Strategic Management Cases Domino’s Pizza, Inc., 2013 www.dominos.com , DPZ Based in Ann Arbor, Michigan, Domino’s is the largest pizza delivery company in the USA having a 22.5 percent share of the pizza delivery market. Domino’s digital ordering channels include online ordering at www.dominos.com, mobile ordering at http://mobile.dominos.com, and ordering on iPhone, Kindle Fire, and Android apps. More than $2 billion of Domino’s pizza is ordered online annually. There are more than 10,300 Domino’s stores in over 70 countries. Domino’s had sales of over $7.4 billion in 2012, with $3.6 billion of that coming from the USA. Copyright by Fred David Books LLC. (Written by Forest R. David) History Growing up in foster homes most of their childhood, Tom Monaghan and his brother James borrowed $900 in 1960 to purchase a mom-and-pop pizza store in Ypsilanti, Michigan, named Domi-Nick’s. After trading his brother James a Volkswagen Beetle for his half of the business in 1961, Tom changed the store name in 1965 from Domi-Nick’s to Domino’s Pizza Inc. The company experienced steady growth during the 1960s, and by 1978, there were 200 Domino’s stores in the USA. During the 1980s, the company expanded rapidly both in the USA and internationally. By the end of the decade, Domino’s had more than 5,000 stores in the USA, Canada, United Kingdom, Japan, Australia, and Colombia. By 1998, there were more than 6,000 Dominos, with 1,500 located outside the USA. Tom Monaghan retired in 1998 and sold 93 percent of the company (worth $1 billion) to Bain Capital Inc. In the six years following the sale, Domino’s enjoyed great success under Bain Capital and in 2004 Domino’s became a publically traded company on the New York Stock Exchange under the ticker symbol DPZ. The initial stock price was $16 per share and placed a value on the company at more than $2 billion (double the price Bain paid). Domino’s changed its 49-year-old recipe at year end 2009 and started a heavily advertised marketing campaign called “new inspired pizza.” Domino’s stock price appreciated from around $8 a share at the start of 2010 to $60 in mid-2003. Fueled by the new recipe and new products, Domino’s celebrated its 50th anniversary in 2010 and was awarded best pizza chain in 2010 and 2011 by Pizza Today magazine, marking the first time ever that the same pizza chain had received the award in consecutive years. Domino’s CEO Patrick Doyle was named the best CEO of 2011 by CNBC. Domino’s was recently ranked number 1 in Forbes magazine’s “Top 20 Franchises for the Money” list. About 96 percent of Domino’s stores are owned by franchisees. There are very few company-owned Domino’s stores. Corporate Philosophy and Mission Statement Domino’s does not have a stated vision statement, but the company mission statement is as follows: “Exceptional franchisees and team members on a mission to be the best pizza delivery company in the world.” Domino’s “guiding principles” are based on the concept of one.

1. Strategic Management Cases
Domino’s Pizza, Inc., 2013
www.dominos.com , DPZ
Based in Ann Arbor, Michigan, Domino’s is the largest pizza
delivery company in the USA having a 22.5 percent share of the
pizza delivery market. Domino’s digital ordering channels
include online ordering at www.dominos.com, mobile ordering
at http://mobile.dominos.com, and ordering on iPhone, Kindle
Fire, and Android apps. More than $2 billion of Domino’s pizza
is ordered online annually. There are more than 10,300
Domino’s stores in over 70 countries. Domino’s had sales of
over $7.4 billion in 2012, with $3.6 billion of that coming from
the USA.
Copyright by Fred David Books LLC. (Written by Forest R.
David)
History
Growing up in foster homes most of their childhood, Tom
Monaghan and his brother James borrowed $900 in 1960 to
purchase a mom-and-pop pizza store in Ypsilanti, Michigan,
named Domi-Nick’s. After trading his brother James a
Volkswagen Beetle for his half of the business in 1961, Tom
changed the store name in 1965 from Domi-Nick’s to Domino’s
Pizza Inc. The company experienced steady growth during the
1960s, and by 1978, there were 200 Domino’s stores in the
USA. During the 1980s, the company expanded rapidly both in
the USA and internationally. By the end of the decade,
Domino’s had more than 5,000 stores in the USA, Canada,
United Kingdom, Japan, Australia, and Colombia. By 1998,
there were more than 6,000 Dominos, with 1,500 located outside
the USA. Tom Monaghan retired in 1998 and sold 93 percent of
the company (worth $1 billion) to Bain Capital Inc. In the six
years following the sale, Domino’s enjoyed great success under
Bain Capital and in 2004 Domino’s became a publically traded
company on the New York Stock Exchange under the ticker

2. symbol DPZ. The initial stock price was $16 per share and
placed a value on the company at more than $2 billion (double
the price Bain paid).
Domino’s changed its 49-year-old recipe at year end 2009 and
started a heavily advertised marketing campaign called “new
inspired pizza.” Domino’s stock price appreciated from around
$8 a share at the start of 2010 to $60 in mid-2003. Fueled by the
new recipe and new products, Domino’s celebrated its 50th
anniversary in 2010 and was awarded best pizza chain in 2010
and 2011 by Pizza Today magazine, marking the first time ever
that the same pizza chain had received the award in consecutive
years. Domino’s CEO Patrick Doyle was named the best CEO of
2011 by CNBC. Domino’s was recently ranked number 1 in
Forbes magazine’s “Top 20 Franchises for the Money” list.
About 96 percent of Domino’s stores are owned by franchisees.
There are very few company-owned Domino’s stores.
Corporate Philosophy and Mission Statement
Domino’s does not have a stated vision statement, but the
company mission statement is as follows: “Exceptional
franchisees and team members on a mission to be the best pizza
delivery company in the world.” Domino’s “guiding principles”
are based on the concept of one united brand, system and team:
· • putting people first;
· • striving to make every customer a loyal customer;
· • delivering with smart hustle and positive energy; and
· • winning by improving results every day. (2012 Annual
Report)
Organizational Structure
As indicated in Exhibit 1, Domino’s has 11 top executives,
mostly executive vice-presidents (EVPs). It appears that
Domino’s operates from a functional organizational structure
with Doyle being “where the buck stops,” although for a firm of
this size, a divisional or strategic business unit type structure by
region (or by franchised versus company owned) may be more
effective in promoting delegation of authority, responsibility,
and accountability.

3. EXHIBIT 1 Domino’s Organizational Chart
Business Segments
Domino’s provides financial information for four key business
segments: (1) domestic company-owned stores, (2) domestic
franchise stores, (3) domestic supply chain, and (4)
international. Note in Exhibit 2 that the largest revenue-
generating segment is the domestic supply chain with more than
50 percent of all revenue. Note also the large revenue numbers
for the relatively few company owned stores, because each
Domino’s domestic franchisee owns his or her own store(s) and
reports their revenues on their own personal financial
statements rather than Domino’s. From franchisees, Domino’s
reports only the royalties and advertising fees it receives from
franchisees as revenue. The financial data for the international
supply chain centers are included in the international division,
not under the domestic supply chain division. Also note in
Exhibit 2 the slight revenue decline in 2012 for domestic
company-owned stores.
Exhibit 3 reveals that for 2012, Domino’s international stores
had the highest growth in revenue, followed by U.S. company-
owned stores. However the sales growth among all three
segments slowed in 2012.
Exhibit 4 reveals that Domino’s growth in number of stores is
highest outside the USA, with the actual number of company-
owned stores in the USA falling to 388. About 10,000
employees work for Domino’s, but counting all workers for all
franchisees, this number is closer to 205,000.
EXHIBIT 2 Finances by Segment (in millions)
Business Segment
Revenue, 2012
Revenue, 2011
Revenue, 2010
Revenue, Increase (%)
Domestic company-owned stores
$324

4. $336
$345
(3.6)
Domestic franchise
195
187
173
4.3
Domestic supply chain
942
928
876
1.5
International
217
201
176
8.0
TOTAL
$1,678
$1,652
$1,571
1.6
Source: Company documents.
Note: Domino’s 2012 year ended 1-31-13.
EXHIBIT 3 Same Store Sales Growth (Percent)
U.S. company-owned stores
U.S. franchiseowned stores
International stores
2008
−2.2
−5.2
6.2
2009
−0.9

5. 0.6
4.3
2010
9.7
10.0
6.9
2011
4.1
3.4
6.8
2012
1.3
3.2
5.2
Source: Company documents.
EXHIBIT 4 Growth: Total Number of Domino’s Stores
U.S. company-owned stores
U.S. franchiseowned stores
International stores
2008
489
4,558
3,736
2009
466
4,461
4,072
2010
454
4,475
4,422
2011
394
4,513
4,835

6. 2012
388
4,540
5,327
Source: Company documents.
Domestic Supply Chain
Domino’s domestic supply chain supplies franchisees with
dough, vegetables, ovens, uniforms, and much more, enabling
better control, pizza consistency, and timely delivery of
products. This backward integration strategy enables Domino’s
to offer pizza at lower prices and allows store managers to focus
on store operations rather than mixing dough on site, prepping
vegetables, and bargaining with independent suppliers for
ingredients. Domino’s has 16 regional doughmanufacturing and
supply chain centers and leases a fleet of more than 400 trucks
to aid in delivering products to stores twice a week. However,
Dominos’ franchisees are not required to purchase supplies from
Domino’s, but interestingly more than 99 percent do purchase
all its supplies from the company’s domestic supply chain
segment. To ensure this division remains viable, Domino’s
provides profit-sharing incentives to franchisees to buy its
products from Domino’s. In addition to the 16 domestic supply
chain centers, Domino’s also operates 6 supply chain centers
outside the USA.
Domestic Stores
The company’s domestic stores division includes a network of
4,540 stores operated by 1,026 franchisees and 388 company-
owned stores in the USA. Domino’s desires to have all of its
stores owned and operated by franchisees, but if certain stores
are underperforming, Domino’s often will purchase these stores
in hopes of turning them around and then refranchising them at
a later date. Domino’s uses company-owned stores as test sites
for new products, promotions, new potential store layout
improvements, and as test sites for prospective new franchisees.
Although the typical franchisee of Domino’s operates 4 stores,
the nine largest franchisees operate more than 50 stores,

7. including the largest domestic franchisee that operates 135
stores. Currently, Domino’s has 1,077 different domestic
franchisees with the average franchisee being in Domino’s
system for an impressive 14 years. Much of this longevity can
be attributed to Domino’s requiring prospective franchisees to
manage a store for 1 year before entering into a long-term
contract with Domino’s. Domino’s feels this system is unique to
the pizza industry and provides a competitive advantage over
rival pizza firms.
International Division
Domino’s has 5,327 franchise stores outside the USA. The
company’s international revenues as a percent of total revenues
increased to 13.0 percent in 2012, up from 11.2 percent in 2010.
Exhibit 5 provides is a breakdown of Domino’s stores in the top
10 markets, which account for more than 75 percent of all
Domino’s international stores. Note that the United Kingdom
has the most Domino’s of all countries, followed by Mexico.
Among the company’s six “international” supply chain centers,
four of these are in Canada, one is in Alaska, and one is in
Hawaii. (It is unclear why Domino’s categorizes Alaska and
Hawaii as international). As with Domestic franchisee stores,
most of the company’s revenue in the international division
comes from royalty payments and advertising, as well as the
sales of food and supplies to certain markets (predominantly
Canada, Alaska, and Hawaii). Note in Exhibit 5 the rapid
growth in Domino’s stores in India, Turkey, and Japan. The
largest Domino’s franchisee outside the USA operates 911
stores.
EXHIBIT 5 Top 10 Countries Where Domino’s Are Located
Country
Number of Stores, 2011
Number of Stores, 2012
% Change
United Kingdom
670
720

8. 7.5
Mexico
577
581
0.7
Australia
450
464
3.1
India
439
522
25.7
South Korea
358
372
3.9
Canada
354
368
3.9
Turkey
220
284
29.0
Japan
205
245
19.5
France
195
215
10.3
Taiwan
141
140

9. –
Source: Company documents.
Internal Issues
Domino’s has a vertically integrated supply chain where they
have backward control to some extent over many of its supplies
such as dough, veggies, equipment, and uniforms and forward
control over around 400 retail stores that are company owned.
Domino’s offers little to nothing in terms of healthy food
options on the menu, such as salads or fruit. Although this
approach enables Domino’s to focus exclusively on pizza, this
practice also increases the firm’s vulnerability to the
increasingly health-minded customer and possible government
mandates for fast-food restaurants to stop using certain
ingredients and preservatives, and potentially forcing all
restaurants to label all nutrition information on the menu at the
point of sale. Such a law would not be favorable to Domino’s.
Domino’s attributes much of its success to an incentive-based
system for franchisees in which it actively shares in profits
through increasing demand for new stores and through
purchasing supplies from the Domino’s supply chain. Domino’s
individual franchisee stores and company-owned stores also
enjoy a simple and effective store layout enabling pizza
delivery and carryout orders to be processed and executed
efficiently as compared to many competitors. Unlike Domino’s,
many rival pizza firms use a dine-in business model, which is
much more costly than Domino’s strategy. Competitive
advantages such as these make Domino’s an attractive
franchisee option in the quick-service restaurant (QSR) market
because overhead and investment is generally cheaper than
competing firms.
Sustainability
Sustainability refers to the extent that an organization’s
operations and actions protect, mend, and preserve rather than
harm or destroy the natural environment. Many firms today
develop an annual sustainability report, similar to an annual
report, to reveal to stakeholders its actions and commitment to

10. sustainability. However, Domino’s does not produce an annual
sustainability report nor does the company have a sustainability
statement on its website.
Advertising and Sales Force
Dominos domestic stores contributed 5.5 percent of all retail
sales to support national and local advertising campaigns.
Domino’s expects this rate to remain unchanged for the
foreseeable future. Much of those monies are devoted to mass-
mail flyers promoting specials at the local Domino’s.
Domino’s Pulse Point-of-Sale System
To maximize efficiencies and provide timely financial and
marketing data, Domino’s requires all stores to install and use
its PULSE system that now exists in all company-owned stores
and 98 percent of franchisee-owned stores. The system enables
touch-screen ordering that improves order accuracy and
efficiency and provides the driver with directions and the best
route to take for multiple deliveries, saving time and money. In
addition, the PULSE system better enables Domino’s to ensure
it receives full royalties from all transactions in what is often a
cash business, assuming the franchisees are honest and always
use the PULSE system when receiving orders.
Finance
Domino’s recent income statements and balance sheets are
provided in Exhibits 6 and 7, respectively. Note that Domino’s
revenues increased 2.6 percent in 2012 and the firm’s long-term
debt rose slightly to $1.53 billion. Note the company has zero
goodwill on its balance sheet.
EXHIBIT 6 Domino’s Pizza, Statements of Income (In
thousands, except per share amounts)
2010
2011
2012
REVENUES:

11. Domestic company-owned stores
$ 345,636
$ 336,349
$ 323,652
Domestic franchise
173,345
187,007
195,000
Domestic supply chain
875,517
927,904
942,219
International
176,396
200,933
217,568
Total revenues
1,570,894
1,652,193
1,678,439
COST OF SALES:
Domestic company-owned stores
278,297
267,066
247,391
Domestic supply chain
778,510
831,665
843,329
International
75,498
82,946

12. 86,381
Total cost of sales
1,132,305
1,181,677
1,177,101
OPERATING MARGIN
438,589
470,516
501,338
GENERAL AND ADMINISTRATIVE
210,887
211,371
219,007
INCOME FROM OPERATIONS
227,702
259,145
282,331
INTEREST INCOME
244
296
304
INTEREST EXPENSE
(96,810)
(91,635)
(101,448)
OTHER
7,809
–
–
INCOME BEFORE PROVISION FOR INCOME TAXES
138,945
167,806
181,187
PROVISION FOR INCOME TAXES
51,028
62,445

13. 68,795
NET INCOME
$ 87,917
$ 105,361
$ 112,392
EARNINGS PER SHARE:
Common Stock—basic
$ 1.50
$ 1.79
$ 1.99
Common Stock—diluted
$ 1.45
$ 1.71
$ 1.91
Source: 2012 Form 10K, p. 50.
EXHIBIT 7 Domino’s Pizza, Balance Sheets (In thousands
except share and per share amounts)
2011
2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
$ 50,292
$ 54,813
Restricted cash and cash equivalents
92,612
60,015
Accounts receivable, net of reserves of $5,446 in 2011 and

14. $5,906 in 2012
87,200
94,103
Inventories
30,702
31,061
Notes receivable, net of reserves of $324 in 2011 and $630 in
2012
945
1,858
Prepaid expenses and other
12,232
11,210
Advertising fund assets, restricted
36,281
37,917
Deferred income taxes
16,579
15,290
Total current assets
326,843
306,267
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings
23,714
24,460
Leasehold and other improvements
79,518
80,279
Equipment
171,726
168,452
Construction in Process
6,052

15. 9,967
281,010
283,158
Accumulated depreciation and amortization
(188,610)
(191,713)
Property, plant and equipment, net
92,400
91,445
OTHER ASSETS:
Investments in marketable securities, restricted
1,538
2,097
Notes receivable, less current portion, net of reserves of
$1,735 in 2011 and $814 in 2012
5,070
3,028
Deferred financing costs, net of accumulated amortization of
$25,590 in 2011 and $5,201 in 2012
16,051
34,787
Goodwill
16,649
16,598
Capitalized software, net of accumulated amortization of
$51,274 in 2011 and $48,381 in 2012
8,176
11,387
Other assets, net of accumulated amortization of $4,070 in
2011 and $4,404 in 2012
8,958
8,635
Deferred income taxes

16. 4,858
3,953
Total other assets
61,300
80,485
Total assets
$ 480,543
$ 478,197
LIABILITIES AND STOCKHOLDERS’ DEFICIT CURRENT
LIABILITIES:
2011
2012
Current portion of long-term debt
$ 904
$ 24,349
Accounts payable
69,714
77,414
Accrued compensation
21,691
21,843
Accrued interest
15,775
15,035
Insurance reserves
13,023
12,964
Legal reserves
10,069
5,025
Advertising fund liabilities
36,281
37,917
Other accrued liabilities
29,718
34,951

17. Total current liabilities
$ 197,175
$ 229,498
LONG-TERM LIABILITIES:
Long-term debt, less current portion
$ 1,450,369
$ 1,536,443
Insurance Reserves
21,334
24,195
Deferred income taxes
5,021
7,001
Other accrued liabilities
16,383
16,583
Total long-term liabilities
1,493,107
1,584,222
Total liabilities
1,690,282
1,813,720
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS’
DEFICIT:
Common stock, par value $0.01 per share; 170,000,000 shares
authorized; 57,741,208 in 2011 and 56,313,249 in 2012 issued
and outstanding
577
563
Preferred stock, par value $0.01 per share; 5,000,000 shares
authorized, none issued
−
−
Additional paid-in capital
−
1,664

18. Retained deficit
(1,207,915)
(1,335,364)
Accumulated other comprehensive loss
(2,401)
(2,386)
Total stockholders’ deficit
(1,209,739)
(1,335,523)
Total liabilities and stockholders’ deficit
$ 480,543
$ 478,197
Source: 2012 Form 10K, pp 48-49.
Competitors
Competition in both the USA and international pizza-delivery
and carry-out business is extremely intense, with Pizza Hut
(owned by Yum Brands) being the largest competitor in the
industry. Pizza Hut’s revenues are more than 60 percent greater
than Domino’s. Papa John’s and Little Caesars are also fierce
rivals in the industry. In fact, Little Caesars was listed as the
fastest-growing pizza chain in 2010, with revenues up 13.6
percent over 2009, followed by Pizza Hut’s 8 percent increase
and Domino’s 7.2 percent increase. In addition to the three main
rivals, Domino’s faces intense competition from many local
mom-and-pop pizza stores, frozen pizzas from the grocery store,
as well as hundreds of non-pizza fast-food options. Pizza Hut,
Domino’s, and Papa John’s account for 51 percent of all
consumer spending on pizza delivery stores in the USA, with
the other 49 percent coming from regional or mom-and-pop
establishments.
Internationally, Pizza Hut and Domino’s are the main players in
the industry, but various countries have numerous national
companies and thousands of mom-and-pop pizza and Italian
restaurants vie for business as well. As with the domestic
market, some customers consider local pizza stores to offer
better quality products than large chains and are willing to pay

19. marginally higher prices for this perceived quality.
Another competitor is Pizza Inn Holdings, Inc., based in The
Colony, Texas. Pizza Inn owns 10 stores and franchises out 300
more stores.
Pizza Hut
A division of Yum Brands, Pizza Hut is based in Plano, Texas,
and operates more than 7,200 restaurants in the USA and more
than 5,600 restaurants internationally in more than 90 countries.
In contrast to Domino’s, almost all Pizza Huts are dine-in
restaurants. Pizza Huts serve pan pizza, as well as its thin n’
crispy, stuffed crust, hand tossed, and sicilian. Other menu
items include pasta, salads, and sandwiches. Pizza Huts offer
dine-in service at its famous redroofed restaurants, as well as
carryout and delivery service. About 15 percent of all Pizza
Huts are company-operated, whereas the remaining stores are
franchised. The world’s largest fast food company, YUM
Brands also owns and operates Kentucky Fried Chicken (KFC),
Long John Silvers, and Taco Bell. Pizza Hut is Domino’s major
pizza rival outside of the USA.
Papa John’s International, Inc.
Headquartered in Louisville, Kentucky, and founded in 1985,
Papa John’s operates 3,883 pizza restaurants with 3,255 of these
being franchisee-owned and 628 being company-owned stores.
Papa John’s has restaurants in all 50 U.S. states and 32 foreign
markets. The company currently has 16,500 full-time employees
and markets its pizza under the slogan “better ingredients,
better pizza.” Between 2001 and 2012, Papa John’s was ranked
number one (by the American Customer Satisfaction Index)
among national pizza chains for 10 of the 11 years during this
period. The company reported revenue of more than $1.2 billion
for year-end 2011, and consistent with the industry, it shows no
revenue allocated to research and development. Papa John’s
carries $75 million in goodwill on its balance sheet; founder
and CEO John Schnatter owns more than 20 percent of the
chain. Papa John’s offers several different pizza styles and
topping choices, as well as a few specialty pies such as The

20. Works and The Meats. Papa John’s stores typically offer
delivery and carryout service only.
Exhibit 8 provides a comparison between Domino’s and Papa
John’s. Note that Domino’s appears to generate more revenue
with less employees, but that is not true because employees at
franchised stores are not Domino’s employees. Pizza Inn’s 57
employees work at company-owned restaurants, not franchised
stores.
Pizza Inn Holdings, Inc.
Pizza Inn is a relatively small chain of franchised quick-service
pizza restaurants, with more than 300 locations in the USA and
the Middle East. Pizza Inns offer pizzas, pastas, and
sandwiches, along with salads and desserts. Most locations offer
buffet-style and table service, whereas other units are strictly
delivery and carryout units. The chain also has limited-menu
express carryout units in convenience stores and airport
terminals, and on college campuses. Pizza Inn’s domestic
locations are concentrated in more than 15 southern states, with
about half located in Texas and North Carolina.
Little Caesars
Headquartered in Detroit, Michigan, and privately held, Little
Caesars is famous for its advertising slogan, “Pizza! Pizza!”
which was introduced in 1979. The phrase refers to two pizzas
being offered for the comparable price of a single pizza from
competitors. In November 2010, Little Caesars introduced
Pizza! Pizza! Pantastic, denying that the return of “Pizza!
Pizza!” had any relationship to the recent success of Domino’s.
Little Caesars operates under its parent Little Caesars
Enterprises and is estimated to be the fourth largest pizza chain
in the USA. Little Caesars operates in 30 foreign countries.
External Issues
EXHIBIT 8 A Comparison Between Domino’s and Papa John’s
Domino’s
Papa John’s
Pizza Inn Holdings

21. Revenue
1.65B
1.24B
43.5M
Market Capitalization
1.76B
1.16B
20.1M
Gross Margin
0.29
0.31
0.12
Net Income
98.99M
55.97M
888K
EPS
1.63
2.24
0.10
Price/Earnings Ratio
18.67
21.69
24.51
Number of Employees
10K
16.5K
57
EPS, earnings per share.
Source: Company documents.
Domino’s competes in the Quick Service Restaurant (QSR)
pizza category, which consists of two categories: 1) delivery
and 2) carry-out. Delivery revenues for the industry in 2012
were $9.6 billion, up only slightly the last few years. The
delivery portion accounts for 30 percent of the total QSP pizza
revenues. However, the carry-out portion of the industry grew

22. revenues from $14.1 billion in 2011 to $14.6 billion in 2012.
Domino’s is the market leader in delivery and second largest in
carry-out. Outside of the USA, pizza delivery is
underdeveloped, with Domino’s and one rival being the only
firms.
Nutrition Concerns
An area of concern for all fast-food establishments, including
pizza stores, is the growing health-minded customer, as well as
the growing pressure from government agencies to label all
products with nutrition information. There have been battles
between the restaurant industry and government agencies for
many years, but much like the tobacco industry (in respect to
labeling its products). It appears the war is close to being lost
for the restaurant industry. Domino’s itemizes nutrition
information on its website, but forces the customer to add the
calories for crust, sauce, cheese, and topping, and then divide
by the number of slices to derive the total calorie count per
slice. After doing the calculations, one large slice of hand-
tossed pepperoni pizza for example has 300 calories and 12
grams of fat, and there are 8 slices in a pizza. To complicate
matters for restaurants such as Domino’s, it is difficult to
provide accurate nutrition labels when there can be an almost
endless combination of ingredients on a pizza. For example,
someone may order a large sausage pizza with onions and olives
whereas someone else might order extra cheese and tomatoes.
Having to print out nutrition labels for all these combinations
would be quite costly as opposed to a restaurant like
McDonald’s where it can print the nutrition label on the Big
Mac because there is uniformity in ingredients and the label is
understood to be for the base item. However, Domino’s PULSE
system could possibly be adjusted to resolve this potential
issue.
Chipotle Mexican Grill claims to only use meat and dairy
products from free-ranging cattle, as opposed to cattle injected
with growth hormones. Domino’s Pizza markets its pizzas as
having gluten-free crust. This is an attempt to win over health-

23. conscious customers, comply with government regulations, and
make current customers feel a little less guilty about eating
pizza. The tug of war between customers, governments, lawyers,
and the restaurant industry on health issues is likely to continue
for some time.
In response to these challenges, many restaurants have opted for
healthy menu options. Wendy’s, for example, has promoted
several meal combinations that contain less than 10 grams of
fat. All of these items were originally on its menu, just not
marketed in that manner. Wendy’s has added side salads and
fruit to help cut down on calories, fat, and sodium. Subway is
also famous for marketing its products as healthy alternatives to
other fast-food options. Domino’s, and many pizza competitors,
offer few to no menu options for the health-conscious consumer.
Barriers to Entry
Barriers to entry are relatively low for the restaurant industry,
but rivalry (competitiveness) among firms is exceptionally high.
One large contributing factor for the low barriers to entry is
many small entrepreneurs can open mom-and-pop
establishments and bypass the franchise fees, royalties,
selection process, and so on of owning a franchised restaurant
and lease an existing building relatively cheap. However, even
avoiding high fixed costs, variable costs are often high and
small-scale entrepreneurs are not able to compete with larger
franchise stores, who can better negotiate pricing on food,
packaging, and other supplies. In the QSR industry, the
bargaining power of consumers is quite powerful, availability of
restaurant options in most places is abundant, and consequently
there is intense price competitiveness among rival firms. Even
if you are sure you want pizza for lunch or dinner, you likely
have many options.
Economic Factors
The current landscape in the QSR business is a bimodal
population distribution with a large population of bargain-
minded customers seeking deals on cheaper end fast food
options, and another population of more affluent consumers

24. targeting middle to higher-end restaurants. Domino’s is well
positioned strategically to target the first group of consumers
because there are many more of them; Domino’s often has
excellent sales and discounts to target this group.
Among the subset of customers who are value shoppers, many
of these are also shoppers of quality and are willing to wait in
line a little longer or pay a little more for better quality food
products. Domino’s has recently capitalized on this well with
the introduction of its artisan pizzas and new recipes (or higher
quality products) for its crust, sauce, and cheeses. In addition,
Domino’s offers many pick up specials. Although an
inconvenience over delivery, many customers in today’s climate
are willing to tolerate a degree of inconvenience that they
historically were not if they can get a better deal.
Similar to Domino’s, many restaurant owners in the fast-food
industry have experienced stronger growth in international
markets than domestic markets. This trend is expected to
continue, especially in China and other developing nations
because many U.S. fast-food options are still novel, even in
Europe. According to the S&P Industry Surveys, QSRs are
expected to see a sales increase of 3 percent in 2012 and orders
to increase 1.5 percent as a result in large part of consumers
trading down to cheaper restaurant alternatives. There also is a
steadily growing international appetite for U.S. fast food and an
improving global economy. These positive trends are expected
to continue into 2013 and should bode well for Domino’s with
its strong international presence.
Ethics and Corporate Citizenship
Domino’s has two extensive “Code of Ethics” documents on its
website: one statement for its employees and one statement for
its executives. The documents outline matters such as: conflicts
of interest, how to report unethical conduct, fair dealing with all
employees, compliance with laws, proper way to use company
assets, and much more.
In addition to Domino’s Code of Ethics statements, the company
is noted for its corporate citizenship record in particular with

25. St. Jude Children’s Research Hospital. Since 2006, Domino’s
has donated more than $12 million to St. Jude and has hosted
pizza parties for patients and its families on St. Jude properties.
In 1986, Domino’s launched its Pizza Partners Foundation with
a mission of “team members helping team members.” The
foundation is 100-percent funded by team member and franchise
contributions and has disbursed nearly $12 million to aid team
members facing crisis situations such as fire, illness, or other
personal tragedies.
The Future
As CEO Doyle and his management team contemplate the future
direction of Domino’s, it has much to consider. Should the firm
continue its aggressive market development strategies and
accept the risk associated with expanding into markets it has
little expertise operating within? What new geographic
locations or regions should Domino’s focus? Should Domino’s
simply follow Pizza Hut’s international rollout of stores? How
would this expansion affect the corporate structure of
Domino’s? Would restructuring by geographic division and thus
establishing offices in Asia, the Middle East, and South
America better enable them to manage these more risky
environments? Can Domino’s afford this financially? Should
Domino’s consider offering salads or a line of healthy menu
options? Should Domino’s purchase trucks to deliver its
products rather than incurring such heavy leasing expenses?
Domino’s needs a clear three-year strategic plan. Prepare this
document for the company.
1 The Nature of Strategic Management
CHAPTER OBJECTIVES
After studying this chapter, you should be able to do the
following:
· 1. Discuss the nature and role of a chief strategy officer
(CSO).
· 2. Describe the strategic-management process.

26. · 3. Explain the need for integrating analysis and intuition in
strategic management.
· 4. Define and give examples of key terms in strategic
management.
· 5. Discuss the nature of strategy formulation, implementation,
and evaluation activities.
· 6. Describe the benefits of good strategic management.
· 7. Discuss the relevance of Sun Tzu’s The Art of War to
strategic management.
· 8. Discuss how a firm may achieve sustained competitive
advantage.
ASSURANCE OF LEARNING EXERCISES
The following exercises are found at the end of this chapter.
· EXERCISE 1A Compare Business Strategy with Military
Strategy
· EXERCISE 1B Gather Strategy Information for PepsiCo
· EXERCISE 1C Update the PepsiCo Cohesion Case
· EXERCISE 1D Strategic Planning for Your University
· EXERCISE 1E Strategic Planning at a Local Company
· EXERCISE 1F Get Familiar With the Strategy Club Website
· EXERCISE 1G Get Familiar With the Case MyLab
When CEOs from the big three U.S. automakers—Ford, General
Motors (GM), and Chrysler—showed up a few years ago
without a clear strategic plan to ask congressional leaders for
bailout monies, they were sent home with instructions to
develop a clear strategic plan for the future. Austan Goolsbee,
one of President Barack Obama’s top economic advisers, said,
“Asking for a bailout without a convincing business plan was
crazy.” Goolsbee also said, “If the three auto CEOs need a
bridge, it’s got to be a bridge to somewhere, not a bridge to
nowhere.”1 This textbook gives the instructions on how to
develop a clear strategic plan—a bridge to somewhere rather
than nowhere.
This chapter provides an overview of strategic management. It
introduces a practical, integrative model of the strategic-
management process; it defines basic activities and terms in

27. strategic management.
This chapter also introduces the notion of boxed inserts. A
boxed insert at the beginning of each chapter reveals how some
firms are doing really well competing in a growing economy.
The firms showcased are utilizing excellent strategic
management to prosper as their rivals weaken. Each boxed
insert examines the strategies of firms doing great amid rising
consumer demand and intense price competition. The first
company featured for excellent performance is the popular
hamburger place, Five Guys Enterprises. Note that there are
more than 1,000 Five Guys grills in the United States and
Canada.
PepsiCo is featured as the new Cohesion Case because it is a
well-known global firm undergoing strategic change and is well
managed. By working through the PepsiCo–related Assurance of
Learning Exercises at the end of each chapter, you will be well
prepared to develop an effective strategic plan for any company
assigned to you this semester. The end-of-chapter exercises
apply chapter tools and concepts.
Five Guys Enterprises: EXCELLENT STRATEGIC
MANAGEMENT SHOWCASED
Have you ever eaten at a Five Guys grill? Headquartered in
Lorton, Virginia, Five Guys Enterprises has grown every year
for 25 years and still is growing, thanks to excellent strategic
management (and great hamburgers served with all the peanuts
you can eat). Five Guys Burgers and Fries is a quick-service
restaurant company that offers a simple menu of burgers, fries,
and hot dogs. With more than 1,000 stores in the United States
and Canada, Five Guys prides itself on using only top-notch
ingredients, the best ground beef, rolls, and fries, and uses only
peanut oil; in keeping with the peanut theme, its restaurants
serve peanuts in bulk. Founded in 1986 by Jerry Murrell, his
wife, and their five sons (Jim, Matt, Chad, Ben, and Tyler), Five
Guys grill succeeds every day in taking business from all the
larger fast food hamburger chains.

28. Five Guys’ strategy has always been to use only the best
ingredients, do no advertising or marketing except by word-of-
mouth, “treat people right,” provide great employee pay and
benefits, and offer outstanding customer service. All 30,000-
plus Five Guys employees have access to the company’s Secret
Shopper Bonus program in which employees anonymously go
check on operations at other stores. All employees receive
additional store-level bonuses to ensure that every store
provides great burgers with great service. Five Guys employees
all have a sense of ownership in their store because their
compensation package is tied to how well their store performs.
Five Guys employees are determined to “make your day” every
time you visit their restaurant. Five Guys burgers are a bit
pricey, but customers keep coming back daily to eat the freshly
prepared product in an upscale décor with exceptional service.
Another Five Guys strategy is franchising (discussed in Chapter
5). About 800 Five Guys grills are owned by franchisees. All of
the territory in both the USA and Canada has been sold to
franchisees, and Five Guys plans to open its first restaurant in
Great Britain in 2013, with plans to open four in the UK in
2013. Murrell says in starting a business, do not rely on banks,
but rather rely on venture capitalists that include friends and
family. With more than $1 billion in revenue in 2013, Murrell,
now 62, gives this advice to all current and future
businesspersons: “Treat your employees and customers right.
Find something you love to do and just do it. Make sure your
heart is in it. You can’t be everything to everybody. You’ve got
to be what you are. That’s all you can do.” Do a Google search
for “Jerry Murrell Video” to watch a 2-minute excellent video
of Murrell sharing lessons he learned in building Five Guys.
Source: Based on Lottie Joiner, “Five Guys Family Keeps It
Simple,” USA Today (July 30, 2012): 3B.
What Is Strategic Management?
Once there were two company presidents who competed in the
same industry. These two presidents decided to go on a camping
trip to discuss a possible merger. They hiked deep into the

29. woods. Suddenly, they came upon a grizzly bear that rose up on
its hind legs and snarled. Instantly, the first president took off
his knapsack and got out a pair of jogging shoes. The second
president said, “Hey, you can’t outrun that bear.” The first
president responded, “Maybe I can’t outrun that bear, but I
surely can outrun you!” This story captures the notion of
strategic management, which is to achieve and maintain
competitive advantage.
Defining Strategic Management
Strategic management can be defined as the art and science of
formulating, implementing, and evaluating cross-functional
decisions that enable an organization to achieve its objectives.
As this definition implies, strategic management focuses on
integrating management, marketing, finance and accounting,
production and operations, research and development, and
information systems to achieve organizational success. The term
strategic management in this text is used synonymously with the
term strategic planning. The latter term is more often used in
the business world, whereas the former is often used in
academia. Sometimes the term strategic management is used to
refer to strategy formulation, implementation, and evaluation
and strategic planning referring only to strategy formulation.
The purpose of strategic management is to exploit and create
new and different opportunities for tomorrow; long-range
planning, in contrast, tries to optimize for tomorrow the trends
of today.
The term strategic planning originated in the 1950s and was
popular between the mid-1960s and the mid-1970s. During these
years, strategic planning was widely believed to be the answer
for all problems. At the time, much of corporate America was
“obsessed” with strategic planning. Following that boom,
however, strategic planning was cast aside during the 1980s as
various planning models did not yield higher returns. The
1990s, however, brought the revival of strategic planning, and
the process is widely practiced today in the business world.
Many companies today have a chief strategy officer (CSO).

30. A strategic plan is, in essence, a company’s game plan. Just as a
football team needs a good game plan to have a chance for
success, a company must have a good strategic plan to compete
successfully. Profit margins among firms in most industries are
so slim that there is little room for error in the overall strategic
plan. A strategic plan results from tough managerial choices
among numerous good alternatives, and it signals commitment
to specific markets, policies, procedures, and operations in lieu
of other, “less desirable” courses of action.
The term strategic management is used at many colleges and
universities as the title for the capstone course in business
administration. This course integrates material from all business
courses, and, in addition, introduces new strategic management
concepts and techniques being widely used by firms in strategic
planning.
Stages of Strategic Management
The strategic-management process consists of three stages:
strategy formulation, strategy implementation, and strategy
evaluation. Strategy formulation includes developing a vision
and mission, identifying an organization’s external
opportunities and threats, determining internal strengths and
weaknesses, establishing long-term objectives, generating
alternative strategies, and choosing particular strategies to
pursue. Strategy-formulation issues include deciding what new
businesses to enter, what businesses to abandon, whether to
expand operations or diversify, whether to enter international
markets, whether to merge or form a joint venture, and how to
avoid a hostile takeover.
Because no organization has unlimited resources, strategists
must decide which alternative strategies will benefit the firm
most. Strategy-formulation decisions commit an organization to
specific products, markets, resources, and technologies over an
extended period of time. Strategies determine long-term
competitive advantages. For better or worse, strategic decisions
have major multifunctional consequences and enduring effects
on an organization. Top managers have the best perspective to

31. understand fully the ramifications of strategy-formulation
decisions; they have the authority to commit the resources
necessary for implementation.
Strategy implementation requires a firm to establish annual
objectives, devise policies, motivate employees, and allocate
resources so that formulated strategies can be executed.
Strategy implementation includes developing a strategy-
supportive culture, creating an effective organizational
structure, redirecting marketing efforts, preparing budgets,
developing and using information systems, and linking
employee compensation to organizational performance.
Strategy implementation often is called the “action stage” of
strategic management. Implementing strategy means mobilizing
employees and managers to put formulated strategies into
action. Often considered to be the most difficult stage in
strategic management, strategy implementation requires
personal discipline, commitment, and sacrifice. Successful
strategy implementation hinges on managers’ ability to motivate
employees, which is more an art than a science. Strategies
formulated but not implemented serve no useful purpose.
Interpersonal skills are especially critical for successful
strategy implementation. Strategy-implementation activities
affect all employees and managers in an organization. Every
division and department must decide on answers to questions
such as “What must we do to implement our part of the
organization’s strategy?” and “How best can we get the job
done?” The challenge of implementation is to stimulate
managers and employees throughout an organization to work
with pride and enthusiasm toward achieving stated objectives.
Strategy evaluation is the final stage in strategic management.
Managers desperately need to know when particular strategies
are not working well; strategy evaluation is the primary means
for obtaining this information. All strategies are subject to
future modification because external and internal factors are
constantly changing. Three fundamental strategy-evaluation
activities are (1) reviewing external and internal factors that are

32. the bases for current strategies, (2) measuring performance, and
(3) taking corrective actions. Strategy evaluation is needed
because success today is no guarantee of success tomorrow!
Success always creates new and different problems; complacent
organizations experience demise.
Formulation, implementation, and evaluation of strategy
activities occur at three hierarchical levels in a large
organization: corporate, divisional or strategic business unit,
and functional. By fostering communication and interaction
among managers and employees across hierarchical levels,
strategic management helps a firm function as a competitive
team. Most small businesses and some large businesses do not
have divisions or strategic business units; they have only the
corporate and functional levels. Nevertheless, managers and
employees at these two levels should be actively involved in
strategic-management activities.
Peter Drucker says the prime task of strategic management is
thinking through the overall mission of a business:
· that is, of asking the question, “What is our business?” This
leads to the setting of objectives, the development of strategies,
and the making of today’s decisions for tomorrow’s results.
This clearly must be done by a part of the organization that can
see the entire business; that can balance objectives and the
needs of today against the needs of tomorrow; and that can
allocate resources of men and money to key results.2
Integrating Intuition and Analysis
Edward Deming once said, “In God we trust. All others bring
data.” The strategic-management process can be described as an
objective, logical, systematic approach for making major
decisions in an organization. It attempts to organize qualitative
and quantitative information in a way that allows effective
decisions to be made under conditions of uncertainty. Yet
strategic management is not a pure science that lends itself to a
nice, neat, one-two-three approach.
Based on past experiences, judgment, and feelings, most people
recognize that intuition is essential to making good strategic

33. decisions. Intuition is particularly useful for making decisions
in situations of great uncertainty or little precedent. It is also
helpful when highly interrelated variables exist or when it is
necessary to choose from several plausible alternatives. Some
managers and owners of businesses profess to have
extraordinary abilities for using intuition alone in devising
brilliant strategies. For example, Will Durant, who organized
GM, was described by Alfred Sloan as “a man who would
proceed on a course of action guided solely, as far as I could
tell, by some intuitive flash of brilliance. He never felt obliged
to make an engineering hunt for the facts. Yet at times, he was
astoundingly correct in his judgment.”3 Albert Einstein
acknowledged the importance of intuition when he said, “I
believe in intuition and inspiration. At times I feel certain that I
am right while not knowing the reason. Imagination is more
important than knowledge, because knowledge is limited,
whereas imagination embraces the entire world.”4
Although some organizations today may survive and prosper
because they have intuitive geniuses managing them, most are
not so fortunate. Most organizations can benefit from strategic
management, which is based on integrating intuition and
analysis in decision making. Choosing an intuitive or analytic
approach to decision making is not an either-or proposition.
Managers at all levels in an organization inject their intuition
and judgment into strategic-management analyses. Analytical
thinking and intuitive thinking complement each other.
Operating from the I’ve-already-made-up-my-mind-don’t-
bother-me-with-the-facts mode is not management by intuition;
it is management by ignorance.5 Drucker says, “I believe in
intuition only if you discipline it. ‘Hunch’ artists, who make a
diagnosis but don’t check it out with the facts, are the ones in
medicine who kill people, and in management kill businesses.”6
As Henderson notes:
· The accelerating rate of change today is producing a business
world in which customary managerial habits in organizations
are increasingly inadequate. Experience alone was an adequate

34. guide when changes could be made in small increments. But
intuitive and experience-based management philosophies are
grossly inadequate when decisions are strategic and have major,
irreversible consequences.7
In a sense, the strategic-management process is an attempt to
duplicate what goes on in the mind of a brilliant, intuitive
person who knows the business and assimilates and integrates
that knowledge using analysis to formulate effective strategies.
Adapting to Change
The strategic-management process is based on the belief that
organizations should continually monitor internal and external
events and trends so that timely changes can be made as needed.
The rate and magnitude of changes that affect organizations are
increasing dramatically, as evidenced by how the global
economic recession caught so many firms by surprise. Firms,
like organisms, must be “adept at adapting” or they will not
survive.
One company trying hard to adapt is the Washington Post
Company, best known as publisher of the Washington Post
newspaper that has a circulation of 525,000 in the Washington,
DC area. But the newspaper industry is in decline globally, so
the Washington Post Company recently diversified by acquiring
Celtic Healthcare, a provider of hospice and home health care
facilities in Pennsylvania and Maryland. Treating patients at
home instead of paying for hospital stays is a much faster
growing industry than selling newspapers. The Washington Post
Company also owns Kaplan, a well-known source of test
preparation materials, and six TV stations.
To survive, all organizations must astutely identify and adapt to
change. The strategic-management process is aimed at allowing
organizations to adapt effectively to change over the long run.
As Waterman has noted:
· In today’s business environment, more than in any preceding
era, the only constant is change. Successful organizations
effectively manage change, continuously adapting their
bureaucracies, strategies, systems, products, and cultures to

35. survive the shocks and prosper from the forces that decimate the
competition.8
On a political map, the boundaries between countries may be
clear, but on a competitive map showing the real flow of
financial and industrial activity, the boundaries have largely
disappeared. The speedy flow of information has eaten away at
national boundaries so that people worldwide readily see for
themselves how other people live and work. We have become a
borderless world with global citizens, global competitors, global
customers, global suppliers, and global distributors! U.S. firms
are challenged by large rival companies in many industries. For
example, Samsung recently surpassed Apple and Lenovo
surpassed HP and Dell in revenues.
The need to adapt to change leads organizations to key
strategic-management questions, such as “What kind of business
should we become?” “Are we in the right field(s)?” “Should we
reshape our business?” “What new competitors are entering our
industry?” “What strategies should we pursue?” “How are our
customers changing?” “Are new technologies being developed
that could put us out of business?”
The Internet promotes endless comparison shopping, which thus
enables consumers worldwide to band together to demand
discounts. The Internet has transferred power from businesses to
individuals. Buyers used to face big obstacles when attempting
to get the best price and service, such as limited time and data
to compare, but now consumers can quickly scan hundreds of
vendor offerings. Both the number of people shopping online
and the average amount they spend is increasing dramatically.
Digital communication has become the name of the game in
marketing. Consumers today are flocking to blogs, sending
tweets, watching and posting videos on YouTube, and spending
hours on Tumbler, Facebook, Reddit, Instagram, and LinkedIn
instead of watching television, listening to the radio, or reading
newspapers, and magazines. Facebook and Myspace recently
unveiled features that further marry these social sites to the
wider Internet. Users on these social sites now can log on to

36. many business shopping sites from their social site so their
friends can see what items they have purchased on various
shopping sites. Both of these social sites want their members to
use their identities to manage all their online identities. Most
traditional retailers have learned that their online sales can
boost in-store sales if they use their websites to promote in-
store promotions.
Key Terms in Strategic Management
Before we further discuss strategic management, we should
define nine key terms: competitive advantage, strategists, vision
and mission statements, external opportunities and threats,
internal strengths and weaknesses, long-term objectives,
strategies, annual objectives, and policies.
Competitive Advantage
Strategic management is all about gaining and maintaining
competitive advantage. This term can be defined as “anything
that a firm does especially well compared to rival firms.” When
a firm can do something that rival firms cannot do or owns
something that rival firms desire, that can represent a
competitive advantage. For example, having ample cash on the
firm’s balance sheet can provide a major competitive advantage.
Some cash-rich firms are buying distressed rivals. Examples of
cash-rich (cash as a percentage of total assets) companies today
include Priceline.com (63%), Altera (80%), Franklin Resources
(51%), Gilead Sciences (57%), and Lorillard (54%). Microsoft,
Apple, and Samsung are cash rich, as is the Cohesion Case
company, PepsiCo.
Having less fixed assets than rival firms also can provide major
competitive advantages. For example, Apple has no
manufacturing facilities of its own, and rival Sony has 57
electronics factories. Apple relies exclusively on contract
manufacturers for production of all of its products, whereas
Sony owns its own plants. Less fixed assets has enabled Apple
to remain financially lean with virtually no long-term debt.
Sony, in contrast, has built up massive debt on its balance sheet.
CEO Paco Underhill of Envirosell says, “Where it used to be a

37. polite war, it’s now a 21 st-century bar fight, where everybody
is competing with everyone else for the customers’ money.”
Shoppers are “trading down,” so Nordstrom is taking customers
from Neiman Marcus and Saks Fifth Avenue, TJ Maxx and
Marshalls are taking customers from most other stores in the
mall, and Family Dollar is taking revenues from Walmart.9
Getting and keeping competitive advantage is essential for long-
term success in an organization. In mass retailing, big-box
companies such as Walmart, Best Buy, and Sears are losing
competitive advantage to smaller stores, so there is a dramatic
shift in mass retailing to becoming smaller. As customers shift
more to online purchases, less brick and mortar is definitely
better for sustaining competitive advantage in retailing.
Walmart Express stores of less than 40,000 square feet each,
rather than 185,000-square-foot Supercenters, and Office
Depot’s new 5,000-square-foot stores are examples of smaller is
better.
Normally, a firm can sustain a competitive advantage for only a
certain period because of rival firms imitating and undermining
that advantage. Thus, it is not adequate to simply obtain
competitive advantage. A firm must strive to achieve sustained
competitive advantage by (1) continually adapting to changes in
external trends and events and internal capabilities,
competencies, and resources; and by (2) effectively formulating,
implementing, and evaluating strategies that capitalize on those
factors.
An increasing number of companies are gaining a competitive
advantage by using the Internet for direct selling and for
communication with suppliers, customers, creditors, partners,
shareholders, clients, and competitors who may be dispersed
globally. E-commerce allows firms to sell products, advertise,
purchase supplies, bypass intermediaries, track inventory,
eliminate paperwork, and share information. In total, e-
commerce is minimizing the expense and cumbersomeness of
time, distance, and space in doing business, thus yielding better
customer service, greater efficiency, improved products, and

38. higher profitability.
Strategists
Strategists are the individuals most responsible for the success
or failure of an organization. Strategists have various job titles,
such as chief executive officer, president, owner, chair of the
board, executive director, chancellor, dean, or entrepreneur. Jay
Conger, professor of organizational behavior at the London
Business School and author of Building Leaders, says, “All
strategists have to be chief learning officers. We are in an
extended period of change. If our leaders aren’t highly adaptive
and great models during this period, then our companies won’t
adapt either, because ultimately leadership is about being a role
model.”
Strategists help an organization gather, analyze, and organize
information. They track industry and competitive trends,
develop forecasting models and scenario analyses, evaluate
corporate and divisional performance, spot emerging market
opportunities, identify business threats, and develop creative
action plans. Strategic planners usually serve in a support or
staff role. Usually found in higher levels of management, they
typically have considerable authority for decision making in the
firm. The CEO is the most visible and critical strategic
manager. Any manager who has responsibility for a unit or
division, responsibility for profit and loss outcomes, or direct
authority over a major piece of the business is a strategic
manager (strategist). In the last few years, the position of CSO
has emerged as a new addition to the top management ranks of
many organizations, including Sun Microsystems, Network
Associates, Clarus, Lante, Marimba, Sapient, Commerce One,
BBDO, Cadbury Schweppes, General Motors, Ellie Mae,
Cendant, Charles Schwab, Tyco, Campbell Soup, Morgan
Stanley, and Reed-Elsevier. This corporate officer title
represents recognition of the growing importance of strategic
planning in business. Franz Koch, the CSO of German
sportswear company Puma AG, was recently promoted to CEO
of Puma. When asked about his plans for the company, Koch

39. said on a conference call “I plan to just focus on the long-term
strategic plan.”
Strategists differ as much as organizations themselves, and
these differences must be considered in the formulation,
implementation, and evaluation of strategies. Some strategists
will not consider some types of strategies because of their
personal philosophies. Strategists differ in their attitudes,
values, ethics, willingness to take risks, concern for social
responsibility, concern for profitability, concern for short-run
versus long-run aims, and management style. The founder of
Hershey Foods, Milton Hershey, built the company to manage
an orphanage. From corporate profits, Hershey Foods today
cares for about 900 boys and 1,000 girls in its boarding school
for pre-K through 12 grade.
Several CSOs who spoke at the CSO Summit in May 2013 in
San Francisco were:
· Roland Pan at Skype
· Mark Achler at Redbox
· Jon Berlin at Wells Fargo
· Drew Aldrich at Trans-Lux
· Ann Neir at Cisco Systems
· Jennifer Scott at Virgin Media
· Gina Copeland at Mitsubishi Electric
· Raj Ratnaker at Tyco Electronics
· Tim Johnsone at Hopelink
· Nhat Ngo at Omnicell
· Daniel Gastel at UBS
· Clarence So at Salesforce
· Barry Margerum at Plantronics
Vision and Mission Statements
Many organizations today develop a vision statement that
answers the question “What do we want to become?”
Developing a vision statement is often considered the first step
in strategic planning, preceding even development of a mission
statement. Many vision statements are a single sentence. For
example, the vision statement of Stokes Eye Clinic in Florence,

40. South Carolina, is “Our vision is to take care of your vision.”
Mission statements are “enduring statements of purpose that
distinguish one business from other similar firms. A mission
statement identifies the scope of a firm’s operations in product
and market terms.”10 It addresses the basic question that faces
all strategists: “What is our business?” A clear mission
statement describes the values and priorities of an organization.
Developing a mission statement compels strategists to think
about the nature and scope of present operations and to assess
the potential attractiveness of future markets and activities. A
mission statement broadly charts the future direction of an
organization. A mission statement is a constant reminder to its
employees of why the organization exists and what the founders
envisioned when they put their fame and fortune at risk to
breathe life into their dreams.
External Opportunities and Threats
External opportunities and external threats refer to economic,
social, cultural, demographic, environmental, political, legal,
governmental, technological, and competitive trends and events
that could significantly benefit or harm an organization in the
future. Opportunities and threats are largely beyond the control
of a single organization—thus the word external. A few
opportunities and threats that face many firms are listed here:
· • Availability of capital can no longer be taken for granted.
· • Consumers expect green operations and products.
· • Marketing is moving rapidly to the Internet.
· • Commodity food prices are increasing.
· • Political unrest in the Middle East is raising oil prices.
· • Computer hacker problems are increasing.
· • Intense price competition is plaguing most firms.
· • Unemployment and underemployment rates remain high
globally.
· • Interest rates are rising.
· • Product life cycles are becoming shorter.
· • State and local governments are financially weak.
· • Drug cartel-related violence in Mexico.

41. · • Winters are colder and summers hotter than usual.
· • Home prices remain exceptionally low.
· • Global markets offer the highest growth in revenues.
These types of changes are creating a different type of
consumer and consequently a need for different types of
products, services, and strategies. Many companies in many
industries face the severe external threat of online sales
capturing increasing market share in their industry.
Other opportunities and threats may include the passage of a
law, the introduction of a new product by a competitor, a
national catastrophe, or the declining value of the Euro. A
competitor’s strength could be a threat. A growing middle class
in Africa, rising energy costs, or social media networking could
represent an opportunity or a threat.
A basic tenet of strategic management is that firms need to
formulate strategies to take advantage of external opportunities
and avoid or reduce the impact of external threats. For this
reason, identifying, monitoring, and evaluating external
opportunities and threats are essential for success. This process
of conducting research and gathering and assimilating external
information is sometimes called environmental scanning or
industry analysis. Lobbying is one activity that some
organizations use to influence external opportunities and
threats.
Internal Strengths and Weaknesses
Internal strengths and internal weaknesses are an organization’s
controllable activities that are performed especially well or
poorly. They arise in the management, marketing,
finance/accounting, production/operations, research and
development (R&D), and management information systems
(MIS) activities of a business. Identifying and evaluating
organizational strengths and weaknesses in the functional areas
of a business is an essential strategic-management activity.
Organizations strive to pursue strategies that capitalize on
internal strengths and eliminate internal weaknesses.
Strengths and weaknesses are determined relative to

42. competitors. Relative deficiency or superiority is important
information. Also, strengths and weaknesses can be determined
by elements of being rather than performance. For example, a
strength may involve ownership of natural resources or a
historic reputation for quality. Strengths and weaknesses may be
determined relative to a firm’s own objectives. For example,
high levels of inventory turnover may not be a strength for a
firm that seeks never to stock-out.
In performing a strategic-management case analysis, it is
important to be as divisional as possible when determining and
stating internal strengths and weaknesses. In other words, for a
company such as Walmart saying that Sam Club’s revenues
grew 11 percent in the recent quarter, rather than Walmart
couching all of their internal factors in terms of Walmart as a
whole. This practice will enable strategies to be more
effectively formulated because in strategic planning, firms must
allocate resources among divisions (segments) of the firm (that
is, by product, region, customer, or whatever the various units
of the firm are), such as Sam’s Club versus Supercenters or
Mexico versus Europe at Walmart.
Both internal and external factors should be stated in specific
terms to the extent possible, using numbers, percentages,
dollars, and ratios, as well as comparisons over time and to
rival firms. Specificity is important because strategies will be
formulated and resources allocated based on this information.
The more specific the underlying external and internal factors,
the more effectively strategies can be formulated and resources
allocated. Determining the numbers takes more time, but
survival of the firm often is at stake, so identifying and
estimating numbers associated with key factors is essential.
Internal factors can be determined in a number of ways,
including computing ratios, measuring performance, and
comparing to past periods and industry averages. Various types
of surveys also can be developed and administered to examine
internal factors such as employee morale, production efficiency,
advertising effectiveness, and customer loyalty.

43. Long-Term Objectives
Objectives can be defined as specific results that an
organization seeks to achieve in pursuing its basic mission.
Long-term means more than one year. Objectives are essential
for organizational success because they provide direction; aid in
evaluation; create synergy; reveal priorities; focus coordination;
and provide a basis for effective planning, organizing,
motivating, and controlling activities. Objectives should be
challenging, measurable, consistent, reasonable, and clear. In a
multidimensional firm, objectives should be established for the
overall company and for each division.
Strategies
Strategies are the means by which long-term objectives will be
achieved. Business strategies may include geographic
expansion, diversification, acquisition, product development,
market penetration, retrenchment, divestiture, liquidation, and
joint ventures. Strategies currently being pursued by some
companies are described in Table 1-1
Strategies are potential actions that require top management
decisions and large amounts of the firm’s resources. In addition,
strategies affect an organization’s long-term prosperity,
typically for at least five years, and thus are future-oriented.
Strategies have multifunctional or multidivisional consequences
and require consideration of both the external and internal
factors facing the firm.
Annual Objectives
Annual objectives are short-term milestones that organizations
must achieve to reach long-term objectives. Like long-term
objectives, annual objectives should be measurable,
quantitative, challenging, realistic, consistent, and prioritized.
They should be established at the corporate, divisional, and
functional levels in a large organization. Annual objectives
should be stated in terms of management, marketing,
finance/accounting, production/operations, R&D, and MIS
accomplishments. A set of annual objectives is needed for each
long-term objective. Annual objectives are especially important

44. in strategy implementation, whereas long-term objectives are
particularly important in strategy formulation. Annual
objectives represent the basis for allocating resources.
TABLE 1-1 Sample Strategies in Action in 2013
Walgreen Company
Do you prefer Walgreen’s or CVS? Headquartered in Deerfield,
Illinois, Walgreen’s is deepening its penetration into the
southeastern portion of the USA by acquiring firms such as
USA Drug, May’s Drug, Med-X, Drug Warehouse, and Super D
Drug. At the same time, Walgreen’s is expanding globally
through acquisition of firms such as U.K pharmacy-led health-
and-beauty retailer Alliance Boots GmbH. Perhaps a reason
Walgreen’s is acquiring firms is that its same-store pharmacy
sales have dropped 15 percent in the last year, mainly as a result
of selling more generic rather than prescription drugs, and their
same-store-overall sales have dropped 10 percent, mainly
because of the chain’s exit from pharmacybenefit manager
Express Scripts Holding. Of course, their major rival firm, CVS,
could also be a key reason why Walgreen’s is acquiring other
firms—to show net growth, despite lower organic (internal)
revenue declines.
Netflix Inc.
Based in Los Gatos, California, the long-time DVD-by-mail
provider is struggling to survive as the firm switches from the
DVD business to (a) providing Internet-delivered streaming
content and (b) expanding to overseas markets. Major rivals to
Netflix include News Corp.’s Hulu and Coinstar’s Redbox, who
are growing rapidly, in the USA. Netflix’s overseas efforts are
not going well because that strategy requires country-by-
country deals to line up video content. In a recent quarter,
Netflix lost 850,000 DVD subscribers and added 530,000 movie
and TV-show streaming customers. Netflix’s international
streaming business lost about $400 million in 2012.
Microsoft
Based in Redmond, Washington, Microsoft added 35 retail
“pop-up stores” in late 2012 to go with its 30 existing retail

45. stores in the United States and one store in Toronto. This
forward integration strategy coincided with Microsoft
introducing its first tablet computer, Surface, which unlike
Apple’s iPad, runs popular Microsoft Office apps such as Word
and Excel. The Surface also has an innovative keyboard cover
that makes typing easier. In addition to its new retail stores,
Microsoft is also selling its new Surface tablet online, but many
customers want to touch and see before buying such a product
online.
Policies
Policies are the means by which annual objectives will be
achieved. Policies include guidelines, rules, and procedures
established to support efforts to achieve stated objectives.
Policies are guides to decision making and address repetitive or
recurring situations.
Policies are most often stated in terms of management,
marketing, finance/accounting, production/operations, R&D,
and MIS activities. Policies can be established at the corporate
level and apply to an entire organization at the divisional level
and apply to a single division, or they can be established at the
functional level and apply to particular operational activities or
departments. Policies, like annual objectives, are especially
important in strategy implementation because they outline an
organization’s expectations of its employees and managers.
Policies allow consistency and coordination within and between
organizational departments.
Substantial research suggests that a healthier workforce can
more effectively and efficiently implement strategies. Smoking
has become a heavy burden for Europe’s state-run social
welfare systems, with smoking-related diseases costing more
than $100 billion a year. Smoking also is a huge burden on
companies worldwide, so firms are continually implementing
policies to curtail smoking. Starbucks in mid-2013 banned
smoking within 25 feet of its 7,000 stores not located inside
another retail establishment.
Hotel and motels in the United States are rapidly going “smoke-

46. free throughout” with more than 13,000 now having this policy.
The American Hotel and Lodging Association says there are
50,800 hotel/motels in the USA with 15 or more rooms. All
Marriotts are now nonsmoking. Almost all (except Hertz) car
rental companies are exclusively nonsmoking, including Avis,
Dollar, Thrifty, and Budget. Most rental car companies charge a
$250 cleaning fee if a customer smokes in their rental vehicle.
More cigarettes are smoked in Russia per capita (2,786) than
any other country in the world, but that country in 2013
instituted strict, mandatory new antismoking policies among all
restaurants and bars and government facilities.11 Sixty percent
of men in Russia smoke. Other heavily smoking countries per
capita include Japan (1,841), China (1,711), and Indonesia
(1,085), compared to the USA (1,028). Excise taxes in Russia
on tobacco products are set to rise 135 percent by 2015. About
400,000 Russians die each year as a result of smoking, costing
the country 1.5 trillion rubles ($48.1 billion) annually in health-
care costs.
The Strategic-Management Model
FIGURE 1-1 A Comprehensive Strategic-Management Model
Source: Fred R. David, “How Companies Define Their
Mission,” Long Range Planning 22, no. 3 (June 1988): 40.
The strategic-management process can best be studied and
applied using a model. Every model represents some kind of
process. The framework illustrated in Figure 1-1 with white
shading is a widely accepted, comprehensive model of the
strategic-management process.12 This model does not guarantee
success, but it does represent a clear and practical approach for
formulating, implementing, and evaluating strategies.
Relationships among major components of the strategic-
management process are shown in the model, which appears in
all subsequent chapters with appropriate areas