The research paper must be written in accordance with the instructions below and must meet the requirement of the Rubrics in the attached PDF Doc. 

Purpose: 

This project is the first of four projects. This project provides the first steps in completing an external environmental analysis of your focal company’s strategic management plan. You will use tools and apply concepts learned in this and previous business courses to demonstrate an understanding of how organizations develop and manage strategies to establish, safeguard and sustain its competitive position in the 21st century’s (rapidly evolving/shifting/changing), uncertain hyper-competitive business environment. 

Completing a company overview and assessing the general environment is a key aspect of performing an external environment analysis. This project provides you with the opportunity to evaluate the competitive position of one of the organizations listed below and integrate that information in the beginnings of a external environmental analysis. 

The company you will be analyzing operates within the global market. You will assess the company in terms of the global industry. Industries differ widely in their economic characteristics, competitive situation and future profit potential.

In this project, you are presenting a report document. The expectation is that the report provides the level of details to help the audience grasp the main topics and to understand the General Environment. 

Analysis is the operative word. In analyzing the external environment, you are expected to thoroughly research and take that research and break it into small parts to gain a better understanding of what is happening in the external environment of the business. In researching an industry, it is important to understand that every company within an industry is different so gathering information on one company does not mean that the collected information is relevant to other companies within that industry. When researching, parsing the material is critical to an accurate analysis. Avoid presenting just any information as that may lead to using irrelevant information.

You will then write the report in your own words to share the external analysis. You are expected to present information and support the ideas and reasoning using the course material and your research. You will not lift any information from source documents without properly citing and referencing. For the technical analysis aspect of the project, you are required to create the technique on your own and may not use from any source material that you happen to find. No work from a clearinghouse or similar website may be used or cited as a credible source.

Outcomes Met With This Project:

utilize a set of useful analytical skills, tools, and techniques for analyzing a company strategically;

integrate ideas, concepts, and theories from previously taken functional courses including accounting, finance, market, business and human resource management;

Instructions:

In completing the report, you will use the chapters in the eBook and other course material, and perform research on the company and industry in which the company operates and answer the required elements below in narrative form following the steps provided.

Step 1: Specific Company for All Four Projects

In this project, you will complete a Company Overview, an Evaluation of the General Environment and a conclusion.

You will be assigned by your instructor one focal company to complete the analysis. The assigned company must be used for all four projects in this course. You are not allowed to write the report on any other company different from the company specifically assigned by your instructor. If a company other than that assigned to you is used, a zero will be assigned.

The instructor will assign you a company from the list below. (Students may not select the company). All companies can be found on Mergent Online.

Assigned Company: Quanta Services, Inc. (NYS:PWR)

https://www.quantaservices.com/

Students must complete the project using the assigned company. Deviating from the assigned company will result in a zero for the project. You will look for the company assigned to you in the Announcement area of the classroom.

Step 2: Course Materials and Research

You are required to research information about the focal company and the internal environment for this project, You are accountable for using the course materials to support the ideas, reasoning and conclusions made. Course materials use goes beyond defining terms but is used to explain the ‘why and how’ of a situation. Using one or two in-text citations from the course materials and then relying on Internet source material will not earn many points on the assignment. A variety of source material is expected and what is presented must be relevant and applicable to the topic being discussed. Avoid merely making statements but close the loop of the discussion by explaining how something happens or why something happens, which focuses on importance and impact. In closing the loop, you will demonstrate the ability to think clearly and rationally showing an understanding of the logical connections between the ideas presented from the research, the course material and the question(s) being asked.

Note: Your report is based on the results of the research performed and not on any prepared documentation. What this means is that you will research and draw your own conclusions that are supported by the research and the course material rather than the use any source material that puts together any of the tools or techniques whether from the Internet, for-pay websites or any pre-prepared document, video or source material. A zero will be earned for not doing your own analysis.

Success: The analysis is based on research and not opinion. You are not making recommendations and you will not attempt to position the focal company in a better or worse light than other companies within the industry merely because you are completing an analysis on this particular company. The analysis must be based on factual information. Any conclusions drawn have to be based on factual information rather than leaps of faith. To ensure success, as stated above, you are expected to use the course materials and research on the focal company’s global industry and the focal company. Opinion does not earn credit nor does using external sources when course materials can be used. It is necessary to provide explanations (the why and how) rather than making statements. Avoid stringing one citation after another as doing so does not show detailed explanations.

Resources

The course ebook chapters are attached in PDF Doc’s

Research for Financial Analysis: Financial Research https://learn.umuc.edu/content/enforced/456311-001153-01-2202-US2-6250/Financial%20Research x?_&d2lSessionVal=N2iHBW3H7GaoSufIDiNAy2STw

Research for Industry Analysis CSI Market

https://csimarket.com/Industry/Industry_Financial_strength.php

What is Strategy? Common Misunderstandings

https://www.youtube.com/watch?v=3Hd88eBgkw0

What is Strategy?

Your Strategy Needs a Strategy

Goldsmith, D. (2013, July/Aug). Rethinking the company’s competitive advantage. Financial Executive 29(6), 14-17. https://learn.umuc.edu/content/enforced/456311-001153-01-2202-US2-6250/Rethinking%20the%20Company’s%20Competitive%20Advantage ?_&d2lSessionVal=N2iHBW3H7GaoSufIDiNAy2STw
Papula, J., Volna, J. (2013). Core competence for sustainable competitive advantage. Academic Conference, 1-7. https://learn.umuc.edu/content/enforced/456311-001153-01-2202-US2-6250/Core%20Competence%20for%20Sustainable%20Competitive%20Advantage ?_&d2lSessionVal=N2iHBW3H7GaoSufIDiNAy2STw

What is Strategy?: The Three Levels of Strategy

https://www.mindtools.com/pages/article/what-is-strategy.htm

What is Strategic Planning, Really?

https://www.youtube.com/watch?v=mLJ34L5UW4E

Strategic Management Process

http://www.managementstudyguide.com/strategic-management-process.htm

Creating a Strategy That Works

http://www.strategy-business.com/feature/Creating-a-Strategy-That-Works

Hard Ball: Five Killer Strategies for Trouncing the Competition. (HBR)

http://hbr.org/2004/04/hardball-five-killer-strategies-for-trouncing-the-competition/ar/1

Porter’s (1980) Generic Strategies as Determinants of Strategic Group Membership and Organizational Performance https://www.jstor.org/stable/pdf/256040

Rumelt, R. (2011, June) The perils of bad strategy, McKinsey Quarterly.

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-perils-of-bad-strategy

Bradley, C., Hirt, M. & Smit, S. (2011, January). Have you tested your strategy lately? McKinsey Quarterly.

http://www.mckinsey.com/insights/strategy/have_you_tested_your_strategy_lately

How to Stress-Test Your Strategy (10:15 minutes; transcript available)

https://www.youtube.com/watch?v=nS-Slo8S6V4

Step 3: How to Set Up the Report:

The document has to be written in Word or rtf. No other format is acceptable. Pdf files will not be graded. Use 12-point font for a double-spaced report. The final product cannot be longer than 8 pages in length, which includes all tables and matrices but excludes the title page and reference page. Do no use an Appendix.

Create a title page with title, your name, the course number, the instructor’s name.

Step 4: Company Overview

Provide a company overview, which is an essential component to the strategic management process. The company overview includes the purpose(s) for the founding of the company, i.e, what problems was it formed to solve and/or opportunities it was formed to exploit, who are the founders, home country or state, current management, employee headcount, last year’s revenue, etc.).

Step 5: Evaluate the General Environment

Identify the global industry in which the company operates. This will come from Mergent Online.

Discuss the company’s general environment by developing a PESTEL analysis. First, use the course material to identify the elements of the PESTEL and what components make up each element. Then, complete the analysis using research on the industry and the focal company. Be sure to thoroughly present and support the reasoning for what is presented. You may not use a PESTEL analysis that is already completed and available on the Internet. A zero will result if used as the analysis has to be the result of your research and your own development. NOTE: A PESTEL analysis is not a table and it is not a bulleted assessment.

Identify and discuss one key trend for each letter of the PESTEL for the industry. Key trends are separate from the PESTEL analysis.

Select one of the six trends identified in the previous requirement and discuss how the focal company could be affected by the selected trends.

Discuss key areas of uncertainty related to the identified trend for the focal company that could potentially impact the company’s strategy.

Perform a strategic analysis of the company’s mission, vision and objectives.

Tools and Techniques:

You will be using the following tools/techniques in the projects. These tools are also part of the quizzes that you will complete so make sure you understand their use and how to do the calculations.

External Factor Evaluation (EFE) Matrix

http://www.maxi-pedia.com/EFE+matrix+external

PESTEL Analysis

https://pestleanalysis.com/

Porter’s Five Forces

Porter’s Five Forces

Using Porter’s Five Force Model

The Five Competitive Forces That Shape Strategy (13:11 minutes)

SWOT Analysis: How to perform one for your organization

https://www.youtube.com/watch?v=GNXYI10Po6A

Profitability Ratios

https://www.readyratios.com/reference/profitability/#ref32

Most Important Financial Ratios

https://www.readyratios.com/reference/analysis/most_important_financial_ratios.html

Balanced Scorecard

https://www.youtube.com/watch?v=oNy8kupW8oI

Step 6: Conclusion

Create a concluding paragraph. The Conclusion is intended to emphasize the purpose/significance of the analysis, emphasize the significance/consequence of findings, and indicate the wider applications that are derived from the main points of the project’s requirements. You will draw conclusions about the findings of the external environment analysis.

Step 7: Review the Paper 

Read the paper to ensure all required elements are present.

The following are specific requirements that you will follow. Use the checklist to mark off that you have followed each specific requirement. 

Checklist

Specific Project Requirements

Proofread your paper

Read and use the grading rubric while completing the paper to ensure all requirements are met that will lead to the highest possible grade. 

Third person writing is required. Third person means that there are no words such as “I, me, my, we, or us” (first person writing), nor is there use of “you or your” (second person writing). If uncertain how to write in the third person, view this link:  http://www.quickanddirtytips.com/education/grammar/first-second-and-third-person. 

Contractions are not used in business writing, so do not use them. 

Paraphrase and do not use direct quotations. Paraphrase means you do not use more than four consecutive words from a source document. Removing quotation marks and citing is inappropriate. Instead put a passage from a source document into your own words and attribute the passage to the source document. There should be no passages with quotation marks. Using more than four consecutive words from a source document would require direct quotation marks. Changing words from a passage does not exclude the passage from having quotation marks. If more than four consecutive words are used from source documents, this material will not be included in the grade. 

You are expected to use the research and weekly course materials to develop the analysis and support the reasoning. There should be a robust use of the course material. Material used from a source document must be cited and referenced. A reference within a reference list cannot exist without an associated in-text citation and vice versa. Changing words from a passage does not exclude the passage from having quotation marks. 

Use in-text citations and provide a reference list that contains the reference associated with each in-text citation.

You may not use books in completing this problem set unless part of the course material. Also, do not use a dictionary, Wikipedia or Investopedia or similar sources. You may not use Fern Fort University, Ibis World or any other for-fee website. 

Provide the page or paragraph number in every in-text citation presented. Since the eBook does not have page numbers, include the chapter title and topic heading. If using a video, provide the minutes and second of the cited material.

3/25/2020 Project 1: Starting an External Environmental Analysis – BMGT 495 6250 Strategic Management (2202) – UMGC Learning Management System

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Assignments

Project 1: Starting an External Environmental Analysis

Project 1: Starting an External Environmental Analysis

Show Assignment

Information

Hide Rubrics

Rubric Name: Project #1 15%

BMGT 495 6250 Strategic Management (2202) ZT

Criteria Equivalent to an A Equivalent to a B Equivalent to a C Equivalent to a D Equivalent to a

Company

Overview

0.9 points

Thoroughly and

correctly

presents

company

overview describing

the

purpose of the founding

of company, why

company was formed,

opportunities, founding

father’s names, home

country or state, current

management, employee

headcount, last year’s

revenue, etc. all clearly

and strongly supported

by thorough research to

explain the

reasoning.

0.765 points

Missing one

identified

element

of company

overview; uses research

that

supports the

reasoning and

conclusions; needs

some

development.

(0.72 – 0.80)

0.675 points

Missing two

identified element

of company

overview; uses

research that

supports the
reasoning and
conclusions; needs

sigificant

development.

(0.63 – 0.71)

0.585 points

Information

presented but is

missing at least

three elements,

superficial, vague,

or incorrect; little to

no

evidence of

research and course

material; needs

major development.

(0.54 – 0.62)

0 points

Fails to discu
company
overview.
(0)

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3/25/2020 Project 1: Starting an External Environmental Analysis – BMGT 495 6250 Strategic Management (2202) – UMGC Learning Management System

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Identify

industry in

which

focal

company

operates.

This

information

comes from

Mergent

Online

General

Environment

–

PESTEL

analysis k

Identify and

(0.81 – 0.9)

0.

3 points

Correctly identifies the

global industry from

Mergent Online in which

the focal company

operates using research

to

support the

reasoning.

(0.27 – 0.3)

0.26 points

No option to select.

0.22 points

No option to select.

0.2 points

Incorrectly

identifies the global

industry or fails to

show research from

which information

derives or does not

use Mergent Online.

(0.18 – 0.20)

0 points

Fails to identi

fy

global industry

which the focal

company opera

(0)

3 points
Thoroughly and

correctly uses the

course material to

identify elements of

each letter in PESTLE

and thoroughly and

correctly discusses both

the general environment

of

the

industry and the

focal

company using research

to support reasoning

and conclusions.

(2.7 – 3.0)

2.6 points

Uses the course

material to identify

elements of each letter

in PESTLE and

discusses both the

general environment of

the industry and the
focal
company using research
to support reasoning

but some development

is

needed.

(2.4 – 2.69)

2.25 points

Uses

some course

material to identify

elements of each

letter in PESTLE and

discusses both the

general

environment of the

industry and the

focal company using

little research to

support reasoning;

significant

development is

needed.

(2.1 – 2.39)

1.95 points

Attempts to discuss

the general

environment OR the

the focal company

but not both OR

presents superficial,

vague, or incorrect

information; little to

no evidence of

research AND

course material;

needs major

development.

(1.8 – 2.09)

0 points

Fails to discu
the general
environment.
(0)

1.65 points

Thoroughly and

1.4 points

Identifies and discusses

1.24 points

Identifies and

1.07 points

Information
0 points
Fails to identi

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discuss one

key trend

for each

letter of

PESTEL

Select one

of the six

trends

identified in

the previous

requirement

and discuss

how the

focal
company

could be

affected by

the selected

trends.

Discuss key

areas of

uncertainty

related to

the

correctly identifies and

discusses one key trend

for each letter of

PESTEL using research

to support reasoning
and conclusions.

(1.48 – 1.6)

one key trend for each

letter

of PESTEL using

research to support the

reasoning made but

some development is

needed.

(1.32 – 1.47)

discusses one key

trend for each letter

of PESTEL using
little research to
support the
reasoning made but
significant
development is
needed.

(1.16 – 1.31)

presented on trends

but is superficial,

vague, or incorrect;

little to no evidence

of research; may

not provide trends

for each letter;

needs major
development.

(0.99 – 1.15)

one key trend
each letter of
PESTEL.
(0)

1.65 points

Selects one of the six

trends identified in the

previous requirement

and thoroughly and

correctly discusses how

the

focal company could

be

affected by the

selected trends using

the research to support

reasoning.
(1.48 – 1.6)

1.4 points
Selects one of the six
trends identified in the
previous requirement

and

discusses how the

focal company could be

affected by the

selected trends using

research to support the

reasoning but some

development is needed.

(1.32 – 1.47)

1.24 points

Selects one of the

six trends identified

in the previous

requirement and

discusses how the
focal company could

be affected by the

selected trends and

attempts to uses

research as support

but support is not

strong; needs

significant
development.
(1.16 – 1.31)

1.07 points
Information
presented but is

incorrect,

superficial, or

vague; little to no

evidence of

research; needs

major development.
(0.99 – 1.15)

0 points

Fails to selec
discuss how
industry in wh
the focal com
operates cou
affected by on
the trends.
(0)

1.65 points
Thoroughly and

correctly discusses key

areas of uncertainty

related

to the identified

d f h f l

1.4 points

Discusses

key areas of

uncertainty related to

the identified trend for

the focal company that

ld i ll i

1.24 points
Attempts to discuss
key areas of

uncertainty related

to the identified
d f h f l
1.07 points
Information
presented but is
incorrect,
superficial, or

li l

0 points

Fails to discu
key areas of
uncertainty
related to the

3/25/2020 Project 1: Starting an External Environmental Analysis – BMGT 495 6250 Strategic Management (2202) – UMGC Learning Management System

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identified

trend for the

focal
company

that could

potentially

impact the

company’s

strategy.

Perform a

strategic

analysis of

the
company’s

mission,

vision and

objectives.

Conclusion

trend for the focal

company that could

potentially impact the

company’s strategy

using research to

support reasoning.

(1.48 – 1.6)

could

potentially impact

the company’s strategy

research to support the
reasoning but some
development is needed.
(1.32 – 1.47)

trend for the focal
company that could
potentially impact

the company’s

strategy and

attempts to uses

some research as

support but support

is not strong or

needs significant

development.

(1.16 – 1.31)

vague; little to no
evidence of
research; needs
major development.
(0.99 – 1.15)

identified tren
the focal com
that could
potentially im
the company’
strategy.
(0)

1.65 points
Thoroughly and

correctly performs a

strategic

analysis of the

company’s mission,

vision and objectives

using the course

material AND research

to support reasoning.

(1.48 – 1.6)

1.41 points

Performs a strategic

analysis of the
company’s mission,
vision and objectives

using course material

and research to support

the reasoning but some

development is needed.
(1.32 – 1.47)

1.23 points

Attempts to

performs a strategic

analysis of the
company’s mission,
vision and

objectives and

attempts to uses
some course

material and

research as support
but support is not

strong OR needs

significant
development.
(1.16 – 1.31)

1.08 points

Information
presented but is
incorrect,
superficial, or
vague; little to no
evidence of
research AND

course material;

needs major
development.
(0.99 – 1.15)
0 points

Fails to perform

strategic analys

the company’s

mission, vision

objectives.
(0)

0.45 points

Thoroughly and

correctly presents

0.38 points

Presents conclusion
that covers most of

0.34 points

Presents

conclusion that

0.29 points

Attempts to present

a conclusion but

0 points

Failed to prov
a conclusion

3/25/2020 Project 1: Starting an External Environmental Analysis – BMGT 495 6250 Strategic Management (2202) – UMGC Learning Management System

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Attention to

Instructions

correctly presents
conclusion that

emphasizes the

purpose/significance of

the analysis, the

consequences of

findings, and indicate

the wider application

derived from main

points using the course

material and research to

support reasoning.

(0.40 – 0.45)

that covers most of
the main points
using course
material and
research to support
the reasoning; some
development is
needed.
(0.36 – 0.39)

conclusion that
covers a general
overview of the
main topics
covered with
little to no
evidence of the
research;
significant
development.
(0.31 – 0.35)

a conclusion but

only addresses

some of the main

topics; needs major

development.

(0.27 – 0.30)

a conclusion.
(0)

1.5 points

Demonstrates
exceptional
understanding of
requirements
responding
completely to each
aspect of assignment
including minor
aspects of the
assignment such as
using third person
writing, no use of
direct quotes, lack of
page/paragraph
numbers, required
use of course
material, and
submission of

WORD/RTF
document etc

1.28 points

Demonstrates
excellent
understanding of
requirements;
missed one minor
elements such of not
using third person
writing, lack of
page/paragraph
numbers; used
direct quotes, lack of
course material OR
failed to submit a
WORD/RTF
document, etc.
(1.2- 1.34)

1.12 points

Demonstrates
satisfactory
understanding of
requirements;
missed a key
element or two
minor aspects of
assignment.
(1.05 – 1.19)

0.98 points

Fails to show a
firm
understanding of
requirements
missing two key
elements or
threeminor
aspects of
assignment.
(0.975 – 1.04)

0 points

Fails to
demonstrate
understanding
assignment
requirements
(0 – 0.974)

3/25/2020 Project 1: Starting an External Environmental Analysis – BMGT 495 6250 Strategic Management (2202) – UMGC Learning Management System

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Writing

Mechanics

APA Style

(6th ed.)

document, etc.
(1.35 – 1.5)

1.5 points

Strictly adheres to
standard usage rules
of written English
using paragraphs
and sentence rather
than bullets,
including but not
limited to
capitalization,
punctuation, run-on
sentences, missing
or extra words,
stylistic errors,
spelling and
grammatical errors.
No contractions or
jargon used. Zero
errors noted.
(1.35 – 1.5)

1.28 points

Excellently adheres
to standard usage of
mechanics:
conventions of
written English,
including
capitalization,
punctuation, and
spelling. One to four
errors noted.
(1.2- 1.34)

1.12 points

Satisfactorily
adheres to
standard usage
rules of
mechanics:
conventions of
English, including
capitalization,
punctuation, and
spelling. Five to
10 errors noted.
(1.05 – 1.19)

0.98 points

Minimally
adheres to
standard usage
rules of
mechanics:
conventions of
written English,
including
capitalization,
punctuation, and
spelling. More
than 10 errors
found.
(0.975 – 1.04)

0 points

Does not adh
to standard u
rules of
mechanics:
conventions o
written Englis
largely
incomprehens
or errors are
plentiful to co
(0 – 0.974)

0.75 points

No APA style or
usage errors; Proper
citation of source
material is used
throughout; Provices
citation every time
with use of source
material. Reference
titles follow APA with
only the first word,

0.64 points

Attempts in-text
citations and
reference list but
one or two APA style
errors noted or fails
to use APA citations
when citations are
required 1-2 times.
(0.6 – 0.674)

0.56 points

Attempts in-text
citations and
reference lists;
APA style errors
are noted
throughout; Fails
to use APA
citations 3 times
in document.
(0.525 – 0.59)

0.49 points

Attempts in-text
citations and
reference lists;
Fails to use APA
citation 4-5 times;
or presents only
a few in-text
citations
throughout
document, and
reference list that

0 points

No attempt at
APA style; or
attempts eithe
text citations
reference list
omits the othe
Use book or
obscure articl
not related to
subject.

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Chapter 3

Evaluating the External Environment

L E A R N I N G O B JE C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What is the general environment and why is it important to organizations?

2. What are the features of Porter’s five forces industry analysis?

3. What are strategic groups and how are they useful to evaluating the environment?

Subway Is on a Roll

As shown in the highlighted countries, Subway is well on its way to building a worldwide sandwich

empire.

Image courtesy of Nomi887,http://en.wikipedia.org/wiki/File:Subway_world_map1edit .

Many observers were stunned in March 2011 when news broke that Subway had surpassed McDonald’s as

the biggest restaurant chain in the world. At the time of the announcement, Subway had 33,749 units

under its banner while McDonald’s had 32,737. [1] Despite its meteoric growth, many opportunities

remained. In China, for example, Subway had fewer than two hundred stores. In contrast, China hosts

Chapter 3 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

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more than 3,200 Kentucky Fried Chicken stores. Overall, Subway was on a roll, and this success seemed

likely to continue.

How had Subway surpassed a global icon like McDonald’s? One key factor was Subway’s efforts to provide

and promote healthy eating options. This emphasis took hold in the late 1990s when the American public

became captivated by college student Jared Fogle. As a freshman at Indiana University in 1998, the 425

pound Fogle decided to try to lose weight by walking regularly and eating a diet consisting of Subway

subs. Amazingly, Fogle dropped 245 pounds by February of 1999.

Subway executives knew that a great story had fallen into their laps. They decided to feature Fogle in

Subway’s advertising and soon he was a well-known celebrity. In 2007, Fogle met with President Bush

about nutrition and testified before the US Congress about the need for healthier snack options in schools.

Today, Fogle is the face of Subway and one of the few celebrities that are instantly recognizable based on

his first name alone. Much like Beyoncé and Oprah, you can mention “Jared” to almost anyone in America

and that person will know exactly of whom you are speaking. Subway’s line of Fresh Fit sandwiches is

targeted at prospective Jareds who want to improve their diets.

Because American diets contain too much salt, which can cause high blood pressure, salt levels in

restaurant food are attracting increased scrutiny. Subway responded to this issue in April 2011 when its

outlets in the United States reduced the amount of salt in all its sandwiches by at least 15 percent without

any alteration in taste. The Fresh Fit line of sandwiches received a more dramatic 28 percent reduction in

salt. These changes were enacted after customers of Subway’s outlets in New Zealand and Australia

embraced similar adjustments. Although the new sandwich recipes cost slightly more than the old ones,

Subway plans to absorb these costs rather than raising their prices. [2] This may be a wise strategy for

retaining customers, who have become very price sensitive because of the ongoing uncertainty

surrounding the American economy and the high unemployment.

[1] Kingsley, P. 2011, March 9. How a sandwich franchise ousted McDonald’s. The Guardian. Retrieved

from http://www.guardian.co.uk/lifeandstyle/2011/mar/09/subway-biggest -fast-food-chain

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[2] Riley, C. 2011, April. Subway lowers salt in its sandwiches. CNNMoney. Retrieved from

http://money.cnn.com/2011/04/18/news/companies/subway_salt/index.htm

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3.1 The Relationship between an Organization and Its
Environment

L E A R N I N G O B JE C T I V E S

1. Define the environment in the context of business.

2. Understand how an organization and its environment affect each other.

3. Learn the difference between the general environment and the

industry.

What Is the Environment?

For any organization, the environment consists of the set of external conditions and forces that have the

potential to influence the organization. In the case of Subway, for example, the environment contains its

customers, its rivals such as McDonald’s and Kentucky Fried Chicken, social trends such as the shift in

society toward healthier eating, political entities such as the US Congress, and many additional conditions

and forces.

It is useful to break the concept of the environment down into two components.

The general environment (or macroenvironment) includes overall trends and events in society such as

social trends, technological trends, demographics, and economic conditions. The

industry (or competitive environment) consists of multiple organizations that collectively compete with

one another by providing similar goods, services, or both.

Every action that an organization takes, such as raising its prices or launching an advertising campaign,

creates some degree of changes in the world around it. Most organizations are limited to influencing their

industry. Subway’s move to cut salt in its sandwiches, for example, may lead other fast-food firms to

revisit the amount of salt contained in their products. A few organizations wield such power and influence

that they can shape some elements of the general environment. While most organizations simply react to

major technological trends, for example, the actions of firms such as Intel, Microsoft, and Apple help

create these trends. Some aspects of the general environment, such as demographics, simply must be

taken as a given by all organizations. Overall, the environment has a far greater influence on most

organizations than most organizations have on the environment.

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Why Does the Environment Matter?

Understanding the environment that surrounds an organization is important to the executives in charge

of the organizations. There are several reasons for this. First, the environment provides resources that an

organization needs in order to create goods and services. In the seventeenth century, British poet John

Donne famously noted that “no man is an island.” Similarly, it is accurate to say that no organization is

self-sufficient. As the human body must consume oxygen, food, and water, an organization needs to take

in resources such as labor, money, and raw materials from outside its boundaries. Subway, for example,

simply would cease to exist without the contributions of the franchisees that operate its stores, the

suppliers that provide food and other necessary inputs, and the customers who provide Subway with

money through purchasing its products. An organization cannot survive without the support of its

environment.

Second, the environment is a source of opportunities and threats for an organization. Opportunities are

events and trends that create chances to improve an organization’s performance level. In the late 1990s,

for example, Jared Fogle’s growing fame created an opportunity for Subway to position itself as a healthy

alternative to traditional fast-food restaurants. Threats are events and trends that may undermine an

organization’s performance. Subway faces a threat from some upstart restaurant chains. Saladworks, for

example, offers a variety of salads that contain fewer than five hundred calories. Noodles and Company

offers a variety of sandwiches, pasta dishes, and salads that contain fewer than four hundred calories.

These two firms are much smaller than Subway, but they could grow to become substantial threats to

Subway’s positioning as a healthy eatery.

Executives must also realize that virtually any environmental trend or event is likely to create

opportunities for some organizations and threats for others. This is true even in extreme cases. In

addition to horrible human death and suffering, the March 2011 earthquake and tsunami in Japan

devastated many organizations, ranging from small businesses that were simply wiped out to corporate

giants such as Toyota whose manufacturing capabilities were undermined. As odd as it may seem,

however, these tragic events also opened up significant opportunities for other organizations. The

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rebuilding of infrastructure and dwellings requires concrete, steel, and other materials. Japanese concrete

manufacturers, steelmakers, and construction companies are likely to be very busy in the years ahead.

Third, the environment shapes the various strategic decisions that executives make as they attempt to lead

their organizations to success. The environment often places important constraints on an organization’s

goals, for example. A firm that sets a goal of increasing annual sales by 50 percent might struggle to

achieve this goal during an economic recession or if several new competitors enter its business.

Environmental conditions also need to be taken into account when examining whether to start doing

business in a new country, whether to acquire another company, and whether to launch an innovative

product, to name just a few.

K E Y T A K E A W A Y

An organization’s environment is a major consideration. The environment is the source of resources that

the organizations needs. It provides opportunities and threats, and it influences the various strategic

decisions that executives must make.

E X E R C I S E S

1. What are the three reasons that the environment matters?

2. Which of these three reasons is most important? Why?

3. Can you identify an environmental trend that no organizations can influence?

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3.2 Evaluating the General Environment

L E A R N I N G O B JE C T I V E S

1. Explain how PESTEL analysis is useful to organizations.

2. Be able to offer an example of each of the elements of the general environment.

The Elements of the General Environment: PESTEL Analysis

An organization’s environment includes factors that it can readily affect as well as factors that largely lay

beyond its influence. The latter set of factors are said to exist within the general environment. Because the

general environment often has a substantial influence on an organization’s level of success, executives

must track trends and events as they evolve and try to anticipate the implications of these trends and

events.

PESTEL analysis is one important tool that executives can rely on to organize factors within the general

environment and to identify how these factors influence industries and the firms within them. PESTEL is

an anagram, meaning it is a word that created by using parts of other words. In particular, PESTEL

reflects the names of the six segments of the general environment: (1) political, (2) economic, (3) social,

(4) technological, (5) environmental, and (6) legal. Wise executives carefully examine each of these six

segments to identify major opportunities and threats and then adjust their firms’ strategies accordingly.

P Is for “Political”

The political segment centers on the role of governments in shaping business. This segment includes

elements such as tax policies, changes in trade restrictions and tariffs, and the stability of governments.

Immigration policy is an aspect of the political segment of the general environment that offers important

implications for many different organizations. What approach to take to illegal immigration into the United

States from Mexico has been a hotly debated dilemma. Some hospital executives have noted that illegal

immigrants put a strain on the health care system because immigrants seldom can pay for medical

services and hospitals cannot by law turn them away from emergency rooms.

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Meanwhile, farmers argue that a tightening of immigration policy would be harmful because farmers rely

heavily on cheap labor provided by illegal immigrants. In particular, if farmers were forced to employ only

legal workers, this would substantially increase the cost of vegetables. Restaurant chains such as Subway

would then pay higher prices for lettuce, tomatoes, and other perishables. Subway would then have to

decide whether to absorb these costs or pass them along to customers by charging more for subs. Overall,

any changes in immigration policy will have implications for hospitals, farmers, restaurants, and many

other organizations.

E Is for “Economic”

The economic segment centers on the economic conditions within which organizations operate. It

includes elements such as interest rates, inflation rates, gross domestic product, unemployment rates,

levels of disposable income, and the general growth or decline of the economy.

The economic crisis of the late 2000s has had a tremendous negative effect on a vast array of

organizations. Rising unemployment discouraged consumers from purchasing expensive, nonessential

goods such as automobiles and television sets. Bank failures during the economic crisis led to a dramatic

tightening of credit markets. This dealt a huge blow to home builders, for example, who saw demand for

new houses plummet because mortgages were extremely difficult to obtain.

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Some businesses, however, actually prospered during the crisis. Retailers that offer deep discounts, such

as Dollar General and Walmart, enjoyed an increase in their customer base as consumers sought to find

ways to economize. Similarly, restaurants such as Subway that charge relatively low prices gained

customers, while high-end restaurants such as Ruth’s Chris Steak House worked hard to retain their

clientele.

S Is for “Social”

A generation ago, ketchup was an essential element of every American pantry and salsa was a relatively

unknown product. Today, however, food manufacturers sell more salsa than ketchup in the United States.

This change reflects the social segment of the general environment. Social factors include trends in

demographics such as population size, age, and ethnic mix, as well as cultural trends such as attitudes

toward obesity and consumer activism. The exploding popularity of salsa reflects the increasing number

of Latinos in the United States over time, as well as the growing acceptance of Latino food by other

ethnic groups.

Sometimes changes in the social segment arise from unexpected sources. Before World War II, the

American workforce was overwhelmingly male. When millions of men were sent to Europe and Asia to

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fight in the war, however, organizations had no choice but to rely heavily on female employees. At the

time, the attitudes of many executives toward women were appalling. Consider, for example, some of the

advice provided to male supervisors of female workers in the July 1943 issue of Transportation

Magazine: [1]

Older women who have never contacted the public have a hard time adapting themselves and are

inclined to be cantankerous and fussy. It’s always well to impress upon older women the importance

of friendliness and courtesy.

General experience indicates that “husky” girls—those who are just a little on the heavy side—are

more even tempered and efficient than their underweight sisters.

Give every girl an adequate number of rest periods during the day. You have to make some allowances

for feminine psychology. A girl has more confidence and is more efficient if she can keep her hair

tidied, apply fresh lipstick and wash her hands several times a day.

The tremendous contributions of female workers during the war contradicted these awful stereotypes. The

main role of women who assembled airplanes, ships, and other war materials was to support the military,

of course, but their efforts also changed a lot of male executives’ minds about what females could

accomplish within organizations if provided with opportunities. Inequities in the workplace still exist

today, but modern attitudes among men toward women in the workplace are much more enlightened than

they were in 1943.

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Women’s immense contributions to the war effort during World War II helped create positive

social changes in the ensuing decades.

Image courtesy of J. Howard Miller, http://en.wikipedia.org/wiki/File:We_Can_Do_It! .

Beyond being a positive social change, the widespread acceptance of women into the workforce has

created important opportunities for certain organizations. Retailers such as Talbot’s and Dillard’s sell

business attire to women. Subway and other restaurants benefit when the scarceness of time lead dual

income families to purchase take-out meals rather than cook at home.

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T Is for “Technological”

The technological segment centers on improvements in products and services that are provided by

science. Relevant factors include, for example, changes in the rate of new product development, increases

in automation, and advancements in service industry delivery. One key feature of the modern era

is the ever-increasing pace of technological innovation. In 1965, Intel cofounder Gordon E. Moore

offered an idea that has come to be known as Moore’s law. Moore’s law suggests that the performance

of microcircuit technology roughly doubles every two years. This law has been very accurate in the

decades since it was offered.

One implication of Moore’s law is that over time electronic devices can become smaller but also more

powerful. This creates important opportunities and threats in a variety of settings. Consider, for example,

photography. Just a decade ago, digital cameras were relatively large and they produced mediocre images.

With each passing year, however, digital cameras have become smaller, lighter, and better. Today, digital

cameras are, in essence, minicomputers, and electronics firms such as Panasonic have been able to

establish strong positions in the market. Meanwhile, film photography icon Kodak has been forced to

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abandon products that had been successful for decades. In 2005, the firm announced that it would stop

producing black-and-white photographic paper. Four years later, Kodachrome color film was phased out.

Successful technologies are also being embraced at a much faster rate than in earlier generations. The

Internet reached fifty million users in only four years. In contrast, television reached the same number of

users in thirteen years while it took radio thirty-eight years. This trend creates great opportunities for

organizations that depend on emerging technologies. Writers of applications for Apple’s iPad and other

tablet devices, for example, are able to target a fast-growing population of users. At the same time,

organizations that depend on technologies that are being displaced must be aware that consumers could

abandon them at a very rapid pace. As more and more Internet users rely on Wi-Fi service, for example,

demand for cable modems may plummet.

Although the influence of the technological segment on technology-based companies such as Panasonic

and Apple is readily apparent, technological trends and events help to shape low-tech businesses too. In

2009, Subway started a service called Subway Now. This service allows customers to place their orders in

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advance using text messages and avoid standing in line at the store. By offering customers this service,

Subway is also responding to a trend in the general environment’s social segment: the need to save time in

today’s fast-paced society.

E Is for “Environmental”

The environmental segment involves the physical conditions within which organizations operate. It

includes factors such as natural disasters, pollution levels, and weather patterns. The threat of

pollution, for example, has forced municipalities to treat water supplies with chemicals. These chemicals

increase the safety of the water but detract from its taste. This has created opportunities for businesses that

provide better-tasting water. Rather than consume cheap but bad-tasting tap water, many consumers

purchase bottled water. Indeed, according to the Beverage Marketing Corporation, the amount of bottled water

consumed by the average American increased from 1.6 gallons in 1976 to 28.3 gallons in 2006.[2]

At present, roughly one-third of Americans drink bottled water regularly.

As is the case for many companies, bottled water producers not only have benefited from the general

environment but also have been threatened by it. Some estimates are that 80 percent of plastic bottles end

up in landfills. This has led some socially conscious consumers to become hostile to bottled water.

Meanwhile, water filtration systems offered by Brita and other companies are a cheaper way to obtain

clean and tasty water. Such systems also hold considerable appeal for individuals who feel the need to cut

personal expenses due to economic conditions. In sum, bottled water producers have been provided

opportunities by the environmental segment of the general environment (specifically, the spread of poor-

tasting water to combat pollution) but are faced with threats from the social segment (the social

conscience of some consumers) and the economic segment (the financial concerns of other consumers).

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L Is for “Legal”

The legal segment centers on how the courts influence business activity. Examples of important legal

factors include employment laws, health and safety regulations, discrimination laws, and antitrust laws.

Intellectual property rights are a particularly daunting aspect of the legal segment for many organizations.

When a studio such as Pixar produces a movie, a software firm such as Adobe revises a program, or a

video game company such as Activision devises a new game, these firms are creating intellectual property.

Such firms attempt to make profits by selling copies of their movies, programs, and games to individuals.

Piracy of intellectual property—a process wherein illegal copies are made and sold by others—poses a

serious threat to such profits. Law enforcement agencies and courts in many countries, including the

United States, provide organizations with the necessary legal mechanisms to protect their intellectual

property from piracy.

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In other countries, such as China, piracy of intellectual property is quite common. Three other general

environment segments play a role in making piracy a major concern. First, in terms of the social segment,

China is the most populous country in the world. Second, in terms of the economic segment, China’s

affluence is growing rapidly. Third, in terms of the technological segment, rapid advances in computers

and communication have made piracy easier over time. Taken together, these various general

environment trends lead piracy to be a major source of angst for firms that rely on intellectual property to

deliver profits.

K E Y T A K E A W A Y

To transform an avocado into guacamole, a chef may choose to use a mortar and pestle. A mortar is a

mashing device that is shaped liked a baseball bat, while a pestle is a sturdy bowl within which the

mashing takes place. Similarly, PESTEL reflects the general environment factors—political, economic,

social, technological, environmental, and legal—that can crush an organization. In many cases, executives

can prevent such outcomes by performing a PESTEL analysis to diagnose where in the general

environment important opportunities and threats arise.

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E X E R C I S E S

1. What does each letter of PESTEL mean?

2. Using a recent news article, identify a trend that has a positive and negative implication for a particular

industry.

3. Can you identify a general environment trend that has positive implications for nursing homes but

negative implications for diaper makers?

4. Are all six elements of PESTEL important to every organization? Why or why not?

5. What is a key trend for each letter of PESTEL and one industry or firm that would be affected by that

trend?

[1] 1943 guide to hiring women. 2007, September–October. Savvy & Sage, p. 16.

[2] Plastic recycling facts. earth911.com. Retrieved from http://earth911.com/recycling/plastic/plastic-bottle-

recycling-facts

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3.3 Evaluating the Industry

L E A R N I N G O B JE C T I V E S

1. Explain how five forces analysis is useful to organizations.

2. Be able to offer an example of each of the five forces.

The Purpose of Five Forces Analysis

Visit the executive suite of any company and the chances are very high that the chief executive officer and

her vice presidents are relying on five forces analysis to understand their industry. Introduced more than

thirty years ago by Professor Michael Porter of the Harvard Business School, five forces analysis has long

been and remains perhaps the most popular analytical tool in the business world.

Adapted from Porter, M. (1980). Competitive strategy. New York: Free Press.

The purpose of five forces analysis is to identify how much profit potential exists in an industry. To do so,

five forces analysis considers the interactions among the competitors in an industry, potential new

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entrants to the industry, substitutes for the industry’s offerings, suppliers to the industry, and the

industry’s buyers. [1] If none of these five forces works to undermine profits in the industry, then the profit

potential is very strong. If all the forces work to undermine profits, then the profit potential is very weak.

Most industries lie somewhere in between these extremes. This could involve, for example, all five forces

providing firms with modest help or two forces encouraging profits while the other three undermine

profits. Once executives determine how much profit potential exists in an industry, they can then decide

what strategic moves to make to be successful. If the situation looks bleak, for example, one possible move

is to exit the industry.

The Rivalry among Competitors in an Industry

The competitors in an industry are firms that produce similar products or services. Competitors use a

variety of moves such as advertising, new offerings, and price cuts to try to outmaneuver one another to

retain existing buyers and to attract new ones. Because competitors seek to serve the same general set of

buyers, rivalry can become intense. Subway faces fierce competition within the restaurant business,

for example. This is illustrated by a quote from the man who built McDonald’s into a worldwide icon.

Former CEO Ray Kroc allegedly once claimed that “if any of my competitors were

drowning, I’d stick a hose in their mouth.” While this sentiment was (hopefully) just a figure of speech,

the announcement in March 2011 that Subway had surpassed McDonald’s in terms of numbers of stores

might lead the hostility of McDonald’s toward its rival to rise.

Understanding the intensity of rivalry among an industry’s competitors is important because the degree of

intensity helps shape the industry’s profit potential. Of particular concern is whether firms in an industry

compete based on price. When competition is bitter and cutthroat, the prices competitors charge—and

their profit margins—tend to go down. If, on the other hand, competitors avoid bitter rivalry, then price

wars can be avoided and profit potential increases.

Every industry is unique to some degree, but there are some general characteristics that help to predict

the likelihood that fierce rivalry will erupt. Rivalry tends to be fierce, for example, to the extent that the

growth rate of demand for the industry’s offerings is low (because a lack of new customers forces firms to

compete more for existing customers), fixed costs in the industry are high (because firms will fight to have

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enough customers to cover these costs), competitors are not differentiated from one another (because this

forces firms to compete based on price rather than based on the uniqueness of their offerings),

and exit barriers in the industry are high (because firms do not have the option of leaving the industry

gracefully). Exit barriers can include emotional barriers, such as the bad publicity associated with massive

layoffs, or more objective reasons to stay in an industry, such as a desire to recoup considerable costs that

might have been previously spent to enter and compete.

Industry concentration is an important aspect of competition in many industries. Industry concentration

is the extent to which a small number of firms dominate an industry. Among circuses, for example,

the four largest companies collectively own 89 percent of the market. Meanwhile, these companies tend

to keep their competition rather polite. Their advertising does not lampoon one another, and they do not

put on shows in the same city at the same time. This does not guarantee that the circus industry will be

profitable; there are four other forces to consider as well as the quality of each firm’s strategy.

But low levels of rivalry certainly help build the profit potential of the industry.

In contrast, the restaurant industry is fragmented, meaning that the largest rivals control just a small

fraction of the business and that a large number of firms are important participants. Rivalry in

fragmented industries tends to become bitter and fierce. Quiznos, a chain of sub shops that is roughly 15

percent the size of Subway, has directed some of its advertising campaigns directly at Subway, including

one depicting a fictional sub shop called “Wrong Way” that bore a strong resemblance to Subway.

Within fragmented industries, it is almost inevitable that over time some firms will try to steal customers

from other firms, such as by lowering prices, and that any competitive move by one firm will be matched

by others. In the wake of Subway’s success in offering foot-long subs for $5, for example, Quiznos has

matched Subway’s price. Such price jockeying is delightful to customers, of course, but it tends to reduce

prices (and profit margins) within an industry. Indeed, Quiznos later escalated its attempt to attract

budget-minded consumers by introducing a flatbread sandwich that cost only $2. Overall, when choosing

strategic moves, Subway’s presence in a fragmented industry forces the firm to try to anticipate not only

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how fellow restaurant giants such as McDonald’s and Burger King will react but also how smaller sub

shop chains like Quiznos and various regional and local players will respond.

The Threat of Potential New Entrants to an Industry

Competing within a highly profitable industry is desirable, but it can also attract unwanted attention from

outside the industry. Potential new entrants to an industry are firms that do not currently compete in the

industry but may in the future. New entrants tend to reduce the profit potential of an industry by increasing

its competitiveness. If, for example, an industry consisting of five firms is entered by two new firms, this means

that seven rather than five firms are now trying to attract the same general pool of customers. Thus executives

need to analyze how likely it is that one or more new entrants will enter their industry as part of their effort

to understand the profit potential that their industry offers.

New entrants can join the fray within an industry in several different ways. New entrants can be start-up

companies created by entrepreneurs, foreign firms that decide to enter a new geographic area, supplier

firms that choose to enter their customers’ business, or buyer firms that choose to enter their suppliers’

business. The likelihood of these four paths being taken varies across industries. Restaurant firms such as

Subway, for example, do not need to worry about their buyers entering the industry because they sell

directly to individuals, not to firms. It is also unlikely that Subway’s suppliers, such as farmers, will make

a big splash in the restaurant industry.

On the other hand, entrepreneurs launch new restaurant concepts every year, and one or more of these

concepts may evolve into a fearsome competitor. Also, competitors based overseas sometimes enter

Subway’s core US market. In February 2011, Australia-based Oporto opened its first US store in

California. [2] Oporto operates more than 130 chicken burger restaurants in its home country. Time will

tell whether this new entrant has a significant effect on Subway and other restaurant firms. Because a

chicken burger closely resembles a hamburger, McDonald’s and Burger King may have more to fear from

Oporto than does Subway.

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Every industry is unique to some degree, but some general characteristics help to predict the likelihood

that new entrants will join an industry. New entry is less likely, for example, to the extent that existing

competitors enjoy economies of scale (because new entrants struggle to match incumbents’ prices),

capital requirements to enter the industry are high (because new entrants struggle to gather enough cash

to get started), access to distribution channels is limited (because new entrants struggle to get their

offerings to customers), governmental policy discourages new entry, differentiation among existing

competitors is high (because each incumbent has a group of loyal customers that enjoy its unique

features), switching costs are high (because this discourages customers from buying a new entrant’s

offerings), expected retaliation from existing competitors is high, and cost advantages independent of size

exist.

The Threat of Substitutes for an Industry’s Offerings

Executives need to take stock not only of their direct competition but also of players in other industries

that can steal their customers. Substitutes are offerings that differ from the goods and services provided

by the competitors in an industry but that fill similar needs to what the industry offers.How strong of a

threat substitutes are depends on how effective substitutes are in serving an industry’s customers.

At first glance, it could appear that the satellite television business is a tranquil one because there are only

two significant competitors—DIRECTV and DISH Network. These two industry giants, however, face a

daunting challenge from substitutes. The closest substitute for satellite television is provided by cable

television firms, such as Comcast and Charter Communications. DIRECTV and DISH Network also need

to be wary of streaming video services, such as Netflix, and video rental services, such as Redbox. The

availability of viable substitutes places stringent limits on what DIRECTV and DISH Network can charge

for their services. If the satellite television firms raise their prices, customers will be tempted to obtain

video programs from alternative sources. This limits the profit potential of the satellite television

business.

In other settings, viable substitutes are not available, and this helps an industry’s competitors enjoy

profits. Like lightbulbs, candles can provide lighting within a home. Few consumers, however, would be

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willing to use candles instead of lightbulbs. Candles simply do not provide as much light as lightbulbs.

Also, the risk of starting a fire when using candles is far greater than the fire risk of using lightbulbs.

Because candles are a poor substitute, lightbulb makers such as General Electric and Siemens do not need

to fear candle makers stealing their customers and undermining their profits.

The dividing line between which firms are competitors and which firms offer substitutes is a challenging

issue for executives. Most observers would agree that, from Subway’s perspective, sandwich maker

Quiznos should be considered a competitor and that grocery stores such as Kroger offer a substitute for

Subway’s offerings. But what about full-service restaurants, such as Ruth’s Chris Steak House, and “fast

causal” outlets, such as Panera Bread? Whether firms such as these are considered competitors or

substitutes depends on how the industry is defined. Under a broad definition—Subway competes in the

restaurant business—Ruth’s Chris and Panera should be considered competitors. Under a narrower

definition—Subway competes in the sandwich business—Panera is a competitor and Ruth’s Chris is a

substitute. Under a very narrow definition—Subway competes in the sub sandwich business—both Ruth’s

Chris and Panera provide substitute offerings. Thus clearly defining a firm’s industry is an important step

for executives who are performing a five forces analysis.

The Power of Suppliers to an Industry

Suppliers provide inputs that the firms in an industry need to create the goods and services that they in

turn sell to their buyers. A variety of supplies are important to companies, including raw materials,

financial resources, and labor. For restaurant firms such as Subway, key suppliers include such firms as Sysco

that bring various foods to their doors, restaurant supply stores that sell kitchen equipment, and

employees that provide labor.

The relative bargaining power between an industry’s competitors and its suppliers helps shape the profit

potential of the industry. If suppliers have greater leverage over the competitors than the competitors

have over the suppliers, then suppliers can increase their prices over time. This cuts into competitors’

profit margins and makes them less likely to be prosperous. On the other hand, if suppliers have less

leverage over the competitors than the competitors have over the suppliers, then suppliers may be forced

to lower their prices over time. This strengthens competitors’ profit margins and makes them more likely

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to be prosperous. Thus when analyzing the profit potential of their industry, executives must carefully

consider whether suppliers have the ability to demand higher prices.

Every industry is unique to some degree, but some general characteristics help to predict the likelihood

that suppliers will be powerful relative to the firms to which they sell their goods and services. Suppliers

tend to be powerful, for example, to the extent that the suppliers’ industry is dominated by a few

companies, if it is more concentrated than the industry that it supplies and/or if there is no effective

substitute for what the supplier group provides. These circumstances restrict industry competitors’ ability

to shop around for better prices and put suppliers in a position of strength.

Supplier power is also stronger to the extent that industry members rely heavily on suppliers to be

profitable, industry members face high costs when changing suppliers, and suppliers’ products are

differentiated. Finally, suppliers possess power to the extent that they have the ability to become a new

entrant to the industry if they wish. This is a strategy calledforward vertical integration. Ford, for

example, used a forward vertical integration strategy when it purchased rental car company (and Ford

customer) Hertz. A difficult financial situation forced Ford to sell Hertz for $5.6 billion in 2005. But

before rental car companies such as Avis and Thrifty drive too hard of a bargain when buying cars from an

automaker, their executives should remember that automakers are much bigger firms than are rental car

companies. The executives running the automaker might simply decide that they want to enjoy the rental

car company’s profits themselves and acquire the firm.

Strategy at the Movies

Flash of Genius

When dealing with a large company, a small supplier can get squashed like a bug on a windshield. That is

what college professor and inventor Dr. Robert Kearns found out when he invented intermittent

windshield wipers in the 1960s and attempted to supply them to Ford Motor Company. As depicted in the

2008 movie Flash of Genius, Kearns dreamed of manufacturing the wipers and selling them to Detroit

automakers. Rather than buy the wipers from Kearns, Ford replicated the design. An angry Kearns then

spent many years trying to hold the firm accountable for infringing on his patent. Kearns eventually won

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in court, but he paid a terrible personal price along the way, including a nervous breakdown and

estrangement from his family. Kearns’s lengthy battle with Ford illustrates the concept of bargaining

power that is central to Porter’s five forces model. Even though Kearns created an exceptional new

product, he had little leverage when dealing with a massive, well-financed automobile manufacturer.

The Power of an Industry’s Buyers

Buyers purchase the goods and services that the firms in an industry produce. For Subway and other

restaurants, buyers are individual people. In contrast, the buyers for some firms are other firms rather than

end users. For Procter & Gamble, for example, buyers are retailers such as Walmart and Target who

stock Procter & Gamble’s pharmaceuticals, hair care products, pet supplies, cleaning products, and other

household goods on their shelves.

The relative bargaining power between an industry’s competitors and its buyers helps shape the profit

potential of the industry. If buyers have greater leverage over the competitors than the competitors have

over the buyers, then the competitors may be forced to lower their prices over time. This weakens

competitors’ profit margins and makes them less likely to be prosperous. Walmart furnishes a good

example. The mammoth retailer is notorious among manufacturers of goods for demanding lower and

lower prices over time. [3] In 2008, for example, the firm threatened to stop selling compact discs if record

companies did not lower their prices. Walmart has the power to insist on price concessions because its

sales volume is huge. Compact discs make up a small portion of Walmart’s overall sales, so exiting the

market would not hurt Walmart. From the perspective of record companies, however, Walmart is their

biggest buyer. If the record companies were to refuse to do business with Walmart, they would miss out

on access to a large portion of consumers.

On the other hand, if buyers have less leverage over the competitors than the competitors have over the

buyers, then competitors can raise their prices and enjoy greater profits. This description fits the textbook

industry quite well. College students are often dismayed to learn that an assigned textbook costs $150 or

more. Historically, textbook publishers have been able to charge high prices because buyers had no

leverage. A student enrolled in a class must purchase the specific book that the professor has selected.

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Used copies are sometimes a lower-cost option, but textbook publishers have cleverly worked to

undermine the used textbook market by releasing new editions after very short periods of time.

Of course, the presence of a very high profit industry is attractive to potential new entrants. Firms such as

the publisher of this book, have entered the textbook market with lower-priced offerings. Time will tell

whether such offerings bring down textbook prices. Like any new entrant, upstarts in the textbook

business must prove that they can execute their strategies before they can gain widespread acceptance.

Overall, when analyzing the profit potential of their industry, executives must carefully consider whether

buyers have the ability to demand lower prices. In the textbook market, buyers do not.

Every industry is unique to some degree, but some general characteristics help to predict the likelihood

that buyers will be powerful relative to the firms from which they purchases goods and services. Buyers

tend to be powerful, for example, to the extent that there are relatively few buyers compared with the

number of firms that supply the industry, the industry’s goods or services are standardized or

undifferentiated, buyers face little or no switching costs in changing vendors, the good or service

purchased by the buyers represents a high percentage of the buyer’s costs, and the good or service is of

limited importance to the quality or price of the buyer’s offerings.

Finally, buyers possess power to the extent that they have the ability to become a new entrant to the

industry if they wish. This strategy is called backward vertical integration. DIRECTV used to be an

important customer of TiVo, the pioneer of digital video recorders. This situation changed, however, when

executives at DIRECTV grew weary of their relationship with TiVo. DIRECTV then used a backward

vertical integration strategy and started offering DIRECTV-branded digital video recorders. Profits that

used to be enjoyed by TiVo were transferred at that point to DIRECTV.

The Limitations of Five Forces Analysis

Five forces analysis is useful, but it has some limitations too. The description of five forces analysis

provided by its creator, Michael Porter, seems to assume that competition is a zero-sum game, meaning

that the amount of profit potential in an industry is fixed. One implication is that, if a firm is to make

more profit, it must take that profit from a rival, a supplier, or a buyer. In some settings, however,

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collaboration can create a larger pool of profit that benefits everyone involved in the collaboration. In

general, collaboration is a possibility that five forces analysis tends to downplay. The relationships among

the rivals in an industry, for example, are depicted as adversarial. In reality, these relationships are

sometimes adversarial and sometimes collaborative. General Motors and Toyota compete fiercely all

around the world, for example, but they also have worked together in joint ventures. Similarly, five forces

analysis tends to portray a firm’s relationships with its suppliers and buyers as adversarial, but many

firms find ways to collaborate with these parties for mutual benefit. Indeed, concepts such as just-in-time

inventory systems depend heavily on a firm working as a partner with its suppliers and buyers.

K E Y T A K E A W A Y

“How much profit potential exists in our industry?” is a key question for executives. Five forces analysis

provides an answer to this question. It does this by considering the interactions among the competitors in

an industry, potential new entrants to the industry, substitutes for the industry’s offerings, suppliers to

the industry, and the industry’s buyers.

E X E R C I S E S

1. What are the five forces?

2. Is there an aspect of industry activity that the five forces seems to leave out?

3. Imagine you are the president of your college or university. Which of the five forces would be most

important to you? Why?

[1] Porter, M. E. 1979, March–April. How competitive forces shape strategy. Harvard Business Review, 137–156.

[2] Odell, K. 2011, February 22. Portuguese-influenced Australian chicken burger chain, Oporto, comes to

SoCal. Eater LA. Retrieved from

http://la.eater.com/archives/2011/02/22/portugueseinfluenced_australian_chicken_burger_chain_oporto_comes

_to_socal.php

[3] Bianco, B., & Zellner, W. 2003, October 6. Is Wal-Mart too powerful? Bloomberg Businessweek. Retrieved

fromhttp://www.businessweek.com/magazine/content/03_40/b3852001_mz001.htm

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3.4 Mapping Strategic Groups

L E A R N I N G O B JE C T I V E S

1. Understand what strategic groups are.

2. Learn three ways that analyzing strategic groups is useful to organizations.

The analysis of the strategic groups in an industry can offer important insights to executives. Strategic

groups are sets of firms that follow similar strategies to one another. [1] More specifically, a strategic

group consists of a set of industry competitors that have similar characteristics to one another but

differ in important ways from the members of other groups.

Understanding the nature of strategic groups within an industry is important for at least three

reasons. First, emphasizing the members of a firm’s group is helpful because these firms are usually

its closest rivals. When assessing their firm’s performance and considering strategic moves, the other

members of a group are often the best referents for executives to consider. In some cases, one or

more strategic groups in the industry are irrelevant. Subway, for example, does not need to worry

about competing for customers with the likes of Ruth’s Chris Steak House and P. F. Chang’s. This is

partly because firms confront mobility barriers that make it difficult or illogical for a particular firm to

change groups over time. Because Subway is unlikely to offer a gourmet steak as well as the

experience offered by fine-dining outlets, they can largely ignore the actions taken by firms in that

restaurant industry strategic group.

Second, the strategies pursued by firms within other strategic groups highlight alternative paths to

success. A firm may be able to borrow an idea from another strategic group and use this idea to

improve its situation. During the recession of the late 2000s, midquality restaurant chains such as

Applebee’s and Chili’s used a variety of promotions such as coupons and meal combinations to try to

attract budget-conscious consumers. Firms such as Subway and Quiznos that already offered low-

priced meals still had an inherent price advantage over Applebee’s and Chili’s, however: There is no

tipping expected at the former restaurants, but there is at the latter. It must have been tempting to

executives at Applebee’s and Chili’s to try to expand their appeal to budget-conscious consumers by

experimenting with operating formats that do not involve tipping.

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Third, the analysis of strategic groups can reveal gaps in the industry that represent untapped

opportunities. Within the restaurant business, for example, it appears that no national chain offers

both very high-quality meals and a very diverse menu. Perhaps the firm that comes the closest to

filling this niche is the Cheesecake Factory, a chain of approximately 150 outlets whose menu

includes more than 200 lunch, dinner, and dessert items. Ruth’s Chris Steak House already offers

very high quality food; its executives could consider moving the firm toward offering a very diverse

menu as well. This would involve considerable risk, however. Perhaps no national chain offers both

very high quality meals and a very diverse menu because doing so is extremely difficult.

Nevertheless, examining the strategic groups in an industry with an eye toward untapped

opportunities offers executives a chance to consider novel ideas.

K E Y T A K E A W A Y

Examination of the strategic groups in an industry provides a firm’s executives with a better

understanding of their closest rivals, reveals alternative paths to success, and highlights untapped

opportunities.

E X E R C I S E S

1. What other colleges and universities are probably in your school’s strategic group?

2. From what other groups of colleges and universities could your school learn? What specific ideas could be

borrowed from these groups?

[1] Hunt, M. S. 1972. Competition in the major home appliance industry 1960–1970. (Unpublished doctoral
dissertation). Harvard University, Cambridge, MA; Short, J. C., Ketchen, D. J., Palmer, T., & Hult, G. T. 2007. Firm,
strategic group, and industry influences on performance. Strategic Management Journal, 28, 147–167.

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3.5 Conclusion

This chapter explains several considerations for examining the external environment that executives

must monitor to lead their organizations strategically. Executives must be aware of trends and

changes in the general environment, as well as the condition of their specific industry, as elements of

both have the potential to change considerably over time. While PESTEL analysis provides a useful

framework to understand the general environment, Porter’s five forces is helpful to make sense of an

industry’s profit potential. Strategic groups are valuable for understanding close competitors that

affect a firm more than other industry members. When executives carefully monitor their

organization’s environment using these tools, they greatly increase the chances of their organization

being successful.

E X E R C I S E S

1. In groups of four or five, use the PESTEL framework to identify elements from each factor of the general

environment that could have a large effect on your future career.

2. Use Porter’s five forces analysis to analyze an industry in which you might like to work in the future.

Discuss the implications your results may have on the salary potential of jobs in that industry and how

that could impact your career plans.

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Chapter 2

Leading Strategically

L E A R N I N G O B JE C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What are vision, mission, and goals, and why are they important to organizations?

2. How should executives analyze the performance of their organizations?

3. In what ways can having a celebrity CEO and a strong entrepreneurial orientation help or harm an

organization?

Questions Are Brewing at Starbucks

Starbucks’s global empire includes this store in Seoul, South Korea.

Image courtesy of Wikimedia,http://commons.wikimedia.org/wiki/File:Starbucks-seoul.J

PG.

Chapter 2 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

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March 30, 2011, marked the fortieth anniversary of Starbucks first store opening for business in Seattle,

Washington. From its humble beginnings, Starbucks grew to become the largest coffeehouse company in

the world while stressing the importance of both financial and social goals. As it created thousands of

stores across dozens of countries, the company navigated many interesting periods. The last few years

were a particularly fascinating era.

In early 2007, Starbucks appeared to be very successful, and its stock was worth more than $35 per share.

By 2008, however, the economy was slowing, competition in the coffee business was heating up, and

Starbucks’s performance had become disappointing. In a stunning reversal of fortune, the firm’s stock was

worth less than $10 per share by the end of the year. Anxious stockholders wondered whether Starbucks’s

decline would continue or whether the once high-flying company would return to its winning ways.

Riding to the rescue was Howard Schultz, the charismatic and visionary founder of Starbucks who had

stepped down as chief executive officer eight years earlier. Schultz again took the helm and worked to turn

the company around by emphasizing its mission statement: “to inspire and nurture the human spirit—one

person, one cup and one neighborhood at a time.” [1]About a thousand underperforming stores were shut

down permanently. Thousands of other stores closed for a few hours so that baristas could be retrained to

make inspiring drinks. Food offerings were revamped to ensure that coffee—not breakfast sandwiches—

were the primary aroma that tantalized customers within Starbucks’s outlets.

By the time Starbucks’s fortieth anniversary arrived, Schultz had led his company to regain excellence,

and its stock price was back above $35 per share. In March 2011, Schultz summarized the situation by

noting that “over the last three years, we’ve completely transformed the company, and the health of

Starbucks is quite good. But I don’t think this is a time to celebrate or run some victory lap. We’ve got a lot

of work to do.” [2] Indeed, important questions loomed. Could performance improve further? How long

would Schultz remain with the company? Could Schultz’s eventual successor maintain Schultz’s

entrepreneurial approach as well as keep Starbucks focused on its mission?

[1] Our Starbucks mission statement. Retrieved from http://www.starbucks.com/about-us/company-

information/mission-statement. Accessed March 31, 2011.

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[2] Starbucks CEO: Can you “get big and stay small” [Review of the book Onward: How Starbucks fought for its life

without losing its soul by Howard Schultz]. 2011, March 28. NPR Books. Retrieved

from http://www.npr.org/2011/03/28/134738487/starbucks-ceo-can-you-get-big-and-stay-small.

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2.1 Vision, Mission, and Goals

L E A R N I N G O B JE C T I V E S

1. Define vision and mission and distinguish between them.

2. Know what the acronym SMART represents.

3. Be able to write a SMART goal.

The Importance of Vision

Good business leaders create a vision, articulate the vision, passionately own the vision, and relentlessly

drive it to completion.

– Jack Welch, former CEO of General Electric

Many skills and abilities separate effective strategic leaders like Howard Schultz from poor strategic

leaders. One of them is the ability to inspire employees to work hard to improve their organization’s

performance. Effective strategic leaders are able to convince employees to embrace lofty ambitions and

move the organization forward. In contrast, poor strategic leaders struggle to rally their people and

channel their collective energy in a positive direction.

As the quote from Jack Welch suggests, a vision is one key tool available to executives to inspire the

people in an organization. An organization’s vision describes what the organization hopes to become

in the future. Well-constructed visions clearly articulate an organization’s aspirations. Avon’s vision is

“to be the company that best understands and satisfies the product, service, and self-fulfillment needs

of women—globally.” This brief but powerful statement emphasizes several aims that are important to Avon,

including excellence in customer service, empowering women, and the intent to be a worldwide player.

Like all good visions, Avon sets a high standard for employees to work collectively toward.

Perhaps no vision captures high standards better than that of aluminum maker Alcoa. This firm’s very ambitious

vision is “to be the best company in the world—in the eyes of our customers, shareholders, communities

and people.” By making clear their aspirations, Alcoa’s executives hope to inspire employees to act in ways that

help the firm become the best in the world.

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The results of a survey of one thousand five hundred executives illustrate how the need to create an

inspiring vision creates a tremendous challenge for executives. When asked to identify the most important

characteristics of effective strategic leaders, 98 percent of the executives listed “a strong sense of vision”

first. Meanwhile, 90 percent of the executives expressed serious doubts about their own ability to create a

vision. [1] Not surprisingly, many organizations do not have formal visions. Many organizations that do

have visions find that employees do not embrace and pursue the visions. Having a well-formulated vision

employees embrace can therefore give an organization an edge over its rivals.

Mission Statements

In working to turnaround Starbucks, Howard Schultz sought to renew Starbucks’s commitment to

its mission statement: “to inspire and nurture the human spirit—one person, one cup and one

neighborhood at a time.” A mission such as Starbucks’s states the reasons for an organization’s existence.

Well-written mission statements effectively capture an organization’s identity and provide answers to the

fundamental question “Who are we?” While a vision looks to the future, a mission captures the key

elements of the organization’s past and present.

Organizations need support from their key stakeholders, such as employees, owners, suppliers, and

customers, if they are to prosper. A mission statement should explain to stakeholders why they should

support the organization by making clear what important role or purpose the organization plays in

society. Google’s mission, for example, is “to organize the world’s information and make it universally

accessible and useful.” Google pursued this mission in its early days by developing a very popular Internet

search engine. The firm continues to serve its mission through various strategic actions, including offering

its Internet browser Google Chrome to the online community, providing free e-mail via its Gmail service,

and making books available online for browsing.

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Many consider Abraham Lincoln to have been one of the

greatest strategic leaders in modern history.

Image courtesy of Alexander Gardner,

http://wikimediafoundation.org/wiki/File:Abraham_Li

ncoln_head_on_shoulders_photo_portrait .

One of Abraham Lincoln’s best-known statements is that “a house divided against itself cannot stand.”

This provides a helpful way of thinking about the relationship between vision and mission. Executives ask

for trouble if their organization’s vision and mission are divided by emphasizing different domains. Some

universities have fallen into this trap. Many large public universities were established in the late 1800s

with missions that centered on educating citizens. As the twentieth century unfolded, however, creating

scientific knowledge through research became increasingly important to these universities. Many

university presidents responded by creating visions centered on building the scientific prestige of their

schools. This created a dilemma for professors: Should they devote most of their time and energy to

teaching students (as the mission required) or on their research studies (as ambitious presidents

demanded via their visions)? Some universities continue to struggle with this trade-off today and remain

houses divided against themselves. In sum, an organization is more effective to the extent that its vision

and its mission target employees’ effort in the same direction.

Pursuing the Vision and Mission through SMART Goals

An organization’s vision and mission offer a broad, overall sense of the organization’s direction. To work

toward achieving these overall aspirations, organizations also need to create goals—narrower aims that

should provide clear and tangible guidance to employees as they perform their work on a daily basis. The

most effective goals are those that are specific, measurable, aggressive, realistic, and time-bound. An easy

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way to remember these dimensions is to combine the first letter of each into one word: SMART.

Employees are put in a good position to succeed to the extent that an organization’s goals are SMART.

A goal is specific if it is explicit rather than vague. In May 1961, President John F. Kennedy proposed a

specific goal in a speech to the US Congress: “I believe that this nation should commit itself to achieving

the goal, before this decade is out, of landing a man on the moon and returning him safely to the

earth.” [2]Explicitness such as was offered in this goal is helpful because it targets people’s energy. A few

moments later, Kennedy made it clear that such targeting would be needed if this goal was to be reached.

Going to the moon, he noted, would require “a major national commitment of scientific and technical

manpower, materiel and facilities, and the possibility of their diversion from other important activities

where they are already thinly spread.” While specific goals make it clear how efforts should be directed,

vague goals such as “do your best” leave individuals unsure of how to proceed.

A goal is measurable to the extent that whether the goal is achieved can be quantified. President

Kennedy’s goal of reaching the moon by the end of the 1960s offered very simple and clear measurability:

Either Americans would step on the moon by the end of 1969 or they would not. One of Coca-Cola’s

current goals is a 20 percent improvement to its water efficiency by 2012 relative to 2004 water usage.

Because water efficiency is easily calculated, the company can chart its progress relative to the 20 percent

target and devote more resources to reaching the goal if progress is slower than planned.

A goal is aggressive if achieving it presents a significant challenge to the organization. A series of

research studies have demonstrated that performance is strongest when goals are challenging but

attainable. Such goals force people to test and extend the limits of their abilities. This can result in

reaching surprising heights. President Kennedy captured this theme in a speech in September 1962: “We

choose to go to the moon. We choose to go to the moon in this decade…not because [it is] easy, but

because [it is] hard, because that goal will serve to organize and measure the best of our energies and

skills.”

In the case of Coca-Cola, reaching a 20 percent improvement will require a concerted effort, but the goal

can be achieved. Meanwhile, easily achievable goals tend to undermine motivation and effort. Consider a

situation in which you have done so well in a course that you only need a score of 60 percent on the final

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exam to earn an A for the course. Understandably, few students would study hard enough to score 90

percent or 100 percent on the final exam under these circumstances. Similarly, setting organizational

goals that are easy to reach encourages employees to work just hard enough to reach the goals.

It is tempting to extend this thinking to conclude that setting nearly impossible goals would encourage

even stronger effort and performance than does setting aggressive goals. People tend to get discouraged

and give up, however, when faced with goals that have little chance of being reached. If, for example,

President Kennedy had set a time frame of one year to reach the moon, his goal would have attracted

scorn. The country simply did not have the technology in place to reach such a goal. Indeed, Americans

did not even orbit the moon until seven years after Kennedy’s 1961 speech. Similarly, if Coca-Cola’s water

efficiency goal was 95 percent improvement, Coca-Cola’s employees would probably not embrace it. Thus

goals must also be realistic, meaning that their achievement is feasible.

You have probably found that deadlines are motivating and that they help you structure your work time.

The same is true for organizations, leading to the conclusion that goals should be time-bound through

the creation of deadlines. Coca-Cola has set a deadline of 2012 for its water efficiency goal, for example.

The deadline for President Kennedy’s goal was the end of 1969. The goal was actually reached a few

months early. On July 20, 1969, Neil Armstrong became the first human to step foot on the moon.

Incredibly, the pursuit of a well-constructed goal had helped people reach the moon in just eight years.

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Americans landed on the moon eight years after President Kennedy set a moon landing as a key

goal for the United States.

Image courtesy of NASA Apollo Archive,

http://upload.wikimedia.org/wikipedia/commons/8/8b/5927_NASA .

The period after an important goal is reached is often overlooked but is critical. Will an organization rest

on its laurels or will it take on new challenges? The US space program again provides an illustrative

example. At the time of the first moon landing, Time magazine asked the leader of the team that built the

moon rockets about the future of space exploration. “Given the same energy and dedication that took

them to the moon,” said Wernher von Braun, “Americans could land on Mars as early as 1982.” [3] No new

goal involving human visits to Mars was embraced, however, and human exploration of space was de-

emphasized in favor of robotic adventurers. Nearly three decades after von Braun’s proposed timeline for

reaching Mars expired, President Barack Obama set in 2010 a goal of creating by 2025 a new space

vehicle capable of taking humans beyond the moon and into deep space. This would be followed in the

mid-2030s by a flight to orbit Mars as a prelude to landing on Mars. [4] Time will tell whether these goals

inspire the scientific community and the country in general.

K E Y T A K E A W A Y

Strategic leaders need to ensure that their organizations have three types of aims. A vision states what

the organization aspires to become in the future. A mission reflects the organization’s past and present by

stating why the organization exists and what role it plays in society. Goals are the more specific aims that

organizations pursue to reach their visions and missions. The best goals are SMART: specific, measurable,

aggressive, realistic, and time-bound.

E X E R C I S E S

1. Take a look at the website of your college or university. What is the organization’s vision and mission?

Were they easy or hard to find?

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2. As a member of the student body, do you find the vision and mission of your college or university to be

motivating and inspirational? Why or why not?

3. What is an important goal that you have established for your career? Could this goal be improved by

applying the SMART goal concept?

[1] Quigley, J. V. 1994. Vision: How leaders develop it, share it, and sustain it. Business Horizons, 37(5), 37–41.

[2] Key documents in the history of space policy: 1960s. National Aeronautics and Space Administration. Retrieved

from http://history.nasa.gov/spdocs.html#1960s

[3] The Moon: Next, Mars and beyond. 1969, July 15. Time. Retrieved

fromhttp://www.time.com/time/magazine/article/0,9171,901107,00.html

[4] Amos, J. 2010, April 15. Obama sets Mars goal for America. BBC News. Retrieved from

http://news.bbc.co.uk/2/hi/8623691.stm

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2.2 Assessing Organizational Performance

L E A R N I N G O B JE C T I V E S

1. Understand the complexities associated with assessing organizational performance.

2. Learn each of the dimensions of the balanced scorecard framework.

3. Learn what is meant by a “triple bottom line.”

Organizational Performance: A Complex Concept

Organizational performance refers to how well an organization is doing to reach its vision, mission, and

goals. Assessing organizational performance is a vital aspect of strategic management. Executives must

know how well their organizations are performing to figure out what strategic changes, if any, to make.

Performance is a very complex concept, however, and a lot of attention needs to be paid to how it is

assessed.

Two important considerations are (1) performance measures and (2) performance referents (Figure 2.5

“How Organizations and Individuals Can Use Financial Performance Measures and

Referents

“).

A performance measure is a metric along which organizations can be gauged. Most executives examine

measures such as profits, stock price, and sales in an attempt to better understand how well their

organizations are competing in the market. But these measures provide just a glimpse of organizational

performance. Performance referents are also needed to assess whether an organization is doing well. A

performance referent is a benchmark used to make sense of an organization’s standing along a

performance measure. Suppose, for example, that a firm has a profit margin of 20 percent in 2011. This

sounds great on the surface. But suppose that the firm’s profit margin in 2010 was 35 percent and that the

average profit margin across all firms in the industry for 2011 was 40 percent. Viewed relative to these two

referents, the firm’s 2011 performance is cause for concern.

Using a variety of performance measures and referents is valuable because different measures and

referents provide different information about an organization’s functioning. The parable of the blind men

and the elephant—popularized in Western cultures through a poem by John Godfrey Saxe in the

nineteenth century—is useful for understanding the complexity associated with measuring organizational

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performance. As the story goes, six blind men set out to “see” what an elephant was like. The first man

touched the elephant’s side and believed the beast to be like a great wall. The second felt the tusks and

thought elephants must be like spears. Feeling the trunk, the third man thought it was a type of snake.

Feeling a limb, the fourth man thought it was like a tree trunk. The fifth, examining an ear, thought it was

like a fan. The sixth, touching the tail, thought it was like a rope. If the men failed to communicate their

different impressions they would have all been partially right but wrong about what ultimately mattered.

Figure 2.5 How Organizations and Individuals Can Use Financial Performance Measures and

Referents

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This story parallels the challenge involved in understanding the multidimensional nature of organization

performance because different measures and referents may tell a different story about the organization’s

performance. For example, the Fortune 500 lists the largest US firms in terms of sales. These firms are

generally not the strongest performers in terms of growth in stock price, however, in part because they are

so big that making major improvements is difficult. During the late 1990s, a number of Internet-centered

businesses enjoyed exceptional growth in sales and stock price but reported losses rather than profits.

Many investors in these firms who simply fixated on a single performance measure—sales growth—

absorbed heavy losses when the stock market’s attention turned to profits and the stock prices of these

firms plummeted.

The story of the blind men and the elephant provides a metaphor for understanding the

complexities of measuring organizational performance.

Image courtesy of Hanabusa Itcho,

http://en.wikipedia.org/wiki/File:Blind_monks_examining_an_elephant .

The number of performance measures and referents that are relevant for understanding an organization’s

performance can be overwhelming, however. For example, a study of what performance metrics were used

within restaurant organizations’ annual reports found that 788 different combinations of measures and

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referents were used within this one industry in a single year. [1]Thus executives need to choose a rich yet

limited set of performance measures and referents to focus on.

The Balanced Scorecard

To organize an organization’s performance measures, Professor Robert Kaplan and Professor David

Norton of Harvard University developed a tool called the balanced scorecard. Using the scorecard helps

managers resist the temptation to fixate on financial measures and instead monitor a diverse set of

important measures.

Indeed, the idea behind the framework is to provide a “balance” between financial measures

and other measures that are important for understanding organizational activities that lead to sustained,

long-term performance. The balanced scorecard recommends that managers gain an overview of the

organization’s performance by tracking a small number of key measures that collectively reflect four

dimensions: (1) financial, (2) customer, (3) internal business process, and (4) learning and growth. [2]

Financial Measures

Financial measures of performance relate to organizational effectiveness and profits. Examples include

financial ratios such as return on assets, return on equity, and return on investment. Other common

financial measures include profits and stock price. Such measures help answer the key question “How do

we look to shareholders?”

Financial performance measures are commonly articulated and emphasized within an organization’s

annual report to shareholders. To provide context, such measures should be objective and be coupled with

meaningful referents, such as the firm’s past performance. For example, Starbucks’s 2009 annual report

highlights the firm’s performance in terms of net revenue, operating income, and cash flow over a five-

year period.

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Customer Measures

Customer measures of performance relate to customer attraction, satisfaction, and retention. These

measures provide insight to the key question “How do customers see us?” Examples might include the

number of new customers and the percentage of repeat customers.

Starbucks realizes the importance of repeat customers and has taken a number of steps to satisfy and to

attract regular visitors to their stores. For example, Starbucks rewards regular customers with free drinks

and offers all customers free Wi-Fi access. [3] Starbucks also encourages repeat visits by providing cards

with codes for free iTunes downloads. The featured songs change regularly, encouraging frequent repeat

visits.

Internal Business Process Measures

Internal business process measures of performance relate to organizational efficiency. These measures

help answer the key question “What must we excel at?” Examples include the time it takes to manufacture

the organization’s good or deliver a service. The time it takes to create a new product and bring it to

market is another example of this type of measure.

Organizations such as Starbucks realize the importance of such efficiency measures for the long-term

success of its organization, and Starbucks carefully examines its processes with the goal of decreasing

order fulfillment time. In one recent example, Starbucks efficiency experts challenged their employees to

assemble a Mr. Potato Head to understand how work could be done more quickly. [4] The aim of this

exercise was to help Starbucks employees in general match the speed of the firm’s high performers, who

boast an average time per order of twenty-five seconds.

Learning and Growth Measures

Learning and growth measures of performance relate to the future. Such measures provide insight to tell

the organization, “Can we continue to improve and create value?” Learning and growth measures focus on

innovation and proceed with an understanding that strategies change over time. Consequently,

developing new ways to add value will be needed as the organization continues to adapt to an evolving

environment. An example of a learning and growth measure is the number of new skills learned by

employees every year.

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One way Starbucks encourages its employees to learn skills that may benefit both the firm and individuals

in the future is through its tuition reimbursement program. Employees who have worked with Starbucks

for more than a year are eligible. Starbucks hopes that the knowledge acquired while earning a college

degree might provide employees with the skills needed to develop innovations that will benefit the

company in the future. Another benefit of this program is that it helps Starbucks reward and retain high-

achieving employees.

Measuring Performance Using the Triple Bottom Line

Ralph Waldo Emerson once noted, “Doing well is the result of doing good. That’s what capitalism is all

about.” While the balanced scorecard provides a popular framework to help executives understand an

organization’s performance, other frameworks highlight areas such as social responsibility. One such

framework, the triple bottom line, emphasizes the three Ps of people (making sure that the actions of the

organization are socially responsible), the planet (making sure organizations act in a way that promotes

environmental sustainability), and traditional organization profits. This notion was introduced in the

early 1980s but did not attract much attention until the late 1990s.

The triple bottom line emphasizes the three Ps of people (social concerns), planet (environmental

concerns), and profits (economic concerns).

In the case of Starbucks, the firm has made clear the importance it attaches to the planet by creating an

environmental mission statement (“Starbucks is committed to a role of environmental leadership in all

facets of our business”) in addition to its overall mission.[5]In terms of the “people” dimension of the

triple bottom line, Starbucks strives to purchase coffee beans harvested by farmers who work under

humane conditions and are paid reasonable wages. The firm works to be profitable as well, of course.

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K E Y T A K E A W A Y

Organizational performance is a multidimensional concept, and wise managers rely on multiple measures

of performance when gauging the success or failure of their organizations. The balanced scorecard

provides a tool to help executives gain a general understanding of their organization’s current level of

achievement across a set of four important dimensions. The triple bottom line provides another tool to

help executives focus on performance targets beyond profits alone; this approach stresses the

importance of social and environmental outcomes.

E X E R C I S E S

1. How might you apply the balanced scorecard framework to measure performance of your college or

university?

2. Identify a measurable example of each of the balanced scorecard dimensions other than the examples

offered in this section.

3. Identify a mission statement from an organization that emphasizes each of the elements of the triple

bottom line.

[1] Short, J. C., & Palmer, T. B. 2003. Organizational performance referents: An empirical examination of their

content and influences. Organizational Behavior and Human Decision Processes, 90, 209–224.

[2] Kaplan, R. S., & Norton, D. 1992, February. The balanced scorecard: Measures that drive performance. Harvard

Business Review, 70–79.

[3] Miller, C. 2010, June 15. Aiming at rivals, Starbucks will offer free Wi-Fi. New York Times. Section B, p. 1.

[4] Jargon, J. 2009, August 4. Latest Starbucks buzzword: “Lean” Japanese techniques. Wall Street Journal, p. A1.

[5] Our Starbucks mission statement. Retrieved on March 31, 2011, fromhttp://www.starbucks.com/about-

us/company-information/mission-statement. Accessed March 31, 2011.

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2.3 The CEO as Celebrity

L E A R N I N G O B JE C T I V E S

1. Understand the benefits and costs of CEO celebrity status.

2. List and define the four types of CEOs based on differences in fame and reputation.

3. Be able to offer an example of each of the four types of CEOs

Benefits and Costs of CEO Celebrity

The nice thing about being a celebrity is that when you bore people, they think it’s their fault.

Henry Kissinger, former US Secretary of State

The word celebrity quickly brings to mind actors, sports stars, and musicians. Some CEOs, such as Bill

Gates, Oprah Winfrey, Martha Stewart, and Donald Trump, also achieve celebrity status. Celebrity CEOs

are not a new phenomenon. In the early twentieth century, industrial barons such as Henry Ford, John D.

Rockefeller, and Cornelius Vanderbilt were household names. However, in the current era of mass and

instant media, celebrity CEOs have become more prevalent and visible (Figure 2.7 “CEO”). [1]

Cornelius Vanderbilt was one of the earliest celebrity CEOs; Vanderbilt University serves as his

legacy.

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Image courtesy of Mathew Brady and Michel Vuijlsteke,

http://en.wikipedia.org/wiki/File:Cornelius_Vanderbilt_Daguerrotype2 .

Both benefits and costs are associated with CEO celebrity. As the quote from Henry Kissinger suggests,

celebrity confers a mystique and reverence that can be leveraged in a variety of ways. CEO celebrity can

serve as an intangible asset for the CEO’s firm and may increase opportunities available to the firm.

Hiring or developing a celebrity CEO may increase stock price, enhance a firm’s image, and improve the

morale of employees and other stakeholders. However, employing a celebrity CEO also entails risks for an

organization. Increased attention to the firm via the celebrity CEO means any gaps between actual and

expected firm performance are magnified. Further, if a celebrity CEO acts in an unethical or illegal

manner, chances are that the CEO’s firm will receive much more media attention than will other firms

with similar problems. [2]

There are also personal benefits and risks associated with celebrity for the CEO. Celebrity CEOs tend to

receive higher compensation and job perks than their colleagues. Celebrity CEOs are likely to enjoy

increased prestige power, which facilitates invitations to serve on the boards of directors of other firms

and creates opportunities to network with other “managerial elites.” Celebrity also can provide CEOs with

a “benefit of the doubt” effect that protects against quick sanctions for downturns in firm performance

and stock price. However, celebrity also creates potential costs for individuals. Celebrity CEOs face larger

and more lasting reputation erosion if their job performance and behavior is inconsistent with their

celebrity image. Celebrity CEOs face increased personal media scrutiny, and their friends and family must

often endure increased attention into their personal and public lives. Accordingly, wise CEOs will attempt

to understand and manage their celebrity status. [3]

Types of CEOs

Icons are CEOs possessing both fame and strong reputations. The icon CEO combines style and substance

in the execution of his or her job responsibilities. Mary Kay Ash, Richard Branson, Bill Gates, and Warren

Buffett are good examples of icons. The late Mary Kay Ash founded Mary Kay Cosmetics Corporation. The

firm’s great success and Ash’s unconventional motivational methods, such as rewarding sales

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representatives with pink Cadillacs, made her famous. Partly because she emphasized helping other

women succeed and ethical business practices, Mary Kay Ash also had a very positive reputation. Richard

Branson has created an empire with more than four hundred companies, including Virgin Atlantic

Airways and Virgin Records. Branson’s celebrity status led him to star in his own reality-based show. He

has also appeared on television series such as Baywatch and Friends, in addition to several cameo

appearances in major motion pictures. Bill Gates, founder and former CEO of Microsoft, also has fame

and a largely positive reputation. Gates is a proverbial “household name” in the tradition of Ford,

Rockefeller, and Vanderbilt. He also is routinely listed among Time magazine’s “100 Most Influential

People” and has received “rock star” receptions in India and Vietnam in recent years.

Former Microsoft CEO Bill Gates exemplifies a CEO who has reached icon

status.

Image courtesy of World Economic Forum,

http://en.wikipedia.org/wiki/File:Bill_Gates_in_WEF_,2007 .

Warren Buffett is perhaps the best-known executive in the United States. As CEO of Berkshire Hathaway,

he has accumulated wealth estimated at $62 billion and was the richest person in the world as of March

2008. Buffett’s business insights command a level of respect that is perhaps unrivaled. Many in the

investment and policymaking communities pay careful attention to his investment choices and his

commentary on economic conditions. Despite Buffett’s immense wealth and success, his reputation

centers on humility and generosity. Buffett avoids the glitz of Wall Street and has lived for fifty years in a

house he bought in Omaha, Nebraska, for $31,000. Meanwhile, his 2006 donation of approximately $30

billion to the Bill and Melinda Gates Foundation was the largest charitable gift in history.

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CEOs who display high levels of relative fame but low levels of reputation are in the group called

scoundrels. These CEOs are well known but vilified. The late Leona Helmsley was a prototypical

scoundrel. Leona Helmsley’s life was a classic rags-to-riches story. Born to immigrant parents, Helmsley

became a billionaire through her work as the head of an extensive hotel and real estate empire. While

certainly famous, her reputation was anything but positive, as reflected by her nickname: the Queen of

Mean. During Helmsley’s trial for tax fraud, her housekeeper quoted her as proclaiming, “We don’t pay

taxes. Only the little people pay taxes.” Following twenty-one months in jail, Helmsley was required to

perform 750 hours of community service. One hundred fifty hours were added to this sentence after it was

discovered that employees had performed some of her service hours. Helmsley’s apparent arrogance,

combined with her cruelty to employees and her reputation as the ultimate workplace bully, cemented her

position as a scoundrel.

The corporate governance scandals of the early 2000s revealed several CEOs as scoundrels. Perhaps the

best known were Kenneth Lay and Dennis Kozlowski. Both men rose to prominence as their firms’ success

and stock prices soared but were undone by dubious activities. Lay was once revered as the son of a poor

minister who founded Enron and built it into a giant in the energy business. In 2001, however, he became

the face of corporate abuses in the United States after Enron’s collapse led to scenes, captured on

television, of employees left jobless and with retirement accounts full of worthless Enron stock. Lay was

convicted of fraud in 2006 but died before sentencing.

Also born to a poor family, Kozlowski started at Tyco as an accountant and worked his way up to the

executive suite. In May 2001, a BusinessWeek cover story lauded Kozlowski as “the most aggressive CEO”

in the country and detailed his strategy for building Tyco into the next General Electric by using

acquisitions to gain the first or second position in all the industries in which it competed. By 2002,

Kozlowski’s reputation was in jeopardy. He was indicted for avoiding more than $1 million in sales taxes

on art purchases. Media stories described in detail a $2 million birthday party Kozlowski threw for his

wife (billing half of it to Tyco as a company function), a $19 million apartment Tyco purchased for him,

and $11 million worth of furnishings for the apartment (including an infamous $6,000 shower curtain).

Accusations that Kozlowski and another Tyco executive stole hundreds of millions of dollars from the firm

ultimately led to a prison sentence of eight to twenty-five years.

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Hidden gems are CEOs who lack fame but possess positive reputations. These CEOs toil in relative

obscurity while leading their firms to success. Their skill as executives is known mainly by those in their

own firm and by their competitors. In many cases, the firm has some renown due to its success, but the

CEO stays unknown. For example, consider the case of Anne Mulcahy. Mulcahy, CEO of Xerox, started

her career at Xerox as a copier salesperson. Despite building an excellent reputation by rescuing Xerox

from near bankruptcy, Mulcahy eschews fame and publicity. While being known for successfully leading

Xerox by example and being willing to fly anywhere to meet a customer, she avoids stock analysts and

reporters.

Silent killers are the fourth and final group of CEOs. These CEOs are overlooked and ignored sources of

harm to their firms. While scoundrels are closely monitored and scrutinized by the media, it may be too

late before the poor ethics or incompetence of the silent killers is detected. In this sense, silent killers are

sometimes worse than scoundrels. One example of a silent killer is Harding Lawrence, former CEO of

defunct Braniff International. Lawrence initiated a massive expansion of the airline following industry

deregulation in the late 1970s. The result was a bloated firm, ill-equipped to survive the extremely

competitive setting that evolved in the early 1980s. Howard Putnam, the CEO of a small regional carrier

named Southwest Airlines, was hired in a failed effort to save the company. By the time Braniff went

bankrupt, Putnam was left to explain its demise, and the name of the main culprit was all but forgotten.

Ironically, had Putnam declined the opportunity to try to save Braniff, perhaps he and not Herb Kelleher

would have become an icon at the helm of Southwest.

Strategy at the Movies

Iron Man

Has Tony Stark gone crazy? This was the question that many stakeholders of Stark Industries were asking

themselves in the 2008 blockbuster Iron Man. Tony Stark, CEO of Stark Industries, stunned his

shareholders, employees, and the world when he announced that he was changing Stark Industries’

mission from being one of the world’s leading weapons manufacturers to being a socially responsible,

clean energy producer. Following his announcement, Stark faced fierce opposition from his board of

directors, employees, the media, and clients such as the US military. The changes at Stark Industries

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attracted tremendous attention in part because of the glamorous Stark’s status as a celebrity CEO.

Initially, Stark is seen by the public as a scoundrel that pays little attention to the social impact his

company makes. After shifting the direction of Stark Industries, however, Stark is viewed as an icon that

is just as attentive to the social performance of the company as he is to its financial performance. Iron

Man illustrates that while changing elements such as firm mission and CEO status is difficult, it is not

impossible.

Iron Man: The Greatest Creation of Fictional Celebrity CEO Tony Stark

Image courtesy of Pop Culture Geek, http://www.flickr.com/photos/popculturegeek/4858995531.

Celebrity Rehabilitation

Anything I say or do is now at risk of showing up on the front page of a national daily newspaper and

therefore, I need to be much more conscious about the implications of everything that I say or do in all

situations.

John Mackey, CEO of Whole Foods Market

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Achieving the level of success that brings about celebrity is seldom a completely smooth process. Even

well-regarded celebrity CEOs seldom have totally untarnished reputations. Bill Gates has been portrayed

as a ruthless and devious genius, for example, while General Electric CEO Jack Welch was attacked in

media outlets for an extramarital affair.

One of the more interesting recent cases of a tarnished reputation centers on John Mackey, founder and

CEO of Whole Foods Market. His strategy of offering organic food and high levels of service allowed

Whole Foods to carve out a profitable and growing niche in an industry whose overall margins have been

squeezed as Walmart’s Supercenters have gained market share. Under Mackey’s leadership, Whole Food’s

stock price tripled from 2001 to 2006. Mackey’s efforts to make food supplies healthier and his teamwork-

centered management approach attracted publicity, and he appeared headed for icon status.

But in 2007 Mackey and Whole Foods were embarrassed by the revelation that Mackey had been

anonymously posting negative information about a rival, Wild Oats, online. Through his online persona

“rahodeb” (a scrambling of his wife’s name), Mackey asserted that Wild Oats’ stock was overpriced and

that the firm was headed toward bankruptcy. This was viewed by some observers as a possible effort to

manipulate Wild Oats’ stock price prior to a proposed acquisition by Whole Foods. Meanwhile, in e-mails

to other Whole Foods executives, Mackey noted that the acquisition of Wild Oats could allow them to

avoid “nasty price wars.” This caught the eye of Federal Trade Commission (FTC) regulators who were

concerned about the antitrust implications of the acquisition.

Whole Foods CEO John Mackey’s celebrity status was amplified when it was revealed that he had posted negative

information online about competitor Wild Oats.

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Image courtesy of Joe M500, http://en.wikipedia.org/wiki/File:John_Mackey,_of_Whole_Foods_in_2009 .

What should a CEO do when his or her reputation takes a hit? As the old saying goes, honesty is the best

policy. An example is offered by David Neeleman, founder and CEO of JetBlue. The reputations of JetBlue

and Neeleman took a severe blow after a widely reported February 2007 debacle in which travelers were

stranded in airplanes for excessive periods of time during a busy holiday weekend. Neeleman took a giant

step toward restoring both his and JetBlue’s reputation by issuing a public, heartfelt apology. He not only

issued a written apology to customers but also bought full-page advertisements in newspapers, posted a

video apology online, and created a new “bill of rights” for JetBlue customers.

Mackey apologized for his actions via his blog in 2008. As part of this apology, Mackey acknowledged that

he had failed to recognize how expectations change when one becomes a celebrity. Mackey noted that

when Whole Foods was a smaller company, “I was seldom interviewed and few people knew or cared who

I was. I wasn’t a public figure and had no desire to become one.” As his company grew, however, Mackey

became subject to more scrutiny. As Mackey put it, “At some point in the past 10 years I went from being a

relatively unknown person to becoming a public figure. I regret not having the wisdom to recognize this

fact until very recently.”[4] A big part of managing celebrity status is realizing that one is in fact a celebrity.

K E Y T A K E A W A Y

The media exposure common to modern CEOs provides the opportunity for such top executives to reach

celebrity status. While this status can provide positive benefits to their firms such as increased

performance, CEOs should be aware of and manage the potential for increased scrutiny associated with

this status.

E X E R C I S E S

1. Can you identify another example of a celebrity CEO, such as Cornelius Vanderbilt, that existed prior to

the 1900s?

2. Identify examples of icons, scoundrels, hidden gems, and silent killers other than the examples offered in

this section.

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3. Would you enjoy the media attention associated with CEO celebrity, or would you prefer to hide from the

limelight? Does your answer have implications for your future career choices?

[1] This section of the chapter is adapted from Ketchen, D., Adams, G., & Shook, C. 2008. Understanding and

managing CEO celebrity. Business Horizons, 51(6), 529–534.

[2] Ranft, A. L., Zinko, R., Ferris, G. R., & Buckley, M. R. 2006. Marketing the image of management: The costs and

benefits of CEO reputation. Organizational Dynamics, 35(3), 279–290.

[3] Wade, J. B., Porac, J. F., Pollock, T. G., & Graffin, S. D. 2008. Star CEOs: Benefit or burden? Organizational

Dynamics, 37(2), 203–210.

[4] John Mackey’s blog. 2008, May 21. Re: Apology. Retrieved

fromhttp://www2.wholefoodsmarket.com/blogs/jmackey/2008/05/21/back-to-blogging/#more-26.

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2.4 Entrepreneurial Orientation
L E A R N I N G O B JE C T I V E S

1. Understand how thinking and acting entrepreneurially can help organizations and individuals.

2. List and define the five dimensions of an entrepreneurial orientation.

The Value of Thinking and Acting Entrepreneurially

When asked to think of an entrepreneur, people typically offer examples such as Howard Schultz, Estée

Lauder, and Michael Dell—individuals who have started their own successful businesses from the bottom

up that generated a lasting impact on society. But entrepreneurial thinking and doing are not limited to

those who begin in their garage with a new idea, financed by family members or personal savings. Some

people in large organizations are filled with passion for a new idea, spend their time championing a new

product or service, work with key players in the organization to build a constituency, and then find ways

to acquire the needed resources to bring the idea to fruition. Thinking and behaving entrepreneurially can

help a person’s career too. Some enterprising individuals successfully navigate through the environments

of their respective organizations and maximize their own career prospects by identifying and seizing new

opportunities.[1]

As a college student, Michael Dell demonstrated an entrepreneurial

orientation by starting a computer-upgrading business in his dorm room.

He later founded Dell Inc.

Image courtesy of Ilan Costica,

http://en.wikipedia.org/wiki/File:Michael_Dell_at_Oracle_OpenWorld.J

PG.

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In the 1730s, Richard Cantillon used the French term entrepreneur, or literally “undertaker,” to refer to

those who undertake self-employment while also accepting an uncertain return. In subsequent years,

entrepreneurs have also been referred to as innovators of new ideas (Thomas Edison), individuals who

find and promote new combinations of factors of production (Bill Gates’ bundling of Microsoft’s

products), and those who exploit opportunistic ideas to expand small enterprises (Mark Zuckerberg at

Facebook). The common elements of these conceptions of entrepreneurs are that they do something new

and that some individuals can make something out of opportunities that others cannot.

Entrepreneurial orientation (EO) is a key concept when executives are crafting strategies in the hopes of

doing something new and exploiting opportunities that other organizations cannot exploit. EO refers to

the processes, practices, and decision-making styles of organizations that act entrepreneurially. [2] Any

organization’s level of EO can be understood by examining how it stacks up relative to five dimensions: (1)

autonomy, (2) competitive aggressiveness, (3) innovativeness, (4) proactiveness, (5) and risk taking.

These dimensions are also relevant to individuals.

Autonomy

Autonomy refers to whether an individual or team of individuals within an organization has the freedom

to develop an entrepreneurial idea and then see it through to completion. In an organization that offers

high autonomy, people are offered the independence required to bring a new idea to fruition, unfettered

by the shackles of corporate bureaucracy. When individuals and teams are unhindered by organizational

traditions and norms, they are able to more effectively investigate and champion new ideas.

Some large organizations promote autonomy by empowering a division to make its own decisions, set its

own objectives, and manage its own budgets. One example is Sony’s PlayStation group, which was created

by chief operating officer (COO) Ken Kutaragi, largely independent of the Sony bureaucracy. In time, the

PlayStation business was responsible for nearly all Sony’s net profit. Because of the success generated by

the autonomous PlayStation group, Kutaragi later was tapped to transform Sony’s core consumer

electronics business into a PlayStation clone. In some cases, an autonomous unit eventually becomes

completely distinct from the parent company, such as when Motorola spun off its successful

semiconductor business to create Freescale.

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Competitive Aggressiveness

Competitive aggressiveness is the tendency to intensely and directly challenge competitors rather than

trying to avoid them. Aggressive moves can include price-cutting and increasing spending on marketing,

quality, and production capacity. An example of competitive aggressiveness can be found in Ben & Jerry’s

marketing campaigns in the mid-1980s, when Pillsbury’s Häagen-Dazs attempted to limit distribution of

Ben & Jerry’s products. In response, Ben & Jerry’s launched their “What’s the Doughboy Afraid Of?”

advertising campaign to challenge Pillsbury’s actions. This marketing action was coupled with a series of

lawsuits—Ben & Jerry’s was competitively aggressive in both the marketplace and the courtroom.

Although aggressive moves helped Ben & Jerry’s, too much aggressiveness can undermine an

organization’s success. A small firm that attacks larger rivals, for example, may find itself on the losing

end of a price war. Establishing a reputation for competitive aggressiveness can damage a firm’s chances

of being invited to join collaborative efforts such as joint ventures and alliances. In some industries, such

as the biotech industry, collaboration is vital because no single firm has the knowledge and resources

needed to develop and deliver new products. Executives thus must be wary of taking competitive actions

that destroy opportunities for future collaborating.

Innovativeness

Innovativeness is the tendency to pursue creativity and experimentation. Some innovations build on

existing skills to create incremental improvements, while more radical innovations require brand-new

skills and may make existing skills obsolete. Either way, innovativeness is aimed at developing new

products, services, and processes. Those organizations that are successful in their innovation efforts tend

to enjoy stronger performance than those that do not.

Known for efficient service, FedEx has introduced its Smart Package, which allows both shippers and

recipients to monitor package location, temperature, and humidity. This type of innovation is a welcome

addition to FedEx’s lineup for those in the business of shipping delicate goods, such as human organs.

How do firms generate these types of new ideas that meet customers’ complex needs? Perennial

innovators 3M and Google have found a few possible answers. 3M sends nine thousand of its technical

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personnel in thirty-four countries into customers’ workplaces to experience firsthand the kinds of

problems customers encounter each day. Google’s two most popular features of its Gmail, thread sorting

and unlimited e-mail archiving, were first suggested by an engineer who was fed up with his own e-mail

woes. Both firms allow employees to use a portion of their work time on projects of their own choosing

with the goal of creating new innovations for the company. This latter example illustrates how multiple

EO dimensions—in this case, autonomy and innovativeness—can reinforce one another.

Ben & Jerry’s displays innovativeness by developing a series of offbeat and creative flavors over time.

Image courtesy of theimpulsivebuy,

Proactiveness

Proactiveness is the tendency to anticipate and act on future needs rather than reacting to events after

they unfold. A proactive organization is one that adopts an opportunity-seeking perspective. Such

organizations act in advance of shifting market demand and are often either the first to enter new markets

or “fast followers” that improve on the initial efforts of first movers.

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Consider Proactive Communications, an aptly named small firm in Killeen, Texas. From its beginnings in

2001, this firm has provided communications in hostile environments, such as Iraq and areas impacted by

Hurricane Katrina. Being proactive in this case means being willing to don a military helmet or sleep

outdoors—activities often avoided by other telecommunications firms. By embracing opportunities that

others fear, Proactive’s executives have carved out a lucrative niche in a world that is technologically,

environmentally, and politically turbulent. [3]

Risk Taking

Risk taking refers to the tendency to engage in bold rather than cautious actions. Starbucks, for example,

made a risky move in 2009 when it introduced a new instant coffee called VIA Ready Brew. Instant coffee

has long been viewed by many coffee drinkers as a bland drink, but Starbucks decided that the

opportunity to distribute its product in a different format was worth the risk of associating its brand name

with instant coffee.

Although a common belief about entrepreneurs is that they are chronic risk takers, research suggests that

entrepreneurs do not perceive their actions as risky, and most take action only after using planning and

forecasting to reduce uncertainty. [4] But uncertainty seldom can be fully eliminated. A few years ago,

Jeroen van der Veer, CEO of Royal Dutch Shell PLC, entered a risky energy deal in Russia’s Far East. At

the time, van der Veer conceded that it was too early to know whether the move would be

successful. [5] Just six months later, however, customers in Japan, Korea, and the United States had

purchased all the natural gas expected to be produced there for the next twenty years. If political

instabilities in Russia and challenges in pipeline construction do not dampen returns, Shell stands to post

a hefty profit from its 27.5 percent stake in the venture.

Building an Entrepreneurial Orientation

Steps can be taken by executives to develop a stronger entrepreneurial orientation throughout an

organization and by individuals to become more entrepreneurial themselves. For executives, it is

important to design organizational systems and policies to reflect the five dimensions of EO. As an

example, how an organization’s compensation systems encourage or discourage these dimensions should

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be considered. Is taking sensible risks rewarded through raises and bonuses, regardless of whether the

risks pay off, for example, or does the compensation system penalize risk taking? Other organizational

characteristics such as corporate debt level may influence EO. Do corporate debt levels help or impede

innovativeness? Is debt structured in such a way as to encourage risk taking? These are key questions for

executives to consider.

Examination of some performance measures can assist executives in assessing EO within their

organizations. To understand how the organization develops and reinforces autonomy, for example, top

executives can administer employee satisfaction surveys and monitor employee turnover rates.

Organizations that effectively develop autonomy should foster a work environment with high levels of

employee satisfaction and low levels of turnover. Innovativeness can be gauged by considering how many

new products or services the organization has developed in the last year and how many patents the firm

has obtained.

Similarly, individuals should consider whether their attitudes and behaviors are consistent with the five

dimensions of EO. Is an employee making decisions that focus on competitors? Does the employee

provide executives with new ideas for products or processes that might create value for the organization?

Is the employee making proactive as opposed to reactive decisions? Each of these questions will aid

employees in understanding how they can help to support EO within their organizations.

K E Y T A K E A W A Y

Building an entrepreneurial orientation can be valuable to organizations and individuals alike in

identifying and seizing new opportunities. Entrepreneurial orientation consists of five dimensions: (1)

autonomy, (2) competitive aggressiveness, (3) innovativeness, (4) proactiveness, and (5) risk taking.

E X E R C I S E S

1. Can you name three firms that have suffered because of lack of an entrepreneurial orientation?

2. Identify examples of each dimension of entrepreneurial orientation other than the examples offered in

this section.

3. How does developing an entrepreneurial orientation have implications for your future career choices?

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4. How could you apply the dimensions of entrepreneurial orientation to a job search?

[1] This section is adapted from Certo, S. T., Moss, T. W., & Short, J. C. 2009. Entrepreneurial orientation: An

applied perspective. Business Horizons, 52, 319–324.

[2] Lumpkin, G. T., & Dess, G. G. 1996. Clarifying the entrepreneurial orientation construct and linking it to

performance. Academy of Management Review, 21, 135–172.

[3] Choi, A. S. 2008, April 16. PCI builds telecommunications in Iraq. Bloomberg Businessweek. Retrieved

fromhttp://www.businessweek.com/magazine/content/08_64/s0804065916656.htm.

[4] Simon, M., Houghton, S. M., & Aquino, K. 2000. Cognitive biases, risk perception, and venture formation: How

individuals decide to start companies. Journal of Business Venturing, 14, 113–134.

[5] Certo, S. T., Connelly, B., & Tihanyi, L. 2008. Managers and their not-so-rational decisions. Business

Horizons, 51(2), 113–119.

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2.5 Conclusion

This chapter explains several challenges that executives face in attempting to lead their organizations

strategically. Executives must ensure that their organizations have visions, missions, and goals in

place that help move these organizations forward. Measures and referents for assessing performance

must be thoughtfully chosen. Some executives become celebrities, thereby creating certain

advantages and disadvantages for themselves and for their firms. Finally, executives must monitor

the degree of entrepreneurial orientation present within their organizations and make adjustments

when necessary. When executives succeed at leading strategically, an organization has an excellent

chance of success.

E X E R C I S E S

1. Divide your class into four or eight groups, depending on the size of the class. Assign each group to

develop arguments that one of the key issues discussed in this chapter (vision, mission, goals; assessing

organizational performance; CEO celebrity; entrepreneurial orientation) is the most important within

organizations. Have each group present their case, and then have the class vote individually for the

winner. Which issue won and why?

2. This chapter discussed Howard Schultz and Starbucks on several occasions. Based on your reading of the

chapter, how well has Schultz done in dealing with setting a vision, mission, and goals, assessing

organizational performance, CEO celebrity, and entrepreneurial orientation?

3. Write a vision and mission for an organization or firm that you are currently associated with. How could

you use the balanced scorecard to assess how well that organization is fulfilling the mission you wrote?

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Chapter 1

Mastering Strategy: Art and Science

L E A R N I N G O B JE C T I V E S

After reading this chapter, you should be able to understand and articulate answers to the following

questions:

1. What are strategic management and strategy?

2. Why does strategic management matter?

3. What elements determine firm performance?

Strategic Management: A Core Concern for Apple

The Opening of the Apple Store

Image courtesy of Neil Bird, http://www.flickr.com/photos/nechbi/2058929337.

March 2, 2011, was a huge day for Apple. The firm released its much-anticipated iPad2, a thinner and

faster version of market-leading Apple’s iPad tablet device. Apple also announced that a leading publisher,

Random House, had made all seventeen thousand of its books available through Apple’s iBookstore.

Apple had enjoyed tremendous success for quite some time. Approximately fifteen million iPads were sold

in 2010, and the price of Apple’s stock had more than tripled from early 2009 to early 2011.

Chapter 1 from Mastering Strategic Management was adapted by The Saylor Foundation under
a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested

by the work’s original creator or licensee. © 2014, The Saylor Foundation.

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But future success was far from guaranteed. The firm’s visionary founder Steve Jobs was battling serious

health problems. Apple’s performance had suffered when an earlier health crisis had forced Jobs to step

away from the company. This raised serious questions. Would Jobs have to step away again? If so, how

might Apple maintain its excellent performance without its leader?

Meanwhile, the iPad2 faced daunting competition. Samsung, LG, Research in Motion, Dell, and other

manufacturers were trying to create tablets that were cheaper, faster, and more versatile than the iPad2.

These firms were eager to steal market share by selling their tablets to current and potential Apple

customers. Could Apple maintain leadership of the tablet market, or would one or more of its rivals

dominate the market in the years ahead? Even worse, might a company create a new type of device that

would make Apple’s tablets obsolete?

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1.1 Defining Strategic Management and Strategy

L E A R N I N G O B JE C T I V E S

1. Learn what strategic management is.

2. Understand the key question addressed by strategic management.

3. Understand why it is valuable to consider different definitions of strategy.

4. Learn what is meant by each of the 5 Ps of strategy.

What Is Strategic Management?

Issues such as those currently faced by Apple are the focus of strategic management because they help

answer the key question examined by strategic management—“Why do some firms outperform other

firms?” More specifically, strategic management examines how actions and events involving top

executives (such as Steve Jobs), firms (Apple), and industries (the tablet market) influence a firm’s

success or failure. Formal tools exist for understanding these relationships, and many of these tools are

explained and applied in this book. But formal tools are not enough; creativity is just as important to

strategic management. Mastering strategy is therefore part art and part science.

This introductory chapter is intended to enable you to understand what strategic management is and why

it is important. Because strategy is a complex concept, we begin by explaining five different ways to think

about what strategy involves. Next, we journey across many centuries to examine the evolution of

strategy from ancient times until today. We end this chapter by presenting a conceptual model that maps

out one way that executives can work toward mastering strategy. The model also provides an overall portrait

s of this book’s contents by organizing the remaining nine chapters into a coherent whole.

Defining Strategy: The Five Ps

Defining strategy is not simple. Strategy is a complex concept that involves many different processes and

activities within an organization. To capture this complexity, Professor Henry Mintzberg of McGill

University in Montreal, Canada, articulated what he labeled as “the 5 Ps of strategy.” According to

Mintzberg, understanding how strategy can be viewed as a plan, as a ploy, as a position, as a pattern, and

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as a perspective is important. Each of these five ways of thinking about strategy is necessary for

understanding what strategy is, but none of them alone is sufficient to master the concept. [1]

Figure 1.1 Defining Strategy: The Five Ps

Images courtesy of Thinkstock (first);Wikipedia (second); OldNavy (third); James Duncan

Davidson from Portland, USA (fourth)

Strategy as a Plan

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Strategic plans are the essence of strategy, according to one classic view of strategy. A strategic plan is a

carefully crafted set of steps that a firm intends to follow to be successful. Virtually every organization

creates a strategic plan to guide its future. In 1996, Apple’s performance was not strong, and Gilbert F.

Amelio was appointed as chief executive officer in the hope of reversing the company’s fortunes. In a

speech focused on strategy, Amelio described a plan that centered on leveraging the Internet (which at the

time was in its infancy) and developing multimedia products and services. Apple’s subsequent success

selling over the Internet via iTunes and with the iPad can be traced back to the plan articulated in 1996. [2]

A business model should be a central element of a firm’s strategic plan. Simply stated, a business model

describes the process through which a firm hopes to earn profits. It probably won’t surprise you to learn

that developing a viable business model requires that a firm sell goods or services for more than it costs

the firm to create and distribute those goods. A more subtle but equally important aspect of a business

model is providing customers with a good or service more cheaply than they can create it themselves.

Consider, for example, large chains of pizza restaurants such as Papa John’s and Domino’s.

Franchises such as Pizza Hut provide an example of a popular business model that has been successful worldwide.

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Image courtesy of Derek Jensen, http://wikimediafoundation.org/wiki/File:Bremen-indiana-pizza-hut .

Because these firms buy their ingredients in massive quantities, they pay far less for these items than any

family could (an advantage called economies of scale). Meanwhile, Papa John’s and Domino’s have

developed specialized kitchen equipment that allows them to produce better-tasting pizza than can be

created using the basic ovens that most families rely on for cooking. Pizza restaurants thus can make

better-tasting pizzas for far less cost than a family can make itself. This business model provides healthy

margins and has enabled Papa John’s and Domino’s to become massive firms.

Strategic plans are important to individuals too. Indeed, a well-known proverb states that “he who fails to

plan, plans to fail.” In other words, being successful requires a person to lay out a path for the future and

then follow that path. If you are reading this, earning a college degree is probably a key step in your

strategic plan for your career. Don’t be concerned if your plan is not fully developed, however. Life is full

of unexpected twists and turns, so maintaining flexibility is wise for individuals planning their career

strategies as well as for firms.

For firms, these unexpected twists and turns place limits on the value of strategic planning. Former

heavyweight boxing champion Mike Tyson captured the limitations of strategic plans when he noted,

“Everyone has a plan until I punch them in the face.” From that point forward, strategy is less about a

plan and more about adjusting to a shifting situation. For firms, changes in the behavior of competitors,

customers, suppliers, regulators, and other external groups can all be sources of a metaphorical punch in

the face. As events unfold around a firm, its strategic plan may reflect a competitive reality that no longer

exists. Because the landscape of business changes rapidly, other ways of thinking about strategy are

needed.

Strategy as a Ploy

A second way to view strategy is in terms of ploys. A strategic ploy is a specific move designed to outwit or

trick competitors. Ploys often involve using creativity to enhance success. One such case involves the

mighty Mississippi River, which is a main channel for shipping cargo to the central portion of the United

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States. Ships traveling the river enter it near New Orleans, Louisiana. The next major port upriver is

Louisiana’s capital, Baton Rouge. A variety of other important ports exist in states farther upriver.

Many decades ago, the governor of Louisiana was a clever and controversial man named Huey Long.

Legend has it that Long ordered that a bridge being constructed over the Mississippi River in Baton Rouge

be built intentionally low to the ground. This ploy created a captive market for cargo because very large

barges simply could not fit under the bridge. Large barges using the Mississippi River thus needed to

unload their cargo in either New Orleans or Baton Rouge. Either way, Louisiana would benefit. Of course,

owners of ports located farther up the river were not happy.

Ploys can be especially beneficial in the face of much stronger opponents. Military history offers quite a

few illustrative examples. Before the American Revolution, land battles were usually fought by two

opposing armies, each of which wore brightly colored clothing, marching toward each other across open

fields. George Washington and his officers knew that the United States could not possibly defeat better-

trained and better-equipped British forces in a traditional battle. To overcome its weaknesses, the

American military relied on ambushes, hit-and-run attacks, and other guerilla moves. It even broke an

unwritten rule of war by targeting British officers during skirmishes. This was an effort to reduce the

opponent’s effectiveness by removing its leadership.

Centuries earlier, the Carthaginian general Hannibal concocted perhaps the most famous ploy ever.

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Hannibal’s clever use of elephants to cross the Alps provides an example of a strategic ploy.

Image courtesy of Wikipedia, http://en.wikipedia.org/wiki/File:Hannibal3 .

Carthage was at war with Rome, a scary circumstance for most Carthaginians given their far weaker

fighting force. The Alps had never been crossed by an army. In fact, the Alps were considered such a

treacherous mountain range that the Romans did not bother monitoring the part of their territory that

bordered the Alps. No horse was up to the challenge, but Hannibal cleverly put his soldiers on elephants,

and his army was able to make the mountain crossing. The Romans were caught completely unprepared

and most of them were frightened by the sight of charging elephants. By using the element of surprise,

Hannibal was able to lead his army to victory over a much more powerful enemy.

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Ploys continue to be important today. In 2011, a pizzeria owner in Pennsylvania was accused of making a

rather unique attempt to outmaneuver two rival pizza shops. According to police, the man tried to

sabotage his competitors by placing mice in their pizzerias. If the ploy had not been discovered, the two

shops could have suffered bad publicity or even been shut down by authorities because of health concerns.

Although most strategic ploys are legal, this one was not, and the perpetrator was arrested. [3]

Strategy as a Pattern

Strategy as pattern is a third way to view strategy. This view focuses on the extent to which a firm’s actions

over time are consistent. A lack of a strategic pattern helps explain why Kmart deteriorated into

bankruptcy in 2002. The company was started in the late nineteenth century as a discount department

store. By the middle of the twentieth century, consistently working to be good at discount retailing had led

Kmart to become a large and prominent chain.

By the 1980s, however, Kmart began straying from its established strategic pattern. Executives shifted the

firm’s focus away from discount retailing and toward diversification. Kmart acquired large stakes in

chains involved in sporting goods (Sports Authority), building supplies (Builders Square), office supplies

(OfficeMax), and books (Borders). In the 1990s, a new team of executives shifted Kmart’s strategy again.

Brands other than Kmart were sold off, and Kmart’s strategy was adjusted to emphasize information

technology and supply chain management. The next team of executives decided that Kmart’s strategy

would be to compete directly with its much-larger rival, Walmart. The resulting price war left Kmart

crippled. Indeed, this last shift in strategy was the fatal mistake that drove Kmart into bankruptcy. Today,

Kmart is part of Sears Holding Company, and its prospects remain uncertain.

In contrast, Apple is very consistent in its strategic pattern: It always responds to competitive challenges

by innovating. Some of these innovations are complete busts. Perhaps the best known was the Newton, a

tablet-like device that may have been ahead of its time. Another was the Pippin, a video game system

introduced in 1996 to near-universal derision. Apple TV, a 2007 offering intended to link televisions with

the Internet, also failed to attract customers. Such failures do not discourage Apple, however, and enough

of its innovations are successful that Apple’s overall performance is excellent. However, there are risks to

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following a pattern too closely. A consistent pattern can make a company predictable, a possibility that

Apple must guard against in the years ahead.

Strategy as a Position

Viewing strategy as a plan, a ploy, and a pattern involve only the actions of a single firm. In contrast, the

next P—strategy as position—considers a firm and its competitors. Specifically, strategy as position refers

to a firm’s place in the industry relative to its competitors. McDonald’s, for example, has long been and

remains the clear leader among fast-food chains. This position offers both good and bad aspects for

McDonald’s. One advantage of leading an industry is that many customers are familiar with and loyal to

leaders. Being the market leader, however, also makes McDonald’s a target for rivals such as Burger King

and Wendy’s. These firms create their strategies with McDonald’s as a primary concern. Old Navy offers

another example of strategy as position. Old Navy has been positioned to sell fashionable clothes at

competitive prices.

Old Navy occupies a unique position as the low-cost strategy within the Gap Inc.’s fleet of brands.

Image courtesy of Lindsey Turner, http://www.flickr.com/photos/theogeo/2148416495.

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Old Navy is owned by the same corporation (Gap Inc.) as the midlevel brand the Gap and upscale brand

Banana Republic. Each of these three brands is positioned at a different pricing level. The firm hopes that

as Old Navy’s customers grow older and more affluent, they will shop at the Gap and then eventually at

Banana Republic. A similar positioning of different brands is pursued by General Motors through its

Chevrolet (entry level), Buick (midlevel), and Cadillac (upscale) divisions.

Firms can carve out a position by performing certain activities in a different manner than their rivals. For

example, Southwest Airlines is able to position itself as a lower-cost and more efficient provider by not

offering meals that are common among other airlines. In addition, Southwest does not assign specific

seats. This allows for faster loading of passengers. Positioning a firm in this manner can only be

accomplished when managers make trade-offs that cut off certain possibilities (such as offering meals and

assigned seats) to place their firms in a unique strategic space. When firms position themselves through

unique goods and services customers value, business often thrives. But when firms try to please everyone,

they often find themselves without the competitive positioning needed for long-term success. Thus

deciding what a firm is not going to do is just as important to strategy as deciding what it is going to do. [4]

To gain competitive advantage and greater success, firms sometimes change positions. But this can be a

risky move. Winn-Dixie became a successful grocer by targeting moderate-income customers. When the

firm abandoned this established position to compete for wealthier customers and higher margins, the

results were disastrous. The firm was forced into bankruptcy and closed many stores. Winn-Dixie

eventually exited bankruptcy, but like Kmart, its future prospects are unclear. In contrast to firms such as

Winn-Dixie that change positions, Apple has long maintained a position as a leading innovator in various

industries. This positioning has served Apple well.

Strategy as a Perspective

The fifth and final P shifts the focus to inside the minds of the executives running a

firm. Strategy as perspective refers to how executives interpret the competitive landscape around them.

Because each person is unique, two different executives could look at the same event—such as a new

competitor emerging—and attach different meanings to it. One might just see a new threat to his or her

firm’s sales; the other might view the newcomer as a potential ally.

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An old cliché urges listeners to “make lemons into lemonade.” A good example of applying this idea

through strategy as perspective is provided by local government leaders in Sioux City, Iowa. Rather than

petition the federal government to change their airport’s unusual call sign—SUX—local leaders decided to

leverage the call sign to attract the attention of businesses and tourists to build their city’s economic base.

An array of clothing and other goods sporting the SUX name is available at http://www.flysux.com. Some

strategists such as these local leaders are willing to take a seemingly sour situation and see the potential

sweetness, while other executives remain fixated on the sourness.

Executives who adopt unique and positive perspectives can lead firms to find and exploit opportunities

that others simply miss. In the mid-1990s, the Internet was mainly a communication tool for academics

and government agencies. Jeff Bezos looked beyond these functions and viewed the Internet as a potential

sales channel. After examining a number of different markets that he might enter using the Internet,

Bezos saw strong profit potential in the bookselling business, and he began selling books online. Today,

the company he created—Amazon—has expanded far beyond its original focus on books to become a

dominant retailer in countless different markets. The late Steve Jobs at Apple appeared to take a similar

perspective; he saw opportunities where others could not, and his firm has reaped significant benefits as a

result.

K E Y T A K E A W A Y

Strategic management focuses on firms and the different strategies that they use to become and remain

successful. Multiple views of strategy exist, and the 5 Ps described by Henry Mintzberg enhance

understanding of the various ways in which firms conceptualize strategy.

E X E R C I S E S

1. Have you developed a strategy to manage your career? Should you make it more detailed? Why or why

not?

2. Identify an example of each of the 5 Ps of strategy other than the examples offered in this section.

3. What business that you visit regularly seems to have the most successful business model? What makes

the business model work?

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[1] Mintzberg, H. 1987. The strategy concept I: Five Ps for strategy. California Management Review, 30(1), 11–24.

[2] Markoff, J. 1996, May 14. Apple unveils strategic plan of small steps. New York Times. Retrieved

from http://www.nytimes.com/1996/05/14/business/apple-unveils-strategic -plan-of-small-steps.html

[3] Reuters. 2011, March 1. Philadelphia area pizza owner used mice vs. competition—police. Retrieved from

news.yahoo.com/s/nm/20110301/od_uk_nm/oukoe_uk_crime_pizza

[4] Porter, M. E. 1996, November–December. What is strategy? Harvard Business Review, 61–79.

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1.2 Intended, Emergent, and Realized Strategies

L E A R N I N G O B JE C T I V E S

1. Learn what is meant by intended and emergent strategies and the differences between them.

2. Understand realized strategies and how they are influenced by intended, deliberate, and emergent

strategies.

A few years ago, a consultant posed a question to thousands of executives: “Is your industry facing

overcapacity and fierce price competition?” All but one said “yes.” The only “no” came from the

manager of a unique operation—the Panama Canal! This manager was fortunate to be in charge of a

venture whose services are desperately needed by shipping companies and that offers the only simple

route linking the Atlantic and Pacific Oceans. The canal’s success could be threatened if transoceanic

shipping was to cease or if a new canal were built. Both of these possibilities are extremely remote,

however, so the Panama Canal appears to be guaranteed to have many customers for as long as

anyone can see into the future.

When an organization’s environment is stable and predictable, strategic planning can provide

enough of a strategy for the organization to gain and maintain success. The executives leading the

organization can simply create a plan and execute it, and they can be confident that their plan will

not be undermined by changes over time. But as the consultant’s experience shows, only a few

executives—such as the manager of the Panama Canal—enjoy a stable and predictable situation.

Because change affects the strategies of almost all organizations, understanding the concepts of

intended, emergent, and realized strategies is important. Also relevant are deliberate and

nonrealized strategies.

Intended and Emergent Strategies

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An intended strategy is the strategy that an organization hopes to execute. Intended strategies are usually

described in detail within an organization’s strategic plan. When a strategic plan is created for a new

venture, it is called a business plan. As an undergraduate student at Yale in 1965, Frederick Smith had to

complete a business plan for a proposed company as a class project. His plan described a delivery system

that would gain efficiency by routing packages through a central hub and then pass them to their

destinations. A few years later, Smith started Federal Express (FedEx), a company whose strategy closely

followed the plan laid out in his class project. Today, Frederick Smith’s personal wealth has surpassed $2

billion, and FedEx ranks eighth among the World’s Most Admired Companies according

to Fortune magazine. Certainly, Smith’s intended strategy has worked out far better than even he could

have dreamed.[2]

Emergent strategy has also played a role at Federal Express. An emergent strategy is an unplanned

strategy that arises in response to unexpected opportunities and challenges. Sometimes emergent

strategies result in disasters. In the mid-1980s, FedEx deviated from its intended strategy’s focus on

package delivery to capitalize on an emerging technology: facsimile (fax) machines. The firm developed a

service called ZapMail that involved documents being sent electronically via fax machines between FedEx

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offices and then being delivered to customers’ offices. FedEx executives hoped that ZapMail would be a

success because it reduced the delivery time of a document from overnight to just a couple of hours.

Unfortunately, however, the ZapMail system had many technical problems that frustrated customers.

Even worse, FedEx failed to anticipate that many businesses would simply purchase their own fax

machines. ZapMail was shut down before long, and FedEx lost hundreds of millions of dollars following

its failed emergent strategy. In retrospect, FedEx had made a costly mistake by venturing outside of the

domain that was central to its intended strategy: package delivery. [3]

Emergent strategies can also lead to tremendous success. Southern Bloomer Manufacturing Company was

founded to make underwear for use in prisons and mental hospitals. Many managers of such institutions

believe that the underwear made for retail markets by companies such as Calvin Klein and Hanes is

simply not suitable for the people under their care. Instead, underwear issued to prisoners needs to be

sturdy and durable to withstand the rigors of prison activities and laundering. To meet these needs,

Southern Bloomers began selling underwear made of heavy cotton fabric.

An unexpected opportunity led Southern Bloomer to go beyond its intended strategy of serving

institutional needs for durable underwear. Just a few years after opening, Southern Bloomer’s

performance was excellent. It was servicing the needs of about 125 facilities, but unfortunately, this was

creating a vast amount of scrap fabric. An attempt to use the scrap as stuffing for pillows had failed, so the

scrap was being sent to landfills. This was not only wasteful but also costly.

One day, cofounder Don Sonner visited a gun shop with his son. Sonner had no interest in guns, but he

quickly spotted a potential use for his scrap fabric during this visit. The patches that the gun shop sold to

clean the inside of gun barrels were of poor quality. According to Sonner, when he “saw one of those

flimsy woven patches they sold that unraveled when you touched them, I said, ‘Man, that’s what I can do’”

with the scrap fabric. Unlike other gun-cleaning patches, the patches that Southern Bloomer sold did not

give off threads or lint, two by-products that hurt guns’ accuracy and reliability. The patches quickly

became popular with the military, police departments, and individual gun enthusiasts. Before long,

Southern Bloomer was selling thousands of pounds of patches per month. A casual trip to a gun store

unexpectedly gave rise to a lucrative emergent strategy. [4]

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Realized Strategy

A realized strategy is the strategy that an organization actually follows. Realized strategies are a product of

a firm’s intended strategy (i.e., what the firm planned to do), the firm’s deliberate strategy (i.e., the parts

of the intended strategy that the firm continues to pursue over time), and its emergent strategy (i.e., what

the firm did in reaction to unexpected opportunities and challenges). In the case of FedEx, the intended

strategy devised by its founder many years ago—fast package delivery via a centralized hub—remains a

primary driver of the firm’s realized strategy. For Southern Bloomers Manufacturing Company, realized

strategy has been shaped greatly by both its intended and emergent strategies, which center on underwear

and gun-cleaning patches.

In other cases, firms’ original intended strategies are long forgotten. A nonrealized strategy refers to the

abandoned parts of the intended strategy. When aspiring author David McConnell was struggling to sell

his books, he decided to offer complimentary perfume as a sales gimmick. McConnell’s books never did

escape the stench of failure, but his perfumes soon took on the sweet smell of success. The California

Perfume Company was formed to market the perfumes; this firm evolved into the personal care products

juggernaut known today as Avon. For McConnell, his dream to be a successful writer was a nonrealized

strategy, but through Avon, a successful realized strategy was driven almost entirely by opportunistically

capitalizing on change through emergent strategy.

Strategy at the Movies

The Social Network

Did Harvard University student Mark Zuckerberg set out to build a billion-dollar company with more

than six hundred million active users? Not hardly. As shown in 2010’s The Social Network, Zuckerberg’s

original concept in 2003 had a dark nature. After being dumped by his girlfriend, a bitter Zuckerberg

created a website called “FaceMash” where the attractiveness of young women could be voted on. This

evolved first into an online social network called Thefacebook that was for Harvard students only. When

the network became surprisingly popular, it then morphed into Facebook, a website open to everyone.

Facebook is so pervasive today that it has changed the way we speak, such as the word friend being used

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as a verb. Ironically, Facebook’s emphasis on connecting with existing and new friends is about as

different as it could be from Zuckerberg’s original mean-spirited concept. Certainly, Zuckerberg’s

emergent and realized strategies turned out to be far nobler than the intended strategy that began his

adventure in entrepreneurship.

The Social Network demonstrates how founder Mark Zuckerberg’s intended strategy gave way to

an emergent strategy via the creation of Facebook.

Image courtesy of Robert Scoble, http://www.flickr.com/photos/scobleizer/5179377698.

K E Y T A K E A W A Y

Most organizations create intended strategies that they hope to follow to be successful. Over time,

however, changes in an organization’s situation give rise to new opportunities and challenges.

Organizations respond to these changes using emergent strategies. Realized strategies are a product of

both intended and realized strategies.

E X E R C I S E S

1. What is the difference between an intended and an emergent strategy?

2. Can you think of a company that seems to have abandoned its intended strategy? Why do you suspect it

was abandoned?

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3. Would you describe your career strategy in college to be more deliberate or emergent? Why?

[1] Mintzberg, H., & Waters, J. A. 1985. Of strategies, deliberate and emergent. Strategic Management Journal, 6,

257–272.

[2] Donahoe, J. A. 2011, March 10. Forbes: Fred Smith’s fortune grows to $.21B. Memphis Business Journal.

Retrieved fromhttp://www.bizjournals.com/memphis/news/2011/03/10/forbes-fred-smiths-fortune-grows-

to.html; Fortune: FedEx 8th “most admired” company in the world. Memphis Business Journal. Retrieved

from http://www.bizjournals .com/memphis/news/2011/03/03/fortune-fedex-8th-most- admired.html

[3] Funding Universe. FedEx Corporation. Retrieved fromhttp://www.fundinguniverse.com/company –

histories/FedEx-Corporation-Company-History.html

[4] Wells, K. 2002. Floating off the page: The best stories from the Wall Street Journal’s middle column. New York:

Simon & Shuster. Quote from page 97.

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1.3 The History of Strategic Management

L E A R N I N G O B JE C T I V E S

1. Consider how strategy in ancient times and military strategy can provide insights to businesses.

2. Describe how strategic management has evolved into a field of study.

Those who cannot remember the past are condemned to repeat it.

– George Santayana, The Life of Reason

Santayana’s quote has strong implications for strategic management. The history of strategic management

can be traced back several thousand years. Great wisdom about strategy can be acquired by

understanding the past, but ignoring the lessons of history can lead to costly strategic mistakes that could

have been avoided. Certainly, the present offers very important lessons; businesses can gain knowledge

about what strategies do and do not work by studying the current actions of other businesses. But this

section discusses two less obvious sources of wisdom: (1) strategy in ancient times and (2) military

strategy. This section also briefly traces the development of strategic management as a field of study.

Strategy in Ancient Times

Perhaps the earliest-known discussion of strategy is offered in the Old Testament of the

Bible. [1] Approximately 3,500 years ago, Moses faced quite a challenge after leading his fellow Hebrews

out of enslavement in Egypt. Moses was overwhelmed as the lone strategist at the helm of a nation that

may have exceeded one million people. Based on advice from his father-in-law, Moses began delegating

authority to other leaders, each of whom oversaw a group of people. This hierarchical delegation of

authority created a command structure that freed Moses to concentrate on the biggest decisions and

helped him implement his strategies. Similarly, the demands of strategic management today are simply

too much for a chief executive officer (the top leader of a company) to handle alone. Many important tasks

are thus entrusted to vice presidents and other executives.

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In ancient China, strategist and philosopher Sun Tzu offered thoughts on strategy that continue to be

studied carefully by business and military leaders today. Sun Tzu’s best-known work is The Art of War. As

this title implies, Sun Tzu emphasized the creative and deceptive aspects of strategy.

One of Sun Tzu’s ideas that has numerous business applications is that winning a battle without fighting is

the best way to win. Apple’s behavior in the personal computer business offers a good example of this idea

in action. Many computer makers such as Toshiba, Acer, and Lenovo compete with one another based

primarily on price. This leads to price wars that undermine the computer makers’ profits. In contrast,

Apple prefers to develop unique features for its computers, features that have created a fiercely loyal set of

customers. Apple boldly charges far more for its computers than its rivals charge for theirs. Apple does

not even worry much about whether its computers’ software is compatible with the software used by most

other computers. Rather than fighting a battle with other firms, Apple wins within the computer business

by creating its own unique market and by attracting a set of loyal customers. Sun Tzu would probably

admire Apple’s approach.

Perhaps the most famous example of strategy in ancient times revolves around the Trojan horse.

According to legend, Greek soldiers wanted to find a way to enter the gates of Troy and attack the city

from the inside. They devised a ploy that involved creating a giant wooden horse, hiding soldiers inside

the horse, and offering the horse to the Trojans as a gift. The Trojans were fooled and brought the horse

inside their city. When night arrived, the hidden Greek soldiers opened the gates for their army, leading to

a Greek victory. In modern times, the term Trojan horse refers to gestures that appear on the surface to

be beneficial to the recipient but that mask a sinister intent. Computer viruses also are sometimes referred

to as Trojan horses.

A far more noble approach to strategy than the Greeks’ is attributed to King Arthur of Britain. Unlike the

hierarchical approach to organizing Moses used, Arthur allegedly considered himself and each of his

knights to have an equal say in plotting the group’s strategy. Indeed, the group is thought to have held its

meetings at a round table so that no voice, including Arthur’s, would be seen as more important than the

others. The choice of furniture in modern executive suites is perhaps revealing. Most feature rectangular

meeting tables, perhaps signaling that one person—the chief executive officer—is in charge.

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Another implication for strategic management offered by King Arthur and his Knights of the Round Table

involves the concept of mission. Their vigorous search to find the Holy Grail (the legendary cup used by

Jesus and his disciples at the Last Supper) serves as an exemplar for the importance of a central mission

to guide organizational strategy and actions.

Lessons Offered by Military Strategy

Key military conflicts and events have shaped the understanding of strategic

management.

Indeed, the word strategy has its roots in warfare. The Greek verb strategosmeans “army leader” and the idea

of stratego (from which we get the word strategy) refers to defeating an enemy by effectively using resources.[2]

A book written nearly five hundred years ago is still regarded by many as an insightful guide for

conquering and ruling territories. Niccolò Machiavelli’s 1532 book The Prince offers clever recipes for

success to government leaders. Some of the book’s suggestions are quite devious, and the

word Machiavellianis used today to refer to acts of deceit and manipulation.

Two wars fought on American soil provide important lessons about strategic management. In the late

1700s, the American Revolution pitted the American colonies against mighty Great Britain. The

Americans relied on nontraditional tactics, such as guerilla warfare and the strategic targeting of British

officers. Although these tactics were considered by Great Britain to be barbaric, they later became widely

used approaches to warfare. The Americans owed their success in part to help from the French navy,

illustrating the potential value of strategic alliances.

Nearly a century later, Americans turned on one another during the Civil War. After four years of

hostilities, the Confederate states were forced to surrender. Historians consider the Confederacy to have

had better generals, but the Union possessed greater resources, such as factories and railroad lines. As

many modern companies have discovered, sometimes good strategies simply cannot overcome a stronger

adversary.

Two wars fought on Russian soil also offer insights. In the 1800s, a powerful French invasion force was

defeated in part by the brutal nature of Russian winters. In the 1940s, a similar fate befell German forces

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during World War II. Against the advice of some of his leading generals, Adolf Hitler ordered his army to

conquer Russia. Like the French before them, the Germans were able to penetrate deep into Russian

territory. As George Santayana had warned, however, the forgotten past was about to repeat itself.

Horrific cold stopped the German advance. Russian forces eventually took control of the combat, and

Hitler committed suicide as the Russians approached the German capital, Berlin.

Five years earlier, Germany ironically had benefited from an opponent ignoring the strategic management

lessons of the past. In ancient times, the Romans had assumed that no army could cross a mountain range

known as the Alps. An enemy general named Hannibal put his men on elephants, crossed the mountains,

and caught Roman forces unprepared. French commanders made a similar bad assumption in 1940.

When Germany invaded Belgium (and then France) in 1940, its strategy caught French forces by surprise.

The top French commanders assumed that German tanks simply could not make it through a thickly

wooded region known as the Ardennes Forest. As a result, French forces did not bother preparing a strong

defense in that area. Most of the French army and their British allies instead protected against a small,

diversionary force that the Germans had sent as a deception to the north of the forest. German forces

made it through the forest, encircled the allied forces, and started driving them toward the ocean. Many

thousands of French and British soldiers were killed or captured. In retrospect, the French generals had

ignored an important lesson of history: Do not make assumptions about what your adversary can and

cannot do. Executives who make similar assumptions about their competitors put their organizations’

performance in jeopardy.

Strategic Management as a Field of Study

Universities contain many different fields of study, including physics, literature, chemistry, computer

science, and engineering. Some fields of study date back many centuries (e.g., literature), while others

(such as computer science) have emerged only in recent years. Strategic management has been important

throughout history, but the evolution of strategic management into a field of study has mostly taken place

over the past century. A few of the key business and academic events that have helped the field develop

are discussed next.

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The ancient Chinese strategist Sun Tzu made it clear that strategic management is part art. But it is also

part science. Major steps toward developing the scientific aspect of strategic management were taken in

the early twentieth century by Frederick W. Taylor. In 1911, Taylor published The Principles of Scientific

Management. The book was a response to Taylor’s observation that most tasks within organizations were

organized haphazardly. Taylor believed that businesses would be much more efficient if management

principles were derived through scientific investigation. In The Principles of Scientific Management,

Taylor stressed how organizations could become more efficient through identifying the “one best way” of

performing important tasks. Implementing Taylor’s principles was thought to have saved railroad

companies hundreds of millions of dollars. [3] Although many later works disputed the merits of trying to

find the “one best way,” Taylor’s emphasis on maximizing organizational performance became the core

concern of strategic management as the field developed.

Also in the early twentieth century, automobile maker Henry Ford emerged as one of the pioneers of

strategic management among industrial leaders. At the time, cars seemed to be a luxury item for wealthy

people. Ford adopted a unique strategic perspective, however, and boldly offered the vision that he would

make cars the average family could afford. Building on ideas about efficiency from Taylor and others, Ford

organized assembly lines for creating automobiles that lowered costs dramatically. Despite his wisdom,

Ford also made mistakes. Regarding his company’s flagship product, the Model T, Ford famously stated,

“Any customer can have a car painted any color that he wants so long as it is black.” When rival

automakers provided customers with a variety of color choices, Ford had no choice but to do the same.

In 1912, Harvard University became the first higher education institution to offer a course focused on how

business executives could lead their organizations to greater success. The approach to maximizing

performance within this “business policy” course was consistent with Taylor’s ideas. Specifically, the goal

of the business policy course was to identify the one best response to any given problem that an

organization confronted. By finding and pursuing this ideal solution, the organization would have the best

chance of enjoying success.

In the 1920s, A&W Root Beer became the first franchised restaurant chain. Franchising involves an

organization (called a franchisor) granting the right to use its brand name, products, and processes to

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other organizations (known as franchisees) in exchange for an up-front payment (a franchise fee) and a

percentage of franchisees’ revenues (a royalty fee). This simple yet powerful business model allows

franchisors to grow their brands rapidly and provides franchisees with the safety of a proven business

format. Within a few decades, the franchising business model would fuel incredible successes for many

franchisors and franchisees across a variety of industries. Today, for example, both Subway and

McDonald’s have more than thirty thousand restaurants carrying their brand names.

The acceptance of strategic management as a necessary element of business school programs took a major

step forward in 1959. A widely circulated report created by the Ford Foundation recommended that all

business schools offer a “capstone” course. The goal of this course would be to integrate knowledge across

different business fields such as marketing, finance, and accounting to help students devise better ideas

for addressing complex business problems. Rather than seeking a “one best way” solution, as advocated

by Taylor and Harvard’s business policy course, this capstone course would emphasize students’ critical

thinking skills in general and the notion that multiple ways of addressing a problem could be equally

successful in particular. The Ford Foundation report was a key motivator that led US universities to create

strategic management courses in their undergraduate and master of business administration programs.

In 1962, business and academic events occurred that seemed minor at the time but that would later give

rise to huge changes. Building on the business savvy that he had gained as a franchisee, Sam Walton

opened the first Walmart in Rogers, Arkansas. Relying on a strategy that emphasized low prices and high

levels of customer service, Walmart grew to 882 stores with a combined $8.4 billion dollars in annual

sales by 1985. A decade later, sales reached $93.6 billion across nearly 3,000 stores. In 2010, Walmart

was the largest company in the world. In recent years, Walmart has arguably downplayed customer

service in favor of cutting costs. Time will tell whether deviating from Sam Walton’s original strategic

positioning will hurt the company.

Also in 1962, Harvard professor Alfred Chandler published Strategy and Structure: Chapters in the

History of the Industrial Enterprise. This book describes how strategy and organizational structure need

to be consistent with each other to ensure strong firm performance, a lesson that Moses seems to have

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mastered during the Hebrews’ exodus from Egypt. Many people working in the field of strategic

management consider Chandler’s book to be the first work of strategic management research.

Two pivotal events that firmly established strategic management as a field of study took place in 1980.

One was the creation of the Strategic Management Journal. The introduction of the journal offered a

forum for researchers interested in building knowledge about strategic management. Much like important

new medical findings appear in the Journal of the American Medical Association and the New England

Journal of Medicine, the Strategic Management Journal publishes pathbreaking insights about strategic

management.

The second pivotal event in 1980 was the publication of Competitive Strategy: Techniques for Analyzing

Industries and Competitors by Harvard professor Michael Porter. This book offers concepts such as five

forces analysis and generic strategies that continue to strongly influence how executives choose strategies

more than thirty years after the book’s publication. Given the importance of these concepts, both five

forces analysis and generic strategies are discussed in detail in Chapter 3, “Evaluating the External

Environment” and Chapter 5, “Selecting Business-Level Strategies”, respectively.

Many consumers today take web-based shopping for granted, but this channel for commerce was created

less than two decades ago. The 1995 launch of Amazon by founder Jeff Bezos was perhaps the pivotal

event in creating Internet-based commerce. In pursuit of its vision “to be earth’s most customer-centric

company,” Amazon has diversified far beyond its original focus on selling books and has evolved into a

dominant retailer. Powerful giants have stumbled badly in Amazon’s wake. Sears had sold great varieties

of goods (even including entire houses) through catalogs for many decades, as had JCPenney. Neither

firm created a strong online sales presence to keep pace with Amazon, and both eventually dropped their

catalog businesses. As often happens with old and large firms, Sears and JCPenney were outmaneuvered

by a creative and versatile upstart.

Ethics have long been an important issue within the strategic management field. Attention to the need for

executives to act ethically when creating strategies increased dramatically in the early 2000s when a series

of companies such as Enron Corporation, WorldCom, Tyco, Qwest, and Global Crossing were found to

have grossly exaggerated the strength of their performance. After a series of revelations about fraud and

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corruption, investors in these firms and others lost billions of dollars, tens of thousands of jobs were lost,

and some executives were sent to prison.

Like ethics, the implications of international competition are of central interest to strategic management.

Provocative new thoughts on the nature of the international arena were offered in 2005 by Thomas L.

Friedman. In his book The World Is Flat: A Brief History of the Twenty-First Century, Friedman argues

that many of the advantages that firms in developed countries such as the United States, Japan, and Great

Britain take for granted are disappearing. One implication is that these firms will need to improve their

strategies if they are to remain successful.

Looking to the future, it appears likely that strategic management will prove to be more important than

ever. In response, researchers who are interested in strategic management will work to build additional

knowledge about how organizations can maximize their performance. Executives will need to keep track

of the latest scientific findings. Meanwhile, they also must leverage the insights that history offers on how

to be successful while trying to avoid history’s mistakes.

K E Y T A K E A W A Y

Although strategic management as a field of study has developed mostly over the last century, the

concept of strategy is much older. Understanding strategic management can benefit greatly by learning

the lessons that ancient history and military strategy provide.

E X E R C I S E S
1. What do you think was the most important event related to strategy in ancient times?

2. In what ways are the strategic management of business and military strategy alike? In what ways are they

different? 3. Do you think executives are more ethical today as a result of the scandals in the early 2000s? Why or why

not?

[1] Bracker, J. 1980. The historical development of the strategic management concept.Academy of Management

Review, 5(2), 219–224.

[2] Bracker, J. 1980. The historical development of the strategic management concept.Academy of Management

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1.4 Understanding the Strategic Management Process

L E A R N I N G O B JE C T I V E S

1. Learn the strategic management process.

2. Understand the four steps in the strategic management process.

Modeling the Strategy Process

Strategic management is a process that involves building a careful understanding of how the world is

changing, as well as a knowledge of how those changes might affect a particular firm. CEOs, such as late

Apple-founder Steve Jobs, must be able to carefully manage the possible actions that their firms might

take to deal with changes that occur in their environment. We present a model of the strategic

management process in Figure 1.7 “Overall Model of the Strategic Management Process”. This model also

guides our presentation of the chapters contained in this book.

Figure 1.7 Overall Model of the Strategic Management Process

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The strategic management process begins with an understanding of strategy and performance. As we have

noted in this introductory chapter, strategic management is both an art and a science, and it involves

multiple conceptualizations of the notion of strategy drawn from recent and ancient history. In Chapter 2

“Leading Strategically”, we focus on how leading strategically is needed if the firm is to achieve the long-

term strong performance companies such as Apple have attained. Consequently, how managers

understand and interpret the performance of their firms is often central to understanding strategy.

Environmental and internal scanning is the next stage in the process. Managers must constantly scan the

external environment for trends and events that affect the overall economy, and they must monitor

changes in the particular industry in which the firm operates. For example, Apple’s decision to create the

iPhone demonstrates its ability to interpret that traditional industry boundaries that distinguished the

cellular phone industry and the computer industry were beginning to blur. At the same time, firms must

evaluate their own resources to understand how they might react to changes in the environment. For

example, intellectual property is a vital resource for Apple. Between 2008 and 2010, Apple filed more

than 350 cases with the US Patent and Trademark Office to protect its use of such terms as apple, pod,

and safari. [1]

A classic management tool that incorporates the idea of scanning elements both external and internal to

the firm is SWOT (strengths, weaknesses, opportunities, and threats) analysis. Strengths and weaknesses

are assessed by examining the firm’s resources, while opportunities and threats refer to external events

and trends. The value of SWOT analysis parallels ideas from classic military strategists such as Sun Tzu,

who noted the value of knowing yourself as well as your opponent. Chapter 3 “Evaluating the External

Environment” examines the topic of evaluating the external environment in detail, and Chapter 4

“Managing Firm Resources” presents concepts and tools for managing firm resources.

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The importance of knowing yourself and your opponent is applicable to the knowledge of strategic

management for business, military strategy, and classic strategy games such as chess.

Strategy formulation is the next step in the strategic management process. This involves developing

specific strategies and actions. Certainly, part of Apple’s success is due to the unique products it offers the

market, as well as how these products complement one another. A customer can buy an iPod that plays

music from iTunes—all of which can be stored in Apple’s Mac computer. [2] In Chapter 5 “Selecting

Business-Level Strategies”, we discuss how selecting business-level strategies helps to provide firms with

a recipe that can be followed that will increase the likelihood that their strategies will be successful.

In Chapter 6 “Supporting the Business-Level Strategy: Competitive and Cooperative Moves”, we present

insights on how firms can support the business-level strategy through competitive and cooperative

moves. Chapter 7 “Competing in International Markets” presents possibilities for firms competing in

international markets, and Chapter 8 “Selecting Corporate-Level Strategies” focuses on selecting

corporate-level strategies.

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Strategy implementation is the final stage of the process. One important element of strategy

implementation entails crafting an effective organizational structure and corporate culture. For example,

part of Apple’s success is due to its consistent focus on innovation and creativity that Steve Jobs described

as similar to that of a start-up. Chapter 9 “Executing Strategy through Organizational Design” offers ideas

on how to manage these elements of implementation. The final chapter explores how to lead an ethical

organization through corporate governance, social responsibility, and sustainability.

K E Y T A K E A W A Y

Strategic management is a process that requires the ability to manage change. Consequently, executives

must be careful to monitor and to interpret the events in their environment, to take appropriate actions

when change is needed, and to monitor their performance to ensure that their firms are able to survive

and, it is hoped, thrive over time.

E X E R C I S E S

1. Who makes the strategic decisions for most organizations?

2. Why is it important to view strategic management as a process?

3. What are the four steps of the strategic management process?

4. How is chess relevant to the study of strategic management? What other games might help teach

strategic thinking?

[1] Apple Inc. litigation. Wikipedia. Retrieved from en.wikipedia.org/wiki/Apple_Inc._ litigation

[2] Inside CRM Editors. Effective strategies Apple uses to create loyal customers [Online article]. Retrieved

from http://www.insidecrm.com/features/strategies-apple-loyal -customers

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1.5 Conclusion

This chapter provides an overview of strategic management and strategy. Ideas about strategy span

many centuries, and modern understanding of strategy borrows from ancient strategies as well as

classic militaries strategies. You should now understand that there are numerous ways to

conceptualize the idea of strategy and that effective strategic management is needed to ensure the

long-term success of firms. The study of strategic management provides tools to effectively manage

organizations, but it also involves the art of knowing how and when to apply creative thinking.

Knowledge of both the art and the science of strategic management is needed to help guide

organizations as their strategies emerge and evolve over time. Such tools will also help you effectively

chart a course for your career as well as to understand the effective strategic management of the

organizations for which you will work.

E X E R C I S E S

1. Think about the best and worst companies you know. What is extraordinary (or extraordinarily bad) about

these firms? Are their strategies clear and focused or difficult to define?

2. If you were to write a “key takeaway” section for this chapter, what would you include as the material

you found most interesting?

External Environmental Analysis

The research paper must be written in accordance with the instructions below and must meet the requirement of the Rubrics in the attached PDF Doc.

Purpose:

This project is the first of four projects. This project provides the first steps in completing an external environmental analysis of your focal company’s strategic management plan. You will use tools and apply concepts learned in this and previous business courses to demonstrate an understanding of how organizations develop and manage strategies to establish, safeguard and sustain its competitive position in the 21st century’s (rapidly evolving/shifting/changing), uncertain hyper-competitive business environment.

Completing a company overview and assessing the general environment is a key aspect of performing an external environment analysis. This project provides you with the opportunity to evaluate the competitive position of one of the organizations listed below and integrate that information in the beginnings of a external environmental analysis.

The company you will be analyzing operates within the global market. You will assess the company in terms of the global industry. Industries differ widely in their economic characteristics, competitive situation and future profit potential.

In this project, you are presenting a report document. The expectation is that the report provides the level of details to help the audience grasp the main topics and to understand the General Environment.

Analysis is the operative word. In analyzing the external environment, you are expected to thoroughly research and take that research and break it into small parts to gain a better understanding of what is happening in the external environment of the business. In researching an industry, it is important to understand that every company within an industry is different so gathering information on one company does not mean that the collected information is relevant to other companies within that industry. When researching, parsing the material is critical to an accurate analysis. Avoid presenting just any information as that may lead to using irrelevant information.

You will then write the report in your own words to share the external analysis. You are expected to present information and support the ideas and reasoning using the course material and your research. You will not lift any information from source documents without properly citing and referencing. For the technical analysis aspect of the project, you are required to create the technique on your own and may not use from any source material that you happen to find. No work from a clearinghouse or similar website may be used or cited as a credible source.

Outcomes Met With This Project:

utilize a set of useful analytical skills, tools, and techniques for analyzing a company strategically;

integrate ideas, concepts, and theories from previously taken functional courses including accounting, finance, market, business and human resource management;

Instructions:

In completing the report, you will use the chapters in the eBook and other course material, and perform research on the company and industry in which the company operates and answer the required elements below in narrative form following the steps provided.

Step 1: Specific Company for All Four Projects

In this project, you will complete a Company Overview, an Evaluation of the General Environment and a conclusion.

You will be assigned by your instructor one focal company to complete the analysis. The assigned company must be used for all four projects in this course. You are not allowed to write the report on any other company different from the company specifically assigned by your instructor. If a company other than that assigned to you is used, a zero will be assigned.

The instructor will assign you a company from the list below. (Students may not select the company). All companies can be found on Mergent Online.

Assigned Company: Quanta Services, Inc. (NYS:PWR)

https://www.quantaservices.com/

Students must complete the project using the assigned company. Deviating from the assigned company will result in a zero for the project. You will look for the company assigned to you in the Announcement area of the classroom.

Step 2: Course Materials and Research

You are required to research information about the focal company and the internal environment for this project, You are accountable for using the course materials to support the ideas, reasoning and conclusions made. Course materials use goes beyond defining terms but is used to explain the ‘why and how’ of a situation. Using one or two in-text citations from the course materials and then relying on Internet source material will not earn many points on the assignment. A variety of source material is expected and what is presented must be relevant and applicable to the topic being discussed. Avoid merely making statements but close the loop of the discussion by explaining how something happens or why something happens, which focuses on importance and impact. In closing the loop, you will demonstrate the ability to think clearly and rationally showing an understanding of the logical connections between the ideas presented from the research, the course material and the question(s) being asked.

Note: Your report is based on the results of the research performed and not on any prepared documentation. What this means is that you will research and draw your own conclusions that are supported by the research and the course material rather than the use any source material that puts together any of the tools or techniques whether from the Internet, for-pay websites or any pre-prepared document, video or source material. A zero will be earned for not doing your own analysis.

Success: The analysis is based on research and not opinion. You are not making recommendations and you will not attempt to position the focal company in a better or worse light than other companies within the industry merely because you are completing an analysis on this particular company. The analysis must be based on factual information. Any conclusions drawn have to be based on factual information rather than leaps of faith. To ensure success, as stated above, you are expected to use the course materials and research on the focal company’s global industry and the focal company. Opinion does not earn credit nor does using external sources when course materials can be used. It is necessary to provide explanations (the why and how) rather than making statements. Avoid stringing one citation after another as doing so does not show detailed explanations.

Resources

The course ebook chapters are attached in PDF Doc’s

Research for Financial Analysis: Financial Research

https://learn.umuc.edu/content/enforced/456311-001153-01-2202-US2-6250/Financial%20Research x?_&d2lSessionVal=N2iHBW3H7GaoSufIDiNAy2STw

Research for Industry Analysis CSI Market

https://csimarket.com/Industry/Industry_Financial_strength.php

What is Strategy? Common Misunderstandings

https://www.youtube.com/watch?v=3Hd88eBgkw0

What is Strategy?

Your Strategy Needs a Strategy

Goldsmith, D. (2013, July/Aug). Rethinking the company’s competitive advantage. Financial Executive 29(6), 14-17.

https://learn.umuc.edu/content/enforced/456311-001153-01-2202-US2-6250/Rethinking%20the%20Company’s%20Competitive%20Advantage ?_&d2lSessionVal=N2iHBW3H7GaoSufIDiNAy2STw

Papula, J., Volna, J. (2013). Core competence for sustainable competitive advantage. Academic Conference, 1-7.

https://learn.umuc.edu/content/enforced/456311-001153-01-2202-US2-6250/Core%20Competence%20for%20Sustainable%20Competitive%20Advantage ?_&d2lSessionVal=N2iHBW3H7GaoSufIDiNAy2STw

What is Strategy?: The Three Levels of Strategy

https://www.mindtools.com/pages/article/what-is-strategy.htm

What is Strategic Planning, Really?

https://www.youtube.com/watch?v=mLJ34L5UW4E

Strategic Management Process

http://www.managementstudyguide.com/strategic-management-process.htm

Creating a Strategy That Works

http://www.strategy-business.com/feature/Creating-a-Strategy-That-Works

Hard Ball: Five Killer Strategies for Trouncing the Competition. (HBR)

http://hbr.org/2004/04/hardball-five-killer-strategies-for-trouncing-the-competition/ar/1

Porter’s (1980) Generic Strategies as Determinants of Strategic Group Membership and Organizational Performance

https://www.jstor.org/stable/pdf/256040

Rumelt, R. (2011, June) The perils of bad strategy, McKinsey Quarterly.

http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-perils-of-bad-strategy

Bradley, C., Hirt, M. & Smit, S. (2011, January). Have you tested your strategy lately? McKinsey Quarterly.

http://www.mckinsey.com/insights/strategy/have_you_tested_your_strategy_lately

How to Stress-Test Your Strategy (10:15 minutes; transcript available)

https://www.youtube.com/watch?v=nS-Slo8S6V4

Step 3: How to Set Up the Report:

The document has to be written in Word or rtf. No other format is acceptable. Pdf files will not be graded. Use 12-point font for a double-spaced report. The final product cannot be longer than 8 pages in length, which includes all tables and matrices but excludes the title page and reference page. Do no use an Appendix.

Create a title page with title, your name, the course number, the instructor’s name.

Step 4: Company Overview

Provide a company overview, which is an essential component to the strategic management process. The company overview includes the purpose(s) for the founding of the company, i.e, what problems was it formed to solve and/or opportunities it was formed to exploit, who are the founders, home country or state, current management, employee headcount, last year’s revenue, etc.).

Step 5: Evaluate the General Environment

Identify the global industry in which the company operates. This will come from Mergent Online.

Discuss the company’s general environment by developing a PESTEL analysis. First, use the course material to identify the elements of the PESTEL and what components make up each element. Then, complete the analysis using research on the industry and the focal company. Be sure to thoroughly present and support the reasoning for what is presented. You may not use a PESTEL analysis that is already completed and available on the Internet. A zero will result if used as the analysis has to be the result of your research and your own development. NOTE: A PESTEL analysis is not a table and it is not a bulleted assessment.

Identify and discuss one key trend for each letter of the PESTEL for the industry. Key trends are separate from the PESTEL analysis.

Select one of the six trends identified in the previous requirement and discuss how the focal company could be affected by the selected trends.

Discuss key areas of uncertainty related to the identified trend for the focal company that could potentially impact the company’s strategy.

Perform a strategic analysis of the company’s mission, vision and objectives.

Tools and Techniques:

You will be using the following tools/techniques in the projects. These tools are also part of the quizzes that you will complete so make sure you understand their use and how to do the calculations.

External Factor Evaluation (EFE) Matrix

http://www.maxi-pedia.com/EFE+matrix+external

PESTEL Analysis

https://pestleanalysis.com/

Porter’s Five Forces

Porter’s Five Forces

Using Porter’s Five Force Model

The Five Competitive Forces That Shape Strategy (13:11 minutes)

SWOT Analysis: How to perform one for your organization

https://www.youtube.com/watch?v=GNXYI10Po6A

Profitability Ratios

https://www.readyratios.com/reference/profitability/#ref32

Most Important Financial Ratios

https://www.readyratios.com/reference/analysis/most_important_financial_ratios.html

Balanced Scorecard

https://www.youtube.com/watch?v=oNy8kupW8oI

Step 6: Conclusion

Create a concluding paragraph. The Conclusion is intended to emphasize the purpose/significance of the analysis, emphasize the significance/consequence of findings, and indicate the wider applications that are derived from the main points of the project’s requirements. You will draw conclusions about the findings of the external environment analysis.

Step 7: Review the Paper

Read the paper to ensure all required elements are present.

The following are specific requirements that you will follow. Use the checklist to mark off that you have followed each specific requirement.

Checklist

Specific Project Requirements

Proofread your paper

Read and use the grading rubric while completing the paper to ensure all requirements are met that will lead to the highest possible grade.

Third person writing is required. Third person means that there are no words such as “I, me, my, we, or us” (first person writing), nor is there use of “you or your” (second person writing). If uncertain how to write in the third person, view this link: http://www.quickanddirtytips.com/education/grammar/first-second-and-third-person.

Contractions are not used in business writing, so do not use them.

Paraphrase and do not use direct quotations. Paraphrase means you do not use more than four consecutive words from a source document. Removing quotation marks and citing is inappropriate. Instead put a passage from a source document into your own words and attribute the passage to the source document. There should be no passages with quotation marks. Using more than four consecutive words from a source document would require direct quotation marks. Changing words from a passage does not exclude the passage from having quotation marks. If more than four consecutive words are used from source documents, this material will not be included in the grade.

You are expected to use the research and weekly course materials to develop the analysis and support the reasoning. There should be a robust use of the course material. Material used from a source document must be cited and referenced. A reference within a reference list cannot exist without an associated in-text citation and vice versa. Changing words from a passage does not exclude the passage from having quotation marks.

Use in-text citations and provide a reference list that contains the reference associated with each in-text citation.

You may not use books in completing this problem set unless part of the course material. Also, do not use a dictionary, Wikipedia or Investopedia or similar sources. You may not use Fern Fort University, Ibis World or any other for-fee website.

Provide the page or paragraph number in every in-text citation presented. Since the eBook does not have page numbers, include the chapter title and topic heading. If using a video, provide the minutes and second of the cited material.