Chapter Summary

Chapter 1

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 an important concept—stakeholder management which 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 endeavour to attain "symbiosis"—that is, interdependence and mutual benefit—among the various stakeholder groups.

In the fourth section, we discussed three interrelated factors—globalization, technology, and intellectual capital—that have accelerated the rate of unpredictable change that manager’s 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 to 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 organization is striving toward fulfilling its vision and mission.

Summary Review Questions

1. How is "strategic management" defined in the text and what are its five key attributes?

2. Briefly discuss the three key activities in the strategic management process. Why is it important for managers to recognize the interdependent nature of these activities?

3. Explain the concept of "stakeholder management"? Why shouldn’t managers be solely interested in stockholder management, that is, maximizing the returns for owners of the firm—its shareholders?

4. How can "symbiosis" (interdependence, mutual benefit) be achieved among a firm’s stakeholders?

5. What are some of the major trends that now require firms to have a greater strategic management perspective and empowerment in the strategic management process throughout the firm?

6. What is meant by a "hierarchy of goals"? What are the main components of it and why must consistency be achieved among them?

Application Questions and Exercises

1. Go to the Internet and look up one of these company sites: www.walmart.com, www.ge.com, andwww.ford.com. What are some of the key events that would represent the "romantic" perspective of leadership? What are some of the key events that depict the "external control" perspective of leadership?

2. Select a company that competes in an industry in which you are interested. What are some of the recent demands that stakeholders have placed on this company? Can you find examples of how the company is trying to develop "symbiosis" (interdependence and mutual benefit) among its stakeholders? (Use the Internet and library resources.)

3. Provide examples of companies that are actively trying to increase the amount of empowerment in the strategic management process throughout the organization. Do these companies seem to be having positive outcomes? Why? Why not?

4. Look up the vision statements and/or mission statements for a few companies. Do you feel that they are constructive and useful as a means of motivating employees and providing a strong strategic direction? Why? Why not? (Note: Annual reports, along with the Internet, may be good sources of information.)

Ethics Questions

1. A company focuses solely on short-term profits to provide the greatest return to the owners of the business (i.e., the shareholders in a publicly held firm). What ethical issues could this raise?

2. A firm has spent some time—with input from managers at all levels—in developing a vision statement and a mission statement. Over time, however, the

behaviour of some executives is contrary to these statements. Could this raise some ethical issues?

Chapter 2

Managers must analyze the external environment to minimize or eliminate threats and exploit opportunities. This involves a continuous process of environmental scanning and monitoring as well as obtaining competitive intelligence on present and potential rivals. These activities provide valuable inputs for developing forecasts. In addition, many firms use scenario planning to anticipate and respond to volatile and disruptive environmental changes.

We identified two types of environment: the general environment and the competitive environment. The six segments of the general environment are demographic, sociocultural, political/legal, technological, economic, and global. Trends and events occurring in these segments, such as the aging of the population, higher percentages of women in the workplace, governmental legislation, and increasing (or decreasing) interest rates, can have a dramatic effect on your firm. A given trend or event may have a positive impact on some industries and a negative or neutral impact or none at all on others.

The competitive environment consists of industry-related factors and has a more direct impact than the general environment. Porter’s five-forces model of industry analysis includes the threat of new entrants, buyer power, supplier power, threat of substitutes, and rivalry among competitors. The intensity of these factors determines, in large part, the average expected level of profitability in an industry. A sound awareness of such factors, both individually and in combination, is beneficial not only for deciding what industries to enter but also for assessing how a firm can improve its competitive position. Although we discussed the general environment and competitive environment in separate sections, they are quite interdependent. A given environmental trend or event, such as changes in the ethnic composition of a population or a technological innovation, typically has a much greater impact on some industries than on others.

The concept of strategic groups is also very important to the external environment of a firm. No two organizations are completely different nor are they exactly the same. The question is how to group firms in an industry on the basis of similarities in their resources and strategies. The strategic groups concept is valuable for determining mobility barriers across groups, identifying groups with marginal competitive positions, charting the future directions of firm strategies, and assessing the implications of industry trends for the strategic group as a whole.

Summary Review Questions

1. Why must managers be aware of a firm’s external environment?

2. What is gathering and analyzing competitive intelligence and why it is important for firms to engage in?

3. Discuss and describe the six elements of the external environment.

4. Select one of these elements and describe some changes relating to it in an industry that interests you.

5. Describe how the five forces can be used to determine the average expected profitability in an industry.

6. Explain how the general environment and industry environment are highly related. How can such interrelationships affect the profitability of a firm or industry?

7. Explain the concept of strategic groups. What are the performance implications?

Application Questions and Exercises

1. Imagine yourself as the CEO of a large firm in an industry in which you are interested. Please (1) identify major trends in the general environment, (2) analyze their impact on the firm, and (3) identify major sources of information to monitor these trends. (Use Internet and library resources.)

2. Analyze movements across the strategic groups in the U.S. retail industry. How do these movements within this industry change the nature of competition?

3. What are the major trends in the general environment that have impacted the U.S. pharmaceutical industry?

4. Go to the Internet and look up www.kroger.com. What are some of the five forces driving industry competition affecting the profitability of this firm?

Ethics Questions

1. What are some of the legal and ethical issues involved in collecting competitor intelligence in the following situations?

a. Hotel A sends an employee posing as a potential client to Hotel B to find out who Hotel B’s major corporate customers are.

b. A firm hires an MBA student to collect information directly from a competitor while claiming the information is for a course project.

c. A firm advertises a nonexistent position and interviews a rival’s employees with the intention of obtaining competitor information.

2. What are some of the ethical implications that arise when a firm tries to exploit its power over a supplier?

Chapter 3

In the traditional approaches to assessing a firm’s internal environment, the primary goal of managers would be to determine their firm’s relative strengths and weaknesses. Such is the role of SWOT analysis, wherein managers analyze their firm’s strengths and weaknesses as well as the opportunities and threats in the external environment. In this chapter, we discussed why this may be a good starting point but hardly the best approach to take in performing a sound analysis. There are many limitations to SWOT analysis, including its static perspective, its potential to overemphasize a single dimension of a firm’s strategy, and the likelihood that a firm’s strengths do not necessarily help the firm create value or competitive advantages.

We identified two frameworks that serve to complement SWOT analysis in assessing a firm’s internal environment: value-chain analysis and the resource-based view of the firm. In conducting a value-chain analysis, first divide the firm into a series of value-creating activities. These include primary activities such as inbound logistics, operations, and service as well as support activities such as procurement and human resources management. Then analyze how each activity adds value as well as how interrelationships among value activities in the firm and among the firm and its customers and suppliers add value. Thus, instead of merely determining a firm’s strengths and weaknesses per se, you analyze them in the overall context of the firm and its relationships with customers and suppliers, the value system.

The resource-based view of the firm considers the firm as a bundle of resources: tangible resources, intangible resources, and organizational capabilities. Competitive advantages that are sustainable over time generally arise from the creation of bundles of resources and capabilities. For advantages to be sustainable, four criteria must be satisfied: value, rarity, difficulty in imitation, and difficulty in substitution. Such an evaluation requires a sound knowledge of the competitive context in which the firm exists.

An internal analysis of the firm would not be complete unless you evaluate its performance and make the appropriate comparisons. Determining a firm’s performance requires an analysis of its financial situation as well as a review of how well it is satisfying a broad range of stakeholders including customers, employees, and stockholders. We discussed the concept of the balanced scorecard, in which four perspectives must be addressed: customer, internal business, innovation and learning, and financial. Central to the balanced scorecard is the idea that the interests of various stakeholders can be interrelated. We provide examples of how indicators of employee satisfaction lead to higher levels of customer satisfaction, which in turn lead to higher levels of financial performance. Thus, improving a firm’s performance does not need to involve making trade-offs among different stakeholders. Assessing the firm’s performance is also more useful if it is evaluated in terms of how it changes over time, compares with industry norms, and compares with key competitors.

Summary Review Questions

1. SWOT analysis is a technique to analyze the internal and external environment of a firm. What are its advantages and disadvantages?

2. Briefly describe the primary and support activities in a firm’s value chain.

3. How can managers create value by establishing important relationships among the value-chain activities both within their firm and between the firm and its customers and suppliers?

4. Briefly explain the four criteria for sustainability of competitive advantages.

5. What are the advantages and disadvantages of conducting a financial ratio analysis of a firm?

6. Summarize the concept of the balanced scorecard. What are its main advantages?

Application Questions and Exercises

1. Using published reports, select two CEOs who have recently made public statements regarding a major change in their firm’s strategy. Discuss how the successful implementation of such strategies requires changes in the firm’s primary and support activities.

2. Select a firm that competes in an industry in which you are interested. Drawing upon published financial reports, complete a financial ratio analysis. Based on changes over time and a comparison with industry norms, evaluate the firm’s strengths and weaknesses in terms of its financial position.

3. How might exemplary human resource practices enhance and strengthen a firm’s value-chain activities?

4. Using the Internet, look up your university or college. What are some of its key value-creating activities that provide competitive advantages? Why?

Ethics Questions

1. What are some of the ethical issues that arise when a firm becomes overly zealous in advertising its products?

2. What are some of the unethical issues that may arise from a firm’s procurement activities? Are you aware of any of these issues from your personal experience or businesses you are familiar with?

Chapter 4

Firms throughout the industrial world are recognizing that the knowledge worker is the key to success in the marketplace. However, we also recognize that human capital, although vital, is still only a necessary but not sufficient condition for creating value. We began the first section of the chapter by addressing the importance of human capital and how it can be attracted, developed, and retained. Then we discussed the role of social capital and technology in leveraging human capital for competitive success. We pointed out that intellectual capital—the difference between a firm’s market value and its book value—has increased significantly over the past few decades. This is particularly true for firms in knowledge-intensive industries, especially where there are relatively few tangible assets such as software development.

The second section of the chapter addressed the attraction, development, and retention of human capital. We viewed these three activities as a "three-legged stool"—that is, it is difficult for firms to be successful if they ignore or are unsuccessful in any one of these activities. Among the issues we discussed in attracting human capital were "hiring for attitude, training for skill" and the value of using social networks to attract human capital. In particular, it is important to attract employees who can collaborate with others given the importance of collective efforts such as teams and task forces. With regard to developing human capital, we discussed the need to encourage widespread involvement throughout the organization, monitor progress and track the development of human capital, and evaluate human capital. Among the issues that are widely practiced in evaluating human capital is the 360-degree evaluation system. Employees are evaluated by their superiors, peers, direct reports, and even internal and external customers. Finally, some mechanisms for retaining human capital are employees’ identification with the organization’s mission and values, providing challenging work and a stimulating environment, the importance of financial and nonfinancial rewards and incentives, and providing flexibility and amenities. A key issue here is that a firm should not overemphasize financial rewards. After all, if individuals join an organization for money, they also are likely to leave for money. With money as the primary motivator, there is little chance that employees will develop firm-specific ties to keep them with the organization.

The third section of the chapter discussed the importance of social capital in leveraging human capital. Social capital refers to the network of relationships that individuals have throughout the organization as well as with customers and suppliers. Such ties can be critical in obtaining both information and resources. With regard to recruiting, for example, we saw how some firms are able to hire en bloc groups of individuals who are part of social networks. Social relationships can also be very important in the effective functioning of groups. Finally, we discussed some of the potential downsides of social capital. These include the expenses that firms may bear when promoting social and working relationships among individuals as well as the potential for "groupthink," wherein individuals

are reluctant to express divergent (or opposing) views on an issue because of social pressures to conform.

The fourth section addressed the role of technology in leveraging human capital. We discussed relatively simple means of using technology such as e-mail and networks where individuals can collaborate by way of personal computers. We also addressed more sophisticated uses of technology such as sophisticated management systems. Here knowledge can be codified and reused at very low cost, as we saw in the examples of firms in the consulting, health care, and high-technology industries. Also, given that there will still be some turnover—voluntary or involuntary—even in the most desirable places to work, technology can be a valuable means of retaining knowledge when individuals terminate their employment with a firm.

The final section addressed how the leveraging of human capital is critical in strategy formulation at all levels. This includes the business, corporate, international, and Internet levels.

Summary Review Questions

1. Explain the role of knowledge in today’s competitive environment.

2. Why is it important for managers to recognize the interdependence in the attraction, development, and retention of talented professionals?

3. Discuss the need for managers to use social capital in leveraging their human capital both within and across their firm.

4. Why are teams so valuable in combining and leveraging knowledge in organizations?

5. Discuss the key role of technology in leveraging knowledge and human capital.

Application Questions and Exercises

1. Look up successful firms in a high-technology industry as well as two successful firms in more traditional industries such as automobile manufacturing and retailing. Compare their market values and book values. What are some implications of these differences?

2. Select a firm in which you believe its social capital—both within the firm and among its suppliers and customers—is vital to its competitive advantage. Support your arguments.

3. Choose a company with which you are familiar. What are some of the ways in which it uses technology to leverage its human capital?

4. Using the Internet, look up a company with which you are familiar. What are some of the policies and procedures that it uses to enhance the firm’s human and social capital?

Ethics Questions

1. Recall an example of a firm that recently faced an ethical crisis. How do you feel the crisis and management’s handling of it affected the firm’s human capital and social capital?

2. Based on your experiences or what you have learned in your previous classes, are you familiar with any companies that used unethical practices to attract talented professionals? What do you feel were the short-term and long-term consequences of such practices?

Chapter 5

How and why firms outperform each other goes to the heart of strategic management. In this chapter, we identified three generic strategies and discussed how firms are able not only to attain advantages over competitors, but also to sustain such advantages over time. Why do some advantages become long-lasting while others are quickly imitated by competitors?

The three generic strategies—overall cost leadership, differentiation, and focus—form the core of this chapter. We began by providing a brief description of each generic strategy (or competitive advantage) and furnished examples of firms that have successfully implemented these strategies. Successful generic strategies invariably enhance a firm’s position vis-à-vis the five forces of that industry—a point that we stressed and illustrated with examples. However, as we pointed out, there are pitfalls to each of the generic strategies. Thus, the sustainability of a firm’s advantage is always challenged because of imitation or substitution by new or existing rivals. Such competitor moves erode a firm’s advantage over time.

We also discussed the viability of combining (or integrating) overall cost leadership and differentiation generic strategies. If successful, such integration can enable a firm to enjoy superior performance and improve its competitive position. However, this is challenging and managers must be aware of the potential downside risks associated with such an initiative.

The concept of the industry life cycle is a critical contingency that managers must take into account in striving to create and sustain competitive advantages. We identified the four stages of the industry life cycle—introduction, growth, maturity, and decline—and suggested how these stages can play a role in decisions that managers must make at the business level. These include overall strategies as well as the relative emphasis on functional areas and value-creating activities.

Summary Review Questions

1. Explain why the concept of competitive advantage is central to the study of strategic management.

2. Briefly describe the three generic strategies: overall cost leadership, differentiation, and focus.

3. Explain the relationship between the three generic strategies and the five forces that determine the average profitability within an industry.

4. Describe some of the pitfalls associated with each of the three generic strategies.

5. Can firms combine the generic strategies of overall cost leadership and differentiation? Why or why not?

6. Explain why the industry life cycle concept is an important factor in determining a firm’s business-level strategy.

Application Questions and Exercises

1. Go to the Internet and look up www.walmart.com. How has this firm been able to combine overall cost leadership and differentiation strategies.

2. Choose a firm with which you are familiar in your local business community. Is the firm successful in following one (or more) generic strategies. Why or why not? What do you think are some of the challenges it faces in implementing these strategies in an effective manner?

3. Think of a firm that has attained a differentiation focus or cost focus strategy. Are their advantages sustainable? Why? Why not? (Hint: Consider its position vis-à-vis Porter’s five forces.)

4. Think of a firm that successfully achieved a combination overall cost leadership and differentiation strategy. What can be learned from this example? Are these advantages sustainable? Why? Why not? (Hint: Consider its competitive position vis-à-vis Porter’s five forces.)

Ethics Questions

1. Can you think of a company (other than the opening case of Food Lion) that suffered ethical consequences as a result of an overemphasis on a cost leadership strategy. What do you think were the financial and nonfinancial implications?

2. In the introductory stage of the product life cycle, what are some of the unethical practices that managers could engage in to enhance their firm’s market position? What could be some of the long-term implications of such actions?

Chapter 6

A key challenge of today’s managers is to create "synergy" when engaging in diversification activities. As we discussed in this chapter, corporate managers do not, in general, have a very good track record in creating value in such endeavours when it comes to mergers and acquisitions. Among the factors that serve to erode shareholder values are paying an excessive premium for the target firm, failing to integrate the activities of the newly acquired businesses into the corporate family, and undertaking diversification initiatives that are too easily imitated by the competition.

We addressed two major types of corporate-level strategy: related and unrelated diversification. With related diversification the corporation strives to enter into areas in which key resources and capabilities of the corporation can be shared or leveraged. Synergies come from horizontal relationships between business units. Cost savings and enhanced revenues can be derived from two major sources. First, economies of scope can be achieved from the leveraging of core competencies and the sharing of activities. Second, market power can be attained from greater, or pooled, negotiating power and from vertical integration.

When firms undergo unrelated diversification they enter product markets that are dissimilar to their present businesses. Thus, there is generally little opportunity to either leverage core competencies or share activities across business units. Here, synergies are created from vertical relationships between the corporate office and the individual business units. With unrelated diversification, the primary ways to create value are corporate restructuring and parenting, as well as the use of portfolio analysis techniques.

Corporations have three primary means of diversifying their product markets. These are mergers and acquisitions, joint ventures/strategic alliances, and internal development. There are key trade-offs associated with each of these. For example, mergers and acquisitions are typically the quickest means to enter new markets and provide the corporation with a high level of control over the acquired business. However, with the expensive premiums that often need to be paid to the shareholders of the target firm and the challenges associated with integrating acquisitions; they can also be quite expensive. Strategic alliances among two or more firms, on the other hand, may be a means of reducing risk since they involve the sharing and combining of resources. But such joint initiatives also provide a firm with less control (than it would have with an acquisition) since governance is shared between two independent entities. Also, there is a limit to the potential "upside" for each partner because returns must be shared as well. Finally, with internal development, a firm is able to capture all of the value from its initiatives (as opposed to sharing it with a merger or alliance partner). However, diversification by means of internal development can be very time-consuming—a disadvantage that becomes even more important in fast-paced competitive environments.

Finally, some managerial behaviours may serve to erode shareholder returns. Among these are "growth for growth’s sake," egotism, and antitakeover tactics. As we discussed, some of these issues—particularly antitakeover tactics—raise ethical considerations because the managers of the firm are not acting in the best interests of the shareholders.

Summary Review Questions

1. Discuss how managers can create value for their firm through diversification efforts.

2. What are some of the reasons that many diversification efforts fail to achieve desired outcomes?

3. How can companies benefit from related diversification? Unrelated diversification? What are some of the key concepts that can explain such success?

4. Discuss some of the various means that firms can use to diversify. What are the pros and cons associated with each of these?

5. Discuss some of the actions which managers may engage in to erode shareholder value.

Application Questions and Exercises

1. What were some of the largest mergers and acquisitions over the last two years? What was the rationale for these actions? Do you think they will be successful? Explain.

2. Discuss some examples from business practice in which an executive’s actions appear to be in his or her self-interest rather than the corporation’s well-being.

3. Discuss some of the challenges that managers must overcome in making strategic alliances successful. What are some strategic alliances with which you are familiar? Were they successful or not? Explain.

4. Use the Internet and select a company that has recently undertaken diversification into new product markets. What do you feel were some of the reasons for this diversification (e.g., leveraging core competencies, sharing infrastructures)?

Ethics Questions

1. In recent years there has been a rash of corporate downsizing and layoffs. Do you feel that such actions raise ethical considerations? Why or why not?

2. What are some of the ethical issues that arise when managers act in a manner that is counter to their firm’s best interests? What are the long-term implications for both the firms and the managers themselves?