as a target and an
initiative. These measures can be thought of as key

zjrs
 performance measures—measures that are essential  Strategic Audit provides a checklist of questions, by
for achieving a desired strategic option area or issue, that enables a systematic analysis of
 For example, a company could include cash flow, various corporate functions and activities to be made.
quarterly sales growth, and ROE as measures for It is a type of management audit and is extremely
success in the financial area. It could include market useful as a diagnostic tool to pinpoint corporatewide
share (competitive position goal), customer problem areas and to highlight organizational
satisfaction, and percentage of new sales coming strengths and weaknesses
from new products (customer acceptance goal) as
measures under the customer perspective. It could PRIMARY MEASURES OF DIVISIONAL AND
include cycle time and unit cost (manufacturing FUNCTIONAL PERFORMANCE
excellence goal) as measures under the internal Responsibility Centers
business perspective. It could include time to develop
next generation products (technology leadership  are used to isolate a unit so that it can be evaluated
objective) under the innovation and learning separately from the rest of the corporation. Each
perspective responsibility center, therefore, has its own budget
 When the balanced scorecard complements and is evaluated on its use of budgeted resources.
corporate strategy, it improves performance. Five Major Types of Responsibility Centers:
Evaluating Top Management and the Board of Directors 1. Standard cost centers: Standard cost centers are
 Objective evaluations of the CEO by the board are primarily used in manufacturing facilities. Standard
very important given that CEOs tend to evaluate (or expected) costs are computed for each operation
senior management’s performance significantly more on the basis of historical data. In evaluating the
positively than do other executives. center’s performance, its total standard costs are
 The board is concerned primarily with overall multiplied by the units produced. The result is the
corporate profitability as measured quantitatively by expected cost of production, which is then compared
ROI, ROE, EPS, and shareholder value. to the actual cost of production
 Members of the compensation committees of today’s 2. Revenue centers: With revenue centers, production,
boards of directors generally agree that a CEO’s usually in terms of unit or dollar sales, is measured
ability to establish strategic direction, build a without consideration of resource costs (for example,
management team, and provide leadership are more salaries). The center is thus judged in terms of
critical in the long run than are a few quantitative effectiveness rather than efficiency. The effectiveness
measures. of a sales region, for example, is determined by
 The board should evaluate top management not only comparing its actual sales to its projected or previous
on the typical output-oriented quantitative measures, year’s sales
but also on behavioral measures—factors relating to 3. Expense centers: Resources are measured in dollars,
its strategic management practices. without consideration for service or product costs.
 Chairman CEO Feedback Instrument – An increasing Thus budgets will have been prepared for engineered
number of companies are evaluating their CEO by expenses (costs that can be calculated) and for
using a 17-item questionnaire developed by Ram discretionary expenses (costs that can be only
Charan, an authority on corporate governance. estimated). Typical expense centers are
administrative, service, and research departments.
- The questionnaire focuses on four key areas: They cost a company money, but they only indirectly
contribute to revenues.
1. company performance
4. Profit centers: Performance is measured in terms of
2. leadership of the organization
the difference between revenues (which measure
3. team-building and management succession
production) and expenditures (which measure
4. leadership of external constituencies.
resources). A profit center is typically established
 Management audits are very useful to boards of
whenever an organizational unit has control over
directors in evaluating management’s handling of
both its resources and its products or services
various corporate activities. Management audits have
5. Investment centers: An investment center’s
been developed to evaluate activities such as
performance is measured in terms of the difference
corporate social responsibility, functional areas such
between its resources and its services or products.
as the marketing department, and divisions such as
the international division

zjrs
Using Benchmarking to Evaluate Performance  A study of 79 MNCs revealed that international
transfer pricing from one country unit to another is
According to Xerox Corporation, the company that pioneered
primarily used not to evaluate performance but to
this concept in the United States, benchmarking is “the
minimize taxes.
continual process of measuring products, services, and
 A Japanese MNC could, therefore, earn more profit
practices against the toughest competitors or those companies
worldwide by reporting less profit in hightax
recognized as industry leaders.”
countries and more profit in low-tax countries.
The benchmarking process usually involves the following Transfer pricing can thus be one way the parent
steps: company can reduce taxes and “capture profits” from
a subsidiary.
1. Identify the area or process to be examined. It should  Other common ways of transferring profits to the
be an activity that has the potential to determine a parent company (often referred to as the repatriation
business unit’s competitive advantage. of profits) are through dividends, royalties, and
2. Find behavioral and output measures of the area or management fees.
process and obtain measurements.  Among the most important barriers to international
3. Select an accessible set of competitors and best-in- trade are the different standards for products and
class companies against which to benchmark. These services. There are at least three categories of
may very often be companies that are in completely standards: safety/environmental, energy efficiency,
different industries, but perform similar activities and testing procedures.
4. Calculate the differences among the company’s
performance measurements and those of the best-in-  An important issue in international trade is
class and determine why the differences exist. counterfeiting/piracy. Firms in developing nations
5. Develop tactical programs for closing performance around the world make money by making
gaps. counterfeit/pirated copies of well-known name-
6. Implement the programs and then compare the brand products and selling them globally as well as
resulting new measurements with those of the best- locally
in-class companies.
 Authorities in international business recommend that
** Benchmarking has been found to produce best results in
the control and reward systems used by a global MNC
companies that are already well managed. Apparently poorer
be different from those used by a multidomestic
performing firms tend to be overwhelmed by the discrepancy
MNC
between their performance and the benchmark—and tend to
 A multidomestic MNC should use loose controls on
view the benchmark as too difficult to reach
its foreign units. The management of each geographic
INTERNATIONAL MEASUREMENT ISSUES unit should be given considerable operational
 The three most widely used techniques for latitude, but it should be expected to meet some
international performance evaluation are ROI,budget performance targets.
analysis, and historical comparisons.  A global MNC, however, needs tight controls over its
 However, ROI can cause problems when it is applied many units. To reduce costs and gain competitive
to international operations: Because of foreign advantage, it is trying to spread the manufacturing
currencies, different accounting systems, different and marketing operations of a few fairly uniform
rates of inflation, different tax laws, and the use of products around the world.
transfer pricing, both the net income figure and the
STRATEGIC INFORMATIO N SYSTEMS
investment base may be seriously distorted
 To deal with different accounting systems throughout Before performance measures can have any impact on
the world, the London-based International strategic management, they must first be communicated to
Accounting Standards Board developed International the people responsible for formulating and implementing
Financial Reporting Standards (IFRS) to harmonize strategic plans. Strategic information systems can perform this
accounting practices. function.
 Nevertheless, enforcement and cultural
interpretations of the international rules can still vary ENTERPRISE RESOURCE PLANNING (ERP)
by country and may undercut what is hoped to be a  ERP unites all of a company’s major business
uniform accounting system activities, from order processing to production,
within a single family of software modules. The
system provides instant access to critical information

zjrs
 to everyone in the organization, from the CEO to the SHORT-TERM ORIENTATION
factory floor worker.  Many accounting-based measures, such as EPS and
 ERP may not fit every company, however. The system ROI, encourage a short-term orientation in which
is extremely complicated and demands a high level of managers consider only current tactical or
standardization throughout a corporation. operational issues and ignore long-term strategic
ones.
There are three reasons ERP could fail:
 Because growth in EPS (earnings per share) is an
1. Insufficient tailoring of the software to fit the important driver of near-term stock price, top
company managers are biased against investments that might
2. inadequate training reduce short-term EPS
3. insufficient implementation support.  In theory, ROI is not limited to the short run, but in
practice it is often difficult to use this measure to
 ERP is a key ingredient for gaining competitive realize long-term benefits for a company. Because
advantage, streamlining operations, and managing a managers can often manipulate both the numerator
lean manufacturing system. (earnings) and the denominator (investment), the
resulting ROI figure can be meaningless.
RADIO FREQUENCY IDENTIFICATION  In a recent survey of financial executives, 80% of the
 Radio frequency identification (RFID) is an electronic managers stated that they would decrease spending
tagging technology used in a number of companies to on research and development, advertising,
improve supply-chain efficiency. maintenance, and hiring in order to meet earnings
 By tagging containers and items with tiny chips, targets
companies use the tags as wireless bar-codes to track  Research supports the conclusion that many CEOs
inventory more efficiently. and their friends on the board of directors’
 some suppliers and retailers of expensive consumer compensation committee manipulate information to
products view the cost of the tag as worthwhile provide themselves a pay raise
because it reduces losses from counterfeiting and
theft. GOAL DISPLACEMENT
Goal displacement is the confusion of means with ends and
DIVISIONAL AND FUNCTIONAL IS SUPPORT occurs when activities originally intended to help managers
 At the divisional or SBU level of a corporation, the attain corporate objectives become ends in themselves—or
information system should be used to support, are adapted to meet ends other than those for which they
reinforce, or enlarge its business-level strategy were intended.
through its decision support system.
 An SBU pursuing a strategy of overall cost leadership TWO TYPES OF GOAL DISPLACEMENT:
could use its information system to reduce costs
1. Behavior Substitution - refers to a phenomenon
either by improving labor productivity or improving
when people substitute activities that do not lead to
the use of other resources such as inventory or
goal accomplishment for activities that do lead to
machinery.
goal accomplishment because the wrong activities
 Another SBU, in contrast, might want to pursue a
are being rewarded.
differentiation strategy. It could use its information
-Managers, like most other people, tend to focus
system to add uniqueness to the product or service
more of their attention on behaviors that are clearly
and contribute to quality, service, or image through
measurable than on those that are not.
the functional areas.
- people tend to substitute behaviors that are
recognized and rewarded for behaviors that are
PROBLEMS IN MEASURIN G PERFORMANCE
ignored, without regard to their contribution to goal
The measurement of performance is a crucial part of accomplishment.
evaluation and control. The lack of quantifiable objectives or - A classic example of behavior substitution happened
performance standards and the inability of the information a few years ago at Sears. Sears’ management thought
system to provide timely and valid information are two that it could improve employee productivity by tying
obvious control problems. performance to rewards. It, therefore, paid
 According to Meg Whitman, pastCEO of eBay, “If you commissions to its auto shop employees as a
can’t measure it, you can’t control it.” percentage of each repair bill. Behavior substitution
resulted as employees altered their behavior to fit
the reward system. The results were over-billed

zjrs
 customers, charges for work never done, and a measurements might contain the following
scandal that tarnished Sears’ reputation for many variations:
years.

2. Suboptimization - refers to the phenomenon of a

unit optimizing its goal accomplishment to the
detriment of the organization as a whole.
Example: The emphasis in large corporations on
developing separate responsibility centers can create
some problems for the corporation as a whole.
The competition between divisions to achieve a high
ROI can result in one division’s refusal to share its
new technology or work process improvements.
One division’s attempt to optimize the
accomplishment of its goals can cause other divisions
to fall behind and thus negatively affect overall
corporate performance.

GUIDELINES FOR PROPER CONTROL

In designing a control system, top management should
remember that controls should follow strategy. The following 2. Long-term evaluation method - compensates
guidelines are recommended: managers for achieving objectives set over a
1. Control should involve only the minimum amount of multiyear period.
information needed to give a reliable picture of - An executive is promised some company stock or
events: Too many controls create confusion. Focus “performance units” (convertible into money or
on the strategic factors by following the 80/20 rule: stock) in amounts to be based on long-term
Monitor those 20% of the factors that determine 80% performance
of the results - The typical emphasis on stock prices makes this
2. Controls should monitor only meaningful activities approach more applicable to top management than
and results, regardless of measurement difficulty to business unit managers
3. Controls should be timely so that corrective action
can be taken before it is too late 3. Strategic-funds method - encourages executives to
4. Long-term and short-term controls should be used look at developmental expenses as being different
5. Controls should aim at pinpointing exceptions from expenses required for current operations.
6. Emphasize the reward of meeting or exceeding An effective way to achieve the desired strategic results
standards rather than punishment for failing to through a reward system is to combine the three approaches:
meet standards
1. Segregate strategic funds from short-term funds, as is done
STRATEGIC INCENTIVE MANAGEMENT in the strategic-funds method.
To ensure congruence between the needs of a corporation as
2. Develop a weighted-factor chart for each SBU.
a whole and the needs of the employees as individuals,
management and the board of directors should develop an 3. Measure performance on three bases: The pretax profit
incentive program that rewards desired performance. indicated by the strategic-funds approach, the weighted
factors, and the long-term evaluation of the SBUs’ and the
The following three approaches are tailored to help match
corporation’s performance.
measurements and rewards with explicit strategic objectives
and time frames: DISCUSSION QUESTIONS:
1. What are some examples of behavior controls?
1. Weighted-factor method - is particularly appropriate
Output controls? Input controls?
for measuring and rewarding the performance of top
2. Is EVA an improvement over ROI, ROE, or EPS?
SBU managers and group-level executives when
3. How much faith can a manager place in a transfer
performance factors and their importance vary from
price as a substitute for a market price in measuring a
one SBU to another.
profit center’s performance?
- Using portfolio analysis, one corporation's

zjrs
 4. Is the evaluation and control process appropriate for
a corporation that emphasizes creativity? Are control
and creativity compatible?

SUMMARY
 In business, the bottom-line measure of performance
is making a profit. If people aren’t willing to pay more
than what it costs to make a product or provide a
service, that business will not continue to exist.
 Evaluation and control is one of the most difficult
parts of strategic management. No one measure can
tell us what we need to know. That’s why we need to
use not only the traditional measures of financial
performance, such as net earnings, ROI, and EPS, but
we need to consider using EVA or MVA and a
balanced scorecard, among other possibilities.
 The measurement of performance can and does
result in short-term oriented actions and goal
displacement.
 That’s why experts suggest that we use multiple
measures of only those things that provide a
meaningful and reliable picture of events: Measure
those 20% of the factors that determine 80% of the
results

zjrs