Category: Strategy

In the field of management, a firm strategy is a comprehensive plan to achieve its goals in the face of these conditions. Strategy defines how a firm will achieve long-term success. Strategy is defined as “the determination of the basic long-term goals of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals” (Chandler, 1962) Strategies are established to set direction, focus effort, define or clarify the organization, and provide consistency or guidance in response to the environment (Mintzberg, 1987). Determining the strategy is a critical decision for management because it involves a significant commitment of resources and, once initiated, it is very difficult and costly to change.

Firm strategy involves the formulation and implementation of the major goals and initiatives taken by an organization’s managers on behalf of stakeholders, based on consideration of resources and an assessment of the internal and external environments in which the organization operates. Firm strategy provides overall direction to an enterprise and involves specifying the organization’s objectives, developing policies and plans to achieve those objectives, and then allocating resources to implement the plans. Academics and practicing managers have developed numerous models and frameworks to assist in strategic decision-making in the context of complex environments and competitive dynamics. Firm strategy is not static in nature; the models often include a feedback loop to monitor execution and to inform the next round of planning.

Michael Porter identifies three principles underlying strategy:

• creating a “unique and valuable [market] position”
• making trade-offs by choosing “what not to do”
• creating “fit” by aligning company activities with one another to support the chosen strategy

Management theory and practice often make a distinction between strategic management and operational management, with operational management concerned primarily with improving efficiency and controlling costs within the boundaries set by the organization’s strategy.

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Once there were two company presidents who competed in the same industry. These two presidents decided to go on a camping trip to discuss a possible merger. They hiked deep into the woods. Suddenly, they came upon a grizzly bear that rose up on its hind legs and snarled. Instantly, the first president took off his knapsack and got out a pair of jogging shoes. The second president said, “Hey, you can’t outrun that bear.” The first president responded, “Maybe I can’t outrun that bear, but I surely can outrun you!” This story captures the notion of strategic manage­ment, which is to gain and sustain competitive advantage.

1. What Is a Cohesion Case?

A distinguishing, popular feature of this text is the cohesion case, named so because a written case on a company appears at the end of this chapter, and then all other chapters feature end-of-chapter assurance of Learning Exercises to apply strategic-planning concepts, tools, and techniques to the cohesion case company. The Hershey company is featured as the new cohesion case in this edition, because Hershey is a well-known, well-managed global firm undergoing strategic change. By working through the Hershey-related exercises at the end of each chapter, students become well prepared to develop an effective strategic plan for any company assigned to them (or their team) to perform a strategic-management case analysis. case analysis is a core part of almost every strategic-management course globally.

2. Defining Strategic Management

Strategic management is the art and science of formulating, implementing, and evaluating cross-functional decisions that enable an organization to achieve its objectives. As this defi­nition implies, strategic management focuses on integrating management, marketing, finance and accounting, production and operations, research and development (R&D), and informa­tion systems to achieve organizational success. the term strategic management in this text is used synonymously with the term strategic planning. the latter term is more often used in the business world, whereas the former is often used in academia. Sometimes the term strate­gic management is used to refer to strategy formulation, implementation, and evaluation, with strategic planning referring only to strategy formulation. the purpose of strategic management is to exploit and create new and different opportunities for tomorrow; long-range planning, in contrast, tries to optimize for tomorrow the trends of today.

The term strategic planning originated in the 1950s and was popular between the mid-1960s and the mid-1970s. During these years, strategic planning was widely believed to be the answer for all problems. at the time, much of corporate America was “obsessed” with strategic planning. Following that boom, however, strategic planning was cast aside during the 1980s as various planning models did not yield higher returns. the 1990s, however, brought the revival of strate­gic planning, and the process is widely practiced today in the business world. Many companies today have a chief strategy officer (CSO). McDonald’s hired a new cSO in October 2015.

A strategic plan is, in essence, a company’s game plan. Just as a football team needs a good game plan to have a chance for success, a company must have a good strategic plan to compete successfully. Profit margins among firms in most industries are so slim that there is little room for error in the overall strategic plan. A strategic plan results from tough managerial choices among numerous good alternatives, and it signals commitment to specific markets, policies, pro­cedures, and operations in lieu of other, “less desirable” courses of action.

The term strategic management is used at many colleges and universities as the title for the capstone course in business administration. this course integrates material from all business courses, and, in addition, introduces new strategic-management concepts and techniques being widely used by firms in strategic planning.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

The strategic-management process consists of three stages: strategy formulation, strategy implementation, and strategy evaluation. Strategy formulation includes developing a vision and a mission, identifying an organization’s external opportunities and threats, determining internal strengths and weaknesses, establishing long-term objectives, generating alternative strategies, and choosing particular strategies to pursue. Strategy-formulation issues include deciding what new businesses to enter, what businesses to abandon, whether to expand operations or diversify, whether to enter international markets, whether to merge or form a joint venture, and how to avoid a hostile takeover.

Because no organization has unlimited resources, strategists must decide which alterna­tive strategies will benefit the firm most. Strategy-formulation decisions commit an organiza­tion to specific products, markets, resources, and technologies over an extended period of time. Strategies determine long-term competitive advantages. For better or worse, strategic decisions have major multifunctional consequences and enduring effects on an organization. Top managers have the best perspective to understand fully the ramifications of strategy-formulation decisions; they have the authority to commit the resources necessary for implementation.

Strategy implementation requires a firm to establish annual objectives, devise policies, motivate employees, and allocate resources so that formulated strategies can be executed. Strategy implementation includes developing a strategy-supportive culture, creating an effective organizational structure, redirecting marketing efforts, preparing budgets, developing and using information systems, and linking employee compensation to organizational performance.

Strategy implementation often is called the “action stage” of strategic management. Implementing strategy means mobilizing employees and managers to put formulated strategies into action. Often considered to be the most difficult stage in strategic management, strategy implementation requires personal discipline, commitment, and sacrifice. Successful strategy implementation hinges on managers’ ability to motivate employees, which is more an art than a science. Strategies formulated but not implemented serve no useful purpose.

Interpersonal skills are especially critical for successful strategy implementation. Strategy- implementation activities affect all employees and managers in an organization. Every division and department must decide on answers to questions such as “What must we do to implement our part of the organization’s strategy?” and “How best can we get the job done?” The challenge of implementation is to stimulate managers and employees throughout an organization to work with pride and enthusiasm toward achieving stated objectives.

Strategy evaluation is the final stage in strategic management. Managers desperately need to know when particular strategies are not working well; strategy evaluation is the primary means for obtaining this information. All strategies are subject to future modification because exter­nal and internal factors constantly change. Three fundamental strategy-evaluation activities are (1) reviewing external and internal factors that are the bases for current strategies, (2) measuring performance, and (3) taking corrective actions. Strategy evaluation is needed because success today is no guarantee of success tomorrow! Success always creates new and different problems; complacent organizations experience demise.

Formulation, implementation, and evaluation of strategy activities occur at three hierarchi­cal levels in a large organization: corporate, divisional or strategic business unit, and functional. By fostering communication and interaction among managers and employees across hierarchical levels, strategic management helps a firm function as a competitive team. Most small businesses and some large businesses do not have divisions or strategic business units; they have only the corporate and functional levels. Nevertheless, managers and employees at these two levels should be actively involved in strategic-management activities.

Peter Drucker says the prime task of strategic management is thinking through the overall mission of a business-that is, of asking the question, “What is our business?” This leads to the setting of objec­tives, the development of strategies, and the making of today’s decisions for tomorrow’s results. This clearly must be done by a part of the organization that can see the entire busi­ness; that can balance objectives and the needs of today against the needs of tomorrow; and that can allocate resources of men and money to key results.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

Edward Deming once said, “In God we trust. All others bring data.” The strategic-management process can be described as an objective, logical, systematic approach for making major decisions in an organization. It attempts to organize qualitative and quantitative information in a way that allows effective decisions to be made under conditions of uncertainty. Yet strategic management is not a pure science that lends itself to a nice, neat, one-two-three approach.

Based on past experiences, judgment, and feelings, most people recognize that intuition is essential to making good strategic decisions. Intuition is particularly useful for making decisions in situations of great uncertainty or little precedent. It is also helpful when highly interrelated variables exist or when it is necessary to choose from several plausible alternatives. Some man­agers and owners of businesses profess to have extraordinary abilities for using intuition alone in devising brilliant strategies. For example, will Durant, who organized GM, was described by Alfred Sloan as “a man who would proceed on a course of action guided solely, as far as i could tell, by some intuitive flash of brilliance. He never felt obliged to make an engineering hunt for the facts. Yet at times, he was astoundingly correct in his judgment.”³ albert Einstein acknowl­edged the importance of intuition when he said, “i believe in intuition and inspiration. at times i feel certain that i am right while not knowing the reason. imagination is more important than knowledge, because knowledge is limited, whereas imagination embraces the entire world.”⁴ although some organizations today may survive and prosper because they have intuitive geniuses managing them, many are not so fortunate. Most organizations can benefit from stra­tegic management, which is based on integrating intuition and analysis in decision making. choosing an intuitive or analytic approach to decision making is not an either-or proposition. Managers at all levels in an organization inject their intuition and judgment into strategic- management analyses. analytical thinking and intuitive thinking complement each other.

Operating from the i’ve-already-made-up-my-mind-don’t-bother-me-with-the-facts mode is not management by intuition; it is management by ignorance.⁵ Drucker says, “i believe in intuition only if you discipline it. ‘Hunch’ artists, who make a diagnosis but don’t check it out with the facts, are the ones in medicine who kill people, and in management kill businesses.”⁶ As Henderson notes:

The accelerating rate of change today is producing a business world in which customary managerial habits in organizations are increasingly inadequate. Experience alone was an adequate guide when changes could be made in small increments. But intuitive and experi­ence-based management philosophies are grossly inadequate when decisions are strategic and have major, irreversible consequences.⁷

In a sense, the strategic-management process is an attempt to duplicate what goes on in the mind of a brilliant, intuitive person who knows the business and assimilates and integrates that knowl­edge using analysis to formulate effective strategies.

1. Adapting to Change

The strategic-management process is based on the belief that organizations should continually monitor internal and external events and trends so that timely changes can be made as needed. The rate and magnitude of changes that affect organizations are increasing dramatically, as evidenced by how the drop in oil prices caught so many firms by surprise. Firms, like organisms, must be “adept at adapting” or they will not survive. To survive, all organizations must astutely identify and adapt to change. The strategic-management process is aimed at allowing organiza­tions to adapt effectively to change over the long run. waterman noted:

in today’s business environment, more than in any preceding era, the only constant is change. Successful organizations effectively manage change, continuously adapting their bureaucracies, strategies, systems, products, and cultures to survive the shocks and prosper from the forces that decimate the competition.⁸

On a political map, the boundaries between countries may be clear, but on a competitive map showing the real flow of financial and industrial activity, the boundaries have largely disappeared. The speedy flow of information has eaten away at national boundaries so that people worldwide readily see for themselves how other people live and work. we have become a borderless world with global citizens, global competitors, global customers, global suppliers, and global distributors! Many firms headquartered in the United States are challenged by out- side-U.S.-based companies in many industries. For example, Toyota, Honda, Yamaha, Suzuki, Volkswagen, Samsung, and Kia have huge market shares in the United States.

The need to adapt to change leads organizations to key strategic-management questions, such as “What kind of business should we become?” “Are we in the right field(s)?” “Should we reshape our business?” “What new competitors are entering our industry?” “What strategies should we pursue?” “How are our customers changing?” “Are new technologies being developed that could put us out of business?”

The Internet promotes endless comparison shopping, enabling consumers worldwide to band together to demand discounts. the internet has transferred power from businesses to indi­viduals. Buyers used to face big obstacles when attempting to get the best price and service, such as limited time and data to compare, but now consumers can quickly scan hundreds of vendor offerings. Both the number of people shopping online and the average amount they spend is increasing dramatically. Digital communication has become the name of the game in market­ing. consumers today are flocking to blogs, sending tweets, watching and posting videos on Youtube, and spending hours on tumbler, Facebook, Reddit, instagram, and Linkedin, instead of watching television, listening to the radio, or reading newspapers and magazines. facebook recently unveiled features that further marry these social sites to the wider internet. Facebook users can now log onto various business shopping sites from their social site, so their friends can see what items they have purchased from what companies. facebook wants their members to use their identities to manage all their online identities. Most traditional retailers boost in-store sales using their websites to promote in-store promotions.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

Before we further discuss strategic management, we should define nine key terms: competitive advantage, strategists, vision and mission statements, external opportunities and threats, inter­nal strengths and weaknesses, long-term objectives, strategies, annual objectives, and policies.

1. Competitive Advantage

Strategic management is all about gaining and maintaining competitive advantage. this term can be defined as any activity a firm does especially well compared to activities done by rival firms, or any resource a firm possesses that rival firms desire.

Having fewer fixed assets than rival firms can provide major competitive advantages. for example, apple has virtually no manufacturing facilities of its own, and rival Sony has 57 elec­tronics factories. Apple relies almost entirely on contract manufacturers for production of all its products, whereas Sony owns its own plants. Having fewer fixed assets has enabled apple to remain financially lean.

according to cEO Paco Underhill of Envirosell, “where it used to be a polite war, it’s now a 21st-century bar fight, where everybody is competing with everyone else for the customers’ money.” Shoppers are “trading down: Nordstrom is taking customers from Neiman Marcus and Saks Fifth Avenue, T.J. Maxx and Marshalls are taking customers from most other stores in the mall, and Family Dollar is taking revenues from Walmart.⁹ Getting and keeping competitive advantage is essential for long-term success in an organization. in mass retailing, big-box com­panies, such as Walmart, Best Buy, and Sears, are losing competitive advantage to smaller stores, reflecting the dramatic shift in mass retailing to becoming smaller. As customers shift more to online purchases, less brick and mortar is definitely better for sustaining competitive advan­tage in retailing. Walmart Express stores of less than 40,000 square feet each, rather than its 185,000-square-foot Supercenters, and Office Depot’s new 5,000-square-foot stores are exam­ples of smaller is better.

Normally, a firm can sustain a competitive advantage for only a certain period because of rival firms imitating and undermining that advantage. thus, it is not adequate simply to obtain competitive advantage. A firm must strive to achieve sustained competitive advantage by (1) continually adapting to changes in external trends and events and internal capabilities, competencies, and resources; and (2) effectively formulating, implementing, and evaluating strategies that capitalize on those factors.

2. Strategists

Strategists are the individuals most responsible for the success or failure of an organization. they have various job titles, such as chief executive officer, president, owner, chair of the board, executive director, chancellor, dean, and entrepreneur. Jay Conger, professor of organizational behavior at the London Business School and author of Building Leaders, says, “All strategists have to be chief learning officers. we are in an extended period of change. If our leaders aren’t highly adaptive and great models during this period, then our companies won’t adapt either, because ultimately leadership is about being a role model.”

Strategists help an organization gather, analyze, and organize information. They track indus­try and competitive trends, develop forecasting models and scenario analyses, evaluate corporate and divisional performance, spot emerging market opportunities, identify business threats, and develop creative action plans. Strategic planners usually serve in a support or staff role. Usually found in higher levels of management, they typically have considerable authority for decision making in the firm. The CEO is the most visible and critical strategic manager. Any manager who has responsibility for a unit or division, responsibility for profit and loss outcomes, or direct authority over a major piece of the business is a strategic manager (strategist).

In the last few years, the position of CSO has become common in many organiza­tions, including Sun Microsystems, Network Associates, Clarus, Lante, Marimba, Sapient, Commerce One, BBDO, Cadbury Schweppes, General Motors, Ellie Mae, Cendant, Charles Schwab, Tyco, Campbell Soup, Morgan Stanley, and Reed-Elsevier. This corporate officer title represents recognition of the growing importance of strategic planning in business. Franz Koch, the CSO of German sportswear company Puma AG, was recently promoted to CEO of Puma. When asked about his plans for the company, Koch said on a conference call, “I plan to just focus on the long-term strategic plan.” Academic Research Capsule 1-1 reveals when CSOs are most often hired.

Strategists differ as much as organizations do, and these differences must be considered in the formulation, implementation, and evaluation of strategies. Strategists differ in their attitudes, values, ethics, willingness to take risks, concern for social responsibility, concern for profitabil­ity, concern for short-run versus long-run aims, and management style—some will not even con­sider various types of strategies because of their personal philosophies.. The founder of Hershey, Milton Hershey, built the company so that he could afford to manage an orphanage. From cor­porate profits, Hershey today cares for about 900 boys and 1,000 girls in its boarding school for pre-K through grade 12.

Athletic coaches are also strategists. Football, basketball, baseball, soccer, and in fact most athletic contests are often won or lost based a team’s game plan. For example, a basketball coach may plan to fast break and play up-tempo, rather than play more half court, if the players are smaller and faster, or if the team has more depth than the opposing team. A few great college bas­ketball coaches today are Mike Krzyzewski at Duke, John Calipari at Kentucky, Jim Boeheim at Syracuse, and Tom Izzo at Michigan State. Great college basketball coaches years ago included John Wooden, Jim Valvano, Dean Smith, and Bobby Knight. Another great coach of yesteryear was Nolan Richardson, who developed excellent game plans and, in 1994, as the first black head coach at a major university in the South, led the Arkansas Razorbacks men’s basketball team to win the NCAA college basketball national championship versus Duke.¹⁰ Switching to football, some inspirational, strategic-planning-related quotes from legendary National Football League (NFL) coaches are provided in Table 1-1.

3. When Are Chief Strategy Officers (CSOs) Hired/Appointed?

An increasing number of firms are employing a chief strategy officer (CSO). In an article published in 2014, Menz and Sheef examined 200 S&P 500 firms over a 5-year period to examine what factors contribute to firms hiring a CSO and what factors contribute to a CSO affecting a firm’s financial performance. Of the sampled firms, on average, during the study, 42 percent employed a CSO. Although many factors may lead to a firm’s decision to appoint a CSO, the authors focused on five key areas that prior research suggests as most important and most likely to lead to a CSO appointment:

• As the business portfolio increases (e.g., the firm becomes more diversified)
• As acquisition activity expands
• As alliance activity increases
• As a firm’s size grows
• As top management team interdependence increases

Results of the Menz and Sheef study reveal that an increase in management interdependence and growth in acquisition activity were most commonly associated with hiring a new CSO.

Source: Based on Markus Menz and Christine Sheef, “Chief Strategy Officers: Contingency Analysis of Their Presence in Top Management Teams,” Strategic Management Journal 35, no. 3 (March 2014): 461-471.

4. Vision and Mission Statements

Many organizations today develop a vision statement that answers the question “What do we want to become?” Developing a vision statement is often considered the first step in strategic planning, preceding even development of a mission statement. Many vision statements are a sin­gle sentence. For example, the vision statement of Stokes Eye Clinic in Florence, South Carolina, is “Our vision is to take care of your vision.”

Mission statements are “enduring statements of purpose that distinguish one business from other similar firms. A mission statement identifies the scope of a firm’s operations in product and market terms.”¹¹ It addresses the basic question that faces all strategists: “What is our business?” A clear mission statement describes the values and priorities of an organization. Developing a mission statement compels strategists to think about the nature and scope of present operations and to assess the potential attractiveness of future markets and activities. A mission statement not only broadly charts the future direction of an organization but it also serves as a constant reminder to its employees of why the organization exists and what the founders envisioned when they put their fame and fortune (and names) at risk to breathe life into their dreams.

5. External Opportunities and Threats

External opportunities and external threats refer to economic, social, cultural, demographic, environmental, political, legal, governmental, technological, and competitive trends and events that could significantly benefit or harm an organization in the future. Opportunities and threats are largely beyond the control of a single organization—thus the word external. Some general categories of opportunities and threats are listed in Table 1-2, but be mindful that dollars, num­bers, percentages, ratios, and quantification are essential, so strategists can assess the magnitude of opportunities and threats and take appropriate actions. For example, in Table 1-2, rather than saying “Marketing is moving rapidly to the Internet,” strategists who take the time to do research would find, for example, that “spending on online advertisements globally rose about 25 percent in 2014, according to eMarketer, and represented about 39 percent of total advertising spending in the USA.¹² Strategies must be formulated and implemented based on specific factual informa­tion to the extent possible-because so much is at stake in having a good game plan.

External trends and events are creating a different type of consumer and consequently a need for different types of products, services, and strategies. Many companies in many industries face the severe threat of online sales eroding brick-and-mortar sales. A competitor’s strength could be a threat, or a rival firm’s weakness could be an opportunity.

A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and avoid or reduce the impact of external threats. For this reason, identifying, monitoring, and evaluating external opportunities and threats are essential for success. This process of conducting research and gathering and assimilating external information is sometimes called environmental scanning or industry analysis. Lobbying is one activity that some organizations use to influence external opportunities and threats.

6. Internal Strengths and Weaknesses

Internal strengths and internal weaknesses are an organization’s controllable activities that are performed especially well or poorly. They arise in the management, marketing, finance/ accounting, production/operations, research and development, and management information systems (MIS) activities of a business. Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity. Organizations strive to pursue strategies that capitalize on internal strengths and eliminate inter­nal weaknesses.

Strengths and weaknesses are determined relative to competitors. Relative deficiency or superiority is important information. Also, strengths and weaknesses can be determined by elements of being rather than performance. For example, a strength may involve ownership of natural resources or a historic reputation for quality. Strengths and weaknesses may be deter­mined relative to a firm’s own objectives. For instance, high levels of inventory turnover may not be a strength for a firm that seeks never to stock-out.

In performing a strategic-management case analysis, it is important to be as divisional as possible when determining and stating internal strengths and weaknesses. In other words, for a company such as Walmart saying, “Sam Club’s revenues grew 11 percent in the recent quarter,” is much better than Walmart couching all of its internal factors in terms of the firm as a whole. “Being divisional” will enable strategies to be more effectively formulated because in strategic planning, firms must allocate resources among divisions (segments) of the firm (that is, by prod­uct, region, customer, or whatever the various units of the firm are), such as Walmart’s Sam’s Club versus Walmart’s Supercenters, or Walmart’s Mexico segment versus Walmart’s Europe segment.

Both internal and external factors should be stated as specifically as possible, using numbers, percentages, dollars, and ratios, as well as comparisons over time to rival firms. Specificity is important because strategies will be formulated and resources allocated based on this informa­tion. The more specific the underlying external and internal factors, the more effectively strategies can be formulated and resources allocated. Determining the numbers takes more time, but survival of the firm often is at stake, so doing some research and incorporating numbers associated with key factors is essential.

Internal factors can be determined in a number of ways, including computing ratios, measur­ing performance, and comparing to past periods and industry averages. Various types of surveys also can be developed and administered to examine internal factors, such as employee morale, production efficiency, advertising effectiveness, and customer loyalty.

7. Long-Term Objectives

Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission. Long-term means more than one year. Objectives are essential for organizational success because they provide direction; aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing, moti­vating, and controlling activities. Objectives should be challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives are needed both for the overall company and each division.

8. Strategies

Strategies are the means by which long-term objectives will be achieved. Business strategies may include geographic expansion, diversification, acquisition, product development, market penetration, retrenchment, divestiture, liquidation, and joint ventures. Strategies currently being pursued by some companies are described in Table 1-3.

Strategies are potential actions that require top-management decisions and large amounts of the firm’s resources. They affect an organization’s long-term prosperity, typically for at least five years, and thus are future-oriented. Strategies also have multifunctional and mul­tidivisional consequences and require consideration of both the external and internal factors facing the firm.

9. Annual Objectives

Annual objectives are short-term milestones that organizations must achieve to reach long­term objectives. Like long-term objectives, annual objectives should be measurable, quanti­tative, challenging, realistic, consistent, and prioritized. They must also be established at the corporate, divisional, and functional levels in a large organization. Annual objectives should be stated in terms of management, marketing, finance/accounting, production/operations, R&D, and MIS accomplishments. A set of annual objectives is needed for each long-term objective. These objectives are especially important in strategy implementation, whereas long-term objec­tives are particularly important in strategy formulation. Annual objectives provide the basis for allocating resources.

10. Policies

Policies are the means by which annual objectives will be achieved. Policies include guidelines, rules, and procedures established to support efforts to achieve stated objectives. Policies are guides to decision making and address repetitive or recurring situations. Usually, policies are stated in terms of management, marketing, finance/accounting, production/ operations, R&D, and MIS activities. They may be established at the corporate level and apply to an entire organization, at the divisional level and apply to a single division, or they may be established at the functional level and apply to particular operational activities or departments.

Like annual objectives, policies are especially important in strategy implementation because they outline an organization’s expectations of its employees and managers. Policies allow consistency and coordination within and between organizational departments. Policy change is sometimes difficult. For example, years ago, it was unquestioningly accepted that people could smoke in their offices, in restaurants, in hotels, and on airplanes. But as people and companies became educated about the harms of smoking—not only to smokers but also to nonsmokers —policy in businesses began to change. Even with the vast changes in smoking in public areas, smoking rates are still high. In the United States, Kentucky takes the lead in hav­ing more smokers than in any other state: 30.2 percent of residents, followed by West Virginia and Mississippi; Utah has the lowest rate (12.2%), followed by California and Minnesota.¹³ In the United States overall, 20.5 percent of men smoke, compared to 15.8 percent of women. For a brief time, people thought the answer might be “tobacco-less” cigarettes, as electronic cigarettes hit the market. Unfortunately, however, the product still injects nicotine into the smoker’s body.

Substantial research suggests that a healthier workforce can more effectively and efficiently implement strategies. Smoking has become a heavy burden for Europe’s state-run social welfare systems, with smoking-related diseases costing more than $100 billion a year. Smoking also is a huge burden on companies worldwide, so firms are continually implementing policies to curtail smoking. Starbucks has banned smoking within 25 feet of its 7,000 stores not located inside another retail establishment.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

The strategic-management process can best be studied and applied using a model. Every model represents some kind of process. the framework illustrated in Figure 1-1 is a widely accepted, comprehensive model of the strategic-management process.¹⁴ this model does not guarantee success, but it does represent a clear and practical approach for formulating, implementing, and evaluating strategies. Relationships among major components of the strategic-management process are shown in the model, which appears in all subsequent chapters with appropriate areas shaped to show the particular focus of each chapter. this text is organized around this model because the model reveals how organizations actually do strategic planning. three important questions to answer in developing a strategic plan are as follows:

where are we now?

where do we want to go?

How are we going to get there?

Identifying an organization’s existing vision, mission, objectives, and strategies is the logi­cal starting point for strategic management because a firm’s present situation and condition may preclude certain strategies and may even dictate a particular course of action. Every organiza­tion has a vision, mission, objectives, and strategy, even if these elements are not consciously designed, written, or communicated. The answer to where an organization is going can be deter­mined largely by where the organization has been!

The strategic-management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. For instance, African countries coming online could represent a major opportunity and require a change in long-term objectives and strategies; a failure to accomplish annual objectives might require a change in policy; or a major competitor’s change in strategy might require a change in the firm’s mission. Therefore, strategy formulation, implementation, and evaluation activities should be performed on a continual basis, not just at the end of the year or semiannually. The strategic-management process never really ends.

Note in the strategic-management model that business ethics, social responsibility, and environmental sustainability issues impact all activities in the model, as discussed in Chapter 10. Also, note in the model that global and international issues impact virtually all strategic decisions, as described in detail in chapter 11.

The strategic-management process is not as cleanly divided and neatly performed in prac­tice as the strategic-management model suggests. Strategists do not go through the process in lockstep fashion. Generally, there is give-and-take among hierarchical levels of an organiza­tion. Many organizations conduct formal meetings semiannually to discuss and update the firm’s vision, mission, opportunities, threats, strengths, weaknesses, strategies, objectives, policies, and performance. These meetings are commonly held off-premises and are called retreats. The ratio­nale for periodically conducting strategic-management meetings away from the work site is to encourage more creativity and candor from participants. Good communication and feedback are needed throughout the strategic-management process. The Academic Research Capsule 1-2 reveals what activity is most important in the strategic-management process.

Application of the strategic-management process is typically more formal in larger and well- established organizations. Formality refers to the extent that participants, responsibilities, authority, duties, and approach are specified. Smaller businesses tend to be less formal. Firms that compete in complex, rapidly changing environments, such as technology companies, tend to be more formal in strategic planning. Firms that have many divisions, products, markets, and technologies also tend to be more formal in applying strategic-management concepts. Greater formality in applying the strategic-management process is usually positively associated with organizational success.¹⁵

What Activity Is Most Important in the Strategic-Management Process?

Recent research has examined the strategic-management process and concluded that perhaps the most important “activity” is the feedback loop, because strategy must be thought of as a “verb rather than a noun.” Rose and Cray contend that strategy is a “living, evolv­ing conceptual entity,” and as such must be engulfed in flexibility. “Flexibility” should also be reflected in the structures put in place to monitor and modify strategic plans. Flexibility safeguards should increasingly be known and practiced throughout the firm, especially at lower levels of the organization. The stages of strategic manage­ment (formulation, implementation, and evaluation) are so fluid as to be virtually indistinguishable when one starts and the other ends. Thus, in the comprehensive model illustrated, the encompassing feedback loop is vitally important to enable firms to readily adapt to changing conditions. A significant change in any activity (box) in the model could necessitate change(s) in other activities.

Source: Based on Wade Rose and David Cray “The Role of Context in the Transformation of Planned Strategy into Implemented Strategy,” International Journal of Business Management and Economic Research 4, no. 3 (2013): 721-737.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

Strategic management allows an organization to be more proactive than reactive in shaping its own future; it allows an organization to initiate and influence (rather than just respond to) activities—and thus to exert control over its own destiny. Small business owners, chief executive officers, presidents, and managers of many for-profit and nonprofit organizations have recog­nized and realized the benefits of strategic management.

Historically, the principal benefit of strategic management has been to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach for decision making. In addition, the process, rather than the decision or document, is also a major benefit of engaging in strategic management. Through involvement in the process (i.e., dialogue and participation), managers and employees become committed to supporting the organization. Communication is a key to successful strategic management. communication may be the most important word in management. Figure 1-2 illustrates this intrinsic benefit of a firm engaging in strategic planning. Note that all firms need all employees “on a mission” to help the firm succeed.

Dale Mcconkey said, “Plans are less important than planning.” The manner in which strategic management is carried out is therefore exceptionally important. A major aim of the process is to achieve understanding and commitment from all managers and employees. Understanding may be the most important benefit of strategic management, followed by com­mitment. when managers and employees understand what the organization is doing and why, they often feel a part of the firm and become committed to assisting it. This is especially true when employees also understand links between their own compensation and organizational performance. Managers and employees become surprisingly creative and innovative when they understand and support the firm’s mission, objectives, and strategies. a great benefit of strategic management, then, is the opportunity that the process provides to empower individu­als. Empowerment is the act of strengthening employees’ sense of effectiveness by encour­aging them to participate in decision making and to exercise initiative and imagination, and rewarding them for doing so. William Fulmer said, “You want your people to run the business as it if were their own.”

Strategic planning is a learning, helping, educating, and supporting process, not merely a paper-shuffling activity among top executives. Strategic-management dialogue is more impor­tant than a nicely bound strategic-management document. The worst thing strategists can do is develop strategic plans themselves and then present them to operating managers to execute. Through involvement in the process, line managers become “owners” of the strategy. Ownership of strategies by the people who have to execute them is a key to success!

Although making good strategic decisions is the major responsibility of an organization’s owner or chief executive officer, both managers and employees must also be involved in strategy formulation, implementation, and evaluation activities. Participation is a key to gaining com­mitment for needed changes. An increasing number of corporations and institutions are using strategic management to make effective decisions. But strategic management is not a guarantee for success; it can be dysfunctional if conducted haphazardly.

1. Financial Benefits

Organizations that use strategic-management concepts are generally more profitable and successful than those that do not. Businesses using strategic-management concepts show signifi­cant improvement in sales, profitability, and productivity compared to firms without systematic planning activities. High-performing firms tend to do systematic planning to prepare for future fluctuations in their external and internal environments. Firms with management systems that utilize strategic-planning concepts, tools, and techniques generally exhibit superior long-term financial performance relative to their industry.

High-performing firms seem to make more informed decisions with good anticipation of both short- and long-term consequences. In contrast, firms that perform poorly often engage in activities that are shortsighted and do not reflect good forecasting of future conditions. Strategists of low-performing organizations are often preoccupied with solving internal problems and meet­ing paperwork deadlines. They typically underestimate their competitors’ strengths and overesti­mate their own firm’s strengths. They often attribute weak performance to uncontrollable factors such as a poor economy, technological change, or foreign competition.

More than 100,000 businesses in the United States fail annually. Business failures include bankruptcies, foreclosures, liquidations, and court-mandated receiverships. Although many factors besides a lack of effective strategic management can lead to business failure, the plan­ning concepts and tools described in this text can yield substantial financial benefits for any organization.

2. Nonfinancial Benefits

Besides helping firms avoid financial demise, strategic management offers other tangible benefits, such as enhanced awareness of external threats, improved understanding of competi­tors’ strategies, increased employee productivity, reduced resistance to change, and a clearer understanding of performance-reward relationships. Strategic management enhances the prob­lem-prevention capabilities of organizations because it promotes interaction among managers at all divisional and functional levels. Firms that have nurtured their managers and employees, shared organizational objectives with them, empowered them to help improve the product or service, and recognized their contributions can turn to them for help in a pinch because of this interaction.

In addition to empowering managers and employees, strategic management often brings order and discipline to an otherwise floundering firm. It can be the beginning of an efficient and effective managerial system. Strategic management may renew confidence in the current business strategy or point to the need for corrective actions. The strategic-management process provides a basis for identifying and rationalizing the need for change to all managers and employees of a firm; it helps them view change as an opportunity rather than as a threat. Some nonfinancial benefits of a firm utilizing strategic management, according to Greenley, are increased discipline, improved coordination, enhanced communication, reduced resistance to change, increased for­ward thinking, improved decision making, increased synergy, and more effective allocation of time and resources.¹⁶

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

Some firms do no strategic planning, and some firms do strategic planning but receive no support from managers and employees. Ten reasons (excuses) often given for poor or no strategic plan­ning in a firm are as follows:

1. No formal training in strategic management
2. No understanding of or appreciation for the benefits of planning
3. No monetary rewards for doing planning
4. No punishment for not planning
5. Too busy “firefighting” (resolving internal crises) to plan ahead
6. View planning as a waste of time, since no product/service is made
7. Laziness; effective planning takes time and effort; time is money
8. Content with current success; failure to realize that success today is no guarantee for success tomorrow; even Apple Inc. is an example
9. Overconfident
10. Prior bad experience with strategic planning done sometime/somewhere

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

Strategic planning is an involved, intricate, and complex process that takes an organization into uncharted territory. It does not provide a ready-to-use prescription for success; instead, it takes the organization through a journey and offers a framework for addressing questions and solving problems. Being aware of potential pitfalls and being prepared to address them is essential to success.

Here are some pitfalls to watch for and avoid in strategic planning:

• Using strategic planning to gain control over decisions and resources
• Doing strategic planning only to satisfy accreditation or regulatory requirements
• Too hastily moving from mission development to strategy formulation
• Failing to communicate the plan to employees, who continue working in the dark
• Top managers making many intuitive decisions that conflict with the formal plan
• Top managers not actively supporting the strategic-planning process
• failing to use plans as a standard for measuring performance
• Delegating planning to a “planner” rather than involving all managers
• failing to involve key employees in all phases of planning
• failing to create a collaborative climate supportive of change
• viewing planning as unnecessary or unimportant
• Becoming so engrossed in current problems that insufficient or no planning is done
• Being so formal in planning that flexibility and creativity are stifled¹⁷

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

A strong military heritage underlies the study of strategic management. terms such as objec­tives, mission, strengths, and weaknesses were first formulated to address problems on the bat­tlefield. according to Webster’s New World Dictionary, strategy is “the science of planning and directing large-scale military operations, of maneuvering forces into the most advantageous position prior to actual engagement with the enemy.”¹⁸ the word strategy comes from the Greek strategos, which refers to a military general and combines stratos (the army) and ago (to lead). the history of strategic planning began in the military. a key aim of both business and military strategy is “to gain competitive advantage.” In many respects, business strategy is like military strategy, and military strategists have learned much over the centuries that can benefit business strategists today.

Both business and military organizations try to use their own strengths to exploit com­petitors’ weaknesses. If an organization’s overall strategy is wrong (ineffective), then all the efficiency in the world may not be enough to allow success. Business or military success is generally not the happy result of accidental strategies. Rather, success is the product of both continuous attention to changing external and internal conditions and the formulation and implementation of insightful adaptations to those conditions. The element of surprise provides great competitive advantages in both military and business strategy; information systems that provide data on opponents’ or competitors’ strategies and resources are also vitally important.

A fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with an assumption of competition, whereas mili­tary strategy is based on an assumption of conflict. Nonetheless, military conflict and business competition are so similar that many strategic-management techniques apply equally to both. Business strategists have access to valuable insights that military thinkers have refined over time. Superior strategy formulation and implementation can overcome an opponent’s superiority in numbers and resources.

Born in Pella in 356 bce, Alexander the Great was king of Macedon, a state in northern ancient Greece. Tutored by Aristotle until the age of 16, Alexander had created one of the largest empires of the ancient world by the age of 30, stretching from the Ionian Sea to the Himalayas. Alexander was undefeated in battle and is considered one of history’s most successful command­ers. He became the measure against which military leaders even today compare themselves, and military academies throughout the world still teach his strategies and tactics. Alexander the Great once said, “Greater is an army of sheep led by a lion, than an army of lions led by a sheep.” This quote reveals the overwhelming importance of an excellent strategic plan for any organization to succeed. the legendary Alabama football coach Bear Bryant asserted, “I will defeat the opposing coach’s team with my players, but if given a week’s notice, i could defeat the opposing coach’s team with his players and he take my players.”

Both business and military organizations must adapt to change and constantly improve to be successful. Too often, firms do not change their strategies when their environment and competi­tive conditions dictate the need to change. Gluck offered a classic military example of this:

When Napoleon won, it was because his opponents were committed to the strategy, tac­tics, and organization of earlier wars. When he lost—against Wellington, the Russians, and the Spaniards—it was because he, in turn, used tried-and-true strategies against enemies who thought afresh, who were developing the strategies not of the last war but of the next.¹⁹

Sun Tzu’s The Art of War has been applied to many fields well outside of the military. Much of the text is about how to fight wars without actually having to do battle: It gives tips on how to outsmart one’s opponent so that physical battle is not necessary. As such, the book has found application as a training guide for many competitive endeavors that do not involve actual combat, such as in devising courtroom trial strategy or acquiring a rival company. There are business books applying its lessons to office politics and corporate strategy. Many Japanese companies make the book required reading for their top executives. The book is a popular read among Western business managers who have turned to it for inspiration and advice on how to succeed in competitive business situations.

The Art of War has also been applied in the world of sports in preparing for athletic con­tests. NFL coach Bill Belichick is known to have read the book and used its lessons to gain insights in preparing for games. Australian cricket coaches, as well as Brazilian association football coaches Luis Felipe Scolari and Carolos Alberto Parreira, embraced the text. Scolari made the Brazilian World Cup squad of 2002 study the ancient work during their successful campaign.

Similarities can be construed from Sun Tzu’s writings to the practice of formulating and implementing strategies among businesses today. Table 1-4 provides narrative excerpts from The Art of War. As you read through the table, consider which of the principles of war apply to busi­ness strategy as companies today compete aggressively to survive and grow.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

It is especially important for managers and executives in any organization to agree on the basic vision that the firm strives to achieve in the long term. A vision statement should answer the basic question, “What do we want to become?” A clear vision provides the foundation for developing a comprehensive mission statement. Many organizations have both a vision and mission statement, but the vision statement should be established first and foremost. The vision statement should be short, preferably one sentence, and as many managers as possible should have input into developing the statement. Where there is no vision, the people perish (Proverbs 29:18).

For many, if not most, corporations, profit rather than mission or vision is the primary motivator. But profit alone is not enough to motivate people. Profit is perceived negatively by many stakeholders of a firm. For example, employees may see profit as something that they earn and management then uses and even gives away to shareholders. Although this perception is undesired and disturbing to management, it clearly indicates that both profit and vision are needed to motivate a workforce effectively.

When employees and managers together shape or fashion the vision and mission statements for a firm, the resultant documents can reflect the personal visions that managers and employees have in their hearts and minds about their own futures. Shared vision creates a commonality of interests that can lift workers out of the monotony of daily work and put them into a new world of opportunity and challenge.

Although typically a single sentence, vision statements need to be written from a customer perspective. For example, eBay’s vision is “To provide a global trading platform where practically anyone can trade practically anything.” Vision statements need to do more than identify the product/service a firm offers. The old Ford Motor Company vision, for example, was product- oriented: “To make the automobile accessible to every American,” but today Ford has a more effective customer-oriented vision statement: “To provide personal mobility for people around the world.” Examples of vision statements are provided in Table 2-1.

Vision Statement Analysis

At a minimum, a vision statement should reveal the type of business the firm engages. For exam­ple, to have a vision that says, “to become the best retailing firm in the USA” is much too broad, because that firm could be selling anything from boats to bunnies. Notice here how Starbucks’ vision statement is improved.

Starbucks Vision Statement (paraphrased)

Starbucks strives to be the premier roaster and retailer of specialty coffee globally.

Starbucks “Improved” Vision Statement

Starbucks’ vision is to be the most well-known, specialty coffee, tea, and pastry restaurant in the world, offering sincere customer service, a welcoming atmosphere, and unequaled quality.

Author Comments

• The first vision statement does not state what the company wants to become. Nor does it acknowledge the firm’s movement into specialty tea offerings. It is not as customer- oriented as needed.
• The improved vision statement reveals the company’s aspirations for the future and acknowledges that upscale tea and pastries complement their premium coffee offerings.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

Current thought on mission statements is based largely on guidelines set forth in the mid-1970s by Peter Drucker, who is often called “the father of modern management” for his pioneering studies at General motors and for his 22 books and hundreds of articles. Drucker believes that asking the question “What is our business?” is synonymous with asking “What is our mission?” An enduring statement of purpose that distinguishes one organization from other similar enter­prises, the mission statement is a declaration of an organization’s “reason for being.” it answers the pivotal question “What is our business?” A clear mission statement is essential for effectively establishing objectives and formulating strategies.

Sometimes called a creed statement, a statement of purpose, a statement of philosophy, a statement of beliefs, a statement of business principles, or a statement “defining our business,” a mission statement reveals what an organization wants to be and whom it wants to serve. All organizations have a reason for being, even if strategists have not consciously transformed this reason into writing. As illustrated with white shading in Figure 2-1, carefully prepared state­ments of vision and mission are widely recognized by both practitioners and academicians as the first step in strategic management. Drucker has the following to say about mission statements (paraphrased):

A mission statement is the foundation for priorities, strategies, plans, and work assign­ments. It is the starting point for the design of jobs and organizational structures. Nothing may seem simpler or more obvious than to know what a company’s business is. a lumber mill makes lumber, an airline carries passengers and freight, and a bank lends money. But “What is our business?” is almost always a difficult question and the right answer is usually anything but obvious. The answer to this question is the first responsibility of strategists.¹

Some strategists spend almost every moment of every day on administrative and tactical concerns; those who rush quickly to establish objectives and implement strategies often overlook the development of a vision and mission statement. This problem is widespread even among large organizations. Many corporations in the United States have not yet developed a formal vision or mission statement. An increasing number of organizations, however, are developing these statements.

Some companies develop mission statements simply because owners or top management believe it is fashionable, rather than out of any real commitment. However, as described in this chapter, firms that develop and systematically revisit their vision and mission statements, treat them as living documents, and consider them to be an integral part of the firm’s culture realize great benefits. For example, managers at Johnson & Johnson (J&J) meet regularly with employees to review, reword, and reaffirm the firm’s vision and mission. The entire J&J work­force recognizes the value that top management places on this exercise, and these employees respond accordingly.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

As indicated in the strategic-management model, clear vision and mission statements are needed before alternative strategies can be formulated and implemented. As many managers as possible should be involved in the process of developing these statements because, through involvement, people become committed to an organization.

A widely used approach to developing a vision and mission statement is first to select several articles (such as those listed as Current Readings at the end of this chapter) about these statements and ask all managers to read these as background information. Then, ask managers to individually prepare a vision and mission statement for the organization. A facilitator or commit­tee of top managers should then merge these statements into a single document and distribute the draft statements to all managers. A request for modifications, additions, and deletions is needed next, along with a meeting to revise the document. To the extent that all managers have input into and support the final documents, organizations can more easily obtain managers’ support for other strategy formulation, implementation, and evaluation activities. Thus, the process of developing vision and mission statements represents a great opportunity for strategists to obtain needed support from all managers in the firm.

During the process of developing vision and mission statements, some organizations use discussion groups of managers to develop and modify existing statements. Other organizations hire an outside consultant or facilitator to manage the process and help draft the language. At times an outside person with expertise in developing such statements, who has unbiased views, can manage the process more effectively than an internal group or committee of manag­ers. Decisions on how best to communicate the vision and mission to all managers, employ­ees, and external constituencies of an organization are needed when the documents are in final form. Some organizations even create a videotape to explain the statements and how they were developed.

An article by Campbell and Yeung emphasizes that the process of developing a mission statement should create an “emotional bond” and “sense of mission” between the organization and its employees.² Commitment to a company’s strategy and intellectual agreement on the strategies to be pursued do not necessarily translate into an emotional bond; hence, strategies that have been formulated may not be implemented. These researchers stress that an emotional bond comes when an individual personally identifies with the underlying values and behavior of a firm, thus turning intellectual agreement and commitment to strategy into a sense of mission. Campbell and Yeung also differentiate between the terms vision and mission, saying that vision is “a possible and desirable future state of an organization” that includes specific goals, whereas mission is more associated with behavior and the present.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

The importance (benefits) of vision and mission statements to effective strategic management is well documented in the literature, although research results are mixed. As indicated in Academic Research Capsule 2-1, there is a positive relationship between mission statements and measures of financial performance.

In actual practice, wide variations exist in the nature, composition, and use of both vision and mission statements. King and Cleland recommend that organizations carefully develop a written mission statement in order to reap the following benefits:

1. To make sure all employees/managers understand the firm’s purpose or reason for being.
2. To provide a basis for prioritization of key internal and external factors utilized to formulate feasible strategies.
3. To provide a basis for the allocation of resources.
4. To provide a basis for organizing work, departments, activities, and segments around a common purpose.

Reuben Mark, former CEO of Colgate, maintains that a clear mission increasingly must make sense internationally. Mark’s thoughts on vision are as follows:

When it comes to rallying everyone to the corporate banner, it’s essential to push one vision globally rather than trying to drive home different messages in different cultures. The trick is to keep the vision simple but elevated: “We make the world’s fastest computers” or “Telephone service for everyone.” You’re never going to get anyone to charge the machine guns only for financial objectives. It’s got to be something that makes people feel better, feel a part of something.⁴

1. The Mission Statement/Firm Performance Linkage

A meta-analysis of 20 years of empirical research on mission statements concluded that “there is a small positive relationship between mission statements and measures of financial organi­zational performance” (Desmidt et al., 2011, p. 468). However, research in marketing explains that customer satisfaction has a strong positive relationship with organizational performance (Devasagayam et al., 2013). Indeed, researchers have noted that “managers increasingly tend to see customer satisfaction as a valu­able intangible asset” (Luo et al., 2012, p. 745). Thus, mission statements designed from a customer perspective could positively impact organizational performance by enhancing customer satis­faction. If written from a customer perspective, mission statements could spur employees, salespersons, and managers to provide exemplary customer service, which arguably would enhance cus­tomer loyalty and translate into customers being “on a mission” to seek out, use, and promote the firm’s products and services. Written from a customer perspective, mission statements may indeed “accomplish their mission.”

Sources: Based on S. Desmidt, A. Prinzie, & A. Decramer, A. “Looking for the Value of Mission Statements: A Meta-Analysis of 20 Years of Research,” Management Decision, 49, no. 3 (2011): 468-483; R. Devasagayam, N. R. Stark, & L. S. Valestin, “Examining the Linearity of Customer Satisfaction: Return on Satisfaction as an Alternative,” Business Perspectives and Research 1, no. 2 (2013): 1-8; X. Luo, J. Wieseke, & C. Homburg, “Incentivizing CEOs to Build Customer- and Employee-Firm Relations for Higher Customer Satisfaction and Firm Value,” Journal of the Academy of Marketing Science 40, no. 6 (2012): 45-758; M. E. David, Forest R. David, & Fred R. David, “Mission Statement Theory and Practice: A Content Analysis and New Direction,” International Journal of Business, Marketing, and Decision Sciences 7, no. 1 (Summer 2014): 95-109.

2. A Resolution of Divergent Views

Another benefit of developing a comprehensive mission statement is that divergent views among managers can be revealed and resolved through the process. The question “What is our busi­ness?” can create controversy. Raising the question often reveals differences among strategists in the organization. Individuals who have worked together for a long time and who think they know each other suddenly may realize that they are in fundamental disagreement. For example, in a college or university, divergent views regarding the relative importance of teaching, research, and service often are expressed during the mission statement development process. Negotiation, compromise, and eventual agreement on important issues are needed before people can focus on more specific strategy-formulation activities.

Considerable disagreement among an organization’s strategists over vision and mission statements can cause trouble if not resolved. For example, unresolved disagreement over the business mission was one of the reasons for W. T. Grant’s bankruptcy and eventual liquidation. Top executives of the firm, including Ed Staley and Lou Lustenberger, were firmly entrenched in opposing positions that W. T. Grant should be like Kmart or JC Penney, respectively. W. T. Grant decided to become a bit like both Kmart and JC Penney; this compromise was a huge strategic mistake. In other words, top executives of W. T. Grant never resolved their vision/mission issue, which ultimately led to the firm’s disappearance.⁵

Too often, strategists develop vision and mission statements only when the organization is in trouble. Of course, the documents are needed then. Developing and communicating a clear mission during troubled times indeed may have spectacular results and may even reverse decline. However, to wait until an organization is in trouble to develop a vision and mission statement is a gamble that characterizes irresponsible management. According to Drucker, the most important time to ask seriously, “What do we want to become?” and “What is our business?” is when a company has been successful:

Success always obsoletes the very behavior that achieved it, always creates new realities, and always creates new and different problems. Only the fairy tale story ends, “They lived happily ever after.” It is never popular to argue with success or to rock the boat. It will not be long before success will turn into failure. Sooner or later, even the most successful answer to the question “What is our business?” becomes obsolete.⁶

In multidivisional organizations, strategists should ensure that divisional units perform strategic-management tasks, including the development of a statement of vision and mission. Each division should involve its own managers and employees in developing a vision and mission statement that is consistent with and supportive of the corporate mission. Ten benefits of having a clear mission and vision are provided in Table 2-2.

An organization that fails to develop a vision statement, as well as a comprehensive and inspiring mission statement, loses the opportunity to present itself favorably to existing and potential stakeholders. All organizations need customers, employees, and managers, and most firms need creditors, suppliers, and distributors. Vision and mission statements are effective vehicles for communicating with important internal and external stakeholders. The principal benefit of these statements as tools of strategic management is derived from their specification of the ultimate aims of a firm. Vision and mission statements reveal the firm’s shared expectations internally among all employees and managers. For external constituencies, the statements reveal the firm’s long-term commitment to responsible, ethical action in providing a needed product and/or service for customers.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

A mission statement is a declaration of attitude and outlook. It usually is broad in scope for at least two major reasons. First, a good mission statement allows for the generation and consideration of a range of feasible alternative objectives and strategies without unduly stifling management creativity. Excess specificity would limit the potential of creative growth for the organization. However, an overly general statement that does not exclude any strategy alterna­tives could be dysfunctional. Apple Computer’s mission statement, for example, should not open the possibility for diversification into pesticides—or Ford Motor Company’s into food processing.

Second, a mission statement needs to be broad to reconcile differences effectively among, and appeal to, an organization’s diverse stakeholders, the individuals and groups of individu­als who have a special stake or claim on the company. Thus, a mission statement should be reconciliatory. Stakeholders include employees, managers, stockholders, boards of directors, customers, suppliers, distributors, creditors, governments (local, state, federal, and foreign), unions, competitors, environmental groups, and the general public. Stakeholders affect and are affected by an organization’s strategies, yet the claims and concerns of diverse constitu­encies vary and often conflict. For example, the general public is especially interested in social responsibility, whereas stockholders are more interested in profitability. Claims on any business literally may number in the thousands, and they often include clean air, jobs, taxes, investment opportunities, career opportunities, equal employment opportunities, employee benefits, salaries, wages, clean water, and community services. All stakeholders’ claims on an organization cannot be pursued with equal emphasis. A good mission statement indi­cates the relative attention that an organization will devote to meeting the claims of various stakeholders.

The fine balance between specificity and generality is difficult to achieve, but it is well worth the effort. George Steiner offers the following insight on the need for a mission statement to be broad in scope:

Most business statements of mission are expressed at high levels of abstraction. Vagueness nevertheless has its virtues. Mission statements are not designed to express concrete ends, but rather to provide motivation, general direction, an image, a tone, and a philosophy to guide the enterprise. An excess of detail could prove counterproductive since concrete specification could be the base for rallying opposition. Precision might stifle creativity in the formulation of an acceptable mission or purpose. Once an aim is cast in concrete, it creates a rigidity in an organization and resists change. Vagueness leaves room for other managers to fill in the details.⁷

As indicated in Table 2-3, in addition to being broad in scope, an effective mission statement should not be too lengthy; recommended length is less than 150 words. An effective mission statement should arouse positive feelings and emotions about an organization; it should be inspiring in the sense that it motivates readers to action. A mission statement should be enduring. All of these are desired characteristics of a statement. An effective mission statement generates the impression that a firm is successful, has direction, and is worthy of time, support, and invest- ment—from all socioeconomic groups of people.

A business mission reflects judgments about future growth directions and strategies that are based on forward-looking external and internal analyses. The statement should provide useful criteria for selecting among alternative strategies. A clear mission statement provides a basis for generating and screening strategic options. The statement of mission should be sufficiently broad to allow judgments about the most promising growth directions and those considered less promising.

A Customer Orientation

An effective mission statement describes an organization’s purpose, customers, products or services, markets, philosophy, and basic technology. According to Vern McGinnis, a mission statement should (1) define what the organization is and what the organization aspires to be, (2) be limited enough to exclude some ventures and broad enough to allow for creative growth, (3) distinguish a given organi­zation from all others, (4) serve as a framework for evaluating both current and prospective activities, and (5) be stated in terms sufficiently clear to be widely understood throughout the organization.⁸ The mission statement should reflect the anticipations of customers. Rather than developing a prod­uct and then trying to find a market, the operating philosophy of organizations should be to identify customers’ needs and then provide a product or service to fulfill those needs.

Good mission statements identify the utility of a firm’s products to its customers. This is why AT&T’s mission statement focuses on communication rather than on telephones; it is why ExxonMobil’s mission statement focuses on energy rather than on oil and gas; it is why Union Pacific’s mission statement focuses on transportation rather than on railroads; it is why Universal Studios’ mission statement focuses on entertainment rather than on movies. A major reason for developing a mission statement is to attract customers who give meaning to an organization.

The following utility statements are relevant in developing a mission statement:

Do not offer me things.

Do not offer me clothes. Offer me attractive looks.

Do not offer me shoes. Offer me comfort for my feet and the pleasure of walking.

Do not offer me a house. offer me security, comfort, and a place that is clean and happy.

Do not offer me books. Offer me hours of pleasure and the benefit of knowledge.

Do not offer me CDs. Offer me leisure and the sound of music.

Do not offer me tools. Offer me the benefits and the pleasure that come from making beau­tiful things.

Do not offer me furniture. Offer me comfort and the quietness of a cozy place.

Do not offer me things. Offer me ideas, emotions, ambience, feelings, and benefits.

Please, do not offer me things.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

Mission statements can and do vary in length, content, format, and specificity. Most practitioners and academicians of strategic management feel that an effective statement should include the nine mission statement components given here. Because a mission statement is often the most visible and public part of the strategic-management process, it is important that it includes not only the characteristics as summarized in Table 2-3 but also the following nine components:

1. Customers—Who are the firm’s customers?
2. Products or services—What are the firm’s major products or services?
3. Markets—Geographically, where does the firm compete?
4. Technology—Is the firm technologically current?
5. Survival, growth, and profitability—Is the firm committed to growth and financial soundness?
6. Philosophy—What are the basic beliefs, values, aspirations, and ethical priorities of the firm?
7. Self-concept (distinctive competence)—What is the firm’s major competitive advantage?
8. Public image—Is the firm responsive to social, community, and environmental concerns?
9. Employees—Are employees a valuable asset of the firm?⁹

To exemplify how mission statements could be written from a customer perspective, a component-by-component example for a charter boat fishing company is provided in Table 2-4. Note the charter company’s customers are “outdoor enthusiasts.” “Customers” is a key compo­nent to include in a mission statement, but simply including the word customer or consumer does not qualify that component to be considered “written from a customer perspective.” The statement needs to identify more precisely the target groups of customers. All nine components in Table 2-4 are written from a customer perspective. For example, regarding the “product/ service” component, the charter fishing company provides “memories for a lifetime”—thus revealing the “utility” of the service offered. Regarding the “distinctive competence” compo­nent, whereby the firm reveals the major competitive advantage its products/services provide, the statement says: “for customer enjoyment and safety, we provide the most experienced staff in the industry.”

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

There is no one best mission statement for a particular organization, so when it comes to evalu­ating mission statements, good judgment is required. Ideally, the statement will provide more than simply inclusion of a single word such as products or employees regarding a respective component. Why? Because the statement should motivate stakeholders to action, as well as be customer-oriented, informative, inspiring, and enduring.

1. Two Mission Statements Critiqued

Perhaps the best way to develop a skill for writing and evaluating mission statements is to study actual company missions. Thus, Table 2-5 provides a component-by-component critique of two actual mission statements from PepsiCo, and Royal Caribbean. the Royal Caribbean statement includes only six of the nine components, comprises 86 words total, and lacks a customer per­spective. The Royal Caribbean statement merely includes the word customer(s), which is inad­equate to be considered written from a customer perspective.

2. Five Mission Statements Revised

As additional guidance for practitioners (and students), five actual mission statements are revised/rewritten from a customer perspective and presented in Table 2-6. The improved state­ments include all nine components written from a customer perspective, and, additionally, are inspiring, concise, and comprised of fewer than 90 words each. regarding the “customer” com­ponent, the new Best Buy statement refers to “individuals and businesses”; the new Lowe’s state­ment refers to “homebuilders and homeowners”; and the improved Crocs statement refers to “men, women, and children.” In contrast, the Crocs, Best Buy, Rite Aid, and Lowe’s actual state­ments merely include (or not) the word customer or consumer. The statements are revised to potentially enhance customer satisfaction, especially if communicated to customers by market­ers, and backed by company commitment to and implementation of the mission message. The proposed statement for the footwear company Crocs, Inc., for example, talks about “dependable and lasting comfort all day,” whereas the UPS proposed statement talks about “the most timely, dependable, and accurate delivery times in the world.”

3. Two Mission Statements Proposed

The process by which mission statements are developed and the exact language/wording included in the statement can significantly impact their effectiveness as a tool for strategic management and marketing strategy. Firms strive to have customers exhibit an emotional bond with the firm’s products/services and be “on a mission” to use and promote those offerings. Mission statements should be developed and used to foster customer satisfaction and create a bond between a firm and its customers. Involving marketers and sales representatives in the mission statement devel­opment process, coupled with including the nine components written from a customer perspec­tive, could enable firms to create an emotional bond with customers, and enhance the likeli­hood that salespersons would be “on a mission” to provide excellent customer service. Avon and L’Oreal’s customers, for example, often portray an emotional bond or attachment to the firm’s products.

Proposed, exemplary mission statements for Avon and L’Oreal are provided in Table 2-7. These rival firms have uniquely different competitive advantages in that Avon utilizes door-to-door sales representatives to gain competitive advantage, whereas L’Oreal markets products in thousands of retail outlets. The proposed Avon and L’Oreal statements have the characteristics described earlier, and include the nine components written from a customer perspective. The proposed Avon state­ment includes the nine components in 58 words, and provides a basis for an emotional bond to be established between the firm and its customers. For example, the Avon statement reveals that if you purchase Avon products, you will be rewarded with “outstanding customer service provided by a personal sales representative who adheres to the highest ethical standards, while providing fragrances, cosmetics, and jewelry that exhibit the highest technological advancements.” There is quite a lot in that brief statement that an Avon customer can become loyal to, especially when the Avon marketing representative reinforces the statement with her actions.

Also written from a customer perspective, the proposed L’Oreal mission statement provides a basis for an emotional bond to be formed between the firm and its customers. Potential cus­tomers are reassured in the statement that the L’Oreal’s fragrances, perfumes, and personal care products are “organic” and developed by excellent teams of researchers. In addition, the state­ment reveals that L’Oreal does great philanthropy work and follows the “golden rule” in all endeavors. Customers may become more dedicated to L’Oreal when they see the company’s marketing communications reinforce the basic content given in the proposed mission statement. Loyal customers are a competitive advantage for any firm.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

The purpose of an external audit is to develop a finite list of opportunities that could benefit a firm as well as threats that should be avoided. As the term finite suggests, the external audit is not aimed at developing an exhaustive list of every possible factor that could influence the business; rather, it is aimed at identifying key variables that offer actionable responses. Firms should be able to respond either offensively or defensively to the factors by formulating strategies that take advantage of external opportunities or that minimize the impact of potential threats. Figure 3-1 illustrates with white shading how the external audit fits into the strategic-management process.

1. Key External Forces

External forces can be divided into five broad categories: (1) economic forces; (2) social, cul­tural, demographic, and natural environment forces; (3) political, governmental, and legal forces; (4) technological forces; and (5) competitive forces. Relationships among these forces and an organization are depicted in Figure 3-2. External trends and events, such as rising food prices and people in African countries learning about online services, significantly affect products, services, markets, and organizations worldwide.

Important Note: When identifying and prioritizing key external factors in strategic planning, make sure the factors selected are (1) specific (i.e., quantified to the extent possible); (2) action­able (i.e., meaningful in terms of having strategic implications) and (3) stated as external trends, events, or facts rather than as strategies the firm could pursue. For example, regarding action­able, “the stock market is volatile” is not actionable because there is no apparent strategy that the firm could formulate to capitalize on that factor. In contrast, a factor such as “the GDP of Brazil is 6.8 percent” is actionable because the firm should perhaps open 100 new stores in Brazil. In other words, select factors that will be helpful in deciding what to recommend the firm should do, rather than selecting nebulous factors too vague for an actionable response. Similarly, “to expand into Europe” is not an appropriate opportunity, because it is both vague and is a strategy; the better opportunity statement would be “the value of the euro has increased 5 percent versus the U.S. dollar in the last twelve months.”

Changes in external forces translate into changes in consumer demand for both industrial and consumer products and services. External forces affect the types of products developed, the nature of positioning and market segmentation strategies, the type of services offered, and the choice of businesses to acquire or sell. External forces have a direct impact on both suppliers and distributors. Identifying and evaluating external opportunities and threats enables organizations to develop a clear mission, to design strategies to achieve long-term objectives, and to develop policies to achieve annual objectives.

The increasing complexity of business today is evidenced by more countries developing the capacity and will to compete aggressively in world markets. Foreign businesses and countries are willing to learn, adapt, innovate, and invent to compete successfully in the marketplace. Fast growth worldwide, recently reported by Alibaba and Samsung, are examples.

2. The Process of Performing an External Audit

The process of performing an external audit must involve as many managers and employees as possible. As emphasized in previous chapters, involvement in the strategic-management process can lead to understanding and commitment from organizational members. Individuals appreci­ate having the opportunity to contribute ideas and to gain a better understanding of their firm’s industry, competitors, and markets. Key external factors can vary over time and by industry.

To perform an external audit, a company first must gather competitive intelligence and infor­mation about economic, social, cultural, demographic, environmental, political, governmental, legal, and technological trends. Individuals can be asked to monitor various sources of infor­mation, such as key magazines, trade journals, and newspapers—and use online sources such as those listed later in this chapter in Table 3-8. These persons can submit periodic scanning reports to the person(s) who coordinate the external audit. This approach provides a continuous stream of timely strategic information and involves many individuals in the external-audit pro­cess. Suppliers, distributors, salespersons, customers, and competitors represent other sources of vital information.

After information is gathered, it should be assimilated and evaluated. A meeting or series of meetings of managers is needed to collectively identify the most important opportunities and threats facing the firm. A prioritized list of these factors must be obtained by requesting that all managers individually rank the factors identified, from 1 (for the most important opportunity/ threat) to 20 (for the least important opportunity/threat). Instead of ranking factors, managers could simply place a checkmark by their most important “top 10 factors.” Then, by summing the rankings, or the number of checkmarks, a prioritized list of factors is revealed. Prioritization is absolutely essential in strategic planning because no organization can do everything that would benefit the firm; tough choices among good choices have to be made.

3. The Industrial Organization (I/O) View

The Industrial Organization view of strategic planning advocates that external (industry) fac­tors are more important than internal ones for gaining and sustaining competitive advantage. Proponents of the I/O view, such as Michael Porter, contend that organizational performance will be primarily determined by industry forces, such as falling gas prices that no single firm can control. Porter’s Five-Forces Model, presented later in this chapter, is an example of the I/O per­spective, which focuses on analyzing external forces and industry variables as a basis for getting and keeping competitive advantage.

Competitive advantage is determined largely by competitive positioning within an indus­try, according to I/O advocates. Managing strategically from the I/O perspective entails firms striving to compete in attractive industries, avoiding weak or faltering industries, and gaining a full understanding of key external factor relationships within that attractive industry. I/O theo­rists contend that external factors—such as economies of scale, barriers to market entry, product differentiation, the economy, and level of competitiveness—are more important than internal resources, capabilities, structure, and operations.

The I/O view has enhanced the understanding of strategic management. However, the authors contend that it is not a question of whether external or internal factors are more important in gaining and maintaining competitive advantage. In contrast, effective integration and under­standing of both external and internal factors is the key to securing and keeping a competitive advantage. In fact, as discussed in Chapter 6, matching key external opportunities and threats with key internal strengths and weaknesses provides the basis for successful strategy formulation.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

1. Economic Forces

Economic factors have a direct impact on the potential attractiveness of various strategies. For example, high underemployment (minimum wage-type employment) in the United States bodes well for discount firms such as Dollar Tree, T.J. Maxx, Walmart, and Subway, but hurts thousands of traditional-priced retailers in many industries. Although the Dow Jones Industrial Average is high, corporate profits are high, dividend increases are up sharply, gas prices are low, and emerg­ing markets are growing, millions of people work for minimum wages or are unemployed. As a result of droughts, commodity prices are up sharply, especially food, which is contributing to rising inflation fears. Many firms are switching to part-time rather than full-time employees to avoid having to pay health benefits.

To take advantage of Canada’s robust economy and eager-to-spend people, many firms are adding facilities in Canada, including T.J. Maxx opening Marshalls stores and Tanger Outlet Factory Centers stores opening. Canada is one of the most economically prosperous countries in the world. Although interrelated, every country has its own economic situation, and those situa­tions impact where companies choose to spend money and do business.

Interest rates, stock prices, and discretionary income are slowly rising. As stock prices increase, the desirability of equity as a source of capital increases. When the market rises, con­sumer and business wealth expands. A few important economic variables that often represent opportunities and threats for organizations are provided in Table 3-1. Be mindful that in strategic planning and case analysis, relevant economic variables such as those listed must be quantified and actionable to be useful.

An example of an economic variable is “value of the dollar” that recently hit a 7-year high compared to the yen, a 9-year high compared to the euro, a 5-year high compared to the Australian dollar, and an 11-year high to some other currencies. The high dollar makes it cheap for Americans to travel abroad, but expensive for foreigners to travel to the United States, thus hurting the U.S. tourism business. Trends in the dollar’s value have significant and unequal effects on companies in different industries and in different locations. Agricultural and petroleum industries are hurt by the dollar’s rise against the currencies of Mexico, Brazil, Venezuela, and Australia. Generally, a strong or high dollar makes U.S. goods more expensive in overseas mar­kets. This worsens the U.S. trade deficit.

Domestic firms with big overseas sales, such as McDonald’s, also are hurt by a strong dol­lar. Its revenue from abroad is lowered because, for example, 100 euros earned in Europe, when translated back to U.S. dollars for reporting purposes, is worth maybe $75. To combat this “loss,” some companies try to raise prices in their European or Mexican stores, but that carries a risk of alienating shoppers, angering retailers, and giving local competitors a price edge. Some advan­tages of a strong dollar, however, are that (1) companies with substantial outside U.S. opera­tions see their overseas expenses, such as salaries paid in euros, become cheaper; (2) it gives U.S. companies greater firepower for international acquisitions; and (3) companies importing goods have greater buying power because their dollars now go further overseas. Table 3-2 lists 10 advantages of a strong U.S. dollar for U.S. firms.

2. Social, Cultural, Demographic, and Natural Environment Forces

Social, cultural, demographic, and environmental changes impact strategic decisions on virtually all products, services, markets, and customers. Small, large, for-profit, and nonprofit organiza­tions in all industries are being staggered and challenged by the opportunities and threats aris­ing from changes in social, cultural, demographic, and environmental variables. In every way, the United States is much different today than it was yesterday, and tomorrow promises even greater changes.

The United States is becoming older and less white. The oldest among the 76 million baby boomers plan to retire soon, and this has lawmakers and younger taxpayers concerned about who will pay their Social Security, Medicare, and Medicaid. Individuals age 65 and older in the United States as a percentage of the population will rise to 18.5 percent by 2025. The old­est American as of January 1, 2015, is 116-year-old Gertrude Weaver of Little Rock, Arkansas. Weaver is the second-oldest person in the world, behind Misao Okawa of Japan, according to the Gerontology Research Group.

The trend toward an older United States is good news for restaurants, hotels, airlines, cruise lines, tours, resorts, theme parks, luxury products and services, recreational vehicles, home builders, furniture producers, computer manufacturers, travel services, pharmaceutical firms, automakers, and funeral homes. Older Americans are especially interested in health care, financial services, travel, crime prevention, and leisure. The world’s longest-living people are the Japanese. By 2050, the Census Bureau projects that the number of Americans age 100 and older will increase to over 834,000 from just under 100,000 centenarians in the country in 2000. Americans age 65 and over will increase from 12.6 percent of the U.S. population in 2000 to 20.0 percent by the year 2050. The aging U.S. population affects the strategic orientation of nearly all organizations.

Retail shoppers in the United States are increasingly buying online, resulting in a persistent 5 to 7 percent decline in store traffic among almost all retail stores, prompting chains to slow or cease store openings.¹ Research reveals that growth in store counts at the 100 largest retailers by revenue slowed to 2 percent in 2014 from more than 12 percent in 2011. Consumer tastes and trends are changing as people wander through stores less, opting more and more to use their mobile phones and computers to research prices and cherry-pick promotions. Sales derived from online purchases are rapidly increasing.

The historical trend of people moving from the Northeast and Midwest to the Sunbelt and West has slowed, but there remains a steady migration to coastal areas. Hard-number data related to this trend can represent key opportunities for many firms and thus can be essential for success­ful strategy formulation, including where to locate new plants and distribution centers and where to focus marketing efforts.

Fortune recently ranked the largest 100 U.S. cities according to the best managed and worst managed.² A variety of factors were included, such as the area’s economy, job market, crime level, and welfare of the population. The best-managed city is Irvine, California, followed by Fremont, California; Plano, Texas; Lincoln, Nebraska; Virginia Beach, Virginia; Scottsdale, Arizona; Seattle, Washington; Austin, Texas; Chesapeake, Virginia, and Raleigh, North Carolina.

By 2075, the United States will have no racial or ethnic majority. This forecast is aggravat­ing tensions over issues such as immigration and affirmative action. Hawaii, California, and New Mexico already have no majority race or ethnic group. The population of the world recently surpassed 7 billion; the United States has slightly more than 310 million people. That leaves literally billions of people outside the United States who may be interested in the products and services produced through domestic firms. Remaining solely domestic is an increasingly risky strategy, especially as the world population continues to grow to an estimated 8 billion in 2028 and 9 billion in 2054.

Social, cultural, demographic, and environmental trends are shaping the way Americans live, work, produce, and consume. New trends are creating a different type of consumer and, con­sequently, a need for different products, new services, and updated strategies. One trend is that there are now more U.S. households with people living alone or with unrelated people than there are households consisting of married couples with children. Another is that U.S. households are making more and more purchases online.

Some important social, cultural, demographic, and environmental variables that represent opportunities or threats for virtually all organizations is given in Table 3-3. Be mindful that in strategic planning and case analysis, relevant social, cultural, demographic, and natural environ­ment factors for a particular business must be quantified and actionable to be useful.

3. Political, Governmental, and Legal Forces

Political issues and stances do matter for business and do impact strategic decisions, especially in today’s world of instant tweeting and emailing. Various industries, such as aerospace and their supplier firms, typically support and lobby for Republicans, whereas other industries, such as automotive and their supplier firms, generally support Democrats. National, state, and local elections impact businesses, with ongoing healthy debate concerning the pros and cons of each party’s agenda for business.

For industries and firms that depend heavily on government contracts or subsidies, political forecasts can be the most important part of an external audit. Changes in patent laws, antitrust legislation, tax rates, and lobbying activities can affect firms significantly. The increasing global interdependence among economies, markets, governments, and organizations makes it impera­tive that firms consider the possible impact of political variables on the formulation and imple­mentation of competitive strategies.

Various countries worldwide are resorting to protectionism to safeguard their own industries. European Union (EU) nations, for example, have tightened their own trade rules and resumed subsidies for their own industries, while barring imports from certain other countries. The EU recently restricted imports of U.S. chicken and beef. India is increasing tariffs on foreign steel. Russia perhaps has instituted the most protectionist measures by raising tariffs on most imports and subsidizing its own exports. Despite these measures taken by other countries, the United States has largely refrained from “Buy American” policies and protectionist measures, although there are increased tariffs on French cheese and Italian water. Many economists say trade con­straints will make it harder for global economic growth.

Local, state, and federal laws, as well as regulatory agencies and special-interest groups, can have a major impact on the strategies of small, large, for-profit, and nonprofit organizations. Many companies have altered or abandoned strategies in the past because of political or govern­mental actions. In the academic world, as state budgets have dropped in recent years, so too has state support for colleges and universities. Resulting from the decline in funds received from the state, many institutions of higher learning are doing more fund-raising on their own—naming buildings and classrooms, for example, for donors.

Some companies take public stands on political issues. For example, Starbucks’ recent support of same-sex marriage in its home state of Washington was praised by a number of prominent rights activists. Today, all states allow same-sex marriage. But the Seattle-based cof­fee chain’s outspoken opponents, such as the National Organization for Marriage (NOM), has vowed to make Starbucks (along with other companies that support same-sex marriage) pay a “price” for this stance. “Middle Eastern countries are hostile to lesbian, gay, bisexual, and trans­gender (LGBT) rights. So, for example, in Qatar, in the Middle East, we’ve begun working to make sure that there’s some price to be paid for this,” Brian Brown of the NOM said. “These are not countries that look kindly on same-sex marriage. And this is where Starbucks wants to expand, as well as India.”

Recently, CVS Caremark stopped selling tobacco products at its 7,600 stores, becoming the first U.S. drugstore chain to remove cigarettes from the store—and at the same time changed its corporate name to CVS Health. Nontobacco consumers and the medical community in gen­eral applauded the CVS announcement. With the announcement, CVS said its tobacco ban will result in the firm losing about $4 billion in annual sales. Euromonitor International reports that cigarette sales in the United States declined 31.3 percent from 2003 to 2013. However, smoking is still cited as the leading cause of preventable death in the country, killing more than 480,000 Americans per year. Within weeks after the CVS announcement, 24 states, Washington DC, and three U.S. territories sent coordinated letters to the CEOs of Walmart, Rite-Aid, Safeway, Kroger, and Walgreens, asking them to stop selling tobacco products.

In mid-2015, the United States normalized relations with Cuba, ending 54 years of hostil­ity. This event represents an opportunity for numerous companies to do business with Cuba. On 7-20-15, Cuba raised its flag over its new embassy in Washington, D.C. For example, Carnival Corporation has won approval to begin cruising to Cuba and back, marking the first time in over 50 years that a cruise line can travel to and from Cuba.

A political debate still rages in the United States regarding sales taxes on the Internet. Walmart, Target, and other large retailers are pressuring state governments to collect sales taxes from Amazon.com. Big brick-and-mortar retailers are backing a coalition called the Alliance for Main Street Fairness, which is leading political efforts to change sales-tax laws in more than a dozen states. According to Walmart’s executive Raul Vazquez, “The rules today don’t allow brick-and-mortar retailers to compete evenly with online retailers, and that needs to be addressed.”

Federal, state, local, and foreign governments are major regulators, deregulators, subsi­dizers, employers, and customers of organizations. Political, governmental, and legal factors, therefore, can represent major opportunities or threats for both small and large organizations. Politicians decide on tax rates. State and local income taxes and property taxes impact where companies locate facilities and where people desire to live. The five states, in rank order, with the lowest overall state taxes, and the five states with the highest state taxes, are shown here.³

Regarding only state income taxes (rather than property, local, and sales taxes, too), seven states have zero (0.00) state income taxes: Texas, Nevada, Alaska, Florida, South Dakota, Washington, and Wyoming. States with the highest income tax are California (13.3%), Hawaii (11%), Oregon (9.90%), Minnesota (9.85%), Iowa (8.98%), and New Jersey (8.97%).

The extent that a state is unionized can be a significant political factor in strategic-planning decisions as related to manufacturing plant location and other operational matters. The size of U.S. labor unions has fallen sharply in the last decade as a result in large part of erosion of the U.S. manufacturing base. Organized public-sector labor issues are being debated in many state legislatures. Wisconsin, for example, recently passed a law eliminating most collective­bargaining rights for the state’s public-employee unions. That law sets a precedent that many other states may follow to curb union rights as a way to help state budgets become solvent. Ohio is close to passing a similar bill that will curb union rights for 400,000 public workers. Among states, New York continues to have the highest union membership rate (24.1 percent) and North Carolina has the lowest rate (2.9 percent).

Some political, governmental, and legal variables that can represent key opportunities or threats to organizations are provided in Table 3-4, but in stating these for a particular company, the factors should be both quantitative and actionable.

4. Technological Forces

A variety of new technologies such as the Internet of Things, 3D printing, the cloud, mobile devices, biotech, analytics, autotech, robotics, and artificial intelligence are fueling innovation in many industries, and impacting strategic-planning decisions. Businesses are using mobile tech­nologies and applications to better determine customer trends and employing advanced analytics data to make enhanced strategy decisions. The vast increase in the amount of data coming from mobile devices is driving the development of advanced analytics applications. In fact, by 2018, machine-to-machine devices ranging from wearable Web access devices and utility meters and sensors in cars will account for 35 percent of global Internet network-connected devices, up from 18.6 percent today.⁴ A primary reason that Cisco Systems has recently entered the data analytics business is that sales of hardware, software, and services connected to the Internet of Things is expected to increase to $7.1 billion by 2020 from about $2.0 billion in 2015.

Rapid technological advances in mobile and electronic banking have led banks to close branch offices at dramatically increasing rates in the United States. The total number of branch locations has dropped below 90,000, the lowest total number in the United States in a decade. Too offset closing branch offices, U.S. banks are ramping up mobile and online services, such as allowing customers to make deposits simply by snapping photos of checks with smartphones and emailing them. Many banks now allow customers to transfer money to other customers via smartphones. At Bank of America, for example, nearly 15 percent of all checks deposited by customers come from snapping pictures on smartphones or tablet computers. Not a single state in the United States reported an increase in the number of branch bank locations in recent years.⁵ Florida leads all states in branch bank closures, followed by Pennsylvania. Technology is rap­idly changing the competitive landscape in banking, and many other industries characterized by brick-and-mortar stores.

Monitoring online reviews about your business, large or small, has become a burdensome but an essential task, especially given emergence of social-media channels, such as Twitter, that empowers opinionated customers. Research is clear that benign neglect of a company’s online reputation could quickly hurt sales, especially given the new normal behavior of customers con­sulting their smartphones for even the smallest of purchases.⁶

A number of organizations are establishing two positions in their firms: chief information officer (CIO) and chief technology officer (CTO), reflecting the growing importance of information technology (IT) in strategic management. A CIO and CTO work together to ensure that information needed to formulate, implement, and evaluate strategies is available where and when it is needed. These individuals are responsible for developing, maintaining, and updating a company’s information database. The CIO is more a manager, managing the firm’s relationship with stakeholders; the CTO is more a technician, focusing on technical issues such as data acquisition, data processing, decision-support systems, and software and hardware acquisition.

Global cybersecurity spending by critical infrastructure industries exceeds $50 billion annu­ally, and is rising more than 10 percent annually.⁷ Security is a major concern for all businesses, yet complete security is something most businesses cannot financially afford to install. Hackers recently stole 40 million of Target Corporation’s customers’ credit- and debit-card numbers, along with passcodes and passwords. Building firewalls and triplicate systems can be expen­sive. Similarly, J.P. Morgan reported that 76 million of their customers’ contact information was recently stolen in a cybersecurity breach. Sony, too, was recently a victim of a massive cyber­attack. Even the federal government employee databanks were recently hacked, reportedly by some entities in China.

Results of technological advancements are varied, as shown in the following list:

1. They represent major opportunities and threats that must be considered in formulating strategies.
2. They can dramatically affect organizations’ products, services, markets, suppliers, distribu­tors, competitors, customers, manufacturing processes, marketing practices, and competi­tive position.
3. They can create new markets, result in a proliferation of new and improved products, change the relative competitive cost positions in an industry, and render existing products and services obsolete.
4. They can reduce or eliminate cost barriers between businesses, create shorter production runs, create shortages in technical skills, and result in changing values and expectations of employees, managers, and customers.
5. They can create new competitive advantages that are more powerful than existing advantages.

No company or industry today is insulated against emerging technological developments. In high-tech industries, identification and evaluation of key technological opportunities and threats can be the most important part of the external strategic-management audit.

5. Competitive Forces

An important part of an external audit is identifying rival firms and determining their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies. George Salk stated, “If you’re not faster than your competitor, you’re in a tenuous position, and if you’re only half as fast, you’re terminal.”

Collecting and evaluating information on competitors is essential for successful strategy formulation. Identifying major competitors is not always easy because many firms have divi­sions that compete in different industries. Many multidivisional firms do not provide sales and profit information on a divisional basis for competitive reasons. Also, privately held firms do not publish any financial or marketing information. Addressing questions about competitors, such as those presented in Table 3-5, is important in performing an external audit.

Competition in virtually all industries is intense—and sometimes cutthroat. For example, Walgreens and CVS pharmacies are located generally across the street from each other and battle each other every day on price and customer service. Most automobile dealerships also are located close to each other. Dollar General, Dollar Tree, and Family Dollar compete intensely on price to attract customers away from each other and away from Walmart and Target.

Seven characteristics describe the most competitive companies:

1. Strive to continually increase market share.
2. Use the vision/mission as a guide for all decisions.
3. Realize that the adage “If it’s not broke, don’t fix it” has been replaced by “Whether it’s broke or not, fix it”; in other words, continually strive to improve everything about the firm.
4. Continually adapt, innovate, improve—especially when the firm is successful.
5. Strive to grow through acquisition whenever possible.
6. Hire and retain the best employees and managers possible.
7. Strive to stay cost-competitive on a global basis.⁸

Competitive intelligence (CI), as formally defined by the Society of Competitive Intelligence Professionals (SCIP), is a systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’s own goals (SCIP website). Good competitive intelligence in business, as in the military, is one of the keys to success. The more information and knowledge a firm can obtain about its com­petitors, the more likely the firm can formulate and implement effective strategies. Major com­petitors’ weaknesses can represent external opportunities; major competitors’ strengths may represent key threats.

Various legal and ethical ways to obtain competitive intelligence include the following:

• Hire top executives from rival firms.
• Reverse engineer rival firms’ products.
• Use surveys and interviews of customers, suppliers, and distributors.
• Conduct drive-by and on-site visits to rival firm operations.
• Search online databases.
• Contact government agencies for public information about rival firms.
• Systematically monitor relevant trade publications, magazines, and newspapers.

Information gathering from employees, managers, suppliers, distributors, customers, credi­tors, and consultants also can make the difference between having superior or just average intel­ligence and overall competitiveness. The Fuld website explains that competitive intelligence is not the following:

Is not spying

Is not a crystal ball

Is not a simple Google search

Is not one-size-fits-all

Is not useful if no one is listening

Is not a job for one, smart person

Is not a fad

Is not driven by software or technology

Is not based on internal assumptions about the market

Is not a spreadsheet.⁹

The three basic objectives of a CI program are (1) to provide a general understanding of an industry and its competitors, (2) to identify areas in which competitors are vulnerable and to assess the impact strategic actions would have on competitors, and (3) to identify potential moves that a competitor might make that would endanger a firm’s position in the market.¹⁰ Competitive information is equally applicable for strategy formulation, implementation, and evaluation decisions. An effective CI program allows all areas of a firm to access consistent and verifiable information in making decisions. All members of an organization—from the CEO to custodians—are valuable intelligence agents and should feel themselves to be a part of the CI process. Special characteristics of a successful CI program include flexibility, usefulness, timeli­ness, and cross-functional cooperation.

Competitive intelligence is not corporate espionage; after all, 95 percent of the information a company needs to make strategic decisions is available and accessible to the public. Sources of competitive information include trade journals, want ads, newspaper articles, and government filings, as well as customers, suppliers, distributors, competitors themselves, and the Internet. Unethical tactics such as bribery, wiretapping, and computer hacking should never be used to obtain information. All the information a company needs can be collected without resorting to unethical tactics.

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).

Former chair and CEO of PepsiCo Wayne Calloway said, “Nothing focuses the mind better than the constant sight of a competitor that wants to wipe you off the map.” As illustrated in Figure 3-3, Porter’s Five-Forces Model of competitive analysis is a widely used approach for developing strategies in many industries. The intensity of competition among firms varies widely across industries. Table 3-6 reveals the average gross profit margin and earnings per share (EPS) for firms in different industries. Note the substantial variation among industries. For example, note that industry operating margins range from 4 to 34 percent, whereas industry EPS values range from -16 to 2.23. Note that food manufacturers have the lowest average profit margin (2.3), which implies fierce competition in that industry. Intensity of competition is high­est in lower-return industries. The collective impact of competitive forces is so brutal in some industries that the market is clearly “unattractive” from a profit-making standpoint. Rivalry among existing firms is severe, new rivals can enter the industry with relative ease, and both suppliers and customers can exercise considerable bargaining leverage. According to Porter, a Harvard Business School professor, the nature of competitiveness in a given industry can be viewed as a composite of five forces:

1. Rivalry among competing firms
2. Potential entry of new competitors
3. Potential development of substitute products
4. Bargaining power of suppliers
5. Bargaining power of consumers

1. Rivalry Among Competing Firms

Rivalry among competing firms is usually the most powerful of the five competitive forces. The strategies pursued by one firm can be successful only to the extent that they provide competitive advantage over the strategies pursued by rival firms. Changes in strategy by one firm may be met with retaliatory countermoves, such as lowering prices, enhancing quality, adding features, pro­viding services, extending warranties, and increasing advertising. For example, Verizon recently acquired AOL for $4.4 billion and soon thereafter launched its own video streaming to mobile devices, in a direct attack on rivals Facebook, Google, Sony, Dish Network, and even Apple. With AOL onboard, Verizon also now derives millions of dollars of mobile advertising revenue.

The intensity of rivalry among competing firms tends to increase as the number of com­petitors increases, as competitors become more equal in size and capability, as demand for the industry’s products declines, and as price cutting becomes common. Rivalry also increases when consumers can switch brands easily; when barriers to leaving the market are high; when fixed costs are high; when the product is perishable; when consumer demand is growing slowly or declines such that rivals have excess capacity or inventory; when the products being sold are commodities (not easily differentiated, such as gasoline); when rival firms are diverse in strate­gies, origins, and culture; and when mergers and acquisitions are common in the industry. As rivalry among competing firms intensifies, industry profits decline, in some cases to the point where an industry becomes inherently unattractive. When rival firms sense weakness, typically they will intensify both marketing and production efforts to capitalize on the “opportunity.” Table 3-7 summarizes conditions that cause high rivalry among competing firms.

2. Potential Entry of New Competitors

Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms increases. Barriers to entry, however, can include the need to gain economies of scale quickly, the need to gain technology and specialized know-how, the lack of experience, strong customer loyalty, strong brand preferences, large capital requirements, lack of adequate distribution channels, government regulatory policies, tariffs, lack of access to raw materials, possession of patents, undesirable locations, counterattack by entrenched firms, and potential saturation of the market.

Despite numerous barriers to entry, new firms sometimes enter industries with higher-quality products, lower prices, and substantial marketing resources. The strategist’s job, therefore, is to identify potential new firms entering the market, to monitor the new rival firms’ strategies, to counterattack as needed, and to capitalize on existing strengths and opportunities. When the threat of new firms entering the market is strong, incumbent firms generally fortify their posi­tions and take actions to deter new entrants, such as lowering prices, extending warranties, add­ing features, or offering financing specials.

The Walt Disney Company is nearing completion of its Shanghai Disneyland, a $4.4 billion complex set to open in China in 2016, complete with hotels, restaurants, retail shops, and other amenities. However, a rival firm, DreamWorks Animation SKG, is nearing completion of a $3.1 billion entertainment district named Dream Center in Shanghai right beside Disneyland and says its facility will also open in 2016. Although expensive to build, theme parks are becom­ing more popular globally. Time Warner’s Warner Brothers is building Harry Potter attractions around the world, including a converted movie studio outside London.

3. Potential Development of Substitute Products

In many industries, firms are in close competition with producers of substitute products in other industries. Examples are plastic container producers competing with glass, paperboard, and aluminum can producers, and acetaminophen manufacturers competing with other manufactur­ers of pain and headache remedies. The presence of substitute products puts a ceiling on the price that can be charged before consumers will switch to the substitute product. Price ceilings equate to profit ceilings and more intense competition among rivals. Producers of eyeglasses and contact lenses, for example, face increasing competitive pressures from laser eye surgery. Producers of sugar face similar pressures from artificial sweeteners. Newspapers and magazines face substitute-product competitive pressures from the Internet and 24-hour cable television. The magnitude of competitive pressure derived from the development of substitute products is gener­ally evidenced by rivals’ plans for expanding production capacity, as well as by their sales and profit growth numbers.

Competitive pressures arising from substitute products increase as the relative price of sub­stitute products declines and as consumers’ costs of switching decrease. The competitive strength of substitute products is best measured by the inroads into the market share those products obtain, as well as those firms’ plans for increased capacity and market penetration.

4. Bargaining Power of Suppliers

The bargaining power of suppliers affects the intensity of competition in an industry, especially when there are few suppliers, when there are few good substitute raw materials, or when the cost of switching raw materials is especially high. It is often in the best interest of both suppliers and producers to assist each other with reasonable prices, improved quality, development of new ser­vices, just-in-time deliveries, and reduced inventory costs, thus enhancing long-term profitability for all concerned.

Firms may pursue a backward integration strategy to gain control or ownership of suppliers. This strategy is especially effective when suppliers are unreliable, too costly, or not capable of meeting a firm’s needs on a consistent basis. Firms generally can negotiate more favorable terms with suppliers when backward integration is a commonly used strategy among rival firms in an industry.

However, in many industries it is more economical to use outside suppliers of compo­nent parts than to self-manufacture the items. This is true, for example, in the outdoor power equipment industry, where producers (such as Murray) of lawn mowers, rotary tillers, leaf blow­ers, and edgers generally obtain their small engines from outside manufacturers (such as Briggs & Stratton) that specialize in such engines and have huge economies of scale.

In more and more industries, sellers are forging strategic partnerships with select suppli­ers in an effort to (1) reduce inventory and logistics costs (e.g., through just-in-time deliveries), (2) accelerate the availability of next-generation components, (3) enhance the quality of the parts and components being supplied and reduce defect rates, and (4) squeeze out important cost savings for both themselves and their suppliers.¹¹

5. Bargaining Power of Consumers

When customers are concentrated or large in number or buy in volume, their bargaining power represents a major force affecting the intensity of competition in an industry. Rival firms may offer extended warranties or special services to gain customer loyalty whenever the bargaining power of consumers is substantial. Bargaining power of consumers also is higher when the products being purchased are standard or undifferentiated. When this is the case, consumers often can negotiate selling price, warranty coverage, and accessory packages to a greater extent.

The bargaining power of consumers can be the most important force affecting competitive advantage. Consumers gain increasing bargaining power under the following circumstances:

1. If they can inexpensively switch to competing brands or substitutes
2. If they are particularly important to the seller
3. If sellers are struggling in the face of falling consumer demand
4. If they are informed about sellers’ products, prices, and costs
5. If they have discretion in whether and when they purchase the product¹²

Source: David Fred, David Forest (2016), Strategic Management: A Competitive Advantage Approach, Concepts and Cases, Pearson (16th Edition).