Strategic Management: Creating Competitive Advantages

 

SUMMARY/OBJECTIVES

 

At the heart of strategic management is the question: "How and why do some firms outperform others?" The challenge to managers is to develop and implement strategies that will provide competitive advantages that will be sustainable over time. This chapter is divided into five sections.

 

1.   The first section addresses the broad question: "What is strategic management?" Here, we define strategic management as: "consisting of the analysis, decisions, and actions an organization undertakes to create and sustain competitive advantages." We also address the four key attributes of strategic management: concern with overall objectives; involves multiple stakeholders; incorporates short- and long-term perspectives; and recognizes tradeoffs between effectiveness and efficiency.

 

2.   The second section discusses the strategic management process. Here, we present the three processes—analysis, formulation, and implementation--that provide the framework for the overall organization of the fourteen chapters of the book.  

 

3.   The third section focuses on the vital role of corporate governance, which is essential to ensuring that the actions of a firm's management are consistent with the goals of its owners—the shareholders. We also address stakeholder management. It must be taken into account throughout the strategic management process.  Although the interests of stakeholders may, at times, conflict, we discuss how firms are able to achieve "symbiosis" among stakeholders wherein various interests are considered interdependent and can be attained simultaneously. We address the importance of social responsibility, including environmental sustainability and how it can enhance an organization's innovation strategy.

 

4.   The fourth section addresses three interrelated factors in the business environment—globalization, technology, and intellectual capital—that have increased the level of unpredictable change for today's leaders. Such factors create a greater need for a strategic management perspective throughout the organization.

 

5.   The fifth section discusses the need for organizations to attain consistency in their vision, mission, and strategic objectives. Collectively, they form a hierarchy of goals.

 

 

LECTURE/DISCUSSION OUTLINE

 

            The introductory case addresses Coca Cola's recent erosion in its performance and competitive position. The case points out its failures in all three aspects of the strategic management process—analysis, formulation, and implementation. It also provides a useful means for illustrating both the "romantic" and external control perspectives of leadership, i.e., performance can be attributed both to leaders as well as to factors that are outside their immediate control, respectively. To lead off the discussion, it may be helpful to ask:

 

q          How does the Coca Cola example illustrate poor strategic management? (discuss in terms of analysis, formulation, and implementation)

 

q          What factors were outside the control of Coca Cola's management that negatively impacted their performance?

 

              On August 29, 2005, Hurricane Katrina had a devastating impact on both the loss of lives and property damage. The SUPPLEMENT below provides some insights on how such a natural disaster can place tremendous constraints on the influence that leaders can have on their firms' performance. This can be viewed as another illustration of the "external control" perspective. We address some of the implications for certain industries.

 

(Before discussing what we have suggested below, you may ask a general question about the impact of Hurricane Katrina on the some industries. Given that the information below was written immediately after the hurricane, there will be more updated information available.)

 

 

THE IMPACT OF HURRICANE KATRINA ON SOME INDUSTRIES

 

·                     Immediately after the hurricane, lumber prices surged. Katrina devastated sawmills and plywood plants on the Gulf Coast and wiped out "vast inventories of wood products", according to one industry newsletter. Up to 1 million board feet of lumber on the docks in New Orleans was destroyed.

·                     Coffee futures soared. About 27 percent of all U. S. green coffee stocks, some 1.6 million 60 kilogram bags, were stored in New Orleans.

·                     The nation's bread basket is also reeling. With Katrina knocking out ports where grain-filled barges are coming upstream to reload, pushing demand—and prices—up.  One company, Colusa Elevator Company in Illinois (which has five grain elevators), has seen the price of corn soar from 42 cents per bushel to 71 cents.

·                     The tourist and convention business has been hard hit. The tourist business employs 84, 300 people in New Orleans. Airlines have been forced to cancel flights, and hotels have halted bookings. Officials at the Omni Hotels in Irving, Texas (which owns two New Orleans hotels) canceled all reservations through September 24. And, the convention business has suffered. The AARP which was scheduled to hold its annual meeting in late September in New Orleans has been canceled. Registration had hit 25,000.

·                     Clearly, some industries will benefit once the rebuilding begins. "From a bank's perspective...it's good economically in the same paradoxical way that war is good economically for a lot of people," according to bank research analyst Eric Reinford of SNL Financial in Charlottesville, Virginia. "Natural disasters historically have been a boon for banks because they'll be lending and speeding up the processing of loans."  Other big winners are construction companies and building materials makers. The stocks of those companies soared immediately after Katrina hit.

 

Sources:  Woellert, L., Palmeri, C., & Reed, S. 2005. Katrina's wake. BusinessWeek, September 12: 32-40; and, Lavelle, M. 2005. The (big) ripple effect. U. S. News & World Report, September 12: 33-35.

 

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We then emphasize that leaders can have a very positive impact on organizations and point out such well known leaders in business as Jack Welch (former GE chairman), Andy Grove (former CEO, Intel), Herb Kelleher (Chairman, Southwest Airlines), and Carlos Ghosn (Nissan) as well as an example from the world of sports (Joe Torre, manager of the New York Yankees).

 

q                    Who are some other successful (unsuccessful) leaders? What explains their success (or lack thereof)?

 

q                    We then address briefly the "external control" perspective. We mention that the decline in the market for carbonated drinks can adversely affect other rivals in the soft drink industry.

 

q                    We also use STRATEGY SPOTLIGHT 1.1 to illustrate the enormous impact that the September 11, 2001 terrorist attacks have had on some industries. We also point out that many high-technology firms have recognized opportunities and have benefited.

 

q                    What are some of the other industries that have been significantly affected by the terrorist attacks and their aftermath? Why?

 

       The SUPPLEMENT below addresses some of the technologies that have been developed by corporations to counter terrorism.

 

THE ANTITERROISM SEAL OF APPROVAL

 

Many firms have joined the foray to develop and market antiterrorism products.  Beginning in late 2003, the new Department of Homeland Security (DHS) will begin certifying products and services as "qualified antiterrorism technologies."  Certified products will enjoy protection from liability suits—similar to the protection defense contractors can receive—when they are used by DHS agencies or by other state or local employees fighting terrorist acts.  Even better, this good homeland-keeping seal of approval can also provide some defense against potential private litigation.

 

An estimated 3,500 businesses are lining up to get certified.  Some of the products, however, may be only tenuously connected to antiterrorism.  Some examples:

 

·          Global Technologies (Starkville, Mississippi) proposed its Web-based program that helps companies to trace contaminated meat. "Lives depend on it", it told DHS.

·          Underwriters Laboratories (Northbrook, Illinois) requested that its product safety standards be certified because plaintiff lawyers might blame those standards if antiterrorism technology fails.

·          Qualcomm (San Diego, California) contended that its software to run mobile communications devices should qualify. The 450,000 commercial trucks equipped with it "are uniquely positioned to report suspicious activity or terrorist events."

·          American Safe Room (Roseburg, Oregon) is pushing an air filtering and pressuring system that keeps out toxins.  It doesn't sell to the federal government but owner Len M. Henrikson claims:  "We should have protection; we're trying to save lives."

 

Source:  Swibel, M. 2003. Antiterrorism seal of approval. Forbes, September 15: 52.

 

 

I.   WHAT IS STRATEGIC MANAGEMENT?

 

We point out that it is very important for managers to see their jobs as more than just custodians of the "status quo." Rather, they must proactively anticipate change and continually refine as well as, when necessary, make significant changes to their strategies. This has become particularly important as competitive environments become characterized by increasing rates of unpredictable change.

 

A.   DEFINING STRATEGIC MANAGEMENT

 

We define strategic management as "consisting of the analysis, decisions, and actions an organization undertakes in order to create and sustain competitive advantages." We believe this definition captures two main elements of the field of strategic management.

 

First, strategic management entails three on-going processes: analysis, decisions, and actions.  That is, managers must analyze the internal and external environment as well as their hierarchy of goals in order to formulate and implement strategies.

 

Second, the essence of strategic management is the study of why some firms outperform others.  We draw on Michael Porter's work to make the important distinction between strategy and operational effectiveness. Managers must create advantages that are sustainable over a period of time, instead of merely temporary. That is: How can we create competitive advantages in the marketplace that are not only unique and valuable but also difficult for competitors to copy or substitute? (This perspective, of course, draws upon the resource base view of the firm that we address in detail in Chapters 3 and 5.)

 

The SUPPLEMENT below addresses how Wal-Mart became successful by questioning "conventional wisdom"—a key to creating advantages that typically have a greater chance of being more sustainable over time.

 

Wal-Mart—questioning conventional wisdom

 

Sam Walton consistently defied conventional wisdom. While Sears and other well-known merchants located their big stores in the cities and suburbs, Walton saw his opportunity in rural America.  In retrospect, the insight seems inevitable:  Major retailers hadn't yet located there.  But the man who would eventually build one of the world's largest corporations didn't even invent discounting (buying direct from manufacturers and displaying merchandise in bulk): Kmart, F. W. Woolworth's Woolco, and Dayton Hudson's Target all began in 1962—the same year Walton opened his first Wal-Mart store.

 

What made Walton the merchant king? He chose his sites more skillfully; by buzzing his airplane low over the crossroads between small towns.  He also delivered his merchandise more smoothly, by investing heavily in high-tech logistics systems.  Following an era in which suppliers told retailers what to buy and merchants spoon-fed consumers, Walton squeezed suppliers' profit margins and funneled the savings to the public.  Consumers made out, as did the visionary in the red pickup truck: When Walton died in 1992; he was America's wealthiest man. 

 

Source:  Sellers, P. 1999. Category killers. Fortune, September 27: 224-226.

 

q                    What are some other examples of leaders who have defied conventional wisdom? (e.g., Jeff Bezos, Amazon.com—spurred consumers to buy online; Bernard Marcus and Arthur Blank, Home Depot—taught homeowners to "do it yourself")

 

B.   FOUR KEY ATTRIBUTES OF STRATEGIC MANAGEMENT

 

Here, we address four key attributes of strategic management. Strategic management is directed toward organizational goals and objectives; includes multiple stakeholders in decision making; incorporates both short-term and long-term perspectives; and, recognizes tradeoffs between effectiveness and efficiency.

 

EXHIBIT 1.1 provides our definition of strategic management and these four attributes.

 

q          What are some examples of leaders who failed to incorporate some of these attributes in their decision-making? What were the implications?

 

We provide the humorous example of British bus drivers (to illustrate the problems with an overemphasis on means versus ends). It may be interesting to ask:

 

q          What are the underlying causes of the British bus driver problem?  (e.g., culture; reward and evaluation system; total lack of empowerment; employee selection; leadership, etc.)

 

We close the section with a brief introduction of the concept of "ambidexterity" – the ability to both be proactive in taking advantage of future opportunities as well as in exploiting an existing resource" base. STRATEGY SPOTLIGHT 1.2 illustrates this concept by "managing at different altitudes." Ask: 

 

q          Do you know of any managers or executives who may have been, in essence, "stuck" at the same altitude? Did performance suffer?

 

 

II.  THE STRATEGIC MANAGEMENT PROCESS

 

We again restate the three on-going processes in strategic management—analysis, decisions, and actions—that are typically referred to as analysis, formulation, and implementation. 

 

Review the chapter opening example of Coca Cola and why it experienced dramatically lowered performance because of errors in all three processes. Emphasize the importance of how poor corporate governance further aggravated the situation.

 

The SUPPLEMENT below provides two more examples of strategies that failed primarily due to poor implementation. (Given students' interest in the Internet, these examples should generate discussion.) Ask students:

 

q          What are some other examples of failed Internet strategies and what are the causes?

 

Failed Internet strategies

 

Furniture.com. The lesson:  Keep your promises.   Furniture.com talked big about delivering a better experience than furniture stores, where salespeople can intimidate and direct price comparison is tough.  But Furniture.com didn't walk its talk.  When e.biz (a Business Week publication) looked into the company in July, 2001, they found a mess.  Product returns were higher than most realized.  Damage to goods in transit and late deliveries were common.  And promises of customer service were not fulfilled.  One writer claimed:  "When I logged on to their instant messaging support line, I was on hold nearly long enough to read a copy of Sports Illustrated."

 

Mortgage.com. Web sites have to be much more convenient, not a little, to draw customers away from old ways of doing business. Online mortgages seemed like such a brilliant idea. The old way of getting home loans is a paper work mess no one really likes.  But online mortgages actually eliminated little paperwork.  And the off-line mortgage market is already highly competitive on price, so the advantage the Web brought was minimized.  Mortgage.com has closed its site but hopes to sell its technology to banks.  It still may make borrowing from the Old Guard moderately better. But much more was expected.

 

Source:  Mullaney, T. J. 2001. Gone but not forgotten. BusinessWeek E.BIZ. January 22: EB 16.

 

In the next three subsections, the text addresses each of the three key strategic management processes—analysis, formulation, and implementation. Brief examples from business practice are discussed based on the opening cases (or vignettes) in each chapter. The examples demonstrate that strategic management poses complex challenges and things can go wrong.

 

EXHIBIT 1.2 draws on the influential work of Henry Mintzberg of McGill University. He distinguishes between "intended" and "realized" strategies and we provide the example of how legislation has increased demand for wind energy.  Ask:

 

q          What are some other examples of "unrealized" or emergent strategies?

 

Given the rising price of gasoline and other petroleum products, many students may be interested in the development of alternative forms of energy. The SUPPLEMENT below provides some additional details on the increasing development and use of solar and wind energy:

 

 

THE GROWING IMPORTANCE OF SOLAR AND WIND ENERGY

 

       In May 2005, GE's Chief Executive, Jeffrey Immelt pledged to double GE's research and investment in cleaner technologies to $1.5 billion annually by 2010. Additionally, the next day, two dozen investing institutions in the United States and Europe promised to invest $1 billion within a year in clean-tech firms.

 

       According to the Cleantech Venture Network, a for-profit membership group that connects venture and institutional investors with entrepreneurs, world-wide revenues from clean technology, broadly defined, now surpass $150 billion a year.

 

       Global solar electric sales soared 62 percent in 2004 to 3.8 gigawatts (measured by peak output), according to market research firm Strategies Unlimited.  Installed wind-generating capacity increased 20 percent to 47 gigawatts, also measured by peak output. To provide a basis for these numbers: a gigawatt of capacity is what a city of 500,000 people would require.

 

       Presently, neither type of renewable energy is competitive on its own compared to electricity from fossil fuel plants. However, thanks to huge government subsidies, the manufacture of wind and solar generators is a vibrant business. The European Union has set a 2010 target of doubling to 12 percent the fraction of primary energy that will come from such renewable sources. And, Germany has decided to phase out nuclear power. Not surprisingly, "as a result, the market for solar in Germany is exploding," according to Philippe Cases, a partner at venture capital firm Partech International in San Francisco. Germany and Japan are now the two largest markets for solar installations.

 

Source:  Dolan, K. A. 2005. Clean and green. Forbes: July 25: 111-112.

 

EXHIBIT 1.3 depicts the strategic management process and indicates how it ties into the chapters in the book. And, consistent with the discussion in the text, the two-way arrows convey the interactive nature of the process.

 

Teaching Tip:  Refer back to the opening case of Coca Cola's declining performance. When discussing EXHIBIT 1.3, it would be helpful to ask the class to illustrate how this exhibit can be useful in outlining the issues surrounding this case and how some of the problems may have been avoided with careful attention to these aspects of analysis, formulation, and implementation. It will also help to show how analysis, formulation, and implementation are highly interrelated (e.g., a poor analysis of market opportunity – such as overestimating the market demand for carbonated soft drinks - led to faulty strategy formulation).

 

A.   STRATEGY ANALYSIS

 

Strategy analysis consists of, in effect, the "advance work" that must be done in order to effectively formulate and implement strategies. Many strategies fail because managers may want to formulate and implement strategies without a careful analysis of the overarching goals of the organization, as well as a thorough analysis of its external and internal environment.

 

1.      ANALYZING ORGANIZATION GOALS AND OBJECTIVES (CHAPTER 1)

 

2.      ANALYZING THE EXTERNAL ENVIRONMENT (CHAPTER 2)

 

3.      ASSESSING THE INTERNAL ENVIRONMENT (CHAPTER 3)

 

4.      ASSESSING A FIRM'S INTELLECTUAL ASSETS (CHAPTER 4)

 

B.        STRATEGY FORMULATION

 

A firm's strategy is formulated at several levels. First, business-level strategy addresses the issue of how firms compete in an industry to gain competitive advantage. Second, corporate-level strategy focuses on two issues:  (1) what businesses to compete in, and, (2) how businesses can be managed to achieve synergy, that is, create more value by working together than if they operated as a stand-alone entity. Third, firms must develop international strategies as they expand beyond their national boundaries.  And, fourth, given the growing importance of the Internet, firms must explore the ramifications of this new strategic platform and formulate e-business strategies.

 

1.      FORMULATING BUSINESS LEVEL STRATEGIES (CHAPTER 5)

 

2.      FORMULATING CORPORATE LEVEL STRATEGIES (CHAPTER 6)

 

3.      FORMULATING INTERNATIONAL LEVEL STRATEGIES (CHAPTER 7)

 

4.      FORMULATING DIGITAL BUSINESS STRATEGIES (CHAPTER 8)

 

C.   STRATEGY IMPLEMENTATION

 

Clearly, effective strategies are of little value if they are not properly implemented.  Implementing strategies involves strategic controls and organizational designs; coordination and integration among activities within the firm as well as with customers and suppliers; and effective leadership.

 

The SUPPLEMENT below provides an insightful perspective on the importance of strategic implementation in effective organizations.

 

The importance of execution

 

Any way you look at it, mastering execution turns out to be the odds-on best way for a CEO to keep his job.  So what's the right way to think about that sexier obsession, strategy?  It's vitally important, obviously.  The problem is that our fascination feeds the mistaken belief that developing exactly the right strategy will enable a company to rocket past competitors.  In reality, that's less than half the battle.

 

This shouldn't be surprising.  Strategies quickly become public property.  Ask Michael Dell the source of his competitive advantage, and he replies, "Our business model."

 

Okay, Michael, but that's not exactly a secret.  Everyone has known about it for years.  How can it be a competitive advantage?  His answer:  "We execute it.  It's all about knowledge and execution."

 

Toyota offers anyone, including its competitors, free, in-depth tours of its main U. S. operations—including product development and distributor relationships.  Why?  The company knows visitors will never figure out its competitive advantage, the way it executes.

 

Southwest Airlines is the only airline that has made money every year the last 27 years.  Everyone knows it strategy, yet no company has successfully copied its execution.

 

Source:  Charan, R. & Colvin, G. 1999. Why CEOs Fail. Fortune: 69. 

 

q          Do you agree with this perspective? Can it be taken too far? (perhaps point out that firms may focus too much on expertly implementing a flawed strategy)

 

1.         IMPLEMENTING STRATEGY: STRATEGIC CONTROL AND CORPORATE GOVERNANCE (CHAPTER 9)

 

2.         IMPLEMENTING STRATEGY: CREATING EFFECTIVE ORGANIZATIONAL DESIGNS (CHAPTER 10)

 

3.         STRATEGIC LEADERSHIP: EXCELLENCE, ETHICS AND CHANGE
(CHAPTER 11)

 

4.         STRATEGIC LEADERSHIP: FOSTERING CORPORATE ENTREPRENEURSHIP (CHAPTER 12)

 

5.         STRATEGIC LEADERSHIP: CREATING NEW VENTURES (CHAPTER 13)

 

 

 

III.    THE ROLE OF CORPORATE GOVERNANCE AND STAKEHOLDER MANAGEMENT

 

This section discusses three important and related concepts:  corporate governance, stakeholder management, and social responsibility. Clearly, these topics (especially corporate governance) have generated quite a bit of controversy in the early 2000's and the topic should lead to some spirited discussion.

 

       Corporate governance addresses the relationship between various participants in determining the overall direction and performance of corporations.  It consists of three primary participants—shareholders, management, and the board of directors. 

 

       EXHIBIT 1.4 illustrates these three participants.

 

(Corporate governance is discussed in much more detail in Chapter 9. However, it is such a "hot" topic, that we wanted to introduce it in the text's opening chapter.)

 

       STRATEGY SPOTLIGHT 1.3 discusses the flawed corporate governance at Italy's Parmalot – providing an example of poor governance outside of the United States.

 

q                    What are some other recent examples of poor corporate governance? (Examples would include Tyco International, WorldCom, Enron, Adelphia, etc.)

 

       The SUPPLEMENT below addresses another corporate governance issue that is becoming increasingly popular in Corporate America—Shareholder Activism:

 

SHAREHOLDER ACTIVISM IN 2003

 

The recent depressed stock market, corporate scandals, and contempt for greedy CEOs have spurred shareholders to pass a record number of proxy resolutions: more than 125 in the first five months of 2003. That is 50 percent more than for the entire year of 2002, which itself was a record.  Although vast numbers of resolutions fail, investors are making management take notice. 

 

Recent resolutions have limited severance pay at Alcoa, Delta, Tyco, and Hewlett-Packard.  In addition, shareholders have voted to expense stock options at Apple, Eastman-Kodak, and Starwood Hotels; eliminate staggered boards at Avon, Boeing, and Weyerhaeuser; and oppose poison pills—anti-takeover provisions—at Southwest Airlines, Delphi, and Yahoo.  In all of these cases, the measures were passed over the objections of management.

 

Source:  Gunther, M. 2003. A big win for the little guys. Fortune: June 16: 21.

 

In addition to shareholders, there are other stakeholders that must be explicitly taken into account in the strategic management process. There are five primary stakeholder groups: customers, employees, suppliers (of goods, services, and capital), the community-at-large, and owners.

 

The SUPPLEMENT below addresses some findings from a study on the relative importance of various stakeholders.

 

Teaching Tip: In recent years, there has been growing outrage about the illegal and unethical behaviors of top executives of firms such as Enron, Tyco, Global Crossing, Arthur Anderson and so on. It would be interesting to discuss what should be done to curb such behavior. Some students may suggest more regulation and tougher punishments for executives as possible solutions. Others may point out the downside of overregulation and suggest letting "the market take its course." You may wish to point out the social and economic costs of fiascoes such as Enron and Worldcom. Here it was not just employees who lost their jobs and retirement benefits, but also literally millions of individuals who suffered financial losses due to the collapse of the stock price who had either purchased these stocks or who owned shares in them through their retirement portfolios. Also, many suppliers and banks were left unpaid. This helps to bring alive the issue of how the actions of executives can have an effect on a broad range of stakeholders.

 

Assessing the relative importance of various stakeholder groups

 

A recent study documented the perhaps politically incorrect truth: not all stakeholder groups are created equal.  Their survey found that there are, in effect, two tiers of stakeholders: customers, employees, and shareholders in the first tier, and suppliers and community-at-large in the second tier. Customers dominated the importance ranking with a 71 percent ranking, while shareholders and employees were virtually tied at 49 percent and 48 percent, respectively.  Suppliers trailed in the rankings at 22 percent, and community-at-large was practically an afterthought at only 10 percent.

 

Source:  Anonymous. 1998. Global Insights 98. Fortune, March 30: S3.

 

q          Are these findings surprising? Why? Why not?

 

q          What are the implications?

 

q          Would you expect these rankings to change over time? Why? Why not?

 

A.        ZERO-SUM OR SYMBIOSIS: TWO ALTERNATIVE PERSPECTIVES ON STAKEHOLDER MANAGEMENT

 

In this section we recognize, of course, that there are often conflicting demands among an organization's stakeholders. However, managers need to acknowledge the interdependence among stakeholders and strive to achieve symbiosis, that is, the recognition that stakeholders are interdependent upon one another for their success and well being. We briefly review (addressed in Chapter 3) how Sears found that there were positive relationships between employee attitudes, customer satisfaction, and revenue increases.

 

q          What are some other ways that stakeholder demands may conflict? How might they be highly interdependent and positively related to each other?

 

The SUPPLEMENT below addresses the relationship between "enlightened workplaces" and stock valuations. It serves to reinforce the point that there are typically positive relationships between satisfying the needs of multiple stakeholders—employees and owners, in this case.

 

 

 

 

 

 

Enlightened workplaces and stock valuation

 

In the early 1990s, CalPERS (the organization responsible for the management of the enormous retirement funds for California's state employees) investigated another indicator of intangible value: enlightened workplace practices, for example, offering employees regular training, involving employees in corporate decision making, and linking employees' pay to performance.  A 1994 report commissioned by the system concluded that companies that do a poor job of nurturing their human assets often do an equally poor job of protecting the value of their stock.  The report went on to recommend that CalPERS consider using workplace practices as another criterion for selecting focus-list companies.

 

Source:  Birchard, B. 1999. Intangible assets + hard numbers = soft finance. Fast Company: October: 324.

 

B.        SOCIAL RESPONSIBILITY, SOCIAL INNOVATION, AND ENVIRONMENTAL SUSTAINABILITY: MOVING BEYOND THE IMMEDIATE STAKEHOLDERS

 

Managers must consider the needs of the broader community-at-large and act in a socially responsible manner. Social responsibility is the expectation that businesses or individuals will strive to improve the overall welfare of a society.

 

The following SUPPLEMENT summarizes some of the central points in the debate as to the value of corporations to devote significant resources to corporate social responsibility:

 

 

STAKEHOLDERS VERSUS SHAREHOLDERS

 

       Although corporate social responsibility may appear to be an "apple-pie virtue", it is quite controversial. Below are some of the chief arguments for and against it:

 

Proponents will claim that it…

 

       BURNISHES A COMPANY'S REPUTATION.  In the wake of corporate        scandals, corporate social responsibility builds goodwill—and can pay off when scandals or regulatory scrutiny inevitably arise.

 

       ATTRACTS TALENT.  Many young professionals expect their employers to be active in social issues. Membership in Netimpact.org, a network of socially-conscious MBA graduates, jumped from 4,000 in 2002 to 10,000 in 2004.

 

On the other hand, Detractors will argue that it…

 

       COSTS TOO MUCH. Giving by corporate foundations reached an all-time high of $3.6 billion last year. However, it can come at the expense of other priorities, such as research and development, and is rarely valued by Wall Street.

 

       IS MISGUIDED.  Many corporate executives believe, as economist Milton Friedman does, that the role of business is to generate profits for shareholders—not to spend others' money for some perceived social benefit.

 

Source:  Grow, B., Hamm, S. & Lee, Louise. 2005. The debate over doing good. BusinessWeek, August 15: 76-78.

 

 

Teaching Tip: You could likely generate some interesting debate by asking students to take alternative positions on this issue. Perhaps, assign one student to the "pro" position and one to the "con" position. Also, give them a chance to rebut the other person's perspective. You could then ask a few others to join the debate by taking their preferred side on this issue. (The debate could become more spirited by raising very "intense" issues such as natural disasters, including Hurricane Katrina in August, 2005.) 

 

We introduce the increased emphasis on "social innovation."  That is when firms consider community needs as an opportunity to develop ideas and demonstrate business technologies as well as ways to find and serve new markets. The example of IBM is provided.  Ask:

 

q          What can be the advantages of pursuing a strategy of social innovation (as opposed to the more traditional "social responsibility")?

 

 

We mention that many companies are measuring what they call the "triple bottom line".  Such a technique involves an assessment of environmental, social, and financial performance. We state that environmental sustainability is now a value embraced by most successful corporations.

 

We close this section with STRATEGY SPOTLIGHT 1.4.  It addresses how DuPont's CEO has have addressed issues beyond financial considerations in their strategy, including environmental sustainability.

 

q          Do you know of other organizations that may have, in effect, used the "triple bottom line" approach to assess environmental, social, and financial performance?

 

q          How will increases in energy costs affect initiatives such as the "triple bottom line" and environmental sustainability?

 

It is important to stress that when considering the "triple bottom line," there are not always tradeoffs. At times, firms can attain symbiosis—that is attain increase their effectiveness in attaining multiple bottom lines simultaneously. The SUPPLEMENT below provides and example of a manufacturer of plastic products, Spartech:

 

 

 

 

 

 

 

 

 

 

 

 

SPARTECH: ATTAINING ENHANCING THE FINANCIAL AND ENVIRONMENTAL BOTTOM LINES AT THE SAME TIME

 

         Spartech, a specialty plastics producer with $1.1 billion in revenues, does not consider its recycling program a necessary evil. Rather, the firm considers it an important value-added customer service. During 2001, it purchased 220 million pounds of spare plastic and trim from 2,000 of its customers and cost-effectively recycled the material back into its own products. In addition, ten of Spartech's plants are involved in a program to reuse wood pallets used for shipments. This eliminated the need for its customers to contend with the disposal of wood waste and saves Spartech and its customers $134,000 in material costs and disposal fees each year.

 

         To assess performance, Spartech looks beyond mere environmental compliance, which it views as a "lagging indicator." Suzanne Riney, Spartech's director of environment, health, and safety suggests that many of the continuous improvements at the firm that go far beyond compliance with laws and regulations and "make good business sense." These include reducing greenhouse gas emissions, improving energy efficiency, and widening the company's recycling program to include all materials and discharges. Given many of the cost savings of Spartech's program, turning the firm's environment, health and safety function into a profit center appears to be a reasonable goal. Forward-looking indicators that measure a company's ability to make efficient use of materials and energy, as well as downstream revenues, can be a measure of innovative ability, effective capital utilization, and value creation.

 

Source:  Funk, K. 2003. Sustainability and performance. MIT Sloan Management Review, 44 (2): 65-70.

 

 

IV.     The Strategic Management Perspective:  An Imperative Throughout the Organization

 

There is an emerging need for empowerment and a strategic management perspective throughout organizations. This is primarily due to today's increasingly complex, interconnected, and ever-changing global economy. We reinforce this point with the quotation from MIT's Peter Senge, perhaps the best-known writer in the area of organizational learning.

 

We first address three driving forces—globalization, technology, and intellectual capital--that are often mentioned as driving the need for broader involvement in the strategic management perspective.

 

A.   KEY DRIVING FORCES

 

We address the interrelated nature of the three driving forces and, for emphasis, provide a quotation from Stephen Case, AOL Time Warner Chairman. 

 

The SUPPLEMENT below provides some additional perspectives by well-known executives:

 

 

 

 

 

 

 

 

 

 

Some perspectives on the accelerating rate of change and its implications

 

Orit Gadiesh (Chairman of Bain & Company):  "You shouldn't have a long-term strategy anymore because you are going to be confined, and you won't be able to move fast enough."

 

Roger Enrico (CEO of PepsiCo):  "When you are faced with a decision the best thing is to do the right thing, the next best is to do the wrong thing, and the worst thing to do is to do nothing."

 

Lawrence A. Weinbach (CEO and Chairman of Unisys):  "…if we are going to be leaders, we're going to have to make decisions with maybe 75 percent of the facts (that we'd like to have).  If you wait for 95 percent, you are going to be a follower."

 

Source:  Garten, J. E. 2001. The Mind of the CEO (book excerpt). Business Week, February 5: 108.

 

You may consider asking:

 

q          Do you agree with these perspectives? Why? Why not?

 

       1.    GLOBALIZATION

 

The defining feature of the global economy is not the flow of goods but rather the flow of capital, people, and information. Time and space are no longer a barrier to doing deals anywhere in the world.  Computer networks permit instantaneous transactions, and the market watchers operate on a 24-hour basis.

 

In this section, we address the challenges of "thinking globally but acting locally" and the importance of moving resources and information around the world to meet local needs; the relevance of markets becoming more open throughout the world, and the importance of the ability to learn and collaborate to manage diversity, complexity, and ambiguity. Clearly, top-level managers can't do it all themselves.

 

       The SUPPLEMENT below discusses one of the rapidly rising expenses faced by multinational firms that are currently doing business overseas:  a dramatic increase in premiums for kidnap and ransom insurance policies. The primary reason is the increase in fundamentalist Islamic groups:

 

SOARING KIDNAP AND RANSOM INSURANCE POLICIES

 

         United States firms are faced with soaring insurance policies when they do business in many countries around the world. Rates have surged 200 percent between January and September 2003, says the St. Paul Cos.'s David Lattin. The key reason: fundamentalist Islamic groups around the world. Where has been the greatest impact?  Brazil, Colombia, Ecuador, former Soviet republics, India, Mexico, Nigeria, Philippines, South Africa, and Venezuela.  Iraq, surprisingly, isn't among them.  Some typical premiums:  $36,000 for a $2.5 million policy covering a medium-size U. S. food concern operating in Brazil: $193,000 for $25 million coverage of a large American utility working in nearby Mexico.

 

Source:  Swibel, M. 2003. Stay north of Tijuana. Forbes, September 15: 36.

 

       2.    TECHNOLOGY

 

The acceleration in the creation and diffusion of technology increases the importance of innovation to remain competitive.  Technology has reduced the life cycles of products—as the example of Intel points out. In addition, technology—from videoconferencing to the Internet--has made our world smaller and faster. Managers must be able to make technology even more viable and a productive part of the work setting.

 

q          What are some other applications of information technology with which you are familiar?  How did it enhance the organization's performance?

 

In addition to the potential benefits of technology, ethical issues can arise. STRATEGY SPOTLIGHT 1.5 raises the issue of designer babies. You may consider asking:

 

q          What ethical issues does this technological capability raise? What should be done?

 

 

       3.    Intellectual Capital

 

Knowledge has become the direct source of competitive advantage(s) for companies selling ideas and relationships as well as an indirect source of competitive advantage for companies trying to differentiate themselves by how they create value for customers. We provide the quotation from Merck's former CEO to drive home the importance of knowledge in value creation for a firm.

 

Technology must also be used effectively to leverage human capital to both facilitate collaboration among individuals and to develop more sophisticated knowledge management systems.   Firms must not only acquire and retain top talent but also develop and maintain a strategic perspective if they are to contribute their efforts to the goals of the firm.

 

       STRATEGY SPOTLIGHT 1.6 illustrates how all of the forces that we address in this section "come together." The global market for talent is clearly impacted by the factors of globalization, technology, and intellectual capital.

 

       The SUPPLEMENT below addresses another example of how globalization and technology can have dramatic effects on an economy. It discusses why many U.S. manufacturing jobs have been lost.

 

GLOBAL COMPETITION AND TECHNOLOGY REDUCES DOMESTIC MANUFACTURING JOBS

 

Charles Seitz remembers when Rochester, New York was a busy manufacturing town. Now all that the fifty-eight year old engineer can see is a landscape of empty buildings.  Such a sight reflects a major trend: fifty years ago, a third of the U. S. workforce labored in factories making everything from lipsticks to cars.  Today, slightly more than one-tenth of the nation's 131 million workers are employed by manufacturing firms.  Four-fifths of them are in services.  The decline in manufacturing jobs in the United States has swiftly accelerated since the beginning of 2000.  Since then, more than 1.9 million jobs have been cut.  Most of these are factory jobs that have been lost because companies are unable to respond effectively to the sharp rise in competition.

 

Jobs are being moved abroad as developing countries promise lower labor costs and attractive new markets.  Further, advances in technology enable firms to produce more with fewer workers.  For example, at Eastman Kodak, ten years ago, mixing filmmaking ingredients with precision was a job done by 14 workers in a dark room.  Today, most of the work is done by one person watching a computer screen in a control room.  Sadly, Seitz was laid off after 26 years at Kodak—right before Christmas and two months away from being eligible for full retirement benefits.

 

In contrast to manufacturing, there is good news for those in the service sector (e.g., education, business services, health).  Between 1950 and 2002, the percentage of service jobs increased from 59 percent to 82 percent in the U. S. economy.  Jobs requiring manual labor are giving way to higher technology and higher educated labor—something that is considered good for the economy in the long run.

 

Source:  Hagenbaugh, B. 2002. Manufacturing jobs fading fast away. USA Today, December 13: 1-2.

 

q                    What are the implications for careers?  Will many service sector jobs also "fade away"?  Why? Why not?

 

q                    Are there any implications for public policy? Legislation?

 

Teaching Tip:  Students will readily recognize the apparent contradictions in STRATEGY SPOTLIGHT 1.6 and the above SUPPLEMENT.  That is, the SUPPLEMENT and SPOTLIGHT 1.6, in effect, "disagree" on the job security of employees in the service sector.  By raising the "career implications" question, you will have the opportunity to briefly introduce the concept of the sustainability of competitive advantage(s), i.e., the criteria of rare, valuable, difficulty to copy (imitate and substitute) that we address at length in Chapters 3 and 5.  The point that can be made is that students should strive to develop skills and capabilities that satisfy these four criteria to enjoy greater career success.  This helps to illustrate some very practical implications of strategy concepts and heighten student interest.

 

B.        ENHANCING EMPLOYEE INVOLVEMENT IN THE STRATEGIC MANAGEMENT PROCESS

 

To develop and mobilize people and other organizational assets, leaders are required throughout the organization. As noted by MIT's Peter Senge, there is a need for three types of leaders:  local line leaders, executive leaders, and internal networkers. We also quote Sally Hegelsen who admonishes against a "heroes and drones" syndrome that demeans the contributions of those lower in an organization's hierarchy.

 

We provide examples of empowerment at both the Virgin Group that is well known for its culture and informal structure as well as Ford's extensive leadership development program. It may be interesting to ask:

 

q          With regard to Ford's development program, is it possible to develop an army of "warrior entrepreneurs"?  Why? Why not?  Do you feel this program will be successful?

 

We close this section with STRATEGY SPOTLIGHT 1.7 that further reinforces the benefits of broad involvement throughout the organization in the strategic management process. It is about the filming of the movie, Gorillas in the Mist, and points out the value of inexperience.

 

V.  ENSURING COHERENCE IN STRATEGIC DIRECTION

 

Successful organizations express priorities through stated goals and objectives that form a hierarchy of goals that includes its vision, mission, and strategic objectives. What visions lack in specificity, they make up for in their ability to evoke powerful and compelling mental images. On the other hand, strategic objectives tend to be more specific and provide a more direct means of determining if the organization is moving toward broader, overall goals.

 

A.   ORGANIZATIONAL VISION

 

An organizational vision has been described as a goal that is "massively inspiring, overarching, and long-term." It should represent a destination and evoke passion.

 

We review a study of 1,500 senior leaders that points out the importance of "a strong sense of vision" as well as "strategy formulation to achieve a vision."

 

We state the visions of four organizations—Disney, Medtronic, Wells Fargo, and McDonald's.  We also assert that a vision statement often contains a slogan, diagram, or picture—whatever grabs attention--and provide such examples as "Beat Xerox" (Canon) and "To take the world boating" (Outboard Marine Corporation).

 

The SUPPLEMENT below (going back in history nearly one hundred years) provides an example of a vision emerging from the middle levels of the organization. Unfortunately, the top executives ignored it.

 

 

David Sarnoff's Visionary Leadership

 

In 1906, a young Russian immigrant found work as an office boy at Marconi Wireless Telegraph Company.  He clawed his way up to Chief Inspector at the age of 22.  And, ever watchful for ways to advance his career, he decided to attend a demonstration of a new kind of circuit—one that could generate continuous electromagnetic waves.  The young man returned to work, convinced he had seen the future.  Memos flew.  He described how music could be broadcast to hundreds of thousands of homes at once, and from a single transmitter. Every family in America would buy a "radio box."  And Marconi would manufacture and sell every one.  He wondered why executives couldn't see that there would be millions of dollars to be made. The company's more senior managers thought he had lost his mind. After all, they were in the telegraph business.

 

Years later, Marconi Wireless became RCA, the Radio Corporation of America.  And former office boy, David Sarnoff became its president.  As for those fellows he worked with, history lost track of them.

 

Source:  Provided by CSX Intermodal (undated).  We acknowledge their contribution.

 

q          Would executives in companies with which you are familiar been more receptive to such initiatives by lower-ranking executives? Why? Why not?

 

We close the section with a brief discussion of some of the reasons that visions fail:

· The Walk Doesn't Match the Talk

· Irrelevance

· Not the Holy Grail

· An Ideal Future Not Reconciled with the Present

 

q          What are some effective (or ineffective) organization visions with which you are familiar?  Why are they successful (or unsuccessful)? (We have found that many students—especially those with a fair amount of work experience—may be somewhat cynical primarily because the "walk doesn't match the talk".)

 

B. MISSION STATEMENTS

 

A company's mission statement differs from its vision in that it encompasses both the purpose of the company as well as the basis for competition and competitive advantages.

 

Teaching Tip:  Many students may have a very "cynical" perspective about mission statements. They may view them as empty platitudes or public relations statements. And, they may have been in organizations where managers did not "walk the talk." You might, for example, ask them to critique the university's mission statement. Alternatively, you may ask if any of them have worked in organizations that had mission statements and ask them if the mission statements were effective and if management "walked the talk"

 

EXHIBIT 1.5 contains the Vision Statement and Mission Statement of WellPoint Health Network, a $9 billion managed health care organization. This exhibit helps to distinguish between these two strategy concepts.

 

Effective mission statements incorporate the concept of stakeholder management, and suggest that organizations must respond to multiple constituencies if they are to survive and prosper. They have the greatest impact when they are used to reflect an organization's enduring, overarching strategic priorities and competitive positioning.

 

We provide the mission statements of Federal Express and Brinker International (whose restaurant chains include Chili's and On the Border). The two examples serve to illustrate how mission statements can vary in length and detail.

 

Few mission statements identify profit or any financial indicator as the sole purpose of the firm.  Good mission statements must communicate why an organization is special and different.

 

At times, mission statements can, and should, change when competitive positions dramatically change or when the firm is faced with new threats and opportunities. STRATEGY SPOTLIGHT 1.8 provides an example of how NextJet correctly readjusted its mission.

 

q                    Can you think of other organizations that have successfully (or unsuccessfully) changed their mission? What can explain their success (or lack thereof)?

 

The SUPPLEMENT below provides an additional perspective on company missions and relates their importance to developing human capital.

 

 

 

Mission Statements:  Making a difference

 

Talented people want to be part of something that they can believe in, something that confers meaning on their work and on their lives—something that involves a mission.  And they don't want that mission to turn into the kind of predictable "mission statement" that plasters many a corporate boardroom wall.  Instead, they desire spiritual goals that energize an organization by resonating with the personal values of the people who work there—the kind of mission that offers people a chance to do work that makes a difference.  Along with the traditional bottom line:  a return on human investment that advances a larger purpose.  A powerful mission is both a magnet and a motivator.

 

Source:  Reich, R. B. 1998. The company of the future. Fast Company, November: 133.

 

q          Do you agree with this perspective? Why? Why not?

 

q          Are you aware of organizations that meet this "standard"?

 

C.   STRATEGIC OBJECTIVES

 

Strategic objectives are used to operationalize the mission statement. That is, they help to provide guidance on how the organization can fulfill or move toward the "higher goals" in the goal hierarchy—the mission and vision.

 

EXHIBIT 1.6 lists several strategic objectives divided into financial and nonfinancial objectives.  While most of these objectives are directed toward generating greater profits and returns for the owners of the business, others are directed at customers or the society-at-large (such as BP Amoco's objective to reduce greenhouse gases over an extended period of time).

 

For objectives to be meaningful, they must satisfy several criteria.  They must be:

·                      Measurable

·                      Specific

·                      Appropriate

·                      Realistic

·                      Timely

 

Objectives that satisfy such criteria provide many benefits to the organization. These include: (1) channel employees throughout the organization toward common goals, (2) motivate and inspire employees to higher levels of commitment and effort, (3) help to resolve conflicts when they arise, and (4) provide a yardstick for rewards and incentives.

 

There are, of course, other objectives that are even more specific that are often referred to as short-term objectives. These are essential components of "action plans" that are vital in the implementation of a firm's strategy.  (We address these in Chapter 9.)

 

VI. SUMMARY

 

We began this introductory chapter by defining strategic management and articulating some of its key attributes. Strategic management is defined as "consisting of the analysis, decisions, and actions an organization undertakes to create and sustain competitive advantages." The issue of how and why some firms outperform others in the marketplace is central to the study of strategic management.  Strategic management has four key attributes: it is directed at overall organizational goals, includes multiple stakeholders, incorporates both short-term and long-term perspectives, and incorporates trade-offs between efficiency and effectiveness.

 

The second section discussed the strategic management process. Here, we paralleled the above definition of strategic management and focused on three core activities in the strategic management process—strategy analysis, strategy formulation, and strategy implementation. We noted how each of these activities is highly interrelated to and interdependent on one another. We also discussed how each of the 12 chapters fit into the three core activities and provided a summary of the opening vignettes in each chapter.

 

Next, we introduced two important and interrelated concepts—corporate governance and stakeholder management. Corporate governance consists of three primary elements—management, boards of directors, shareholders (owners) —which play the key role in determining a corporation's strategic direction. Stakeholder management addresses the individuals (and organizations) that must be taken into account throughout the strategic management process. We identified five key stakeholders in all organizations:  owners, customers, suppliers, employees, and society-at-large. Successful firms go beyond an overriding focus on satisfying solely the interests of owners. Rather, they recognize the inherent conflicts that arise among the demands of the various stakeholders as well as the need to endeavor to attain "symbiosis"—that is, interdependence and mutual benefit—among the various stakeholder groups. We also addressed environmental sustainability and how the application of "social innovation" can be beneficial to both firms and society.

 

In the fourth section, we discussed three interrelated factors—globalization, technology, and intellectual capital—that have accelerated the rate of unpredictable change that managers face today.  These factors, and the combination of them, have increased the need for managers and employees throughout the organization to have a strategic management perspective and become more empowered.

 

The final section addressed the need for consistency between a firm's vision, mission, and strategic objectives. Collectively, they form an organization's hierarchy of goals. Visions should evoke powerful and compelling mental images. However, they are not very specific. Strategic objectives, on the other hand, are much more specific and are vital to ensuring that the organiz