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  1. 1. 13 | P a g e CHAPTER 1 THE NATURE OF STRATEGIC MANAGEMENT CHAPTER OUTLINE j What is Strategic Management? j Key Terms in Strategic Management j The Strategic-Management Model j Benefits of Strategic Management j Why Some Firms Do No Strategic Planning j Pitfalls in Strategic Planning j Guidelines for Effective Strategic Management j Business Ethics and Strategic Management j Comparing Business and Military Strategy j The Nature of Global Competition j The Cohesion Case: Disney CHAPTER OBJECTIVES After studying this chapter, you should be able to do the following: 1. Describe the strategic-management process. 2. Explain the need for integrating analysis and intuition in strategic management. 3. Define and give examples of key terms in strategic management. 4. Discuss the nature of strategy formulation, implementation, and evaluation activities. 5. Describe the benefits of good strategic management. 6. Explain why good ethics is good business in strategic management. 7. Explain the advantages and disadvantages of entering global markets. 8. Discuss the relevance of Sun Tzu¶s The Art of War to strategic management. 9. Discuss how a firm may achieve sustained competitive advantage. 10. Explain ISO 14000 and 14001 CHAPTER OVERVIEW Chapter 1 provides an overview of strategic management. A practical, integrative model of the strategic-management process is introduced. Basic activities and terms in strategic management are defined. The benefits of strategic management are presented. Important relationships between
  2. 2. 14 | P a g e business ethics and strategic management are discussed. In addition, the chapter initiates discussion of two themes that are present throughout the text: global considerations and the strategic implications of the natural environment. VTN (Visit the Net): The website, designed by Dr. David, provides strategic planning tools, templates, links, and information to help strategic management students analyze cases. The first theme is that global considerations impact virtually all strategic decisions. The boundaries of countries can no longer be the boundary of our minds. It has become a matter of survival for businesses to see and appreciate the world from the perspective of others. The underpinnings of strategic management hinge on managers gaining an understanding of competitors, markets, prices, suppliers, distributors, governments, creditors, shareholders, and customers worldwide. The price and quality of a firm¶s products and services must be competitive on a world basis, not just a local basis. A Global Perspective illustration is provided in all chapters of this text to emphasize the importance of global factors in strategic management. A second theme evidenced throughout this text is that the natural environment is an important strategic issue. Perhaps no greater threat exists to business and society than the continuous decimation and degradation of our natural environment. This is a strategic issue that needs immediate and substantive attention by all businesses and managers. A Natural Environment Perspective is provided in all chapters. Like the Global Perspectives, these are boxed inserts. VTN (Visit The Net): The website provides sample tests and supplemental material for each chapter. EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS I. WHAT IS STRATEGIC MANAGEMENT? A. 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. 1. The term strategic management is used synonymously with strategic planning. 2. The purpose of strategic management is to exploit and create new and different opportunities for tomorrow while long-range planning tries to optimize for tomorrow the trends of today.
  3. 3. 15 | P a g e B. Stages of Strategic Management 1. The strategic-management process consists of three stages. a. 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. b. 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 utilizing information systems, and linking employee compensation to organizational performance. c. 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. VTN (Visit The Net): The website provides a narrative on strategy formulation and implementation at Southern Polytechnic State University. 2. Three fundamental strategy evaluation activities are provided below: a. Reviewing external and internal factors that are the bases for current strategies b. Measuring performance c. Taking corrective action 3. Strategy formulation, implementation, and evaluation activities occur at three hierarchical levels in a large organization: corporate, divisional, and functional. Smaller businesses may only have the corporate and functional levels. C. Integrating Intuition and Analysis 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. D. Adapting to Change 1. 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.
  4. 4. 16 | P a g e 2. The need to adapt to change leads organizations to key strategic-management questions, such as, ³What kind of business should be become?´ ³Are we in the right field?´ ³Should we reshape our business?´ ³What new competitors are entering our industry?´ Teaching Tip: Strategy & Business is a magazine that publishes articles that focus on strategic management issues. The magazine, which contains excellent feature articles, is available online at {}. Teaching Tip: The Business Policy & Strategy Division of the Academy of Management maintains a website that contains a wide variety of useful information on strategic management topics. The site is available at {}. VTN (Visit The Net): The website reveals that strategies must be constantly changed. VTN (Visit The Net): The website reveals that actual strategy results from planned strategy coupled with reactive changes. II. KEY TERMS IN STRATEGIC MANAGEMENT A. Competitive Advantage 1. Competitive advantage is defined as anything that a firm does especially well compared to rival firms. 2. Firms should seek a sustained competitive advantage by continually adapting to changes in external trends and internal capabilities and evaluating strategies that capitalize on those factors. B. Strategists 1. Strategists are individuals who are most responsible for the success or failure of an organization. 2. Strategists hold various job titles, such as chief executive officers, president, owner, chair of the board, executive director, chancellor, dean, or entrepreneur. 3. 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.
  5. 5. 17 | P a g e C. Vision and Mission Statements 1. Vision statements answer the question: ³What do we want to become?´ 2. Mission statements are ³enduring 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.´ It addresses the basic question that faces all strategists: ³What is our business?´ It should include the values and priorities of an organization. D. External Opportunities and Threats 1. 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. 2. Opportunities and threats are largely beyond the control of a single organization, thus the term external. 3. A basic tenet of strategic management is that firms need to formulate strategies to take advantage of external opportunities and to avoid or reduce the impact of external threats. 4. The process of conducting research and gathering and assimilating external information is called environmental scanning or industry analysis. E. Internal Strengths and Weaknesses 1. Internal strengths and internal weaknesses are an organization¶s controllable activities that are performed especially well or poorly. 2. Identifying and evaluating organizational strengths and weaknesses in the functional areas of a business is an essential strategic-management activity. 3. Strengths and weaknesses are determined relative to competitors and may be determined by both performance and elements of being. F. Long-Term Objectives 1. Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission. 2. Long term means more than one year.
  6. 6. 18 | P a g e 3. Objectives state direction, aid in evaluation, create synergy, reveal priorities, focus coordination, and provide a basis for effective planning, organizing, motivating and controlling activities. 4. Objectives should be challenging, measurable, consistent, reasonable, and clear. G. Strategies 1. 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 venture. 2. Strategies currently being pursued by McDonald¶s and American General are described in Table 1-1. H. Annual Objectives 1. Annual objectives are short-term milestones that organizations must achieve to reach long-term objectives. 2. Like long-term objectives, annual objectives should be measurable, quantitative, challenging, realistic, consistent, and prioritized. I. Policies 1. 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. 2. Policies are most often stated in terms of management, marketing, finance/accounting, production/operations, research and development, and computer information systems activities. Global Perspective Box: The Largest Companies in the World. This box explains the growing dominance of non-U.S.-based firms in several industries. A list of the largest companies in the world, pulled from Fortune magazine¶s annual ranking, includes firms from Britain, Netherlands, Germany, Japan, France, Italy, Belgium, and China. III. THE STRATEGIC MANAGEMENT MODEL A. The Strategic Management Model is shown in Figure 1-1.
  7. 7. 19 | P a g e 1. The framework illustrated in Figure 1-1 is a widely accepted, comprehensive model of the strategic-management process. This model does not guarantee success, but it does represent a clear and practical approach for formulating, implementing, and evaluating strategies. 2. The strategic-management process is dynamic and continuous. A change in any one of the major components in the model can necessitate a change in any or all of the other components. VTN (Visit the Net): The website explains in detail how to prepare a strategic plan and compares this document to a business plan. IV. BENEFITS OF STRATEGIC MANAGEMENT The principle benefit of strategic management has beeen to help organizations formulate better strategies through the use of a more systematic, logical, and rational approach to strategic choice. Communication is a key to successful strategic management. The major aim of the communication process is to achieve understanding and commitment throughout the organization. It results in the great benefit of empowerment. A. Financial Benefits 1. Research indicates that organizations using strategic-management concepts are more profitable and successful than those that do not. 2. High-performing firms tend to do systematic planning to prepare for future fluctuations in the external and internal environments. Firms with planning systems more closely resembling strategic-management theory generally exhibit superior long-term financial performance relative to their industry. B. Nonfinancial Benefits 1. Besides helping firms avoid financial demise, strategic management offers other tangible benefits, such as an enhanced awareness of external threats, an improved understanding of competitors¶ strengths, increased employee productivity, reduced resistance to change, and a clearer understanding of performance-reward relationships. 2. In addition to empowering managers and employees, strategic management often brings order and discipline to an otherwise floundering firm. 3. Greenley stated that strategic management offers these benefits: a. It allows for identification, prioritization, and exploitation of opportunities. b. It provides an objective view of management problems. c. It represents a framework for improved coordination and control of activities.
  8. 8. 20 | P a g e d. It minimizes the effects of adverse conditions and changes. e. It allows major decisions to better support established objectives. f. It allows more effective allocation of time and resources to identified opportunities. g. It allows fewer resources and less time to be devoted to correcting erroneous or ad hoc decisions. h. It creates a framework for internal communication among personnel. i. It helps integrate the behavior of individuals into a total effort. j. It provides a basis for clarifying individual responsibilities. k. It encourages forward thinking. l. It provides a cooperative, integrated, and enthusiastic approach to tackling problems and opportunities. m. It encourages a favorable attitude toward change. n. It gives a degree of discipline and formality to the management of a business. VTN (Visit the Net): The website provides an excellent narrative on the benefits of strategic planning, pitfalls in planning, and steps in doing strategic planning. V. WHY SOME FIRMS DO NO STRATEGIC PLANNING Some reasons for poor or no strategic planning are as follows: Poor reward structures Fire fighting Waste of time Too expensive Laziness Content with success Fear of failure Overconfidence Prior bad experience Self-interest Fear of the unknown Honest difference of opinion Suspicion VTN (Visit the Net): The website gives reasons many organizations avoid strategic planning. VTN (Visit the Net): The website provides a discussion of the limitations of strategic planning.
  9. 9. 21 | P a g e VI. PITFALLS IN STRATEGIC PLANNING Some pitfalls to watch for and avoid in strategic planning are provided below: Using strategic planning to gain control over decisions and resources Doing strategic planning only to satisfy accreditation or regulatory requirements Too hastily moving from mission development to strategy formulation Failing to communicate the plan to employees, who continue working in the dark Top managers making many intuitive decisions that conflict with the formal plan Top managers not actively supporting the strategic-planning process Failing to use plans as a standard for measuring performance Delegating planning to a ³planner´ rather than involving all managers Failing to involve key employees in all phases of planning Failing to create a collaborative climate supportive of change Viewing planning to be unnecessary or unimportant Becoming so engrossed in current problems that insufficient or no planning is done Being so formal in planning that flexibility and creativity are stifled VII. GUIDELINES FOR EFFECTIVE STRATEGIC MANAGEMENT A. Failure to Follow Certain Guidelines in Planning Can Cause Problems 1. An integral part of strategy evaluation must be to evaluate the quality of the strategic-management process. Issues such as ³Is strategic management in our firm a people process or a paper process?´ should be addressed. 2. Strategic decisions require trade-offs such as long-range versus short-range considerations or maximizing profits versus increasing shareholders¶ wealth. 3. Subjective factors such as attitudes toward risk, concern for social responsibility, and organizational culture will always affect strategy-formulation decisions, but organizations must remain as objective as possible. VIII. BUSINESS ETHICS AND STRATEGIC MANAGEMENT A. Business Ethics 1. Business ethics can be defined as principles of conduct within organizations that guide decision making and behavior. Good business ethics are a prerequisite for good strategic management; good ethics is just good business. 2. A code of business ethics can provide a basis on which policies can be devised to guide daily behavior and decisions at the work site.
  10. 10. 22 | P a g e 3. Organizations need to conduct periodic ethics workshops to sensitize people to workplace circumstances in which ethics issues may arise. VTN (Visit the Net): The website describes why organizations should have ethics codes and gives guidelines for preparing codes of ethics. VTN (Visit the Net): Professor Hansen at Stetson University provides a strategic management slide show for this entire text at Teaching Tip: Business Ethics magazine posts selected articles from each bi-monthly issue on the magazine¶s website at {}. These articles provide rich information for lecture material. It also lists the top 100 corporate citizens at {}. Teaching Tip: The following are websites that provide examples of codes of ethics. y National Association of Realtors: {} y American Psychological Association: {} y Johnson Johnson: {} Natural Environment Perspective Box: This insert discusses the use of ISO 14000 Certification to gain strategic advantage. The ISO (International Organization for Standardization) is based in Geneva, Switzerland and represents a network of the national standards institutes for 147 countries. Its standards are voluntary but widely accepted worldwide. ISO 14000 is a series of voluntary standards in the environmental field. This family of standards addresses the extent to which a firm minimizes harmful effects on the environment caused by its activities and continually monitors and improves its own environmental performance. The U.S. Environmental Protection Agency offers a guide on becoming ISO 14001 certified. IX. COMPARING BUSINESS AND MILITARY STRATEGY A. A Strong Military Heritage Underlies the Study of Strategic Management 1. Terms such as objectives, mission, strengths, and weaknesses were first formulated to address problems on the battlefield. 2. A fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with the assumption of competition, while military strategy is based on an assumption of conflict. 3. The similarities between military and business strategy can be seen in Sun Tzu¶s The Art of War. Table 1-2 provides excerpts. X. THE NATURE OF GLOBAL COMPETITION
  11. 11. 23 | P a g e A. International Firms or Multinational Corporations 1. Organizations that conduct business operations across national borders are called international firms or multinational corporations. 2. The term parent company refers to a firm investing in international operations; host country is the country where that business is conducted. B. Advantages and Disadvantages of International Operations 1. Advantages of International Operations a. Firms have numerous reasons to formulate and implement strategies that initiate, continue, or expand involvement in business operations across borders. 1. Foreign operations can absorb excess capacity, reduce unit costs, and spread economic risks over a wider number of markets. 2. Foreign operations can allow firms to establish low-cost production facilities in locations close to raw materials and/or cheap labor. 3. Competitors in foreign markets may not exist, or competition may be less intense than in domestic markets. 4. Foreign operations may result in reduced tariffs, lower taxes, and favorable political treatment in other countries. 5. Joint ventures can enable firms to learn the technology, culture, and business practices of other people and to make contacts with potential customers, suppliers, creditors, and distributors in foreign countries. 6. Many foreign governments and countries offer varied incentives to encourage foreign investment in specific locations. 7. Economics of scale can be achieved from operation in global rather than solely domestic markets. Larger-scale production and better efficiencies allow higher sales volumes and lower price offerings. b. Perhaps the greatest advantage is that firms can gain new customers for their products and services, thus increasing revenues. 2. Disadvantages of International Operations a. There are also numerous potential disadvantages of initiating, continuing, or expanding business across national borders. 1. Firms confront different social, cultural, demographic, environmental, political, governmental, legal, technological, economic, and competitive forces when doing business internationally.
  12. 12. 24 | P a g e 2. Weaknesses of competitors in foreign lands are often overestimated and strengths underestimated. 3. Language, culture, and value systems differ among countries. 4. It is necessary to gain an understanding of regional organizations such as the European Economic Community and the Latin American Free Trade Area. 5. Dealing with two or more monetary systems can complicate international business operations. 6. The availability, depth, and reliability of economic and marketing information in different countries vary extensively, as do industrial structures, business practices, and nature of regional organizations. Teaching Tip: A fun website that demonstrates the global breadth of one company is the site entitled ³The Coca-Cola Bottles of the World´ {}. This site shows how Coke has adapted its bottle to reflect the language and customs of the different countries that it operates in. Teaching Tip: You are invited to visit text¶s website at {} for this chapter¶s World Wide Web exercises. ISSUES FOR REVIEW AND DISCUSSION 1. Explain why Strategic Management often is called a ³capstone course.´ Answer: Business policy is commonly called a capstone course because students¶ major responsibility in this class is to use all knowledge gained in prior courses to chart the future direction of different organizations. 2. What aspect of strategy formulation do you think requires the most time? Why? Answer: Important aspects of strategy formulation include developing a business mission, performing an external audit, conducting an internal audit, generating alternative strategies, and choosing among alternative strategies. Performing an external audit generally takes the most time. For example, identifying competitors¶ strengths and weaknesses is an essential aspect of the external audit. Effective use of the Internet can reduce the time required for performing an external audit. 3. Why is strategy implementation often considered the most difficult stage in the strategic-management process? Answer: Strategy implementation is often considered to be the most difficult stage in strategic management because it requires discipline, sacrifice, commitment, and hard work from all employees and managers. It is always more difficult to do something than to say you¶re going to do it.
  13. 13. 25 | P a g e 4. Why is it so important to integrate intuition and analysis in strategic management? Answer: Neither intuition nor analysis alone is sufficient for making good strategic decisions. Intuition, based on one¶s past experiences, judgment, and ³gut´ feelings, does not include the use of analytical strategic-management concepts that have been developed and successfully tested in the business world. To ignore these techniques that are based on historical learning is like trying to reinvent the wheel. However, no analytical tools can capture all aspects of a given organization¶s culture and situation. Nor can analytical tools assimilate all the subjective information that must be considered in strategic management, such as personalities, emotions, values, beliefs, customs, and ethical factors. Thus, it is very important to integrate intuition and analysis in strategic management. 5. Explain the importance of a vision and mission statement. Answer: Reaching agreement on formal vision and mission statements can greatly facilitate the process of reaching agreement on an organization¶s strategies, objectives, and policies. Organizational success depends on reasonable agreement on these issues, so a clear mission statement is a most important strategic-management tool. 6. Discuss relationships among objectives, strategies, and policies. Answer: Long-term objectives and strategies are products of strategy formulation. Short-term (annual) objectives and policies are products of strategy implementation. Firms should translate long-term objectives into annual objectives. Similarly, strategies should be supported with clear policies. 7. Why do you think some chief executive officers fail to use a strategic-management approach to decision making? Answer: Some chief executive officers, strategists, and organizations have been successful, to date, without using strategic-management concepts and techniques. However, success today is no guarantee for success tomorrow. The business world is becoming global in scope; technology is changing the nature of competition in all industries. Strategic management enables organizations to recognize and adapt to change more readily; successfully adapting to change is the key to survival and prosperity. There is no good alternative approach to strategic management. 8. Discuss the importance of feedback in the strategic-management model. Answer: Note in the strategic-management model that feedback is critically important. Changes can occur that impact all strategic-management activities. Feedback allows these changes to be identified and adjustments to be made. Feedback in the strategic-management process promotes the creation of a climate for two-way communication and, thus, allows esprit de corps to be achieved in an organization. 9. How can strategists best ensure that strategies will be effectively implemented?
  14. 14. 26 | P a g e Answer: Strategists can best assure that strategies formulated will be effectively implemented by involving as many managers as possible in the strategy formulation process. Also, it is important to communicate effectively why changes are needed. 10. Give an example of a recent political development that changed the overall strategy of an organization. Answer: Students¶ answers will vary. Some possible examples might include 1) the recent tariffs placed on steel imported into the US and how that has changed strategy for steel companies both at home and abroad, 2) the change in guidelines and requirements for airport safety and subsequent changes in the strategies of airlines, or 3) the political investigations into the Enron case and potential changes that may result in major accounting/consulting firms. 11. Who are the major competitors of your college or university? What are their strengths and weaknesses? How successful are these institutions compared to your college? Answer: Answers to this question will vary by institution. 12. If you owned a small business, would you develop a code of business conduct? If yes, what variables would you include? If no, how would you ensure that your employees were following ethical business standards? Answer: It is advisable for all businesses, large and small, to have a clear code of business ethics. Such codes provide a guideline for appropriate behavior and aid in decision making. Chris MacDonald states these guidelines (available at for developing a code of ethics: j What will be the purpose of your new code? Is it to regulate behavior? To inspire? j Different kinds of documents serve different purposes. Is your new document intended to guide people or to set out requirements? Is it really a Code of Ethics that you need? You might consider creating a Statement of Values, a Policy, a Mission Statement, and a Code of Conduct. j A code of ethics should be tailored to the needs and values of your organization. j Many ethics codes have two components. First, an aspirational section, often in the preamble, that outlines what the organization aspires to, or the ideals it hopes to live up to. Second, an ethics code will typically list some rules or principles, which members of the organization will be expected to adhere to. j Will your new ethics document include some sort of enforcement? If so, what kind? j Often the principles or values listed in an ethics document will be listed in rough order of importance to the organization. The ordering need not be strict, but generally the value or principle listed first will have a natural prominence. j Think carefully about the process by which you create your new code. Who will be involved? A small working group? Or all the people affected by the code? How will you distill the needs of your organization and the beliefs of your members into a document? The process may matter as much as the final product.
  15. 15. 27 | P a g e j How will your new code be implemented? How will it be publicized, both inside and outside of your organization? What steps, if any, will be taken to ensure that the values embodied in your code get implemented in organizational policies and practices? j How/when will your code be reviewed/revised? 13. Would strategic-management concepts and techniques benefit foreign businesses as much as domestic firms? Justify your answer. Answer: The answer to this question is yes. Many foreign businesses are using strategic- management concepts and techniques effectively. Students could look in the England-based journal Long Range Planning to read about foreign firms also benefiting from strategic- management ideas. Another good foreign-based business journal that carries strategic- management articles is the Journal of Management Studies. 14. What do you believe are some potential pitfalls or risks in using a strategic-management approach to decision making? Answer: There is a risk of too little top management support for the process. There is a risk of too little involvement by line managers and employees. There is a risk that top managers will underestimate the importance of understanding and commitment. 15. In your opinion, what is the single major benefit of using a strategic-management approach to decision making? Justify your answer. Answer: The single major benefit is the potential for improved understanding of the business and industry on the part of all managers and employees. Understanding generally leads to increased commitment, which, in turn, leads to creativity, innovativeness, and overall cooperativeness. The process is more important than the plan. Also, the strategic- management process allows an organization to initiate and influence, rather than just respond and react to its environment. That is, it allows an organization to be proactive, rather than reactive, in controlling its own destiny. Strategic-management concepts provide an objective basis for allocating resources and for reducing internal conflicts that can arise when subjectivity alone is the basis for major decisions. 16. Compare business strategy and military strategy.
  16. 16. 28 | P a g e Answer: As discussed in the latter part of this chapter, business and military strategy are similar in many respects. Many of the ideas developed in business strategy were first formulated as military strategy. Both military and business organizations have competitors. A fundamental difference between military and business strategy is that business strategy is formulated, implemented, and evaluated with the assumption of competition, while military strategy is based on an assumption of conflict. 17. What do you feel is the relationship between personal ethics and business ethics? Are they, or should they be, the same? Answer: Personal ethics is the foundation of business ethics. Business ethics encompass more situations than personal ethics, but a personal ethics doctrine still provides a basis for all business ethics decisions. 18. Why is it important for all business majors to study strategic management, as most students will never become a chief executive officer or even a top manager in a large company? Answer: Strategic management takes place at multiple levels within an organization. Although most students may never become the CEO of a corporation, they may become the ³branch manager´ or department head of a larger firm. In these roles, they may be asked to complete a strategic plan for their branch or department. In addition, employees at all levels are frequently asked to contribute to the development of their firm¶s strategic plan. As a result, an understanding of the strategic-management process is important. 19. Explain why consumption patterns are becoming similar worldwide. What are the strategic implications of this trend? Answer: As a result of improvements in global communications, consumers across the world are increasingly being exposed to the same advertising, the same cultural events, the same news, and the same forms of entertainment. As a result, the tastes of consumers across the world are converging. This development helps to explain why consumption patterns are becoming similar worldwide.
  17. 17. 29 | P a g e 20. What are the advantages and disadvantages of beginning export operations in a foreign country? Answer: The following are the primary advantages and disadvantages of initiating export operations in a foreign country. Advantages: y Export operations can absorb excess capacity, reduce unit costs, and spread economic risks over a wider number of markets. y Firms can gain new customers for their products and services, thus increasing revenues. y Competitors in foreign markets may not exist, or competition may be less intense than in domestic markets. Disadvantages: y Firms confront different and often little understood social, cultural, demographic, and competitive forces when doing business overseas. y Weaknesses of competitors in foreign lands are often overestimated, and strengths are often underestimated. y Language, cultural, and value systems differ among countries, and this can create barriers of communication and other problems. 21. Describe the content available on the SMCO ( website. Answer: The SMCO website provides links to websites with information useful for case analysis such as corporate websites, business analysis services, news sites, magazines, governmental sites, and financial ratio analyses. It also provides links to job search websites, graduate school websites, and websites related to strategic planning. Several software packages are available for purchase on the site including a template for generating the matrices required for case analyses. 22. List four financial and four nonfinancial benefits of a firm engaging in strategic planning. Answer: Businesses engaging in strategic planning experience the following financial benefits. They show significant improvement in sales, profitability, and productivity compared to firms without strategic planning activities. Firms using strategic planning generally exhibit superior long-term financial performance relative to their industry and seem to make more informed decisions with good anticipation of both short and long- term consequences. They are also prepared for fluctuations in their external and internal environments. In addition to the financial benefits, firms using strategic planning also experience nonfinancial benefits. These include an enhanced awareness of external threats, an
  18. 18. 30 | P a g e improved understanding of competitors¶ strategies, increased employee productivity, reduced resistance to change, and a clearer understanding of performance-reward relationships. 23. Why is it that a firm can sustain a competitive advantage normally for only a limited period of time? Answer: A firm can sustain a competitive advantage for only a certain period of time due to rival firms. These competing firms will attempt to imitate the competitive advantage in order to undermine the leader. 24. Why is it not adequate to simply obtain a competitive advantage? Answer: Because other firms will constantly attempt to undermine firms with competitive advantages and imitate those advantages, organizations must constantly strive to achieve a sustained competitive advantage. 25. How can a firm best achieve a sustained competitive advantage? Answer: A sustained competitive advantage can best be achieved 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 upon those factors. 26. Compare and contrast ISO 14000 and 14001. Answer: ISO 14000 focuses on operating in an environmentally-friendly manner. The standards were created by the International Organization for Standardization and provide universal guidelines for standardization. ISO 14000 is a series of standards in the environmental field. ISO 14001 is part of the 14000 family of standards. 14001 standards offer a universal technical standard for environmental compliance in fields such as environmental auditing, environmental performance evaluation, environmental labeling, and life-cycle assessment.
  19. 19. 31 | P a g e CHAPTER 2 THE BUSINESS VISION AND MISSION CHAPTER OUTLINE j What Do We Want to Become? j What is Our Business? j Importance of Vision and Mission Statement j Characteristics of a Mission Statement j Mission Statement Components j Writing and Evaluating Mission Statements CHAPTER OBJECTIVES After studying this chapter, you should be able to do the following: 1. Describe the nature and role of vision and mission statements in strategic management. 2. Discuss why the process of developing a mission statement is as important as the resulting document. 3. Identify the components of mission statements. 4. Discuss how clear vision and mission statements can benefit other strategic- management activities. 5. Evaluate mission statement of different organizations. 6. Write good vision and mission statements. CHAPTER OVERVIEW Chapter 2 focuses on the concepts and tools needed to evaluate and write business mission statements. A practical framework for developing mission statements is provided. Actual mission statements of large and small organizations and profit and nonprofit enterprises are presented and critically examined. The process of creating a vision and mission statement is discussed.
  20. 20. 32 | P a g e EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS I. WHAT DO WE WANT TO BECOME? A. Importance of a Vision Statement 1. A vision statement should answer the basic question, ³What do we want to become?´ A clear vision provides the foundation for developing a comprehensive mission statement. 2. Many organizations have both a vision and a mission statement, but the vision statement should be established first and foremost. a. The vision statement should be short, preferably one sentence, and as many managers as possible should have input into developing the statement. b. Table 2-1 provides examples of several vision statements. VTN (Visit the Net): The website gives an introduction to the vision concept. VTN (Visit the Net): The website gives an introduction to the mission concept. II. WHAT IS OUR BUSINESS? A. Mission Statements 1. Drucker says asking the question, ³What is our business?´ is synonymous with asking the question, ³What is our mission?´ a. An enduring statement of purpose that distinguishes one organization from other similar enterprises, the mission statement is a declaration of an organization¶s ³reason for being.´ b. Sometimes called a creed statement, a statement of purpose, a statement of philosophy, a statement of beliefs, a statement of business principles, or a statement ³defining our business,´ a mission statement reveals what an organization wants to be and whom it wants to serve. c. See Figure 2-1 ± the comprehensive strategic management model. It shows developing mission and vision as the first step in strategic management. d. Table 2-2 provides examples of mission statements. B. Vision versus Mission
  21. 21. 33 | P a g e 1. Many organizations develop both a mission statement and a vision statement. Whereas the mission statement answers the question, ³What is our business?´ the vision statement answers the question, ³What do we want to become?´ 2. Several examples are given in the textbook. C. The Process of Developing a Vision and Mission Statement 1. As indicated in the strategic-management model, a clear mission statement is needed before alternative strategies can be formulated and implemented. 2. It is important to involve as many managers as possible in the process of developing a mission statement, because through involvement, people become committed to an organization. 3. A widely used approach to developing a mission statement is to a. Select several articles about mission statements and ask all managers to read these as background information. b. Ask managers to prepare a mission statement for the organization. c. A facilitator, or committee of top managers, should then merge these statements into a single document and distribute this draft to all managers. d. A request for modifications, additions, and deletions is needed next along with a meeting to revise the document. VTN (Visit the Net): The website gives questions that help to develop mission and vision statements. Teaching Tip: An excellent book on mission statements is entitled, The Mission Statement Book: 301 Corporate Mission Statements from America¶s Top Companies. The book is written by Jeffrey Abrahams and is an excellent resource for individuals interested in knowing more about the purpose and value of corporate mission statements. III. IMPORTANCE OF VISION AND MISSION STATEMENTS A. The Importance of Mission Statements is Well Documented Rarick and Vitton found that firms with a formalized mission statement have twice the average return on shareholders¶ equity than those firms without a formalized mission statement. Bart and Baetz found a positive relationship between mission statements and organizational performance. Business Week reports that firms using mission statement have a 30 percent higher return on financial measures than those without such statements. B. Reasons for Developing a Written Mission Statement
  22. 22. 34 | P a g e 1. To ensure unanimity of purpose within the organization 2. To provide a basis, or standard, for allocating organizational resources 3. To establish a general tone or organizational climate 4. To serve as a focal point for individuals to identify with the organization¶s purpose and direction, and to deter those who cannot from participating further in the organization¶s activities 5. To facilitate the translation of objectives into a work structure involving the assignment of tasks to responsible elements within the organization 6. To specify organizational purposes and the translation of these purposes into objectives in such a way that cost, time, and performance parameters can be assessed and controlled VTN (Visit the Net): A great article on writing a meaningful mission statement is available at mission and vision statements. C. A Resolution of Divergent Views 1. Developing a comprehensive mission statement is important because divergent views among managers can be revealed and resolved through this process. 2. Considerable disagreement among an organization¶s strategists over vision and mission can cause trouble if not resolved. 3. An organization that fails to develop a vision statement as well as a comprehensive and inspiring mission statement loses the opportunity to present itself favorably to existing and potential stakeholders. Natural Environment Perspective: Is Your Firm Environmentally Proactive? This box describes the differences between proactive and reactive environmental policy and gives the reasons for having a proactive policy. IV. CHARACTERISTICS OF A MISSION STATEMENT A. A Declaration of Attitude 1. A mission statement is a declaration of attitude and outlook more than a statement of specific details. It is usually broad in scope for at least two reasons:
  23. 23. 35 | P a g e a. First, a good mission statement allows for the generation and consideration of a range of feasible alternative objectives and strategies without unduly stifling management creativity. b. Second, a mission statement needs to be broad to effectively reconcile differences among and appeal to an organization¶s diverse stakeholders, the individuals and groups of persons who have a special stake or claim on the company. 2. An effective mission statement arouses positive feelings and emotions about an organization; it is inspiring in the sense that it motivates readers to action. 3. It should be short ± less than 250 words. B. A Customer Orientation 1. A good mission statement reflects the anticipation of customers. Rather than developing a product and then trying to find a market, the operating philosophy of organizations should be to identify customers¶ needs and then to provide a product or service to fulfill those needs. 2. According to Vern McGinnis, mission statements should 1) define what the organization is and what it aspires to be, 2) be limited enough to exclude some ventures and broad enough to allow for creative growth, 3) distinguish a given organization from all others, 4) serve as a framework for evaluating both current and prospective activities, and 5) be stated in terms sufficiently clear to be widely understood throughout the organization. 3. Good mission statements identify the utility of a firm¶s products to its customers. C. A Declaration of Social Policy 1. The words social policy embrace managerial philosophy and thinking at the highest levels of an organization. For this reason, social policy affects the development of a business mission statement. 2. Despite differences in approaches, most American companies try to assure outsiders that they conduct business in a socially responsible way. The mission statement is an effective instrument for conveying this message. 3. Table 2-3 identifies characteristics of mission statements. Global Perspective: Social Policies on Retirement, Japan Versus the World. This box highlights the challenge that many countries face as their population ages. Some countries like Germany encourage immigration to bolster their workforces, but Japan has offered incentives for its elderly to work until a later age.
  24. 24. 36 | P a g e Teaching Tip: Your students may find it interesting to know that not only corporations find mission statement useful. Steven Covey, the author of the highly successful book, The Seven Habits of Highly Successful People, has written two books that explain how individuals and families can use mission statements to help them determine who they are and what they want to accomplish. The first book, How to Develop and Use a Personal Mission Statement, explains why individuals should write mission statements to provide a sense of direction and purpose for their lives. The second book, How to Develop a Family Mission Statement, applies the same principles in a family concept. Laurie Beth Jones advances a similar set of ideas in her popular book, The Path: Creating Your Mission Statement for Work and for Life. V. MISSION STATEMENT COMPONENTS A. Components and Questions That a Mission Statement Should Answer 1. Customers: Who are the firm¶s customers? 2. Products or services: What are the firm¶s major products? 3. Markets: Geographically, where does the firm compete? 4. Technology: Is the firm technologically current? 5. Concern for survival, growth, and profitability: Is the firm committed to growth and financial soundness? 6. Philosophy: What are the basic beliefs, values, aspirations, and ethical priorities of the firm? 7. Self-concept: What is the firm¶s distinctive competence or major competitive advantage? 8. Concern for public image: Is the firm responsive to social, community, and environmental concerns? 9. Concern for employees: Are employees a valuable asset of the firm? VTN (Visit the Net): The websites,, and module1/sld017.htm provide examples of vision and mission statements that can be critiqued. Teaching Tip: If you are interested in obtaining the mission statement for a particular company, a good place to look is the company¶s website or its annual report. Annual reports can be obtained directly from a company or through a service that disseminates annual reports. An example of the latter is The Public Register¶s Annual Report Service at {}. This service provides free access to the annual reports of over 3,600 public companies. VI. WRITING AND EVALUATING MISSION STATEMENTS A. Perhaps the best way to develop a skill for writing and evaluating mission statements is to study actual company missions. B. Examples of the essential components of mission statements providedin Table 2-4.
  25. 25. 37 | P a g e VTN (Visit the Net): The website provides mission statement information on nonprofit firms. Teaching Tip: Along with vision statements and mission statements, some organizations articulate corporate ³values´ statements, which describe the underlying principles that determine everything the organization does and stands for. y Johnson Johnson: y Samsung: Group_ValuesPhilosophy.html Teaching Tip: You are invited to visit the text¶s website at {} for this chapter¶s World Wide Web exercises. ISSUES FOR REVIEW AND DISCUSSION 1. Compare and contrast vision statements with mission statements in terms of composition and importance. Answer: Many organizations develop both a mission statement and a vision statement. Whereas the mission statement answers the question, ³What is our business?´ the vision statement answers the question, ³What do we want to become?´ Both statements are essential for firm success. 2. Do local service stations need to have written vision and mission statements? Why or why not? Answer: Less formality and detail characterize strategic management in small businesses such as a local service station. However, local service stations are not immune to competitive pressures, changes in technology, changes in demographic factors, and resistance to change. Therefore, it is recommended that even the smallest organization develop a written mission statement. Such a formal statement indicates vision and good management, which could enhance a small business's efforts to secure bank financing and to develop good supplier, customer, and employee relationships. 3. Why do you think organizations that have a comprehensive mission statement tend to be high performers? Does having a comprehensive mission cause high performance? Answer: Having a comprehensive mission statement does not guarantee or cause high performance. However, a comprehensive mission statement can contribute significantly to
  26. 26. 38 | P a g e high performance. As described in the chapter, a comprehensive mission statement provides numerous benefits that usually translate into high performance. 4. Explain why a mission statement should not include strategies and objectives. Answer: A mission statement should not include strategies and objectives because the statement needs to be broad in scope to effectively provide a basis for performing an external and internal audit and for generating and selecting among alternative strategies. Including specific strategies and objectives in a mission statement could reduce the level of innovative and creative thinking in an organization. Also, including specific strategies and objectives in a mission statement jeopardizes the potential for the statement to be widely accepted by all managers and employees of the organization. Acceptance of a clear mission is a prerequisite for gaining acceptance for strategies and objectives of the organization. 5. What is your college or university¶s self-concept? How would you state that in a mission statement? Answer: These answers will vary by institution. See the examples in the chapter. 6. Explain the principal value of a vision and mission statement. Answer: Many organizations develop both a mission statement and a vision statement. Whereas the mission statement answers the question, ³What is our business?´ the vision statement answers the question, ³What do we want to become?´ Both the vision statement and the mission statement ensure unanimity of purpose within the organization and make important statements about ³who the firm is´ and ³what it wants to become´ to outside stakeholders. 7. Why is it important for a mission statement to be reconciliatory? Answer: A mission statement needs to be reconciliatory because the claims of a firm's various stakeholders often conflict. An effective mission statement reconciles major differences among key stakeholders. 8. In your opinion, what are the three most important components to include in writing a mission statement? Why? Answer: All of the evaluative criteria described in Chapter 2 are important, but three are particularly important: customers, products or services, and markets. 9. How would the mission statement of a for-profit and a nonprofit organization differ?
  27. 27. 39 | P a g e Answer: The mission statements of profit versus nonprofit organizations would not differ in format, except for the survival, growth, and profitability component. 10. Write a vision and mission statement for an organization of your choice. Answer: This is a worthwhile classroom activity. 11. Conduct an Internet search with the keywords ³vision statement´ and ³mission statement.´ Find company vision and mission statements and evaluate the documents. Write a one-page report on your findings. Answer: This is a worthwhile activity for students to perform as a homework assignment followed by class discussion of the assortment of statements identified. 12. Who are the major stakeholders of the bank that you do business with locally? What are the major claims of those stakeholders? Answer: The major stakeholders of a bank include commercial customers, consumer customers, shareholders, communities, managers, and employees. Each stakeholder group relies upon the organization. Customers expect the bank to perform in a manner that protects them financially. Shareholders expect the firm to be profitable. Local communities rely upon the bank to provide jobs and pay taxes. Employees rely upon the bank for their income. 13. How could a strategist¶s attitude toward social responsibility affect a firm¶s strategy? What is your attitude toward social responsibility? Answer: Firms must seek to address the concerns of many stakeholder groups. Social policies ultimately affect the environment directly and indirectly. The beliefs of the primary strategists in the organization will absolutely affect how social policy is addressed in the organization¶s mission statement and strategies. Some strategists believe that organizations have tremendous social obligations. Others believe that organizations have no obligation to do any more for society than is legally required. Most strategists agree that the first social responsibility of any business must be to make enough profit to cover the costs of the future, because if this is not achieved, no other social responsibility can be met. Strategists should examine social problems in terms of potential costs and benefits to the firm, and they should address social issues that could benefit the firm most. 14. List the seven characteristics of a mission statement. Answer: A mission statement has the following characteristics: 1) it is broad enough to allow for the generation and consideration of a range of feasible alternative objectives and
  28. 28. 40 | P a g e strategies without stifling management; 2) it can reconcile differences among and appeal to an organization¶s diverse stakeholders; 3) it is less than 250 words; 4) it arouses positive feelings and emotions about the organization; 5) it should be enduring; 6) it generates a favorable impression of the firm, and 7) it is useful for judging opportunities and strategies. 15. List the benefits of having a clear mission statement. Answer: Mission statements provide the following benefits: 1) agreement on the purpose of the organization, 2) standard for allocation of resources, 3) basis for organizational climate, 4) focal point for individuals to identify with the organization¶s purpose and direction, 5) facilitation of the translation of objectives into a work structure, and 6) specification of organizational purposes into objectives. Mission statements are essential in guiding strategic planning. 16. How often do you feel a firm¶s vision and mission statement should be changed? Answer: This depends on the individual firm. Vision and mission statements should be evaluated on a regular basis to determine if they are still appropriate. Firms may wish to change the statements in times of crisis and in times of success. Ultimately the vision and mission should be in tune with the company and its environment.
  29. 29. 41 | P a g e CHAPTER 3 THE EXTERNAL ASSESSMENT CHAPTER OUTLINE j The Nature of an External Audit j The Industrial Organization (I/O) View j Economic Forces j Social, Cultural, Demographic, and Environmental Forces j Political, Governmental, and Legal Forces j Technological Forces j Competitive Forces j Competitive Analysis: Porter¶s Five-Forces Model j Sources of External Information j Forecasting Tools and Techniques j The Global Challenge j Industry Analysis: The External Factor Evaluation (EFE) Matrix j The Competitive Profile Matrix (CPM) CHAPTER OBJECTIVES After studying this chapter, you should be able to do the following: 1. Describe how to conduct an external strategic-management audit. 2. Discuss 10 major external forces that affect organizations: economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive. 3. Identify key sources of external information, including the Internet. 4. Discuss important forecasting tools used in strategic management. 5. Discuss the importance of monitoring external trends and events. 6. Explain how to develop an EFE Matrix. 7. Explain how to develop a Competitive Profile Matrix. 8. Discuss the importance of gathering competitive intelligence. 9. Describe the trend toward cooperation among competitors. 10. Discuss the economic environment in Russia. 11. Discuss the global challenges facing American firms. 12. Discuss market commonality and resource similarity in relation to competitive analysis.
  30. 30. 42 | P a g e CHAPTER OVERVIEW Chapter 3 examines the tools and concepts needed to conduct an external strategic-management audit (sometimes called environmental scanning or industry analysis). An external audit focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased foreign competition, population shifts to the Sun Belt, an aging society, information technology, and the computer revolution. An external audit reveals key opportunities and threats confronting an organization, so managers can formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats. This chapter presents a practical framework and guidelines for gathering, assimilating, and analyzing environmental information. The Industrial Organization (I/O) view of strategic management is introduced. EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS I. THE NATURE OF AN EXTERNAL AUDIT The purpose of an external audit is to develop a finite list of opportunities that could benefit a firm and avoid threats. Figure 3-1 illustrates how the external audit fits into the strategic- management process. VTN (Visit the Net): describes how strategic planning evolved from long range planning and environmental scanning. A. Key External Forces 1. External forces can be divided into five broad categories: (1) economic forces; (2) social, cultural, demographic, and environmental forces; (3) political, governmental, and legal forces; (4) technological forces; and (5) competitive forces. 2. Relations among these forces and an organization are depicted in Figure 3-2. External trends and events significantly affect all products, services, markets, and organizations in the world. 3. Changes in external forces translate into changes in consumer demand for both industrial and consumer products and services. B. The Process of Performing an External Audit 1. The process of performing an external audit must involve as many managers and employees as possible. As emphasized in earlier chapters, involvement in the strategic-management process can lead to understanding and commitment from organizational members. 2. To perform an external audit, a company first must gather competitive intelligence and information about social, cultural, demographic, environmental, economic, political, legal, governmental, and technological trends.
  31. 31. 43 | P a g e a. Individuals can be asked to monitor various sources of information such as key magazines, trade journals, and newspapers. b. The Internet is another source for gathering strategic information, as are corporate, university, and public libraries. c. Suppliers, distributors, salespersons, customers, and competitors represent other sources of vital information. 3. Once information is gathered, it should be assimilated, evaluated, and prioritized. 4. Key external factors should be important to achieving long term and annual objectives, measurable, applicable to all competing firms, and hierarchical in the sense that some will pertain to the overall company while others will be more narrowly focused. Teaching Tip: Many organizations are scrambling to collect information about how to conduct business on the Internet. The following is a list of the premier magazines that are available online that focus on e-commerce and the Internet. y Money Magazine{} y The Industry Standard {} y Red Herring {} Teaching Tip: There are a number of Internet sites that provide a wealth of information on publicly traded corporations, including EDGAR filings, company press releases, newspaper articles, and analysts¶ estimates. The following is a sample of the sites that are particularly useful. y Hoovers Online {} y CBS Marketwatch {} y {} y Motley Fool {} y Yahoo! Company Information {} II. THE INDUSTRIAL ORGANIZATION (I/O) VIEW A. External Factors versus Internal Factors
  32. 32. 44 | P a g e 1. External factors are more important than internal factors in a firm achieving competitive advantage. Organizational performance is primarily determined by industry forces. 2. Managing strategically from the I/O perspective entails firms striving to compete in attractive industries, avoiding weak or faltering industries, and gaining a full understanding of key external factor relationships. B. Factors Affecting Firm Performance 1. Firm performance is primarily based on industry properties such as economies of scale, barriers to market entry, product differentiation, and level of competitiveness. 2. Approximately 20% of a firm¶s profitability can be explained by industry factors while about 36% of the variance is attributed to a firm¶s internal factors. III. ECONOMIC FORCES A. Economic Factors Have a Direct Impact 1. Economic factors have a direct impact on the potential attractiveness of various strategies. For example, if interest rates rise, then funds needed for capital expansion become more costly or unavailable. 2. The key economic variables that a firm should monitor are listed in Table 3-1. The list includes (1) shifts to a service economy in the United States; (2) availability of credit; (3) level of disposable income; (4) propensity of people to spend; (5) interest rates; (6) inflation rate; (7) unemployment trends; and so on. 3. The economic standard of living varies considerably across cities and countries. Table 3-2 illustrates the cost of living in various cities worldwide. For example, a cup of coffee is $4.76 in Tokyo but just 94 cents in Rio de Janeiro. VTN (Visit the Net): explains NASA¶s strategic management process and provides NASA¶s entire strategic plan. 4. Russia¶s Economy a. Political bureaucracy in Russia severely limits its ability to develop its economy. b. Business people who do not cater to the government¶s interests are targeted with punitive interference like audits, fines, and inspections.
  33. 33. 45 | P a g e Teaching Tip: The Economist is a high-quality British magazine that is available online. The magazine publishes insightful articles on economic and political issues that are of interest to business strategists {}. III. SOCIAL, CULTURAL, DEMOGRAPHIC, AND ENVIRONMENTAL FORCES A. Social, Cultural, Demographic, and Environmental Impact 1. Social, cultural, demographic, and environmental changes have a major impact on virtually all products, services, markets, and customers. 2. Social, cultural, demographic, and environmental trends are shaping the way Americans live, work, produce, and consume. New trends are creating a different type of consumer and, consequently, a need for different products, services, and strategies. 3. Significant trends for the future include consumers becoming more educated, the population aging, minorities becoming more influential, people looking for local rather than federal solutions to problems, and fixation on youth decreasing. 4. Table 3-2 identifies states with the oldest and youngest populations. Table 3-3 lists key social, cultural, demographic, and environmental variables. Natural Environment Perspective: Amerian Business Leaders Pusing for Legislation on Climate Change. A group of business leaders are pushing the government to cap greenhouse-gas emissions. California has the most developed environmental standards. Among companies, the top five buyers of green power are PepsiCo, Wells Fargo, Whole Foods, U.S. Air Force, and Johnson Johnson. PepsiCo and Whole Foods get all of their power from green sources like wind, solar, hydroelectric, and nuclear. IV. POLITICAL, GOVERNMENTAL, AND LEGAL FORCES A. Political, Governmental, and Legal Factors Represent Key Forces . Federal, state, local, and foreign governments are major regulators, deregulators, subsidizers, employers, and customers of organizations. B. Political, governmental, and legal factors therefore can represent key opportunities or threats for both small and large organizations. 1. For industries and firms that depend heavily on government contracts or subsidies, political forecasts can be the most important part of an external audit. 2. Changes in patent laws, antitrust legislation, tax rates, and lobbying activities can affect firms significantly.
  34. 34. 46 | P a g e C. The increasing global interdependence among economies, markets, governments, and organizations make it imperative that firms consider the possible impact of political variables on the formulation and implementation of competitive strategies. Increasing global competition accents the need for accurate political, governmental, and legal forecasts. D. Although the EU strives to standardize tax breaks, member countries defend their right to politically and legally set their own tax rates. E. Local, state, and federal laws, regulatory agencies, and special interest groups can have a major impact on the strategies of small, large, for-profit, and nonprofit organizations. F. Table 3-4 lists key political, governmental, and legal variables. Teaching Tip: CEO Express is an excellent website that provides managers with links to broad ranges of resources that are helpful in following changes in the external environment. The website is available at {}. V. TECHNOLOGICAL FORCES A. Technological Forces Play a Key Role. The Internet is changing the very nature of opportunities and threats by altering the life cycles of products, increasing the speed of distribution, creating new products and services, erasing limitations of traditional geographic markets, and changing the historical trade-off between production standardization and flexibility. B. To effectively capitalize on information technology, a number of organizations are establishing two new positions in their firms: chief information officer (CIO) and chief technology officer (CTO). Teaching Tips: There are a number of on-line periodicals that focus specifically on technology related business issues. A sample of these magazines, which provides information to strategists in terms of monitoring changes in their business¶s technological environments, are as follows: y CIO {} y ComputerWorld {} y Intranet Journal {} y MIT TechReview {} y Wired {} VI. COMPETITIVE FORCES A. An Awareness of Competitive Forces is Essential for Success
  35. 35. 47 | P a g e 1. The top five U.S. competitors in four different industries are identified in Table 3-5. An important part of an external audit is identifying rival firms and determining their strengths, weaknesses, capabilities, opportunities, threats, objectives, and strategies. 2. Collecting and evaluating information on competitors are essential for successful strategy formulation. 3. Table 3-6 provides key questions about competitors. VTN (Visit the Net): provides information on the importance of gathering competitive information. It offers an audio frequently asked questions section on intelligence systems. B. Competitive Intelligence (CI) Programs 1. Good CI in business, as in the military, is one of the keys to success. The more information and knowledge a firm can obtain about competitors, the more likely it can formulate and implement effective strategies. a. What is CI? CI, as formally defined by the Society of Competitive Intelligence Professionals (SCIP), is a systematic and ethical process of gathering and analyzing information about the competition¶s activities and general business trends to further a business¶s own goals (SCIP website). 2. Firms need an effective competitive intelligence program. The three basic missions of a CI program are (1) to provide a general understanding of an industry and its competitors, (2) to identify areas in which competitors are vulnerable and to assesses the impact strategic actions would have on competitors, and (3) to identify potential moves that a competitor might make that would endanger a firm¶s position in the market. 3. Unethical tactics such as bribery, wiretapping, and computer break-ins should never be used to obtain information. VTN (Visit the Net): describes the nature and role of strategic planning in a firm. Teaching Tip: Whisper Number is an example of a web-based firm that conducts competitive intelligence for business organizations {}. The website is interesting and provides the most popular companies according to individual investors as well as the most pessimistic and optimistic expectations. C. Cooperation Among Competitors 1. Strategies that stress cooperation among competitors are being used more. For example, Lockheed recently teamed up with British Aerospace PLC to compete against Boeing Company to develop the next generation U.S. fighter jet.
  36. 36. 48 | P a g e 2. The idea of joining forces with a competitor is not easily accepted by Americans, who often view cooperation and partnerships with skepticism and suspicion. Indeed, joint ventures and cooperative arrangements among competitors demand a certain amount of trust to combat paranoia about whether one firm will injure the other. D. Market Commonality and Resource Similarity 1. Competitors are firms that offer similar products in the same market. 2. Markets can be geographic, product areas, or segments. 3. Market commonality can be defined as the number and significance of markets that a firm competes in with rivals. 4. Resource similarity is the extent to which the type and amount of a firm¶s internal resources arecomparable to a rival. VTN (Visit the Net): gives 30+ pages of excellent detail on ³Developing a Business Strategy.´ VII. COMPETITIVE ANALYSIS: PORTER¶S FIVE-FORCES MODEL A. Porter¶s Five-Forces Model 1. Figure 3-3 illustrates Porter¶s Five-Forces Model. The intensity of competition among firms varies widely from industry to industry. Table 3-7 reveals the average ROI for firms in different industries. 2. According to Porter, the nature of competitiveness in a given industry can be viewed as a composite of five forces. a. Rivalry among competitive firms. b. Potential entry of new competitors. c. Potential development of substitute products. d. Bargaining power of suppliers. e. Bargaining power of consumers. 3. These three steps can reveal whether competition in a given industry is such that a firm can make an acceptable profit: a. Identify key aspects or elements of each competitive force that impact the firm. b. Evaluate how strong and important each element is for the firm. c. Decide whether the collective strength of the elements is worth the firm entering or staying in the industry.
  37. 37. 49 | P a g e 4. Rivalry among competing firms. Is usually the most powerful of the five competitive forces. The strategies pursued by one firm can be successful only to the extent that they provide competitive advantage over the strategies pursued by rival firms. 5. Potential entry of new competitors. Whenever new firms can easily enter a particular industry, the intensity of competitiveness among firms increases. 6. Potential development of substitute products. In many industries, firms are in close competition with producers of substitute products in other industries. 7. Bargaining power of suppliers. The bargaining power of suppliers affects the intensity of competition in an industry, especially when there are a large number of suppliers, when there are only a few good substitute raw materials, or when the cost of switching raw materials is especially costly. 8. Bargaining power of consumers. When customers are concentrated, large, or buy in volume, their bargaining power represents a major force affecting intensity of competition in an industry. In particular, consumers gain increasing bargaining power under the following circumstances: a. If they can inexpensive switch to competing brands or substitutes, b. If they are particularly important to the seller, c. If sellers are struggling in the face of falling consumer demand, d. If they are well informed about sellers¶ products, prices, and costs, and e. If they have discretion in whether and when they purchase the product. VTN (Visit the Net): The Mind Tools website ( gives good information about why employees may resist change. VIII. SOURCES OF EXTERNAL INFORMATION A. Information is Available from Both Published and Unpublished Sources 1. Unpublished sources include customer surveys, market research, speeches at professional and shareholders¶ meetings, television programs, interviews, and conversations with stakeholders. 2. Published sources of strategic information include periodicals, journals, reports, government documents, abstracts, books, directories, newspapers, and manuals. B. Internet 1. Millions of people today use on-line services for both business and personal purposes.
  38. 38. 50 | P a g e 2. The Internet offers consumers and businesses a widening range of services and information resources from all over the world. VTN (Visit the Net): gives an extensive slide show presentation about strategic management, from beginning to the end of the process. IX. FORECASTING TOOLS AND TECHNIQUES A. Forecasts 1. Forecasts are educated assumptions about future trends and events. 2. Forecasting is a complex activity due to factors such as technological innovation, cultural changes, new products, improved services, stronger competitors, shifts in government priorities, changing social values, unstable economic conditions, and unforeseen events. 3. Forecasting tools can be broadly categorized into two groups: quantitative techniques and qualitative techniques. a. Quantitative forecasts are most appropriate when historic data are available and when the relationships among key variables are expected to remain the same in the future. The three basic types of quantitative forecasting techniques are econometric models, regression, and trend extrapolation. b. Qualitative forecasts. The six basic qualitative approaches to forecasting are: (1) sales force estimates, (2) juries of executive opinions, (3) anticipatory surveys or market research, (4) scenario forecasts, (5) Delphi forecasts, and (6) brainstorming. B. Making Assumptions 1. By identifying future occurrences that could have a major effect on the firm and making reasonable assumptions about those factors, strategists can carry the strategic- management process forward. X. THE GLOBAL CHALLENGE The global challenge faced by U.S. businesses is twofold: 1) how to gain and maintain exports to other nations and 2) how to defend domestic markets against imported goods. Global Perspective: China¶s Automobile Producers Heading to the United States in 2008. China¶s auto exports doubled in 2006 from the previous year to 340,000 units. China plans to increase auto exports to $120 billion in the next ten years. A. Multinational Corporations
  39. 39. 51 | P a g e 1. MNCs face risks like expropriation of assets, currency losses through exchange rate fluctuations, unfavorable court interpretations of contracts and agreements, social/political disturbances, import/export restrictions, tariffs, and trade barriers. 2. Firms must due extensive environmental scanning to assess risks and opportunities prior to entering global markets. B. Globalization 1. Globalization is the process of worldwide integration of strategy formulation, implementation, and evaluation activities. Strategic decisions are made based on their impact on global profitability of the firm, rather than on just domestic or other individual country considerations. 2. Globalization of industries is occurring for many reasons, including a worldwide trend toward similar consumption patterns, the emergence of global buyers and sellers, e- commerce, and instant transmission of money and information across continents. XI. INDUSTRY ANALYSIS: THE EXTERNAL FACTOR EVALUATION (EFE) MATRIX A. An EFE Matrix 1. An EFE Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. 2. There are five steps in developing an EFE Matrix as illustrated in Table 3-8. a. List key external factors as identified in the external-audit process. Include a total of 10-20 factors from both the opportunities and threats. b. Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights show the relative importance. The total of all the weights should equal 1.0. c. Assign a 1-4 rating to each factor to indicate how effectively the firm¶s current response strategy is: 1 = the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the response is superior. d. Multiply each factor¶s weight by its rating to get a weighted score. e. Sum the weighted scores for each variable to determine the total weighted score for the organization. XII. THE COMPETITIVE PROFILE MATRIX (CPM) A. The CPM Matrix
  40. 40. 52 | P a g e 1. The CPM, illustrated in Table 3-9, identifies a firm¶s major competitors and their particular strengths and weaknesses in relation to a sample firm¶s strategic position. 2. Table 3-10 provides a Competitive Profile Matrix example. 3. There are some important differences between the EFE and CPM. First, the critical success factors in a CPM are broader. These factors are also not grouped into opportunities and threats as in the EFE. In a CPM, the ratings and weighted scores can be compared to rival firms. VTN (Visit the Net): Visit the text¶s website,, for this chapter¶s WWW exercises.
  41. 41. 53 | P a g e ISSUES FOR REVIEW AND DISCUSSION 1. Explain how to conduct an external strategic-management audit. Answer: An effective approach for conducting an external strategic-management audit consists of four basic steps: (1) select key variables, (2) select key sources of information, (3) use forecasting tools and techniques, and (4) construct an EFE Matrix. 2. Identify a recent economic, social, political, or technological trend that significantly affects financial institutions. Answer: Economic²Interest rates remain low. Social²Many states are passing no smoking ordinances. Political²Eastern European countries are experiencing political instability. Technological²Use of the Internet is doubling every 100 days. 3. Discuss the following statement: Major opportunities and threats usually result from an interaction among key environmental trends rather than from a single external event or factor. Answer: This statement is accurate. It reveals how complex the external audit part of strategy formulation can be. There are an infinite number of interactions among key external factors. 4. Identify two industries experiencing rapid technological changes and three industries that are experiencing little technological change. How does the need for technological forecasting differ in these industries? Why? Answer: The computer industry, communications industry, and aerospace industry are experiencing rapid technological change. Three industries that are experiencing little technological change are the forest products industry, the shipping industry, and the dairy industry. 5. Use Porter¶s five-forces model to evaluate competitiveness within the U.S. banking industry. Answer: Porter identifies five competitive forces that determine the intensity of competition in an industry and the total value of profits created in a particular industry. The five forces are 1) new entrants, 2) substitute products or services, 3) bargaining power of suppliers, 4) bargaining power of buyers, and 5) rivalry among existing firms. A key to selecting appropriate generic strategies is to analyze these competitive forces in terms of trends, opportunities, and threats facing the firm. Ask your students to apply an analysis of these forces to the banking industry.
  42. 42. 54 | P a g e 6. What major forecasting techniques would you use to identify (1) economic opportunities and threats and (2) demographic opportunities and threats? Why are these techniques most appropriate? Answer: With the advent of sophisticated computers, simultaneous systems of regression equations have become the most widely used approach for forecasting economic variables. Scenario development is the most popular of all techniques for social and demographic forecasting, although surveys and market research are also widely used. 7. How does the external audit affect other components of the strategic-management process? Answer: In countless ways, external audit results can and often do affect all other components of the strategic-management model. 8. As the owner of a small business, explain how you would organize a strategic-information scanning system. How would you organize such a system in a large organization? Answer: In both small and large organizations, strategists could assign specific publications to particular individuals who could then monitor their assigned source and regularly report strategic information to a coordinator. Also, both small businesspeople and chief executive officers of large businesses could effectively use on-line databases. 9. Construct an EFE Matrix for an organization of your choice. Answer: An EFE Matrix allows strategists to summarize and evaluate economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. There are five steps in developing an EFE Matrix as illustrated in Table 3-9. List key external factors as identified in the external-audit process. Include a total of 10-20 factors from both the opportunities and threats. Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights show the relative importance. The total of all the weights should equal 1.0. Assign a 1-4 rating to each factor to indicate how effectively the firm¶s current response strategy: 1= the response is poor, 2 = the response is average, 3 = the response is above average, and 4 = the response is superior. Multiply each factor¶s weight by its rating to get a weighted score. Sum the weighted scores for each variable to determine the total weighted score for the organization. While each answer will vary for this question, students should follow these guidelines.
  43. 43. 55 | P a g e 10. Make an appointment with a librarian at your university to learn how to use on-line databases. Report your findings in class. Answer: This is an interesting and beneficial library exercise. Many libraries have a business liaison who will come to your class to illustrate the use of these databases. 11. Give some advantages and disadvantages of cooperative versus competitive strategies. Answer: Cooperative strategies are generally less costly than competitive strategies. Cooperative strategies between domestic and foreign companies can facilitate entry into world markets. However, competitive strategies recognize that survival of the fittest is an underlying philosophy of business not only in the United States, but also in most of the world. Identifying competitors¶ strengths and weaknesses is, thus, an integral and vital part of the external audit. 12. As strategist for a local bank, explain when you would use qualitative versus quantitative forecasts. Answer: Qualitative forecasts are most appropriate when historical data are not available and when relationships among key variables are expected to vary greatly in the future. In addition, when conditions are exploratory in nature, qualitative data can be very useful. Quantitative forecasts require access to quantitative data. 13. What is your forecast for interest rates and the stock market in the next several months? As the stock market moves up, do interest rates always move down? Why? What are the strategic implications of these trends? Answer: As the stock market goes up, interest rates usually go down. An underlying reason for this trend is that investors find stocks more attractive than certificates of deposit as investment opportunities when stock prices rise. The primary strategic implications of these trends concern the relative attractiveness of stock versus debt as a source of capital to finance strategy implementation. As stock prices move up and interest rates move down, debt becomes more attractive as a source of capital. 14. Explain how information technology affects strategies of the organization where you have worked most recently. Answer: Answers will vary for each student. If asking this question as a class exercise, encourage students to think about how information technology might have represented a strength or weakness for that organization. In addition, mention that rapidly changing information technology can represent a threat or opportunity for a firm.
  44. 44. 56 | P a g e 15. Let¶s say your boss develops an EFE Matrix that includes 62 factors. How would you suggest reducing the number of factors to 20? Answer: Let a group of knowledgeable individuals in the organization evaluate the relative importance of each factor by assigning a 1 = not important, 2 = somewhat important, and 3 = very important. Then add the ratings each factor receives. The 20 factors with the highest sum score should be included in the EFE Matrix. 16. Discuss the ethics of gathering competitive intelligence. Answer: Gathering competitive intelligence information is not corporate espionage because all the information needed is available by ethical means, mostly accessible through the Internet. Firms owe it to all their stakeholders to gather competitive intelligence and to perform this activity systematically and ethically. 17. Discuss the ethics of cooperating with rival firms. Answer: The norms of personal ethics serve as a foundation for business ethics and provide a basis for cooperating with rival firms. Engaging in unethical practices, even with rival firms, will jeopardize a firm¶s credibility and respect in the industry. 18. Visit the SEC website at and discuss the benefits of using information provided here. Answer: This is a good Internet exercise for students. The SEC website contains a plethora of information including SEC forms and filings, information for investors, accountants, mutual fund managers, etc. While the information can be useful for conducting company business and planning, it is also a good source of environmental information particularly related to regulations and the financial environment. 19. What are the major differences between U.S. and multinational operations that affect strategic management? Answer: The external environment is much broader for a firm that conducts multinational operations than for a firm that only sells domestically. As a result, a firm that conducts multinational operations must consider a broader range of information in its external analysis, which may affect how its strategies are structured and implemented.
  45. 45. 57 | P a g e 20. Why is globalization of industries a common factor today? Answer: The following are trends that are contributing to the globalization of industries around the world: y Corporations in every corner of the globe are taking advantage of the opportunity to share in the benefits of worldwide economic development. y Markets are shifting rapidly and in many cases are converging in terms of tastes, trends, and prices. y Innovative transport systems are accelerating the transfer of technology, and shifts in the nature and location of production systems are reducing the response time to changing market conditions. y More and more countries around the world are welcoming foreign investment and capital. y E-commerce and the instant transmission of money and information across continents. 21. Do you agree with I/O theorists that external factors are more important than internal factors in a firm achieving competitive advantage? Explain both your and their position. Answer: While I/O theorists claim that industry factors are more important than internal factors, research findings suggest that only 20% of a firm¶s profitability can be explained by industry factors and 36% explained by internal factors. Regardless, it is not a question of whether external or internal factors are more important. Rather, effective integration and understanding of both external and internal factors is the key to securing and keeping a competitive advantage. 22. Define, compare, and contrast the Weights vs Ratings in an EFEM vs IFEM. Answer: The weight in an EFE Matrix indicates the relative importance of that factor to being successful in the firm¶s industry. The rating indicates how effectively the firm¶s current strategies respond to each key external factor. Thus, the weight allows more important factors to receive more consideration while the rating evaluates how well the firm handles each factor. Weights are industry-based but ratings are company-based. The weight in an IFE also indicates the relative importance of the factor to the firm¶s successfulness in the industry. However, in the IFE the factors under consideration are internal factors rather than external factors. Ratings in the IFE indicate whether the factor is a major or minor weakness or strength. Like in the EFE, weights industry-based while ratings are company- based. The IFE is presented in Chapter 4.
  46. 46. 58 | P a g e 23. Develop a Competitive Profile Matrix for your university. Include 6 factors. Answer: List critical success factors identified in the internal and external analysis. Assign to each factor a weight from .0 (not important) to 1.0 (very important). These weights show the relative importance. The total of all the weights should equal 1.0. Assign a 1-4 rating to each factor to describe the factor: 1= major weakness, 2 = minor weakness, 3 = minor strength, and 4 = major strength. Multiply each factor¶s weight by its rating to get a weighted score. Sum the weighted scores for each variable to determine the total weighted score for the organization. Do the same for one or more competing organizations using the same critical success factors and weights. While each answer will vary for this question, students should follow these guidelines. A template is provided below. University 1: University 2: Critical Success Factors Weight Rating Score Rating Score Tuition costs Quality of faculty Academic reputation Average class size Campus landscaping Athletic programs Quality of students Graduate programs Location of campus Campus culture Totals 1.0 24. List the 10 external areas that give rise to opportunities and threats. Answer: The ten external areas are economic, social, cultural, demographic, environmental, political, government, legal, and technological.
  47. 47. 59 | P a g e CHAPTER 4 THE INTERNAL ASSESSMENT CHAPTER OUTLINE j The Nature of an Internal Audit j The Resource-Based View j Integrating Strategy and Culture j Management j Marketing j Finance/Accounting j Production/Operations j Research and Development j Management Information Systems j Value Chain Analysis j The Internal Factor Evaluation (IFE) Matrix CHAPTER OBJECTIVES After studying this chapter, you should be able to do the following: 1. Describe how to perform an internal strategic-management audit. 2. Discuss the Resource-Based View (RBV) in strategic management. 3. Discuss key interrelationships among the functional areas of business. 4. Compare and contrast culture in the United States versus other countries. 5. Identify the basic functions or activities that make up management, marketing, finance/ accounting, production/operations, research and development, and management information systems. 6. Explain how to determine and prioritize a firm¶s internal strengths and weaknesses. 7. Explain the importance of financial ratio analysis. 8. Discuss the nature and role of management information systems in strategic management. 9. Develop an IFE Matrix. 10. Explain benchmarking as a strategic management tool. CHAPTER OVERVIEW Chapter 4 focuses on identifying and evaluating a firm¶s strengths and weaknesses in the functional areas of business, including management, marketing, finance/accounting, production/operations, research and development, and management information systems. Relationships among these areas of business and the strategic implications of important functional area concepts are examined. The process of performing an internal audit is described. Strategies are formulated that take advantage of an organization¶s internal strengths and improve upon weaknesses. The Resource-Based View (RBV) of strategic management is introduced as well as the Value Chain Analysis (VCA) concept. EXTENDED CHAPTER OUTLINE WITH TEACHING TIPS I. THE NATURE OF AN INTERNAL AUDIT A. Strengths and Weaknesses