Reflection Paper 4Length & GuidelinesEach question must be res.docx

Reflection Paper 4
Length & Guidelines
Each question must be responded to with around a half-page of
text including complete and well-formed sentences. Certain
questions will require more or less to fully articulate a
response. Bulleted lists may be included but may not make up
the entire answer. When responding to a prompt requiring an
article review the response to the review portion must be at
least 1 full page. Your response will likely require additional
length to provide a quality response.
(Refer to Chapters 7 and 8, Case # 17 of your textbook)
Chapter 7: Strategy and Technology
1. Describe standardization, format wars, and how
standardization can lead to a format war.
2. Once standardization occurs, how does the industry
benefit?
3. During a format war, describe how competition occurs and
how a price war can take shape.
4. Define first and second movers. How do these two entities
interact within and industry, and who learns what as the
industry takes shape?
Chapter 8 Questions: Strategy and the Global Environment
5. Why do companies go global? Once a company has
decided to go global what entry modes could the company
leverage to break in to the global market?
6. What additional benefits from economies of scale does a
company receive from going global?
7. Describe the main strategies available to an organization
going global. Describe why each strategy may be chosen.
8. What are the advantages and disadvantages of the different
entry modes a company can use to break in to the global
market?

Case #17 Uber Driving Global Disruption
9. How has Uber’s entry, where successful, changed the
economics of the local ride for hire market? Who benefits from
this?
10. What is Uber’s growth strategy?
Ethical Issues with Employees Using Social Media
Managing Social Media in the Workplace: On Ethics
https://sites.ewu.edu/cmst496-stafford/2012/06/12/managing-
social-media-in-the-workplace-on-
ethics/
Jeffery Stafford talks about the use of social media in the
workplace. He discuss the benefits of
social media, but he talks about the misuse of company
resources, How the NLRB’s decisions
in cases involving social media are narrowing the definition of
concerted activity whether
employees like it or not
conflict of interest, and criticism of others dealing with using
social media in the workplace. The
article mentions how social media can be an outlet for a breach
of confidentiality, conflicts of
interest, misuse of company resources. The article mentions
different ways that social media
can impact the company and how management needs to address
the use of social media in the
workplace.
Negative effects of social media in the workplace
https://www.jobcluster.com/career-advice/the-7-negative-

effects-of-social-media-in-the-workplac
e-66
This article discusses the negative effects of social media in the
workplace. I will use this to
discuss the negative issues and how things can change.
Peer reviewed journal
Social Media: Managing the Ethical Issues
https://web-a-ebscohost-
com.library3.webster.edu/ehost/detail/detail?vid=28&sid=0e918
b2d-78
ae-4ed7-bdfa-d75350b3c0d9%40sdc-v-
sessmgr01&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%
3d#AN=91258911&db=a9h
Vicki Lachman talks about the ethical issues with social media.
It talks about HIPAA and gives
the definition. It gives examples of the different types of social
medias and the definitions. It
also talks about different things that shouldn't be done and how
these can affect the employer. I
will use this article to discuss how different social media post
affects the company and how it
can affect the employee
Social Media Ethical Issues
https://www.bing.com/videos/search?q=videos+on+ethical+issu
es+with+social+media+in+the+
workplace&&view=detail&mid=4A60D599610A5F2A33494A60
D599610A5F2A3349&&FORM=V
RDGAR
social-media-in-the-workplace-on-ethics/

social-media-in-the-workplace-on-ethics/
effects-of-social-media-in-the-workplace-66
b2d-78ae-4ed7-bdfa-d75350b3c0d9%40sdc-v-
sessmgr01&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#AN=9
1258911&db=a9h
1258911&db=a9h
1258911&db=a9h
es+with+social+media+in+the+workplace&&view=detail&mid=
4A60D599610A5F2A33494A60D599610A5F2A3349&&FORM=
VRDGAR
4A60D599610A5F2A33494A60D599610A5F2A3349&&FORM=
VRDGAR
4A60D599610A5F2A33494A60D599610A5F2A3349&&FORM=
VRDGAR
This video gives examples of how some things should not be put

on facebook and how things
can be bad with accepting friends that you don’t know on social
media. It also talks about how
social media can be addicting.
The Ethical Dilemma: Social media in the workplace
es+with+social+media+in+the+
workplace&&view=detail&mid=3C1E25B2EEB2CECB4B253C1
E25B2EEB2CECB4B25&&FOR
M=VRDGAR
This video provides information about the different things that
happen in the workplace, it
provides examples on ways that individuals use social media
and they don’t realize how things
can get them in trouble. It provide statistics on the use of social
media and how it is used all
over the world. The video also talks about the Ethical dilemmas
that social media can cause in
the workplace
Negative effects of social media in the workplace
effects-of-social-media-in-the-workplac
e-66
This article discusses the negative effects of social media in the
workplace. I will use this to
discuss the negative issues and how things can change.
3C1E25B2EEB2CECB4B253C1E25B2EEB2CECB4B25&&FOR
M=VRDGAR

M=VRDGAR
M=VRDGAR
Strategic
Management Theory
An Integrated Approach
E I G H T H E D I T I O N
Charles W. L. Hill
UNIVERSITY OF WASHINGTON
Gareth R. Jones
TEXAS A&M UNIVERSITY
Houghton Mifflin Company Boston New York
342927_FM_Theory_pi-xvi.qxd 9/21/07 2:57 PM Page i
Executive Publisher: George Hoffman
Executive Editor: Lisé Johnson
Senior Marketing Manager: Nicole Hamm
Development Editor: Suzanna Smith

Senior Project Editor: Carol Merrigan
Art and Design Manager: Jill Haber
Cover Design Director: Tony Saizon
Senior Photo Editor: Jennifer Meyer Dare
Senior Composition Buyer: Chuck Dutton
New Title Project Manager: James Lonergan
Editorial Assistant: Kathryn White
Marketing Assistant: Tom DiGiano
Cover image: Jason Hawkes, www.jasonhawkes.com
Copyright © 2008 by Houghton Mifflin Company. All rights
reserved.
No part of this work may be reproduced or transmitted in any
form or by any means, electronic or
mechanical, including photocopying and recording, or by any
information storage or retrieval system
without the prior written permission of Houghton Mifflin
Company unless such copying is expressly
permitted by federal copyright law. Address inquiries to College
Permissions, Houghton Mifflin Company,
222 Berkeley Street, Boston, MA 02116-3764.
Printed in the U.S.A.
Library of Congress Control Number: 2007934815
Instructor’s examination copy:
ISBN-10: 0-547-00490-7
ISBN-13: 978-0-547-00490-7
For orders, use student text ISBNs:
ISBN-10: 0-618-89476-4
ISBN-13: 978-0-618-89476-5

1 2 3 4 5 6 7 8 9–DOW–11 10 09 08 07
For my children, Elizabeth, Charlotte, and Michelle
Charles W. L. Hill
For Nicholas and Julia and Morgan and Nia
Gareth R. Jones
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Contents
Preface xiii
Part 1 Introduction to Strategic Management
1 Strategic Leadership: Managing the Strategy-Making Process
for Competitive Advantage 1
Opening Case: Dell Computer 1
Overview 3
Strategic Leadership, Competitive Advantage, and Superior
Performance 4
Superior Performance 4 ● Competitive Advantage and a
Company’s Business Model 5
● Industry Differences in Performance 7 ● Performance in
Nonprofit Enterprises 7
Strategic Managers 8
Corporate-Level Managers 8 ● Business-Level Managers 10 ●
Functional-Level Managers 10
The Strategy-Making Process 10
A Model of the Strategic Planning Process 10 ● Mission

Statement 11 ● External Analysis 16
Strategy in Action 1.1: Strategic Analysis at Time Inc. 17
Internal Analysis 18 ● SWOT Analysis and the Business Model
18 ● Strategy
Implementation 19 ● The Feedback Loop 19
Strategy as an Emergent Process 20
Strategy Making in an Unpredictable World 20 ● Autonomous
Action: Strategy Making by
Lower-Level Managers 20
Strategy in Action 1.2: Starbucks’s Music Business 21
Serendipity and Strategy 21
Strategy in Action 1.3: A Strategic Shift at Charles Schwab 22
Intended and Emergent Strategies 22
Strategic Planning in Practice 24
Scenario Planning 24 ● Decentralized Planning 25 ● Strategic
Intent 26
Strategic Decision Making 27
Cognitive Biases and Strategic Decision Making 27 ●
Groupthink and Strategic Decisions 29
● Techniques for Improving Decision Making 29
Strategy in Action 1.4: Was Intelligence on Iraq Biased by
Groupthink? 30
Strategic Leadership 31
Vision, Eloquence, and Consistency 31 ● Articulation of the
Business Model 32
● Commitment 32 ● Being Well Informed 32 ● Willingness to
Delegate and Empower 33
● The Astute Use of Power 33 ● Emotional Intelligence 33

Summary of Chapter 34 ● Discussion Questions 35
Practicing Strategic Management 35
Small-Group Exercise: Designing a Planning System ● Article
File 1 ● Strategic
Management Project: Module 1 ● Ethics Exercise
iii
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Closing Case: The Best-Laid Plans—Chrysler Hits the Wall 37
Appendix to Chapter 1: Enterprise Valuation, ROIC, and
Growth 39
2 External Analysis: The Identification of Opportunities and
Threats 41
Opening Case: The United States Beer Industry 41
Overview 42
Defining an Industry 43
Industry and Sector 43 ● Industry and Market Segments 44 ●
Changing Industry
Boundaries 44
Porter’s Five Forces Model 45
Risk of Entry by Potential Competitors 46
Strategy in Action 2.1: Circumventing Entry Barriers into the
Soft Drink Industry 47
Rivalry Among Established Companies 49
Strategy in Action 2.2: Price Wars in the Breakfast Cereal

Industry 51
Industry Demand 51 ● Cost Conditions 52 ● Exit Barriers 52 ●
The Bargaining Power
of Buyers 53 ● The Bargaining Power of Suppliers 54
Strategy in Action 2.3: Wal-Mart’s Bargaining Power over
Suppliers 55
Substitute Products 56 ● A Sixth Force: Complementors 56 ●
Porter’s Model
Summarized 57
Running Case: Dell Computer and the Personal Computer
Industry 57
Strategic Groups Within Industries 58
Implications of Strategic Groups 59 ● The Role of Mobility
Barriers 59
Industry Life Cycle Analysis 60
Embryonic Industries 61 ● Growth Industries 61 ● Industry
Shakeout 61
● Mature Industries 62 ● Declining Industries 63 ● Industry
Life Cycle 63
Limitations of Models for Industry Analysis 63
Life Cycle Issues 63 ● Innovation and Change 64 ● Company
Differences 66
The Macroenvironment 66
Macroeconomic Forces 66 ● Global Forces 68 ● Technological
Forces 68
● Demographic Forces 69 ● Social Forces 70 ● Political and
Legal Forces 70

Small-Group Exercise: Competing with Microsoft ● Article File
2 ● Strategic Management
Project: Module 2 ● Ethics Exercise
Closing Case: The Pharmaceutical Industry 73
Part 2 The Nature of Competitive Advantage
3 Internal Analysis: Distinctive Competencies, Competitive
Advantage, and Profitability 75
Opening Case: Southwest Airlines 75
Overview 76
The Roots of Competitive Advantage 77
Distinctive Competencies 77 ● Competitive Advantage, Value
Creation, and Profitability 80
The Value Chain 83
Primary Activities 83
iv Contents
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Strategy in Action 3.1: Value Creation at Burberry 85
Support Activities 85
Strategy in Action 3.2: Competitive Advantage at Zara 86
The Building Blocks of Competitive Advantage 87
Efficiency 87 ● Quality as Excellence and Reliability 88 ●
Innovation 90 ● Customer
Responsiveness 91 ● Business Models, the Value Chain, and

Generic Distinctive Competencies 91
Analyzing Competitive Advantage and Profitability 93
Running Case: Comparing Dell to Hewlett-Packard 95
The Durability of Competitive Advantage 97
Barriers to Imitation 97 ● Capability of Competitors 99 ●
Industry Dynamism 99
● Summarizing Durability of Competitive Advantage 100
Avoiding Failure and Sustaining Competitive Advantage 100
Why Companies Fail 100 ● Steps to Avoid Failure 102
Strategy in Action 3.3: The Road to Ruin at DEC 103
The Role of Luck 104
Strategy in Action 3.4: Bill Gates’s Lucky Break 105
Summary of Chapter 105 ● Discussion of Questions 106
Small-Group Exercise: Analyzing Competitive Advantage ●
Active File 3 ● Strategic Management
Project: Module 3 ● Ethics Exercise
Closing Case: Starbucks 107
4 Building Competitive Advantage Through Functional-Level
Strategy 109
Opening Case: Boosting Efficiency at Matsushita 109
Overview 110
Achieving Superior Efficiency 111
Efficiency and Economies of Scale 111 ● Efficiency and
Learning Effects 113
Strategy in Action 4.1: Learning Effects in Cardiac Surgery 114

Efficiency and the Experience Curve 115 ● Efficiency, Flexible
Production Systems, and Mass
Customization 117
Strategy in Action 4.2: Mass Customization at Lands’ End 118
Marketing and Efficiency 119
Materials Management, Just-in-Time, and Efficiency 121
R&D Strategy and Efficiency 122 ● Human Resources Strategy
and Efficiency 122
● Information Systems and Efficiency 124 ● Infrastructure and
Efficiency 124
Running Case: Dell’s Utilization of the Internet 125
Summary: Achieving Efficiency 125
Achieving Superior Quality 126
Attaining Superior Reliability 126
Strategy in Action 4.3: General Electric’s Six Sigma Quality
Improvement Process 128
Implementing Reliability Improvement Methodologies 128 ●
Improving Quality as
Excellence 132
Strategy in Action 4.4: Six Sigma at Mount Carmel Health 132
Achieving Superior Innovation 134
The High Failure Rate of Innovation 134 ● Building
Competencies in Innovation 136
Strategy in Action 4.5: Corning: Learning from Innovation
Failures 141
Achieving Superior Responsiveness to Customers 142
Focusing on the Customer 142 ● Satisfying Customer Needs 143

Contents v
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Small-Group Exercise: Identifying Excellence ● Article File 4 ●
Strategic Management Project:
Module 4 ● Ethics Exercise
Closing Case: Verizon Wireless 147
Part 3 Strategies
5 Building Competitive Advantage Through Business-Level
Strategy 149
Opening Case: E*Trade’s Changing Business Strategies 149
Overview 150
Competitive Positioning and the Business Model 151
Formulating the Business Model: Customer Needs and Product
Differentiation 151 ● Formulating
the Business Model: Customer Groups and Market Segmentation
153 ● Implementing the Business
Model: Building Distinctive Competencies 156
Competitive Positioning and Business-Level Strategy 157
Competitive Positioning: Generic Business-Level Strategies 159
Cost Leadership 160
Strategy in Action 5.1: Ryanair Takes Control over the Sky in
Europe 162
Focused Cost Leadership 163 ● Differentiation 166 ● Focused

Differentiation 168
Strategy in Action 5.2: L. L. Bean’s New Business Model 169
The Dynamics of Competitive Positioning 170
Strategy in Action 5.3: Zara Uses IT to Change the World of
Fashion 171
Competitive Positioning for Superior Performance: Broad
Differentiation 172
Strategy in Action 5.4: Toyota’s Goal? A High-Value Vehicle to
Match Every Customer Need 174
Competitive Positioning and Strategic Groups 177 ● Failures in
Competitive Positioning 179
Strategy in Action 5.5: Holiday Inns on Six Continents 181
Small-Group Exercise: Finding a Strategy for a Restaurant ●
Article File 5 ● Strategic
Closing Case: Samsung Changes Its Business Model Again and
Again 184
6 Business-Level Strategy and the Industry Environment 186
Opening Case: Competition Gets Ugly in the Toy Business 186
Overview 187
Strategies in Fragmented Industries 188
Chaining 189 ● Franchising 190 ● Horizontal Merger 190 ●
Using Information
Technology and the Internet 190
Strategy in Action 6.1: Clear Channel Creates a National Chain
of Local Radio Stations 191

Strategies in Embryonic and Growth Industries 192
The Changing Nature of Market Demand 193 ● Strategic
Implications: Crossing the Chasm 195
Strategy in Action 6.2: How Prodigy Fell into the Chasm
Between Innovators and the Early
Majority 197
Strategic Implications of Market Growth Rates 198 ● Factors
Affecting Market Growth Rates 198
● Strategic Implications of Differences in Growth Rates 199
vi Contents
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Navigating Through the Life Cycle to Maturity 200
Embryonic Strategies 201 ● Growth Strategies 201 ● Shakeout
Strategies 202
● Maturity Strategies 203
Strategy in Mature Industries 203
Strategies to Deter Entry: Product Proliferation, Price Cutting,
and Maintaining Excess Capacity 204
● Strategies to Manage Rivalry 206
Strategy in Action 6.3: New Competitors for Toys “R” Us 207
Running Case: Dell Has to Rethink Its Business-Level
Strategies 212
Game Theory 214
Strategy in Action 6.4: Coca-Cola and PepsiCo Go Head-to-
Head 220
Strategies in Declining Industries 221

The Severity of Decline 221 ● Choosing a Strategy 222
Strategy in Action 6.5: How to Make Money in the Vacuum
Tube Business 223
Small-Group Exercise: How to Keep the Salsa Hot ● Article
File 6 ● Strategic Management Project:
Closing Case: Nike’s Winning Ways 226
7 Strategy and Technology 228
Opening Case: Format War—Blu-Ray Versus HD-DVD 228
Overview 229
Technical Standards and Format Wars 230
Examples of Standards 230 ● Benefits of Standards 232 ●
Establishment of Standards 233
● Network Effects, Positive Feedback, and Lockout 233
Strategy in Action 7.1: How Dolby Became the Standard in
Sound Technology 236
Strategies for Winning a Format War 237
Ensure a Supply of Complements 237 ● Leverage Killer
Applications 237 ● Aggressively Price
and Market 238 ● Cooperate with Competitors 238 ● License
the Format 239
Costs in High-Technology Industries 240
Comparative Cost Economics 240 ● Strategic Significance 241
Strategy in Action 7.2: Lowering the Cost of Ultrasound
Equipment Through Digitalization 242

Managing Intellectual Property Rights 242
Intellectual Property Rights 243 ● Digitalization and Piracy
Rates 243 ● Strategies for
Managing Digital Rights 244
Strategy in Action 7.3: Battling Piracy in the Videogame
Industry 245
Capturing First-Mover Advantages 246
First-Mover Advantages 247 ● First-Mover Disadvantages 247
● Strategies for Exploiting
First-Mover Advantages 248
Technological Paradigm Shifts 251
Paradigm Shifts and the Decline of Established Companies 252
Strategy in Action 7.4: Disruptive Technology in Mechanical
Excavators 255
Strategic Implications for Established Companies 256 ●
Strategic Implications for New
Entrants 258
Small-Group Exercise: Digital Books ● Article File 7 ●
Closing Case: The Failure of Friendster 260
Contents vii
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8 Strategy in the Global Environment 262
Opening Case: MTV—A Global Brand Goes Local 262
Overview 263
The Global and National Environments 264
The Globalization of Production and Markets 264
Strategy in Action 8.1: Finland’s Nokia 266
National Competitive Advantage 267 ● Using the Framework
269
Increasing Profitability and Profit Growth Through Global
Expansion 269
Expanding the Market: Leveraging Products 270 ● Realizing
Cost Economies from Global Volume
270 ● Realizing Location Economies 271 ● Leveraging the
Skills of Global Subsidiaries 272
Cost Pressures and Pressures for Local Responsiveness 273
Pressures for Cost Reductions 274 ● Pressures for Local
Responsiveness 275
Strategy in Action 8.2: Localization at IKEA 276
Choosing a Global Strategy 278
Global Standardization Strategy 279
Running Case: Dell’s Global Business Strategy 279
Localization Strategy 280 ● Transnational Strategy 280 ●
International Strategy 282
● Changes in Strategy over Time 282
Basic Entry Decisions 283
Which Overseas Markets to Enter 283 ● Timing of Entry 284 ●

Scale of Entry and Strategic
Commitments 285
The Choice of Entry Mode 286
Exporting 286 ● Licensing 287 ● Franchising 288 ● Joint
Ventures 289 ● Wholly
Owned Subsidiaries 290 ● Choosing an Entry Strategy 291
Global Strategic Alliances 293
Advantages of Strategic Alliances 293
Strategy in Action 8.3: Cisco and Fujitsu 294
Disadvantages of Strategic Alliances 294 ● Making Strategic
Alliances Work 295
Small-Group Exercise: Developing a Global Strategy ● Article
Closing Case: The Evolution of Strategy at Procter & Gamble
300
9 Corporate-Level Strategy: Horizontal Integration, Vertical
Integration, and Strategic Outsourcing 302
Opening Case: Oracle Strives to Become the Biggest and the
Best 302
Overview 303
Corporate-Level Strategy and the Multibusiness Model 304
Horizontal Integration: Single-Industry Strategy 305
Benefits of Horizontal Integration 307
Running Case: Beating Dell: Why HP Acquired Compaq 308

Problems with Horizontal Integration 310
Strategy in Action 9.1: Horizontal Integration in Health Care
311
Vertical Integration: Entering New Industries to Strengthen the
Core Business Model 312
Increasing Profitability Through Vertical Integration 314
viii Contents
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Strategy in Action 9.2: Specialized Assets and Vertical
Integration in the Aluminum
Industry 316
Problems with Vertical Integration 317 ● The Limits of Vertical
Integration 318
Alternatives to Vertical Integration: Cooperative Relationships
319
Short-Term Contracts and Competitive Bidding 319 ● Strategic
Alliances and Long-Term
Contracting 320
Strategy in Action 9.3: DaimlerChrysler’s U.S. Keiretsu 321
Building Long-Term Cooperative Relationships 322
Strategic Outsourcing 323
Benefits of Outsourcing 325 ● Risks of Outsourcing 326

Small-Group Exercise: Comparing Vertical Integration
Strategies ● Article File 9
● Strategic Management Project: Module 9 ● Ethics Exercise
Closing Case: Read All About It News Corp. 329
10 Corporate-Level Strategy: Formulating and Implementing
Related and Unrelated Diversification 331
Opening Case: Tyco’s Rough Ride 331
Overview 332
Expanding Beyond a Single Industry 333
A Company as a Portfolio of Distinctive Competencies 333
Increasing Profitability Through Diversification 335
Transferring Competencies Across Industries 336 ● Leveraging
Competencies 337
Strategy in Action 10.1: Diversification at 3M: Leveraging
Technology 338
Sharing Resources: Economies of Scope 339 ● Using Product
Bundling 340
● Managing Rivalry: Multipoint Competition 340 ● Utilizing
General Organizational
Competencies 341
Two Types of Diversification 343
Related Diversification 344 ● Unrelated Diversification 344
Strategy in Action 10.2: Related Diversification at Intel 345
Disadvantages and Limits of Diversification 346
Changing Industry- and Firm-Specific Conditions 346 ●
Diversification for the
Wrong Reasons 346 ● The Bureaucratic Costs of Diversification
347

Choosing a Strategy 349
Related Versus Unrelated Diversification 349 ● The Web of
Corporate-Level
Strategy 350
Entering New Industries: Internal New Ventures 351
The Attraction of Internal New Venturing 351 ● Pitfalls of New
Ventures 352
● Guidelines for Successful Internal New Venturing 353
Entering New Industries: Acquisitions 354
The Attractions of Acquisitions 355 ● Acquisition Pitfalls 355
Strategy in Action 10.3: Postacquisition Problems at Mellon
Bank 357
Guidelines for Successful Acquisition 358
Entering New Industries: Joint Ventures 360
Restructuring 361
Why Restructure? 361
Contents ix
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Small-Group Exercise: Dun & Bradstreet ● Article File 10 ●
Closing Case: United Technologies Has an “ACE in Its Pocket”

364
Part 4 Implementing Strategy
11 Corporate Performance, Governance, and Business Ethics
366
Opening Case: The Rise and Fall of Dennis Kozlowski 366
Overview 367
Stakeholders and Corporate Performance 367
Stakeholder Impact Analysis 368 ● The Unique Role of
Stockholders 368 ● Profitability,
Profit Growth, and Stakeholder Claims 369
Strategy in Action 11.1: Price Fixing at Sotheby’s and
Christie’s 371
Agency Theory 372
Principal-Agent Relationships 372 ● The Agency Problem 372
Strategy in Action 11.2: Self-Dealing at Computer Associates
376
Governance Mechanisms 377
The Board of Directors 377 ● Stock-Based Compensation 379 ●
Financial Statements and
Auditors 380 ● The Takeover Constraint 380 ● Governance
Mechanisms Inside a
Company 381
Ethics and Strategy 384
Ethical Issues in Strategy 384
Strategy in Action 11.3: Nike and the Sweatshop Debate 385
The Roots of Unethical Behavior 388 ● The Philosophical
Approaches to Ethics 389
● Behaving Ethically 392

Running Case: Dell’s Code of Ethics 394
Small-Group Exercise: Evaluating Stakeholder Claims ● Article
Closing Case: Working Conditions at Wal-Mart 399
12 Implementing Strategy in Companies That Compete in a
Single Industry 401
Opening Case: Strategy Implementation at Dell Computer 401
Overview 402
Implementing Strategy Through Organizational Design 403
Building Blocks of Organizational Structure 404
Grouping Tasks, Functions, and Divisions 404 ● Allocating
Authority and Responsibility 405
Strategy in Action 12.1: Union Pacific Decentralizes to Increase
Customer Responsiveness 408
Integration and Integrating Mechanisms 409
Strategic Control Systems 409
Levels of Strategic Control 411 ● Types of Strategic Control
Systems 411 ● Using
Information Technology 414
Strategy in Action 12.2: Control at Cypress Semiconductor 415
Strategic Reward Systems 415
x Contents
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Organizational Culture 416
Culture and Strategic Leadership 417 ● Traits of Strong and
Adaptive Corporate Cultures 417
Strategy in Action 12.3: How Ray Kroc Established McDonald’s
Culture 418
Building Distinctive Competencies at the Functional Level 419
Functional Structure: Grouping by Function 419 ● The Role of
Strategic Control 420
● Developing Culture at the Functional Level 421 ● Functional
Structure and Bureaucratic
Costs 423 ● The Outsourcing Option 424
Implementing Strategy in a Single Industry 425
Implementing Cost Leadership 426 ● Implementing
Differentiation 427 ● Product
Structure: Implementing a Wide Product Line 428 ● Market
Structure: Increasing Responsiveness
to Customer Groups 429 ● Geographic Structure: Expanding
Nationally 429 ● Matrix and
Product-Team Structures: Competing in Fast-Changing, High-
Tech Environments 431 ● Focusing on a
Narrow Product Line 433
Strategy in Action 12.4: Restructuring at Lexmark 434
Restructuring and Reengineering 435
Small-Group Exercise: Deciding on an Organizational Structure
● Article File 12 ● Strategic

Closing Case: Nokia’s New Product Structure 440
13 Implementing Strategy in Companies That Compete Across
Industries and Countries 442
Opening Case: Ford Has a New CEO and a New Global
Structure 442
Overview 443
Managing Corporate Strategy Through the Multidivisional
Structure 444
Advantages of a Multidivisional Structure 447 ● Problems in
Implementing a Multidivisional
Structure 448 ● Structure, Control, Culture, and Corporate-
Level Strategy 450 ● The Role of
Information Technology 453
Strategy in Acton 13.1: SAP’s ERP Systems 454
Implementing Strategy Across Countries 455
Implementing a Localization Strategy 456 ● Implementing an
International Strategy 457
● Implementing a Global Standardization Strategy 458 ●
Implementing a Transnational
Strategy 459
Strategy in Action 13.2: Using IT to Make Nestlé’s Global
Structure Work 460
Entry Mode and Implementation 462
Internal New Venturing 462 ● Joint Venturing 465 ● Mergers
and Acquisitions 466
Information Technology, the Internet, and Outsourcing 467
Information Technology and Strategy Implementation 468
Strategy in Action 13.3: Oracle’s New Approach to Control 469

Strategic Outsourcing and Network Structure 470
Strategy in Action 13.4: Li & Fung’s Global Supply-Chain
Management 471
Small-Group Exercise: Deciding on an Organizational Structure
● Article File 13 ● Strategic
Closing Case: GM Searches for the Right Global Structure 474
Endnotes 477
Box Source Notes 493
Contents xi
342927_FM_Theory_pi-xvi.qxd 9/21/07 2:57 PM Page xi
Appendix: Analyzing a Case Study and Writing a Case Study
Analysis C1
What Is a Case Study Analysis? C1
Analyzing a Case Study C2
Writing a Case Study Analysis C6
The Role of Financial Analysis in Case Study Analysis C8
Profit Ratios C8 ● Liquidity Ratios C9 ● Activity Ratios C10 ●
Leverage Ratios C10
● Shareholder-Return Ratios C11 ● Cash Flow C12
Conclusion C12

Index I1
xii Contents
342927_FM_Theory_pi-xvi.qxd 10/5/07 3:52 PM Page xii
Preface
Since the seventh edition was published, this book has
strengthened its position as
the most widely used strategic management textbook on the
market. This tells us that
we continue to meet the expectations of existing users and
attract many new users to
our book. It is clear that most strategy instructors share with us
a concern for cur-
rency in the text and its examples to ensure that cutting-edge
issues and new devel-
opments in strategic management are continually addressed.
Just as in the last edition, our objective in writing the eighth
edition has been to
maintain all that was good about prior editions, while refining
our approach to dis-
cussing established strategic management issues and adding new
material to the text
to present a more complete, clear, and current account of
strategic management as
we move steadily into the twenty-first century. We believe that
the result is a book
that is more closely aligned with the needs of today’s professors
and students and
with the realities of competition in the new global environment.

We have updated many of the features running throughout the
chapters, including
all new Opening Cases and Running Cases. For the Running
Cases, Dell has replaced
Wal-Mart as the focus company. In this edition, we have made
no changes to the
number or sequencing of our chapters. However, we have made
many significant
changes inside each chapter to refine and update our
presentation of strategic man-
agement. Continuing real-world changes in strategic
management practices such as
the increased use of cost reduction strategies like global
outsourcing, ethical issues,
and lean production, and a continued emphasis on the business
model as the driver
of differentiation and competitive advantage, have led to many
changes in our ap-
proach. To emphasize the importance of ethical decision making
in strategic man-
agement, we have included a new feature in the end matter of
every chapter that in-
troduces concept-specific ethical dilemmas that could develop
in a real-world
business setting.
Throughout the revision process, we have been careful to
preserve the balanced
and integrated nature of our account of strategic management.
As we have continued
to add new material, we have also shortened or deleted coverage
of out-of-date or
less important models and concepts to help students identify and
focus on the core
concepts and issues in the field. We have also paid close
attention to retaining the

book’s readability.
We have received a lot of positive feedback about the
usefulness of the end-of-chap-
ter exercises and assignments in the Practicing Strategic
Management sections in our
book. They offer a wide range of hands-on learning experiences
for students. Follow-
ing the Chapter Summary and Discussion Questions, each
chapter contains the fol-
lowing exercises and assignments:
xiii
Comprehensive and
Up-to-Date Coverage
Practicing Strategic
Management: An
Interactive Approach
342927_FM_Theory_pi-xvi.qxd 9/21/07 2:57 PM Page xiii
● Small Group Exercise. This short (20-minute) experiential
exercise asks students
to divide into groups and discuss a scenario concerning some
aspect of strategic
management. For example, the scenario in Chapter 11 asks
students to identify
the stakeholders of their educational institution and evaluate
how stakeholders’
claims are being and should be met.

● Ethics Exercise. The ethics exercise has replaced the
Exploring the Web feature
(now online). This feature has been developed to highlight the
importance of
ethical decision making in today’s business environment. With
today’s current
examples of poor decision making (as seen in Enron, Tyco, and
WorldCom, to
name a few), we hope to equip students with the tools they need
to be strong eth-
ical leaders.
● Article File. As in the last edition, this exercise requires
students to search busi-
ness magazines to identify a company that is facing a particular
strategic manage-
ment problem. For instance, students are asked to locate and
research a company
pursuing a low-cost or a differentiation strategy, and to describe
this company’s
strategy, its advantages and disadvantages, and the core
competencies required to
pursue it. Students’ presentations of their findings lead to lively
class discussions.
● Strategic Management Project. In small groups, students
choose a company to
study for the whole semester and then analyze the company
using the series of
questions provided at the end of every chapter. For example,
students might se-
lect Ford Motor Co. and, using the series of chapter questions,
collect informa-
tion on Ford’s top managers, mission, ethical position, domestic
and global strat-
egy and structure, and so on. Students write a case study of

their company and
present it to the class at the end of the semester. In the past, we
also had students
present one or more of the cases in the book early in the
semester, but now in our
classes, we treat the students’ own projects as the major class
assignment and
their case presentations as the climax of the semester’s learning
experience.
● Closing Case Study. A short closing case provides an
opportunity for a short class
discussion of a chapter-related theme.
In creating these exercises, it is not our intention to suggest that
they should all be
used for every chapter. For example, over a semester, an
instructor might combine a
group Strategic Management Project with five to six Article File
assignments and five
to six Exploring the Web exercises, while doing eight to ten
Small Group Exercises in
class.
We have found that our interactive approach to teaching
strategic management
appeals to students. It also greatly improves the quality of their
learning experience.
Our approach is more fully discussed in the Instructor’s
Resource Manual.
Taken together, the teaching and learning features of Strategic
Management provide
a package that is unsurpassed in its coverage and that supports
the integrated ap-
proach that we have taken throughout the book.

For the Instructor
● The Instructor’s Resource Manual: Theory has been
completely revised. For
each chapter, we provide a clearly focused synopsis, a list of
teaching objectives, a
comprehensive lecture outline, suggested answers to discussion
questions, and
xiv Preface
Teaching and
Learning Aids
342927_FM_Theory_pi-xvi.qxd 9/21/07 2:57 PM Page xiv
comments on the end-of-chapter activities. Each chapter-
opening case, Strategy
in Action boxed feature, and chapter-closing case has a synopsis
and a correspon-
ding teaching note to help guide class discussion.
● The HMTesting CD has been revised and offers a set of
comprehensive true/false
and multiple-choice questions, and new essay questions for each
chapter in the
book. The mix of questions has been adjusted to provide fewer
fact-based or sim-
ple memorization items and to provide more items that rely on
synthesis or ap-
plication. Also, more items now reflect real or hypothetical
situations in organiza-
tions. Every question is keyed to the teaching objectives in the

Instructor’s
Resource Manual and includes an answer and page reference to
the textbook.
● The video program highlights many issues of interest and can
be used to spark
class discussion. It offers a compilation of footage from the
Videos for Humani-
ties series.
● An extensive website contains many features to aid
instructors, including down-
loadable files for the text and case materials from the
Instructor’s Resource Manu-
als, the downloadable Premium and Basic PowerPoint slides, the
Video Guide,
and sample syllabi. Additional materials on the student website
may also be of use
to instructors.
● Eduspace®, powered by Blackboard®, is a course
management tool that includes
chapter outlines, chapter summaries, audio chapter summaries
and quizzes, all
questions from the textbook with suggested answers, Debate
Issues, ACE self-test
questions, auto-graded quizzes, Premium and Basic PowerPoint
slides, Class-
room Response System content, links to content on the
websites, video activities,
and test pools. A Course Materials Guide is available to help
instructor organiza-
tion.
● Blackboard®/Web CT® includes course material, chapter
outlines, chapter sum-

maries, audio chapter summaries and quizzes, all questions from
the textbook
with suggested answers, Premium and Basic PowerPoint slides,
Classroom Re-
sponse System content, links to content on the websites, video
activities, and Test
Bank content.
For the Student
● The student website includes chapter overviews, Internet
exercises, ACE self-
tests, audio summaries and quizzes, case discussion questions to
help guide stu-
dent case analysis, glossaries, flashcards for studying the key
terms, a section with
guidelines on how to do case study analysis, and much more.
This book is the product of far more than two authors. We are
grateful to Lisé John-
son, our sponsor; Suzanna Smith, our editor; and Nicole Hamm,
our marketing
manager, for their help in promoting and developing the book
and for providing us
with timely feedback and information from professors and
reviewers, which allowed
us to shape the book to meet the needs of its intended market.
We are also grateful to
Carol Merrigan and Kristen Truncellito, project editors, for
their adept handling of
production. We are also grateful to the case authors for allowing
us to use their mate-
rials. We also want to thank the departments of management at
the University of
Washington and Texas A&M University for providing the
setting and atmosphere in

Preface xv
Acknowledgments
342927_FM_Theory_pi-xvi.qxd 9/21/07 2:57 PM Page xv
Ken Armstrong, Anderson University
Richard Babcock, University of San Francisco
Kunal Banerji, West Virginia University
Kevin Banning, Auburn University – Montgomery
Glenn Bassett, University of Bridgeport
Thomas H. Berliner, The University of Texas at Dallas
Bonnie Bollinger, Ivy Technical Community College
Richard G. Brandenburg, University of Vermont
Steven Braund, University of Hull
Philip Bromiley, University of Minnesota
Geoffrey Brooks, Western Oregon State College
Amanda Budde, University of Hawaii
Lowell Busenitz, University of Houston
Charles J. Capps III, Sam Houston State University
Don Caruth, Texas A&M Commerce
Gene R. Conaster, Golden State University
Steven W. Congden, University of Hartford
Catherine M. Daily, Ohio State University
Robert DeFillippi, Suffolk University Sawyer School of
Management
Helen Deresky, SUNY – Plattsburgh
Gerald E. Evans, The University of Montana
John Fahy, Trinity College, Dublin
Patricia Feltes, Southwest Missouri State University
Bruce Fern, New York University
Mark Fiegener, Oregon State University

Chuck Foley, Columbus State Community College
Isaac Fox, Washington State University
Craig Galbraith, University of North Carolina at Wilmington
Scott R. Gallagher, Rutgers University
Eliezer Geisler, Northeastern Illinois University
Gretchen Gemeinhardt, University of Houston
Lynn Godkin, Lamar University
Sanjay Goel, University of Minnesota – Duluth
Robert L. Goldberg, Northeastern University
James Grinnell, Merrimack College
Russ Hagberg, Northern Illinois University
Allen Harmon, University of Minnesota – Duluth
David Hoopes, California State University – Dominguez Hills
Todd Hostager, University of Wisconsin – Eau Claire
Graham L. Hubbard, University of Minnesota
Tammy G. Hunt, University of North Carolina at Wilmington
James Gaius Ibe, Morris College
W. Grahm Irwin, Miami University
Homer Johnson, Loyola University – Chicago
Jonathan L. Johnson, University of Arkansas – Walton College
of Business Administration
Marios Katsioloudes, St. Joseph’s University
Robert Keating, University of North Carolina at Wilmington
Geoffrey King, California State University – Fullerton
John Kraft, University of Florida
Rico Lam, University of Oregon
Robert J. Litschert, Virginia Polytechnic Institute and State
University
Franz T. Lohrke, Louisiana State University
Paul Mallette, Colorado State University
Daniel Marrone, SUNY Farmingdale
Lance A. Masters, California State University – San Bernardino
Robert N. McGrath, Embry-Riddle

Aeronautical University
Charles Mercer, Drury College
Van Miller, University of Dayton
Tom Morris, University of San Diego
Joanna Mulholland, West Chester University of Pennsylvania
John Nebeck, Viterbo University
Richard Neubert, University of Tennessee – Knoxville
Francine Newth, Providence College
Don Okhomina, Fayetteville State University
Phaedon P. Papadopoulos, Houston Baptist University
John Pappalardo, Keene State College
Paul R. Reed, Sam Houston State University
Rhonda K. Reger, Arizona State University
Malika Richards, Indiana University
Simon Rodan, San Jose State
Stuart Rosenberg, Dowling College
Douglas Ross, Towson University
Ronald Sanchez, University of Illinois
Joseph A. Schenk, University of Dayton
Brian Shaffer, University of Kentucky
Leonard Sholtis, Eastern Michigan University
Pradip K. Shukla, Chapman University
Mel Sillmon, University of Michigan – Dearborn
Dennis L. Smart, University of Nebraska at Omaha
Barbara Spencer, Clemson University
Lawrence Steenberg, University of Evansville
Kim A. Stewart, University of Denver
Ted Takamura, Warner Pacific College
Scott Taylor, Florida Metropolitan University
Bobby Vaught, Southwest Missouri State
Robert P. Vichas, Florida Atlantic University
Edward Ward, St. Cloud State University
Kenneth Wendeln, Indiana University
Daniel L. White, Drexel University
Edgar L. Williams, Jr., Norfolk State University

Jun Zhao, Governors State University
Charles W. L. Hill
Gareth R. Jones
which the book could be written, and the students of these
universities who reacted
to and provided input for many of our ideas. In addition, the
following reviewers of
this and earlier editions gave us valuable suggestions for
improving the manuscript
from its original version to its current form:
xvi Preface
342927_FM_Theory_pi-xvi.qxd 10/5/07 3:52 PM Page xvi
O P E N I N G C A S E
Dell Computer
Dell Computer has enjoyed a decade of very high profitability.
Between 1998 and 2006, its aver-
age return on invested capital (ROIC) was a staggering 48.3%,
far ahead of the profitability of
competing manufacturers of personal computers (see Figure
1.1). Moreover, while the prof-
itability of its competitors fell sharply during 2001–2004,
reflecting a tough selling environment
in the personal computer industry, Dell managed to maintain a
very high ROIC. Clearly, Dell
has had a sustained competitive advantage over its rivals.
Where did this come from?

An answer can be found in Dell’s business model: selling
directly to retail customers.
Michael Dell reasoned that by cutting out wholesalers and
retailers, he would obtain the profit
they would otherwise receive and could give part of the profit
back to customers in the form of
lower prices. Initially, Dell did its direct selling through
mailings and telephone contacts, but
since the mid-1990s, much of its sales have been made through
its website. Dell’s sophisticated
website allows customers to mix and match product features
such as microprocessors, memory,
monitors, internal hard drives, CD and DVD drives, keyboard
and mouse format, and so on, to
customize their own computer systems. The ability to customize
orders kept retail customers
coming back to Dell and helped to drive sales to a record $55.9
billion in 2004.
Another reason for Dell’s high performance is the way it
manages its supply chain to mini-
mize the costs of holding inventory. Dell has about 200
suppliers, over half of them located out-
side the United States. Dell uses the Internet to feed real-time
information about order flow to
its suppliers so they have up-to-the-minute information about
demand trends for the compo-
nents they produce, along with volume expectations for the
upcoming four to twelve weeks.
Dell’s suppliers use this information to adjust their own
production schedules, manufacturing
just enough components for Dell’s needs and shipping them by
the most appropriate mode so
that they arrive just in time for production. This tight
coordination is pushed back even further
down the supply chain because Dell shares this information with

its suppliers’ biggest suppliers.
Dell’s goal is to coordinate its supply chain to such an extent
that it drives all inventories out
of the supply chain, apart from those actually in transit between
suppliers and Dell, effectively re-
placing inventory with information. Dell has succeeded in
driving down inventory to the lowest
Strategic Leadership:
Managing the Strategy-Making
Process for Competitive Advantage
1
1
C H A P T E R
342927_Ch01_p001-040.qxd 9/20/07 12:12 PM Page 1
2 PART 1 Introduction to Strategic Management
level in the industry. In mid-2006, it was turning its in-
ventory over every five days, compared to an average of
forty-one days at key competitor Hewlett-Packard. This is
a major source of competitive advantage in the computer
industry, where component costs account for 75% of rev-
enues and typically fall by 1% per week due to rapid ob-
solescence.
Despite its high profitability, between mid-2005 and
mid-2006, Dell’s stock lost half its market value, sliding
from $42 a share to $22. There were several reasons for
this. First, after years of trying, three of Dell’s competi-

tors, Acer, Hewlett-Packard, and Lenovo, had reduced
their cost structure and become more competitive with
Dell, enabling them to match Dell on prices and still
make profits. Second, by 2005, the consumer market for
PCs in developed nations had become mature. To keep
growing, Dell tried to expand its share of the business
market—but here it faces tough competition from
Hewlett-Packard, which can offer business users a wider
range of products, and extensive consulting services and
after-sales service and support, all things that business
users value highly. Third, Dell’s growth had been hurt by
poor customer service. Dell had outsourced customer
service to India in an attempt to reduce costs, only to find
that poor service alienated its customers. Even though
Dell moved customer service for business users back to
the United States, some damage had already been done,
and this only served to emphasize the difference between
Dell and HP in the minds of business customers. Fourth,
in an attempt to gain market share from competitors,
Dell cut prices in 2005 and 2006, but it gained little in
sales volume, made less profit per computer, and experi-
enced only sluggish profit growth for 2006.
Many investors, deciding that Dell’s years of rapid
profit growth might be over, sold the stock. Looking for-
ward, analysts think that Dell’s profitability, as measured
by ROIC, will decline from over 60% in 2006 to 30% by
2009 as competitors like Acer, Lenovo, and Hewlett-
Packard start to match Dell’s cost structure, and differen-
tiate themselves from Dell in ways that users value.1
R
et
ur

n
o
n
I
n
v
e
st
ed
C
ap
it
al
(%
)
Apple Dell Gateway Hewlett-
Packard
1998 2000 20022001 2003 200620051999 2004
40
50
60
70

80
90
10
20
0
30
Profitability of U.S. Personal Computer Makers
F I G U R E 1 . 3F I G U R E 1 . 1
Source: Value Line Calculations. Data for 2006 are estimates
based on three quarters.
342927_Ch01_p001-040.qxd 9/20/07 12:12 PM Page 2
Why do some companies succeed while others fail? Why has
Dell Computer been able to
do so well in the fiercely competitive personal computer
industry, while competitors like
Gateway have struggled to make money? In the airline industry,
how is it that Southwest
Airlines has managed to keep increasing its revenues and profits
through both good times
and bad, while rivals such as US Airways and United Airlines
have had to seek bankruptcy
protection? What explains the persistent growth and
profitability of Nucor Steel, now the
largest steel maker in America, during a period when many of

its once larger rivals disap-
peared into bankruptcy?
In this book, we argue that the strategies that a company’s
managers pursue have
a major impact on its performance relative to its competitors. A
strategy is a set of
related actions that managers take to increase their company’s
performance. For
most, if not all, companies, achieving superior performance
relative to rivals is the
ultimate challenge. If a company’s strategies result in superior
performance, it is said
to have a competitive advantage. Dell Computer’s strategies
produced superior per-
formance during the late 1990s and first half of the 2000s; as a
result, Dell enjoyed a
competitive advantage over its rivals. How did Dell achieve this
competitive advan-
tage? As explained in the Opening Case, it was due to the
successful pursuit of a
number of strategies by Dell’s managers. These strategies
enabled the company to
lower its cost structure, charge low prices, gain market share,
and become more
profitable than its rivals. We will return to the example of Dell
several times through-
out this book in a Running Case that examines various aspects
of Dell strategy and
performance.
This book identifies and describes the strategies that managers
can pursue to
achieve superior performance and provide their company with a
competitive advan-
tage. One of its central aims is to give you a thorough

understanding of the analytical
techniques and skills necessary to identify and implement
strategies successfully. The
first step toward achieving this objective is to describe in more
detail what superior
performance and competitive advantage mean and to explain the
pivotal role that
managers play in leading the strategy-making process.
Strategic leadership is about how to most effectively manage a
company’s
strategy-making process to create competitive advantage. The
strategy-making
process is the process by which managers select and then
implement a set of
strategies that aim to achieve a competitive advantage. Strategy
formulation is
the task of selecting strategies, whereas strategy implementation
is the task of
putting strategies into action, which includes designing,
delivering, and support-
ing products; improving the efficiency and effectiveness of
operations; and design-
ing a company’s organization structure, control systems, and
culture. Paraphrasing
the well-known saying that “success is 10% inspiration and 90%
perspiration,” in
the strategic management arena we might say that “success is
10% formulation and
90% implementation.” The task of selecting strategies is
relatively easy (but re-
quires good analysis and some inspiration); the hard part is
putting those strate-
gies into effect.
By the end of this chapter, you will understand how strategic

leaders can manage
the strategy-making process by formulating and implementing
strategies that enable
a company to achieve a competitive advantage and superior
performance. Moreover,
you will learn how the strategy-making process can go wrong
and what managers
can do to make this process more effective.
O V E R V I E W
CHAPTER 1 Strategic Leadership: Managing the Strategy-
Making Process for Competitive Advantage 3
342927_Ch01_p001-040.qxd 9/20/07 12:12 PM Page 3
Strategic Leadership, Competitive Advantage, and Superior
Performance
Strategic leadership is concerned with managing the strategy-
making process to in-
crease the performance of a company, thereby increasing the
value of the enterprise to
its owners, its shareholders. As shown in Figure 1.2, to increase
shareholder value, man-
agers must pursue strategies that increase the profitability of the
company and ensure
that profits grow (for more details, see the Appendix to this
chapter). To do this, a com-
pany must be able to outperform its rivals; it must have a
competitive advantage.
Maximizing shareholder value is the ultimate goal of profit-
making companies, for

two reasons. First, shareholders provide a company with the risk
capital that enables
managers to buy the resources needed to produce and sell goods
and services. Risk
capital is capital that cannot be recovered if a company fails and
goes bankrupt. In
the case of Dell, for example, shareholders provided the
company with capital to
build its assembly plants, invest in information systems, build
its order taking and
customer support system, and so on. Had Dell failed, its
shareholders would have lost
their money; their shares would have been worthless. Thus,
shareholders will not
provide risk capital unless they believe that managers are
committed to pursuing
strategies that give them a good return on their capital
investment. Second, share-
holders are the legal owners of a corporation, and their shares
therefore represent a
claim on the profits generated by a company. Thus, managers
have an obligation to
invest those profits in ways that maximize shareholder value. Of
course, as explained
later in this book, managers must behave in a legal, ethical, and
socially responsible
manner while working to maximize shareholder value.
By shareholder value, we mean the returns that shareholders
earn from purchas-
ing shares in a company. These returns come from two sources:
(a) capital apprecia-
tion in the value of a company’s shares and (b) dividend
payments. For example, be-
tween January 2 and December 31, 2003, the value of one share
in the bank

JPMorgan increased from $23.96 to $35.78, which represents a
capital appreciation
of $11.82. In addition, JPMorgan paid out a dividend of $1.30 a
share during 2003.
Thus, if an investor had bought one share of JPMorgan on
January 2 and held on to
it for the entire year, her return would have been $13.12 ($11.82
+ $1.30), an impres-
sive 54.8% return on her investment. One reason JPMorgan’s
shareholders did so
well during 2003 was that investors came to believe that
managers were pursuing
strategies that would both increase the long-term profitability of
the company and
significantly grow its profits in the future.
● Superior
Performance
Shareholder
value
Effectiveness
of strategies
Profit
growth
Profitability
(ROIC)
Determinants of
Shareholder Value

F I G U R E 1 . 2
342927_Ch01_p001-040.qxd 9/20/07 12:12 PM Page 4
One way of measuring the profitability of a company is by the
return that it
makes on the capital invested in the enterprise.2 The return on
invested capital
(ROIC) that a company earns is defined as its net profit over the
capital invested in
the firm (profit/capital invested). By net profit, we mean net
income after tax. By cap-
ital, we mean the sum of money invested in the company: that
is, stockholders’ equity
plus debt owed to creditors. So defined, profitability is the
result of how efficiently
and effectively managers use the capital at their disposal to
produce goods and serv-
ices that satisfy customer needs. A company that uses its capital
efficiently and effec-
tively makes a positive return on invested capital.
The profit growth of a company can be measured by the
increase in net profit
over time. A company can grow its profits if it sells products in
markets that are
growing rapidly, gains market share from rivals, increases the
amount it sells to exist-
ing customers, expands overseas, or diversifies profitably into
new lines of business.
For example, between 1996 and 2005, Dell increased its net
profit from $531 million
to $3.825 billion. It was able to do this because the company
had a low cost structure,

which enabled it to take market share from rivals such as
Gateway, Hewlett-Packard,
and IBM. In addition, the entire PC industry was growing at a
healthy pace during
this period, further boosting Dell’s profits.
Together, profitability and profit growth are the principal
drivers of shareholder
value (see the Appendix to this chapter for details). To both
boost profitability and
grow profits over time, managers must formulate and implement
strategies that give
their company a competitive advantage over rivals. Dell’s
strategies achieved this
until 2005. As a result, investors who purchased Dell stock on
January 1, 1996, at
$1.11 a share, and held that position until December 30, 2005,
when the stock was
worth $29.95, would have made a 2,700% return on their
investment! However, as
noted in the Opening Case, now Dell is finding it increasingly
difficult to achieve
profit growth and high profitability. Indeed, Dell’s net profits
shrank between 2005
and 2006. As a result, the shares traded as low as $18.95 in
2006, even though the
company remained very profitable. To get the share price up,
managers at Dell need
to pursue strategies that reignite profit growth while
maintaining the company’s his-
torically high profitability.
One of the key challenges managers face is to simultaneously
generate high prof-
itability and increase the profits of the company. As Dell’s
managers have discovered

since 2005, companies that have high profitability but whose
profits are not growing
will not be as highly valued by shareholders as a company that
has both high prof-
itability and rapid profit growth (see the Appendix for details).
At the same time,
managers need to be aware that if they grow profits but
profitability declines, that too
will not be as highly valued by shareholders. What shareholders
want to see, and what
managers must try to deliver through strategic leadership, is
profitable growth: that is,
high profitability and sustainable profit growth. This is not
easy, but some of the most
successful enterprises of our era have achieved it—companies
such as Microsoft, Intel,
and Wal-Mart, and until 2005 at least, Dell.
Managers do not make strategic decisions in a competitive
vacuum. Their company
is competing against other companies for customers.
Competition is a rough-and-
tumble process in which only the most efficient and effective
companies win out. It is
a race without end. To maximize shareholder value, managers
must formulate and
implement strategies that enable their company to outperform
rivals—that give it a
competitive advantage. A company is said to have a competitive
advantage over its
rivals when its profitability is greater than the average
profitability and profit growth

● Competitive
Advantage and a
Company’s Business
Model
342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 5
of other companies competing for the same set of customers.
The higher its prof-
itability relative to rivals, the greater its competitive advantage
will be. A company
has a sustained competitive advantage when its strategies enable
it to maintain
above-average profitability for a number of years. As discussed
in the Opening Case,
Dell had a significant and sustained competitive advantage over
rivals such as Gateway
and Hewlett-Packard between 1996 and 2004. That competitive
advantage may now
be starting to dissipate.
If a company has a sustained competitive advantage, it is likely
to gain market share
from its rivals and thus grow its profits more rapidly than those
of rivals. In turn, com-
petitive advantage will also lead to higher profit growth than
that shown by rivals.
The key to understanding competitive advantage is appreciating
how the differ-
ent strategies managers pursue over time can create activities
that fit together to
make a company unique or different from its rivals and able to

consistently outper-
form them. A business model is managers’ conception of how
the set of strategies
their company pursues should mesh together into a congruent
whole, enabling the
company to gain a competitive advantage and achieve superior
profitability and
profit growth. In essence, a business model is a kind of mental
model, or gestalt, of
how the various strategies and capital investments made by a
company should fit to-
gether to generate above-average profitability and profit
growth. A business model
encompasses the totality of how a company will:
● Select its customers
● Define and differentiate its product offerings
● Create value for its customers
● Acquire and keep customers
● Produce goods or services
● Lower costs
● Deliver those goods and services to the market
● Organize activities within the company
● Configure its resources
● Achieve and sustain a high level of profitability
● Grow the business over time

The business model at Dell Computer, for example, is based on
the idea that costs
can be lowered by selling directly to consumers and avoiding
using a distribution chan-
nel (see the Opening Case). The cost savings that are attained as
a result of this model
are passed to consumers in the form of lower prices, which has
enabled Dell to gain mar-
ket share from rivals. Over time, this business model proved
superior to the established
business model in the industry, which involved selling
computers through retailers.
Dell outperformed close rivals, like Gateway, who adopted the
same basic direct-
selling business model because Dell implemented its business
model more effectively.
Most important, Dell did a much better job of using the Internet
to coordinate its
supply chain and to match orders for computers to the delivery
of inventory from
suppliers, so that it increased its inventory turnover and reduced
its costs.
The business model that managers develop may not only lead to
higher prof-
itability and thus competitive advantage at a certain point in
time, but it may also
help the firm to grow its profits over time, thereby maximizing
shareholder value
while maintaining or even increasing profitability. Dell’s
business model was so

342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 6
efficient and effective that it enabled the company to take
market share from rivals
and thereby increase its profits over time.
It is important to recognize that in addition to its business
model and associated strate-
gies, a company’s performance is also determined by the
characteristics of the industry
in which it competes. Different industries are characterized by
different competitive
conditions. In some, demand is growing rapidly, and in others it
is contracting. Some
might be beset by excess capacity and persistent price wars,
others by excess demand
and rising prices. In some, technological change might be
revolutionizing competition.
Others might be characterized by a lack of technological
change. In some industries,
high profitability among incumbent companies might induce
new companies to enter
the industry, and these new entrants might depress prices and
profits in the industry. In
other industries, new entry might be difficult, and periods of
high profitability might
persist for a considerable time. Thus, the different competitive
conditions prevailing in
different industries might lead to differences in profitability and
profit growth. For ex-
ample, average profitability might be higher in some industries
and lower in other in-
dustries because competitive conditions vary from industry to
industry.

Figure 1.3 shows the average profitability, measured by ROIC,
among companies
in several different industries between 2002 and 2006. The drug
industry had a fa-
vorable competitive environment: demand for drugs was high
and competition was
generally not based on price. Just the opposite was the case in
the air transport in-
dustry, which was extremely price competitive. Exactly how
industries differ is dis-
cussed in detail in Chapter 2. For now, the important point to
remember is that the
profitability and profit growth of a company are determined by
two main factors: its
relative success in its industry and the overall performance of
its industry relative to
other industries.3
A final point concerns the concept of superior performance in
the nonprofit sector.
By definition, nonprofit enterprises such as government
agencies, universities, and
charities are not in “business” to make profits. Nevertheless,
they are expected to use
their resources efficiently and operate effectively, and their
managers set goals to
measure their performance. The performance goal for a business
school might be to
● Industry
Differences in

Performance
● Performance in
Nonprofit Enterprises
Return on Invested
Capital in Selected
Industries, 2002–2006
Source: Value Line Investment
Survey.
F I G U R E 1 . 3
R
et
ur
n
on
In
ve
st
ed
C
ap
it
al
(%
)

2002 2003 2004 2005 2006
15
20
25
5
0
10
Air transport Computer software
Hotel/gaming Retail
Drug
342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 7
get its programs ranked among the best in the nation. The
performance goal for a
charity might be to prevent childhood illnesses in poor
countries. The performance
goal for a government agency might be to improve its services
while not exceeding its
budget. The managers of nonprofits need to map out strategies
to attain these goals.
They also need to understand that nonprofits compete with each
other for scarce re-
sources, just as businesses do. For example, charities compete
for scarce donations,
and their managers must plan and develop strategies that lead to

high performance
and demonstrate a track record of meeting performance goals. A
successful strategy
gives potential donors a compelling message about why they
should contribute addi-
tional donations. Thus, planning and thinking strategically are
as important for
managers in the nonprofit sector as they are for managers in
profit-seeking firms.
Strategic Managers
Managers are the linchpin in the strategy-making process. It is
individual managers
who must take responsibility for formulating strategies to attain
a competitive advan-
tage and for putting those strategies into effect. They must lead
the strategy-making
process. The strategies that made Dell Computer so successful
were not chosen by
some abstract entity known as the company; they were chosen
by the company’s
founder, Michael Dell, and the managers he hired. Dell’s
success, like the success of
any company, was based in large part on how well the
company’s managers per-
formed their strategic roles. In this section, we look at the
strategic roles of different
managers. Later in the chapter, we discuss strategic leadership,
which is how man-
agers can effectively lead the strategy-making process.
In most companies, there are two main types of managers:
general managers,
who bear responsibility for the overall performance of the
company or for one of its

major self-contained subunits or divisions, and functional
managers, who are re-
sponsible for supervising a particular function, that is, a task,
activity, or operation,
such as accounting, marketing, research and development
(R&D), information tech-
nology, or logistics.
A company is a collection of functions or departments that work
together to
bring a particular good or service to the market. If a company
provides several differ-
ent kinds of goods or services, it often duplicates these
functions and creates a series
of self-contained divisions (each of which contains its own set
of functions) to man-
age each different good or service. The general managers of
these divisions then be-
come responsible for their particular product line. The
overriding concern of general
managers is for the health of the whole company or division
under their direction;
they are responsible for deciding how to create a competitive
advantage and achieve
high profitability with the resources and capital they have at
their disposal. Figure 1.4
shows the organization of a multidivisional company, that is, a
company that com-
petes in several different businesses and has created a separate
self-contained division
to manage each. As you can see, there are three main levels of
management: corpo-
rate, business, and functional. General managers are found at
the first two of these
levels, but their strategic roles differ depending on their sphere
of responsibility.

The corporate level of management consists of the chief
executive officer (CEO),
other senior executives, and corporate staff. These individuals
occupy the apex of de-
cision making within the organization. The CEO is the principal
general manager. In
● Corporate-Level
Managers
342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 8
consultation with other senior executives, the role of corporate-
level managers is to
oversee the development of strategies for the whole
organization. This role includes
defining the goals of the organization, determining what
businesses it should be in,
allocating resources among the different businesses, formulating
and implementing
strategies that span individual businesses, and providing
leadership for the entire or-
ganization.
Consider General Electric as an example. GE is active in a wide
range of busi-
nesses, including lighting equipment, major appliances, motor
and transportation
equipment, turbine generators, construction and engineering
services, industrial
electronics, medical systems, aerospace, aircraft engines, and

financial services. The
main strategic responsibilities of its CEO, Jeffrey Immelt, are
setting overall strategic
goals, allocating resources among the different business areas,
deciding whether the
firm should divest itself of any of its businesses, and
determining whether it should
acquire any new ones. In other words, it is up to Immelt to
develop strategies that
span individual businesses; his concern is with building and
managing the corporate
portfolio of businesses to maximize corporate profitability.
It is not his specific responsibility to develop strategies for
competing in the indi-
vidual business areas, such as financial services. The
development of such strategies is
the responsibility of the general managers in these different
businesses, or business-
level managers. However, it is Immelt’s responsibility to probe
the strategic thinking
of business-level managers to make sure that they are pursuing
robust business mod-
els and strategies that will contribute toward the maximization
of GE’s long-run
profitability, to coach and motivate those managers, to reward
them for attaining or
exceeding goals, and to hold them accountable for poor
performance.
Corporate-level managers also provide a link between the
people who oversee the
strategic development of a firm and those who own it (the
shareholders). Corporate-
level managers, and particularly the CEO, can be viewed as the
agents of sharehold-

ers.4 It is their responsibility to ensure that the corporate and
business strategies
that the company pursues are consistent with maximizing
profitability and profit
growth. If they are not, then ultimately the CEO is likely to be
called to account by
the shareholders.
Corporate Level
CEO, board of
directors, and
corporate staff
Business Level
Divisional
managers
and staff
Functional Level
Functional
managers
Market A Market B Market C
Division A Division C
Business
functions
Business

functions
Head
Office
Division B
Business
functions
Levels of Strategic
Management
F I G U R E 1 . 4
342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 9
A business unit is a self-contained division (with its own
functions—for example, fi-
nance, purchasing, production, and marketing departments) that
provides a product
or service for a particular market. The principal general
manager at the business
level, or the business-level manager, is the head of the division.
The strategic role of
these managers is to translate the general statements of
direction and intent that
come from the corporate level into concrete strategies for
individual businesses.
Whereas corporate-level general managers are concerned with
strategies that span
individual businesses, business-level general managers are
concerned with strategies
that are specific to a particular business. At GE, a major

corporate goal is to be first or
second in every business in which the corporation competes.
Then the general man-
agers in each division work out for their business the details of
a business model that
is consistent with this objective.
Functional-level managers are responsible for the specific
business functions or opera-
tions (human resources, purchasing, product development,
customer service, and so on)
that constitute a company or one of its divisions. Thus, a
functional manager’s sphere of
responsibility is generally confined to one organizational
activity, whereas general man-
agers oversee the operation of a whole company or division.
Although they are not re-
sponsible for the overall performance of the organization,
functional managers never-
theless have a major strategic role: to develop functional
strategies in their area that help
fulfill the strategic objectives set by business- and corporate-
level general managers.
In GE’s aerospace business, for instance, manufacturing
managers are responsible
for developing manufacturing strategies consistent with
corporate objectives. More-
over, functional managers provide most of the information that
makes it possible for
business- and corporate-level general managers to formulate
realistic and attainable
strategies. Indeed, because they are closer to the customer than
is the typical general
manager, functional managers themselves may generate
important ideas that subse-

quently become major strategies for the company. Thus, it is
important for general
managers to listen closely to the ideas of their functional
managers. An equally great
responsibility for managers at the operational level is strategy
implementation: the
execution of corporate- and business-level plans.
The Strategy-Making Process
We can now turn our attention to the process by which
managers formulate and im-
plement strategies. Many writers have emphasized that strategy
is the outcome of a
formal planning process and that top management plays the
most important role in
this process.5 Although this view has some basis in reality, it is
not the whole story. As
we shall see later in the chapter, valuable strategies often
emerge from deep within
the organization without prior planning. Nevertheless, a
consideration of formal, ra-
tional planning is a useful starting point for our journey into the
world of strategy.
Accordingly, we consider what might be described as a typical
formal strategic plan-
ning model for making strategy.
The formal strategic planning process has five main steps:
1. Select the corporate mission and major corporate goals.
2. Analyze the organization’s external competitive environment
to identify oppor-
tunities and threats.

● Business-Level
Managers
● Functional-Level
Managers
● A Model of the
Strategic Planning
Process
342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 10
3. Analyze the organization’s internal operating environment to
identify the organi-
zation’s strengths and weaknesses.
4. Select strategies that build on the organization’s strengths
and correct its weak-
nesses in order to take advantage of external opportunities and
counter external
threats. These strategies should be consistent with the mission
and major goals of
the organization. They should be congruent and constitute a
viable business
model.
5. Implement the strategies.
The task of analyzing the organization’s external and internal
environments and
then selecting appropriate strategies constitutes strategy

formulation. In contrast, as
noted earlier, strategy implementation involves putting the
strategies (or plan) into
action. This includes taking actions consistent with the selected
strategies of the
company at the corporate, business, and functional levels;
allocating roles and respon-
sibilities among managers (typically through the design of
organization structure); al-
locating resources (including capital and money); setting short-
term objectives; and
designing the organization’s control and reward systems. These
steps are illustrated in
Figure 1.5 (which can also be viewed as a plan for the rest of
this book).
Each step in Figure 1.5 constitutes a sequential step in the
strategic planning
process. At step 1, each round or cycle of the planning process
begins with a statement
of the corporate mission and major corporate goals. This
statement is shaped by the
existing business model of the company. The mission statement
is followed by the
foundation of strategic thinking: external analysis, internal
analysis, and strategic
choice. The strategy-making process ends with the design of the
organizational
structure and the culture and control systems necessary to
implement the organiza-
tion’s chosen strategy. This chapter discusses how to select a
corporate mission and
choose major goals. Other parts of strategic planning are
reserved for later chapters,
as indicated in Figure 1.5.

Some organizations go through a new cycle of the strategic
planning process
every year. This does not necessarily mean that managers
choose a new strategy each
year. In many instances, the result is simply to modify and
reaffirm a strategy and
structure already in place. The strategic plans generated by the
planning process gen-
erally look out over a period of one to five years, with the plan
being updated, or
rolled forward, every year. In most organizations, the results of
the annual strategic
planning process are used as input into the budgetary process
for the coming year so
that strategic planning is used to shape resource allocation
within the organization.
The first component of the strategic management process is
crafting the organiza-
tion’s mission statement, which provides the framework or
context within which
strategies are formulated. A mission statement has four main
components: a state-
ment of the raison d’être of a company or organization—its
reason for existence—
which is normally referred to as the mission; a statement of
some desired future state,
usually referred to as the vision; a statement of the key values
that the organization is
committed to; and a statement of major goals.
The Mission A company’s mission describes what the company
does. For example,
the mission of Kodak is to provide “customers with the
solutions they need to cap-
ture, store, process, output, and communicate images—

anywhere, anytime.”6 In other
words, Kodak exists to provide imaging solutions to consumers.
In its mission state-
ment, Ford Motor Company describes itself as a company that is
“passionately committed
● Mission Statement
342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 11
to providing personal mobility for people around the world. . . .
We anticipate con-
sumer need and deliver outstanding products and services that
improve people’s
lives.”7 In short, Ford is a company that exists to satisfy
consumer needs for personal
mobility; that is its mission. Both of these missions focus on the
customer needs that the
company is trying to satisfy rather than on particular products
(imaging and personal
STRATEGY FORMULATION
External Analysis:
Opportunities
and Threats
Chapter 2

FE
ED
B
A
C
K
STRATEGY IMPLEMENTATION
Business-Level Strategies
Chapters 5, 6, and 7
Global Strategies
Chapter 8
Corporate-Level Strategies
Chapters 9 and 10
Designing
Organization
Culture
Chapters 12 and 13
Designing
Organization
Controls
Chapters 12 and 13
Governance and Ethics
Chapter 11
Functional-Level Strategies

Chapter 4
Internal Analysis:
Strengths and
Weaknesses
Chapter 3
SWOT
Strategic
Choice
Mission, Vision,
Values, and
Goals
Chapter 1
Existing
Business Model
Designing
Organization
Structure
Chapters 12 and 13
Main Components of
the Strategic Planning
Process
F I G U R E 1 . 5
342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 12

mobility rather than conventional film or cameras and
automobiles). These are
customer-oriented rather than product-oriented missions.
An important first step in the process of formulating a mission
is to come up with
a definition of the organization’s business. Essentially, the
definition answers these
questions: “What is our business? What will it be? What should
it be?”8 The responses
guide the formulation of the mission. To answer the question,
“What is our busi-
ness?” a company should define its business in terms of three
dimensions: who is
being satisfied (what customer groups), what is being satisfied
(what customer
needs), and how customers’ needs are being satisfied (by what
skills, knowledge, or
distinctive competencies).9 Figure 1.6 illustrates these
dimensions.
This approach stresses the need for a customer-oriented rather
than a product-
oriented business definition. A product-oriented business
definition focuses on the
characteristics of the products sold and the markets served, not
on which kinds of
customer needs the products are satisfying. Such an approach
obscures the com-
pany’s true mission because a product is only the physical
manifestation of applying
a particular skill to satisfy a particular need for a particular
customer group. In prac-
tice, that need may be served in many different ways, and a
broad customer-oriented

business definition that identifies these ways can safeguard
companies from being
caught unaware by major shifts in demand.
By helping anticipate demand shifts, a customer-oriented
mission statement can
also assist companies in capitalizing on changes in their
environment. It can help an-
swer the question, “What will our business be?” Kodak’s
mission statement—to pro-
vide “customers with the solutions they need to capture, store,
process, output, and
communicate images”—is a customer-oriented statement that
focuses on customer
needs rather than a particular product (or solution) for
satisfying those needs, such
as chemical film processing. For this reason, it is helping to
drive Kodak’s current in-
vestments in digital imaging technologies, which are now fast
replacing its traditional
business based on chemical film processing.
Who is being
satisfied?
Customer groups
What is being
satisfied?
Customer needs
How are

customer needs
being satisfied?
Distinctive
competencies
Business
Definition
Defining the Business
Source: D. F. Abell, Defining the
Business: The Starting Point of
Strategic Planning (Englewood
Cliffs, N.J.: Prentice-Hall, 1980),
p. 7.
F I G U R E 1 . 6
342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 13
The need to take a customer-oriented view of a company’s
business has often
been ignored. History is littered with the wreckage of once-
great corporations that
did not define their business or defined it incorrectly so that
ultimately they declined.
In the 1950s and 1960s, many office equipment companies such
as Smith Corona
and Underwood defined their businesses as being the production
of typewriters. This
product-oriented definition ignored the fact that they were
really in the business of
satisfying customers’ information-processing needs.
Unfortunately for those compa-

nies, when a new technology came along that better served
customer needs for infor-
mation processing (computers), demand for typewriters
plummeted. The last great
typewriter company, Smith Corona, went bankrupt in 1996, a
victim of the success of
computer-based word-processing technology.
In contrast, IBM correctly foresaw what its business would be.
In the 1950s, IBM
was a leader in the manufacture of typewriters and mechanical
tabulating equipment
using punch-card technology. However, unlike many of its
competitors, IBM defined
its business as providing a means for information processing
and storage, rather than
just supplying mechanical tabulating equipment and
typewriters.10 Given this defini-
tion, the company’s subsequent moves into computers, software
systems, office sys-
tems, and printers seem logical.
Vision The vision of a company lays out some desired future
state; it articulates,
often in bold terms, what the company would like to achieve.
Nokia, the world’s
largest manufacturer of mobile (wireless) phones, operates with
a very simple but
powerful vision: “If it can go mobile, it will!” This vision
implies that not only will
voice telephony go mobile (it already has), but so will a host of
other services based
on data, such as imaging and Internet browsing. This vision has
led Nokia to develop
multimedia mobile handsets that not only can be used for voice
communication but

that also take pictures, browse the Internet, play games, and
manipulate personal and
corporate information.
Values The values of a company state how managers and
employees should conduct
themselves, how they should do business, and what kind of
organization they should
build to help a company achieve its mission. Insofar as they
help drive and shape be-
havior within a company, values are commonly seen as the
bedrock of a company’s
organizational culture: the set of values, norms, and standards
that control how em-
ployees work to achieve an organization’s mission and goals.
An organization’s cul-
ture is commonly seen as an important source of its competitive
advantage.11 (We
discuss the issue of organization culture in depth in Chapter
12.) For example, Nucor
Steel is one of the most productive and profitable steel firms in
the world. Its com-
petitive advantage is based in part on the extremely high
productivity of its work
force, which the company maintains is a direct result of its
cultural values, which in
turn determine how it treats its employees. These values are as
follow:
● “Management is obligated to manage Nucor in such a way that
employees will
have the opportunity to earn according to their productivity.”
● “Employees should be able to feel confident that if they do
their jobs properly,
they will have a job tomorrow.”

● “Employees have the right to be treated fairly and must
believe that they will be.”
● “Employees must have an avenue of appeal when they believe
they are being
treated unfairly.”12
342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 14
At Nucor, values emphasizing pay for performance, job
security, and fair treatment
for employees help to create an atmosphere within the company
that leads to high
employee productivity. In turn, this has helped to give Nucor
one of the lowest cost
structures in its industry, which helps to explain the company’s
profitability in a very
price-competitive business.
In one study of organizational values, researchers identified a
set of values associ-
ated with high-performing organizations that help companies
achieve superior fi-
nancial performance through their impact on employee
behavior.13 These values in-
cluded respect for the interests of key organizational
stakeholders: individuals or
groups that have an interest, claim, or stake in the company, in
what it does, and in
how well it performs.14 They include stockholders,
bondholders, employees, cus-

tomers, the communities in which the company does business,
and the general pub-
lic. One study found that deep respect for the interests of
customers, employees, sup-
pliers, and shareholders was associated with high
performance.15 The study also
noted that the encouragement of leadership and entrepreneurial
behavior by mid-
and lower-level managers and a willingness to support change
efforts within the or-
ganization contributed to high performance. Companies that
emphasize such values
consistently throughout their organization include Hewlett-
Packard, Wal-Mart, and
PepsiCo. The same study identified the values of poorly
performing companies—
values that, as might be expected, are not articulated in
company mission statements:
(1) arrogance, particularly to ideas from outside the company;
(2) a lack of respect
for key stakeholders; and (3) a history of resisting change
efforts and “punishing”
mid- and lower-level managers who showed “too much
leadership.” General Motors
was held up as an example of one such organization. According
to the authors of this
study, a mid- or lower-level manager who showed too much
leadership and initiative
there was not promoted!
Major Goals Having stated the mission, vision, and key values,
strategic managers
can take the next step in the formulation of a mission statement:
establishing major
goals. A goal is a precise and measurable desired future state
that a company attempts

to realize. In this context, the purpose of goals is to specify
with precision what must
be done if the company is to attain its mission or vision.
Well-constructed goals have four main characteristics:16
● They are precise and measurable. Measurable goals give
managers a yardstick or
standard against which they can judge their performance.
● They address crucial issues. To maintain focus, managers
should select a limited
number of major goals to assess the performance of the
company. The goals that
are selected should be crucial or important ones.
● They are challenging but realistic. They give all employees an
incentive to look for
ways of improving the operations of an organization. If a goal is
unrealistic in the
challenges it poses, employees may give up; a goal that is too
easy may fail to mo-
tivate managers and other employees.17
● They specify a time period in which the goals should be
achieved, when that is ap-
propriate. Time constraints tell employees that success requires
a goal to be attained
by a given date, not after that date. Deadlines can inject a sense
of urgency into goal
attainment and act as a motivator. However, not all goals
require time constraints.
Well-constructed goals also provide a means by which the
performance of managers
can be evaluated.

342927_Ch01_p001-040.qxd 8/9/07 9:22 AM Page 15
As noted earlier, although most companies operate with a
variety of goals, the
central goal of most corporations is to maximize shareholder
returns, and doing this
requires both high profitability and sustained profit growth.
Thus, most companies
operate with goals for profitability and profit growth. However,
it is important that
top managers do not make the mistake of overemphasizing
current profitability to
the detriment of long-term profitability and profit growth.18
The overzealous pursuit
of current profitability to maximize short-term ROIC can
encourage such misguided
managerial actions as cutting expenditures judged to be
nonessential in the short
run—for instance, expenditures for research and development,
marketing, and new
capital investments. Although cutting current expenditure
increases current prof-
itability, the resulting underinvestment, lack of innovation, and
diminished market-
ing can jeopardize long-run profitability and profit growth.
These expenditures are
vital if a company is to pursue its long-term mission and sustain
its competitive ad-
vantage and profitability over time. Despite these negative
consequences, managers

may make such decisions because the adverse effects of a short-
run orientation may
not materialize and become apparent to shareholders for several
years, or because
they are under extreme pressure to hit short-term profitability
goals.19 It is also
worth noting that pressures to maximize short-term profitability
may drive man-
agers to act unethically. This apparently occurred during the
late 1990s at Enron Cor-
poration, Tyco, WorldCom, and Computer Associates, where
managers systemati-
cally inflated profits by manipulating financial accounts in a
manner that
misrepresented the true performance of the firm to shareholders.
(Chapter 11 pro-
vides a detailed discussion of the issues.)
To guard against short-run behavior, managers need to ensure
that they adopt
goals whose attainment will increase the long-run performance
and competitive-
ness of their enterprise. Long-term goals are related to such
issues as product devel-
opment, customer satisfaction, and efficiency, and they
emphasize specific objec-
tives or targets concerning such details as employee and capital
productivity,
product quality, innovation, customer satisfaction and customer
service. At Dell
Computer, for example, the goal of replacing inventory with
information is to focus
management attention on what can be done to increase
inventory turnover and thus
reduce costs.

The second component of the strategic management process is
an analysis of the or-
ganization’s external operating environment. The essential
purpose of the external
analysis is to identify strategic opportunities and threats in the
organization’s operat-
ing environment that will affect how it pursues its mission.
Strategy in Action 1.1 de-
scribes how an analysis of opportunities and threats in the
external environment led
to a strategic shift at Time Inc.
Three interrelated environments should be examined when
undertaking an ex-
ternal analysis: the industry environment in which the company
operates, the coun-
try or national environment, and the wider socioeconomic or
macroenvironment.
Analyzing the industry environment requires an assessment of
the competitive
structure of the company’s industry, including the competitive
position of the com-
pany and its major rivals. It also requires analysis of the nature,
stage, dynamics, and
history of the industry. Because many markets are now global
markets, analyzing
the industry environment also means assessing the impact of
globalization on com-
petition within an industry. Such an analysis may reveal that a
company should
move some production facilities to another nation, that it should
aggressively ex-
pand in emerging markets such as China, or that it should
beware of new competition

Reflection Paper 4Length & GuidelinesEach question must be res.docx

Reflection Paper 4Length & GuidelinesEach question must be res.docx

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