Key terms in Strategic Management

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).