316082
316082
316082
KNOWLEDGE OBJECTIVES
CHAPTER OUTLINE
1-1
LECTURE NOTES
Chapter Introduction: You may want to begin this lecture with a general comment that
Chapter 1 provides an overview of the strategic management process. This chapter
introduces a number of key terms and models that students will study in more detail in
Chapters 2 through 13. Stress the importance of students paying careful attention to the
concepts introduced in this chapter so that they are well-grounded in strategic management
concepts before proceeding further.
OPENING CASE
Once a Giant, Borders Became a Weakling on Its Knees
At one-time Borders was the largest bookseller in the world. However, in February, 2011,
Borders declared bankruptcy. The opening case drives home the point that a companys
past success guarantees it nothing when key conditions in its environment change.
Competition from big box retailers, evolving information technologies, changes in the ways
consumers acquire content, and the ongoing consumer quest for convenience have all
chipped away at Borders old sources of competitive advantage.
To initiate discussion, ask how the case lays the groundwork for the importance of strategy
as defined in the chapterthe coordinated set of commitments and actions designed to
achieve competitive advantage. Ask students how Borders should have responded to the
many environmental changes that it was experiencing. The case also provides a nice lead-in
to discuss anticipated environmental changes and how Borders might position itself for
future successthere is nowhere to go but up. Finally, the case provides the opportunity to
discuss strategic leadership or, in this case, the lack thereof. How could effective leadership
have kept Borders in the black?
Strategy can be defined as an integrated and coordinated set of commitments and actions
designed to exploit core competencies and gain a competitive advantage.
So long as a firm can sustain (or maintain) a competitive advantage, investors will earn above-
average returns. Above-average returns represent returns that exceed returns that investors
expect to earn from other investments with similar levels of risk (investor uncertainty about
the economic gains or losses that will result from a particular investment). In other words,
above average-returns exceed investors expected levels of return for given risk levels.
1-2
Teaching Note: Point out that in the long run, firms must earn at least
average returns and provide investors with average returns if they are to
survive. If a firm earns below-average returns and provides investors with
below-average returns, investors will withdraw their funds and place them in
investments that earn at least average returns. At this point it may be useful
to highlight the role institutional investors play in regulating above average
performances.
In smaller new venture firms, performance is sometimes measured in terms of the amount and
speed of growth rather than more traditional profitability measuresnew ventures require
time to earn acceptable returns.
A framework that can assist firms in their quest for strategic competitiveness is the strategic
management process, the full set of commitments, decisions and actions required for a firm to
systematically achieve strategic competitiveness and earn above-average returns. This process
is illustrated in Figure 1.1.
FIGURE 1.1
The Strategic Management Process
Figure 1.1 illustrates the dynamic, interrelated nature of the elements of the strategic
management process and provides an outline of where the different elements of the process
are covered in this text.
Feedback linkages among the three primary elements indicate the dynamic nature of the
strategic management process: strategic inputs, strategic actions, and strategic outcomes.
Strategic actions are guided by the firm's vision and mission, and are represented by
strategies that are formulated or developed and subsequently implemented or put into
action.
Feedback links the elements of the strategic management process together and helps firms
continuously adjust or revise strategic inputs and strategic actions in order to achieve
desired strategic outcomes.
In addition to describing the impact of globalization and technological change on the current
business environment, this chapter also discusses two approaches to the strategic management
process. The first, the industrial organization model, suggests that the external environment
1-3
should be considered as the primary determinant of a firms strategic actions. The second is
the resource-based model, which perceives the firms resources and capabilities (the internal
environment) as critical links to strategic competitiveness. Following the discussion in this
chapter, as well as in Chapters 2 and 3, students should see that these models must be
integrated to achieve strategic competitiveness.
The competitive landscape can be described as one in which the fundamental nature of
competition is changing in a number of the worlds industries. Further, the boundaries of
industries are becoming blurred and more difficult to define.
Consider recent changes that have taken place in the telecommunication and TV industries
e.g., not only cable companies and satellite networks compete for entertainment revenue from
television, but telecommunication companies also are stepping into the entertainment business
through significant improvements in fiber-optic lines. Partnerships further blur industry
boundaries (e.g., MSNBC is co-owned by NBC, itself owned by General Electric and
Microsoft). Many firms are looking into the delivery of video on demand (VOD). Apple iPod
has the current lead in offering VOD content, but Netflix is vying hard to compete in this
arena since VOD could be the kiss of death to its current online DVD rental service.
Blockbuster and Amazon are also seeking a piece of this competitive pie.
The twenty-first century competitive landscape thus implies that traditional sources of
competitive advantageeconomies of scale and large advertising budgetsmay not be as
important in the future as they were in the past. The rapid and unpredictable technological
change that characterizes this new competitive landscape implies that managers must adopt
new ways of thinking. The new competitive mind-set must value flexibility, speed, innovation,
integration, and the challenges that evolve from constantly changing conditions.
1-4
A global economy is one in which goods, services, people, skills, and ideas move freely across
geographic borders.
The emergence of this global economy results in a number of challenges and opportunities.
For instance, Europe is now the worlds largest single market (despite the difficulties of
adapting to multiple national cultures and the lack of a single currency. The European Union
has a gross domestic product (GDP) that is over 35% greater than that of the US, with 700
million potential customers.
Today, China is seen as an extremely competitive market in which local market-seeking MNCs
(multinational corporations) fiercely compete against other MNCs and local low-cost
producers. China has long been viewed as a low-cost producer of goods, but heres an
interesting twist. China is now an exporter of local management talent. Procter & Gamble
actually exports Chinese management talent; it has been dispatching more Chinese abroad than
it has been importing expatriates to China. GE estimates that by 2024, China will be the
worlds greatest consumer of electricity and will also be the worlds largest consumer and
consumer-finance market. GE is making strategic decisions today, such as significant investing
in China and India, that will enhance its competitive posture in both countries in the future.
STRATEGIC FOCUS
Huawei Also Needs Guanxi in the United States
Guanxi, the Chinese term for building strong relationships in which each party feels obligated
to help the other is an important dimension to successful business in China. Huawei, the
Chinese phone network manufacturer has also learned that Guanxi helps it do business abroad.
Huawei is an extremely innovative company and its innovations are helping it gain respect
within the industry. While relationships with other firms have been strong because of past ties
with the Chinese military, Huawei has had trouble convincing the US government that
potential acquisitions in the US should be allowed.
Teaching Note: Huawei helps illustrate just how global business has become.
Once the province of US firms, Huawei shows how foreign companies have
become significant players in major US (and global) industries. Ask students if
they believe the US governments actions to block Huaweis potential
acquisitions with US firms are justified (and to explain their rationale). Ask them
to identify other actions that Huawei might take to convince the US government
1-5
that they do not pose a threat to national security. Is Guanxi with the US
government possible?
Although globalization seems an attractive strategy for competing in the current competitive
landscape, there are risks as well. These include such factors as:
The liability of foreignness (i.e., the risk of competing internationally)
Overdiversification beyond the firms ability to successfully manage operations in multiple
foreign markets
A point to emphasize: entry into international markets requires proper use of the strategic
management process.
Though global markets are attractive strategic options for some companies, they are not the
only source of strategic competitiveness. In fact, for most companies, even for those capable
of competing successfully in global markets, it is critical to remain committed to and
strategically competitive in the domestic market. And domestic markets can be testing grounds
for possibly entering an international market at some point in the future.
1-6
Teaching Note: Indicate that the risks that often accompany
internationalization and strategies for minimizing their impact on firms are
discussed in more detail in Chapter 8.
Three technological trends and conditions are significantly altering the nature of competition:
Increasing rate of technological change and diffusion
The information age
Increasing knowledge intensity
Both the rate of change and the introduction of new technologies have increased greatly over
the last 15 to 20 years.
A term that is used to describe rapid and consistent replacement of current technologies by
new, information-intensive technologies is perpetual innovation. This implies that innovation
discussed in more detail in Chapter 13must be continuous and carry a high priority for all
organizations.
The shorter product life cycles that result from rapid diffusion of innovation often means
that products may be replicated within very short time periods, placing a competitive
premium on a firms ability to rapidly introduce new products into the marketplace. In fact,
speed-to-market may become the sole source of competitive advantage. In the computer
industry during the early 1980s, hard disk drives would typically remain current for four to
six years, after which a new and better product became available. By the late 1980s, the
expected life had fallen to two to three years. By the 1990s, it was just six to nine months.
The rapid diffusion of innovation may have made patents a source of competitive advantage
only in the pharmaceutical and chemical industries. Many firms do not file patent applications
to safeguard (for at least a time) the technical knowledge that would be disclosed explicitly in
a patent application.
1-7
Disruptive technologies (in line with the Schumpeterian notion of creative destruction) can
destroy the value of existing technologies by replacing them with new ones. Current examples
include the success of iPods, PDAs, and WiFi.
Changes in information technology have made rapid access to information available to firms
all over the world, regardless of size. Consider the rapid growth in the following technologies:
personal computers (PCs), cellular phones, computers, personal digital assistants (PDAs),
artificial intelligence, virtual reality, and massive databases. These examples show how
information is used differently as a result of new technologies. The ability to access and use
information has become an important source of competitive advantage in almost every
industry.
There have been dramatic changes in information technology in recent years.
The number of PCs is expected to grow to 278 million by 2010.
The Internet provides an information-carrying infrastructure available to individuals and
firms worldwide.
The ability to access a high level of relatively inexpensive information has created strategic
opportunities for many information-intensive businesses. For example, retailers now can use
the Internet to provide shopping to customers virtually anywhere.
STRATEGIC FOCUS
The Core of Apple: Technology and Innovation
Apple has been on a hot streak for over a decade. It is an exceptionally innovative company
and its products have revolutionized multiple industries. Its brand is incredibly strong on a
global scale and customers continue to purchase its products even though cheaper substitutes
in the market abound. iPod, iTunes, iPhone, and iPad have powered the company to the point
that it had the second largest market capitalization of all firms in the world in 2011.
1-8
Shareholder value is increasingly influenced by the value of a firms intangible assets, such
as knowledge
The implication of this discussion is that to achieve strategic competitiveness and earn above-
average returns, firms must develop the ability to adapt rapidly to change or achieve strategic
flexibility.
Strategic flexibility represents the set of capabilitiesin all areas of their operationsthat
firms use to respond to the various demands and opportunities that are found in dynamic,
uncertain environments. This implies that firms must develop certain capabilities, including
the capacity to learn continuously, that will provide the firm with new skill sets. However,
those working within firms to develop strategic flexibility should understand that the task is
not an easy one, largely because of inertia that can build up over time. A firms focus and
past core competencies may actually slow change and strategic flexibility.
Teaching Note: Firms capable of rapidly and broadly applying what they learn
achieve strategic flexibility and the resulting capacity to change in ways that will
increase the probability of succeeding in uncertain, hypercompetitive
environments. Some firms must change dramatically to remain competitive or
return to competitiveness. How often are firms able to make this shift? Overall,
does it take more effort to make small, periodic changes, or to wait and make
more dramatic changes when these become necessary?
Two models describing key strategic inputs to a firm's strategic actions are discussed next: the
Industrial Organization (or externally focused) model and the Resource-Based (or internally
focused) model.
1-9
to introduce linkages in the I/O model and provide the background for an
expanded discussion of the model in Chapter 2.
The I/O or Industrial Organization model adopts an external perspective to explain that forces
outside of the organization represent the dominant influences on a firm's strategic actions. In
other words, this model presumes that the characteristics of and conditions present in the
external environment determine the appropriateness of strategies that are formulated and
implemented in order for a firm to earn above-average returns. In short, the I/O model
specifies that the choice of industries in which to compete has more influence on firm
performance than the decisions made by managers inside their firm.
3. Resources used to implement strategies are highly mobile across firms. Significant
differences in strategically relevant resources among firms in an industry tend to disappear
because of resource mobility. Thus, any resource differences soon disappear as they are
observed and acquired or learned by other firms in the industry.
According to the I/O model, which was a dominant paradigm from the 1960s through the
1980s, firms must pay careful attention to the structured characteristics of the industry in
which they choose to compete, searching for one that is the most attractive to the firm, given
the firm's strategically relevant resources. Then, the firm must be able to successfully
implement strategies required by the industry's characteristics to be able to increase their level
of competitiveness. The five forces model is an analytical tool used to address and describe
these industry characteristics.
FIGURE 1.2
The I/O Model of Above-Average Returns
Based on its four underlying assumptions, the I/O model prescribes a five-step process for
firms to achieve above-average returns:
1-10
1. Study the external environmentgeneral, industry, and competitiveto determine the
characteristics of the external environment that will both determine and constrain the firm's
strategic alternatives.
2. Select an industry (or industries) with a high potential for returns based on the structural
characteristics of the industry. A model for assessing these characteristics, the Five Forces
Model of Competition, is discussed in Chapter 2.
3. Based on the characteristics of the industry in which the firm chooses to compete,
strategies that are linked with above-average returns should be selected. A model or
framework that can be used to assess the requirements and risks of these strategies (the
generic strategies called cost leadership & differentiation) are discussed in detail in
Chapter 4.
5. The I/O model indicates that above-average returns will accrue to firms that successfully
implement relevant strategic actions that enable the firm to leverage its strengths (skills
and resources) to meet the demands or pressures and constraints of the industry in which
it has elected to compete. The implementation process is described in Chapters 10 through
13.
The resource-based model adopts an internal perspective to explain how a firm's unique
bundle or collection of internal resources and capabilities represent the foundation on which
1-11
value-creating strategies should be built.
Resources are inputs into a firm's production process, such as capital equipment, individual
employee's skills, patents, brand names, finance, and talented managers. These resources can
be tangible or intangible.
Core competencies are resources and capabilities that serve as a source of competitive
advantage for a firm. Often related to functional skills (e.g., marketing at Philip Morris), core
competencieswhen developed, nurtured, and applied throughout a firmmay result in
strategic competitiveness.
FIGURE 1.3
The Resource-Based Model of Above-Average Returns
1. Firms should identify their internal resources and assess their strengths and weaknesses.
The strengths and weaknesses of firm resources should be assessed relative to
competitors.
2. Firms should identify the set of resources that provide the firm with capabilities that are
unique to the firm, relative to its competitors. The firm should identify those capabilities
that enable the firm to perform a task or activity better than its competitors.
3. Firms should determine the potential for their unique sets of resources and capabilities to
outperform rivals in terms of returns. Determine how a firms resources and capabilities
can be used to gain competitive advantage.
4. Locate and compete in an attractive industry. Determine the industry that provides the best
1-12
fit between the characteristics of the industry and the firms resources and capabilities.
Resources and capabilities can lead to a competitive advantage when they are valuable, rare,
costly to imitate, and non-substitutable.
Resources are valuable when they support taking advantage of opportunities or
neutralizing external threats.
Resources are rare when possessed by few, if any, competitors.
Resources are costly to imitate when other firms cannot obtain them inexpensively (relative
to other firms).
Resources are non-substitutable when they have no structural equivalents.
Teaching Note: Refer students to Figure 1.1 that indicates the link or
relationship between identifying a firm's internal resources and capabilities
and the conditions and characteristics of the external environment with the
development of the firm's vision and mission.
Vision
Vision is a picture of what the firm wants to be, and in broad terms, what it wants to
ultimately achieve. Vision is big picture thinking with passion that helps people feel what
they are supposed to be doing.
Vision statements:
Reflect a firms values and aspirations
Are intended to capture the heart and mind of each employee (and hopefully, many of its
other stakeholders)
Tend to be enduring, whereas its mission can change in light of changing environmental
conditions
Tend to be relatively short and concise, easily remembered
1-13
We must be a great company with great people. (LG Electronics)
The CEO is responsible for working with others to form the firms vision. However,
experience shows that the most effective vision statement results when the CEO involves a
host of people to develop it.
A vision statement should be clearly tied to the conditions in the firms external and internal
environments and it must be achievable. Moreover, the decisions and actions of those involved
with developing the vision must be consistent with that vision.
Mission
A firm's mission is an externally focused application of its vision that states the firm's unique
purpose and the scope of its operations in product and market terms.
As with the vision, the final responsibility for forming the firms mission rests with the CEO,
though the CEO and other top-level managers tend to involve a larger number of people in
forming the mission. This is because middle- and first-level managers and other employees
have more direct contact with customers and their markets.
A firm's vision and mission must provide the guidance that enables the firm to achieve the
desired strategic outcomesstrategic competitiveness and above-average returnsillustrated
in Figure 1.1 that enable the firm to satisfy the demands of those parties having an interest in
the firm's success: organizational stakeholders.
Earning above-average returns often is not mentioned in mission statements. The reasons for
this are that all firms want to earn above-average returns and that desired financial outcomes
result from properly serving certain customers while trying to achieve the firms intended
future. In fact, research has shown that having an effectively formed vision and mission has a
positive effect on performance (growth in sales, profits, employment, and net worth).
STAKEHOLDERS
Stakeholders are the individuals and groups who can affect and are affected by the strategic
outcomes achieved and who have enforceable claims on a firm's performance.
Classification of Stakeholders
The stakeholder concept reflects that individuals and groups have a "stake" in the strategic
outcomes of the firm because they can be either positively or negatively affected by those
outcomes and because achieving the strategic outcomes may be dependent on the support or
active participation of certain stakeholder groups.
Figure Note: Students can use Figure 1.4 to visualize the three stakeholder
groups.
1-14
FIGURE 1.4
The Three Stakeholder Groups
Figure 1.4 provides a definition of a stakeholder and illustrates the three general classifications
and members of each stakeholder group:
Capital market stakeholders
Product market stakeholders
Organizational stakeholders
Note: Students can use Figure 1.4 while you discuss the challenges of meeting conflicting
stakeholder expectations.
Teaching Note: The following table was developed from the texts
presentation (and more) to assist you in organizing a discussion of each
stakeholder group's expectations or demands, potential conflicts, and
stakeholder management strategies.
If the firm is strategically competitive and earns above-average returns, it can afford to
1-15
simultaneously satisfy all stakeholders. When earning average or below-average returns,
tradeoffs must be made. At the level of average returns, firms must at least minimally satisfy
all stakeholders. When returns are below average, some stakeholders can be minimally
satisfied, while others may be dissatisfied.
For example, reducing the level of research and development expenditures (to increase short-
term profits) enables the firm to pay out the additional short-term profits to shareholders as
dividends. However, if reducing R&D expenditures results in a decline in the long-term
strategic competitiveness of the firm's products or services, it is possible that employees will
not enjoy a secure or rewarding career environment (which violates a primary union
expectation or demand for job security for its membership). At the same time, customers may
be offered products that are less reliable at unattractive prices, relative to those offered by
firms that did not reduce R&D expenditures.
Thus, the stakeholder management process may involve a series of tradeoffs that is dependent
on the extent to which the firm is dependent on the support of each affected stakeholder and
the firm's ability to earn above-average returns.
STRATEGIC LEADERS
Although it depends on the size of the organization, all organizations have a CEO or top
manager and this individual is the primary organizational strategist in every organization.
1-16
Small organizations may have a single strategist: the CEO or owner. Large organizations may
have few or several top-level managers, executives, or a top management team. All of these
individuals are organizational strategists.
Top managers play decisive roles in firms efforts to achieve their desired strategic outcomes.
As organizational strategists, top managers are responsible for deciding how resources will be
developed or acquired, at what cost, and how they will be used or allocated throughout the
organization. Strategists also must consider the risks of actions under consideration, along
with the firms vision and managers strategic orientations.
Organizational strategists also are responsible for determining how the organization does
business. This responsibility is reflected in the organizational culture, which refers to the
complex set of ideologies, symbols, and core values shared throughout the firm and that
influences the way it conducts business. The organizations culture is the social energy that
drivesor fails to drivethe organization.
The Work of Effective Strategic Leaders
Though it seems simplistic, performing their role effectively requires strategists to work hard,
perform thorough analyses of available information, be brutally honest, desire high
performance, exercise common sense, think clearly, and ask questions and listen. In addition,
strategic leaders must be able to think seriously and deeply about the purposes of the
organizations they head or functions they perform, about the strategies, tactics, technologies,
systems, and people necessary to attain these purposes and about the important questions that
always need to be asked. Additionally, effective strategic leaders work to set an ethical tone
in their firms.
Strategists work long hours and face ambiguous decision situations, but they also have
opportunities to dream and act in concert with a compelling vision that motivates others in
creating competitive advantage.
Top-level managers try to predict the outcomes of their strategic decisions before they are
implemented, but this is sometimes very difficult to do. Those firms that do a better job of
anticipating the outcomes of strategic moves will obviously be in a better position to succeed.
One way to do this is by mapping out the profit pools of an industry. Profit pools are the total
profits earned in an industry at all points along the value chain. Four steps are involved:
1. Define the pools boundaries
2. Estimate the pools overall size
3. Estimate the size of the value-chain activity in the pool
4. Reconcile the calculations
1-17
Teaching Note: The final section of this chapter reviews Figure 1.1 (The
Strategic Management Process), providing both an outline of the process and
the framework for the next 12 chapters. Thus, students should refer back to
Figure 1.1 as you present the material to come next.
Chapters 2 and 3 provide more detail regarding the strategic inputs to the strategic
management process: assessments of the firm's external and internal environments that must
be performed so that sufficient knowledge is developed regarding external opportunities and
internal capabilities. This enables the development of the firm's vision and mission.
Chapters 4 through 9 discuss the strategy formulation stage of the process. Topics covered
include:
Deciding on business-level strategy, or how to compete in a given business (Chapter 4)
Understanding competitive dynamics, in that strategies are not formulated and implemented
in isolation but require understanding and responding to competitors' actions (Chapter 5)
Setting corporate-level strategy, or deciding in which industries or businesses the firm will
compete, how resources will be allocated, and how the different business units will be
managed (Chapter 6)
The acquisition of business units and the restructuring of the firms portfolio of businesses
(Chapter 7)
Selecting appropriate international strategies that are consistent with the firm's resources,
capabilities and core competencies, and external opportunities (Chapter 8)
Developing cooperative strategies with other firms to gain competitive advantage (Chapter
9)
The final section of the text, Chapters 1013, examines actions necessary to effectively
implement strategies:
Methods for governing to ensure satisfaction of stakeholder demands and attainment of
strategic outcomes (Chapter 10)
Structures that are used and actions taken to control a firm's operations (Chapter 11)
Patterns of strategic leadership that are most appropriate given the competitive
environment (Chapter 12)
Linkages among corporate entrepreneurship, innovation, and strategic competitiveness
(Chapter 13)
Teaching Note: Students should realize that none of the chapters stands
alone, just as no single step or facet of the strategic management process
stands alone. If the strategic management process is to result in a firm being
strategically competitive and earning above-average returns, all facets of the
process must be treated as both interdependent and interrelated.
1-18
Strategic competitiveness is achieved when a firm successfully formulates and implements
a value-creating strategy.
Above-average returns are returns that are in excess of what an investor expects to earn
from other investments with a similar level or amount of risk.
The strategic management process (see Figure 1.1) is the full set of commitments,
decisions, and actions required for a firm to achieve strategic competitiveness and earn
above-average returns.
2. What are the characteristics of the current competitive landscape? What two
factors are the primary drivers of this landscape? (pp. 614)
In the current competitive landscape, the nature of competition has changed. As a result,
managers making strategic decisions must adopt a new mind-set that is global in
orientation. Firms must learn to compete in highly chaotic environments that produce
disorder and a great deal of uncertainty.
The two primary factors that have created the current competitive landscape are
globalization of industries and markets and rapid and significant technological change.
The implication for business firms is that to be successful, they must be able to meet or
exceed global performance standards (in terms of such factors as quality, price, product
features, speed to market) and be able to keep up with both the rapid pace of
technological change as well as the rapid diffusion of innovation.
3. According to the I/O model, what should a firm do to earn above-average returns?
(pp. 1415)
The I/O model suggests that conditions and characteristics of the external environment
(the general, industry, and competitive environments) are the primary inputs to and
determinants of strategies that firms should formulate and implement to earn above-
average returns. Assumptions of the I/O model are that: (1) the external environment
imposes pressures and constraints that determine which strategies will result in superior
profitability, (2) most firms competing in an industry (or industry segment) control similar
strategically relevant resources and pursue similar strategies in light of resource similarity,
(3) resources used to implement strategies are highly mobile across firms, and (4) decision
makers are assumed to be rational and committed to acting in the firms best interests.
The I/O model thus challenges firms to seek out the industry (or industry segment) with
1-19
the greatest profit potential and then learn how to use their resources to implement value-
creating strategies given the structural characteristics of the industry.
4. What does the resource-based model suggest a firm should do to earn above-
average returns? (pp. 1516)
The resource-based model assumes that each firm is a collection of unique resources and
capabilities that provides the basis for its strategy and is the primary source of its
profitability. It also assumes that over time, firms acquire different resources and develop
unique capabilities. Thus, all firms competing within an industry (or industry segment) may
not possess the same strategically relevant resources and capabilities. In addition,
resources may not be highly mobile across firms.
Thus, the resource-based model challenges firms to formulate and implement strategies
that allow the firm to best exploit its core competenciescapabilities that are valuable,
rare, costly to imitate, and non-substitutablerelative to opportunities in the external
environment. Resources and capabilities that meet the criteria of core competencies then
serve as the basis of a firm's sustainable competitive advantage, enabling it to achieve
strategic competitiveness and earn above-average returns.
5. What are vision and mission? What is their value for the strategic management
process? (pp. 1719)
Vision is a picture of what the firm wants to be, and in broad terms, what it wants to
ultimately achieve. Vision is big picture thinking with passion that helps people feel what
they are supposed to be doing.
The differences between vision and mission are important because of their different
focuses. However, they are both highly interdependent and add value to the strategic
management process. The externally focused mission provides a sense of purpose for the
firm by indicating the products to be provided to specific markets, while the internally set
vision indicates what ultimately will be achieved. In other words, taken together, the
vision and mission will provide a firms managers with the insights needed to effectively
formulate and implement the firms strategies.
6. What are stakeholders? How do the three primary stakeholder groups influence
organizations? (pp. 1922)
Stakeholders are individuals and groups who can affect and are affected by strategic
outcomes achieved and who have enforceable claims on a firm's performance. In other
words, stakeholders have a stake (or a vested interest) in the actions of the firm.
Stakeholders can influence organizations because they have the ability to withhold
participation that is essential to a firm's survival, competitiveness, and profitability. The
1-20
three primary stakeholder groups are: (1) capital market stakeholders, e.g., shareholders,
lenders, (2) product market stakeholders, e.g., customers, suppliers, host communities,
unions, and (3) organizational stakeholders, e.g., employees, managers, and others.
There are many ways that stakeholders can influence organizations. For example,
dissatisfied lenders can impose stricter covenants on subsequent borrowing of capital.
Dissatisfied stockholders can reflect this sentiment through several means, including
selling their stock (which can have a negative effect on its price). Dissatisfied employees
can organize for collective bargaining. Dissatisfied community groups could express their
disapproval by boycotting the firms goods. Stakeholder groups each have ways of
bringing their influence to bear on the firm.
7. How would you describe the work of strategic leaders? (pp. 2224)
Strategic leaders are people located in different parts of the firm using the strategic
management process to help the firm reach its vision and mission. Regardless of their
location in the firm, successful strategic leaders are decisive and committed to nurturing
those around them and are committed to helping the firm create value for customers and
returns for shareholders and other stakeholders.
The work of strategists includes scanning the environmentboth internally and externally
to seek out information that will assist the firm in achieving its mission and satisfying its
vision. Strategists would think about how the resources and capabilities of the firm could
be nurtured and exploited to develop core competencies that would enable the firm to
exploit environmental opportunities, achieve strategic competitiveness, and attain a
competitive advantage that results in above-average returns.
8. What are the elements of the strategic management process? How are they
interrelated? (pp. 2526)
The parts of the strategic management process (illustrated in Figure 1.1) are strategic
inputs, strategic actions and strategic outcomes. Strategic inputs are represented by the
firms vision and mission that result from the assessment of the firms resources,
capabilities, and competencies and conditions in the external environment. These strategic
inputsvision and missiondrive the firms strategic actions or the formulation and
implementation of strategy. The strategic outcomes of successfully formulating and
implementing value-creating strategies are strategic competitiveness and above-average
returns. A feedback loop links strategic outcomes with strategic inputs.
1-21
This exercise is meant to piece together many of the elements that are covered in Chapter 1
such as stakeholders, the strategic management process, and strategic leadership. The
exercise brings this all together by asking teams of students to identify a not-for-profit firm.
This forum is used because many times not-for-profits face unique stakeholder challenges
that are interesting to uncover. Additionally most not-for-profits put their strategic plans in
easy to find places on their websites. The key for the student teams is to identify the
stakeholders and relevant issues that may face them if the firm implements the items in its
strategic plan.
You may also make this an individual assignment rather than teamwork. If so desired, the
exercise would fit well in either scenario.
Each team should present its findings as regards the exercise. The instructor should pay
particular attention to the teams attentiveness to its stakeholders.
This exercise is meant to be reflective for your students as well as to allow them to gain an
appreciation for the inherent difficulty in crafting vision and mission statements for
organizations. It should also highlight the importance of these statements for forward-
looking companies.
You may want to first ask volunteers about the last place they worked. Next find out if
anyone knew either the vision or mission statement of the place they worked. What does
that mean about the company either way? For those who knew, this suggests a firm that
places a lot of value on their statements; for those that dont the opposite.
Next ask for volunteers to talk about their vision and mission. Ask some questions to get
the students talking and sharing:
1-22
Have students think about the difference between corporate and personal visions
and missions. For example:
o Focus of one person vs. many in the organization.
o The concerns of multiple stakeholders with conflicting interests.
o The ease of change and adaptation to environmental shifts. It is much more
difficult to shift an organization of many vs. an organization of one.
Each student should submit their personal statements so that the instructor is able
to provide feedback. This should be constructive so that students can see the power
in personal statements.
With stagnant economies across the world, Brazils economy is growing at 7%--3 times
faster than America. Brazil is a huge country, slightly larger than the continental US with
vast expanses of arable farmland, an abundance of natural resources, and 14% of the
worlds fresh water. With the worlds greenest economy, 80% of Brazils electricity comes
from hydropower and it has the most sophisticated biofuel industry in the world. Brazil is
already the worlds largest producer of iron ore and leading exporter of beef, chicken,
orange juice, sugar, coffee, and tobacco. China has replaced the US as Brazils leading
trade partner. Brazilians contend that their size can match Chinas dragon-like appetite and
they need Brazil to fulfill the Chinese needs. Batista, with Chinese investment, and interests
in mining, transportation, oil, and gas is building a huge super port complex north of Rio
that will accommodate the worlds largest tankers and speed delivery of iron ore and other
resources to Asia. Commodities are not the only things driving the Brazilian boomBrazil
has a substantial manufacturing base and a large auto industry. The worlds third largest
aircraft manufacturer also resides in Brazil. Batista says that the one thing Brazil needs
more of is skilled labormore engineers, which he now must import from America. He
indicates that Brazil is walking into a phase of almost full employment with the creation of
1.5 million jobs in one year.
Brazil has seen periods of prosperity beforeonly to have the bubbles burst. Brazil spent
billions in the 50s and 60s moving its capital to Savannah where it built the futuristic city
Brazilia. Brazil then borrowed billions more to develop the countys interior. Corruption
then led to a financial collapse2000 % inflation and the largest financial rescue package
in the history of the international monetary fund. Lula, as President of Brazil, a metal
worker with a 4th grade education, receives much credit for turning the country around.
Lula, in an interview, indicates that Brazil was a capitalist country without capital. He
asserts that Brazil needed a metal worker with socialist views to bring more money for
1-23
banks, more sales for car companies, and more money to the workers. When asked how,
Lula says the success of an elected official is in the art of doing what is obviouswhat
everyone knows needs to be done but some insist on doing differently. Lula recognized the
separation between the rich and poor of Brazil. He gave the poor families a monthly
stipend of $115 dollars just for sending their kids to school and taking them to the doctor.
Such an infusion of cash helped lift 21 million out of poverty and into the lower middle
class, which created an untapped market of first-time buyers for refrigerators and cars. Lula
also encouraged growth and development by businesses but created tight banking
regulations to maintain conservative fiscal policies.
Historically, Brazil had ignored the festering slums overlooking Rio, which was a staging
area for street crimes and drug gangs, but now gets the attention of military police. Brazil
has massive problems with infrastructuretraffic and roads. Ninety percent of the roads
remain unpaved and little public transportation exists in the cities. Delays in building and
renovation exist for the upcoming 2014 World Cup. Lula, in the interview, indicates that
Brazil will organize the most extraordinary World Cup ever. He says that as he leaves office
he told his people that they are not second class citizenswe can get things done, and we
can believe in ourselves. People have started to believemeaning that he expects his
momentum to continue for the country.
1-24
Is Brazil a hypercompetitor?
o Text: Hypercompetition results from the dynamics of strategic maneuvering
among global and innovative combatants. It is a condition of rapidly
escalating competition based on price-quality positioning, competition to
create new know-how and establish first-mover advantage, and competition
to protect or invade established product or geographic markets. The
emergence of a global economy and technology, specifically rapid
technological change are two primary drivers of hypercompetitive
environments.
o Hypercompetitor: The worlds greenest economy, most sophisticated biofuel
industry in the world, largest producer of iron ore, leading exporter of beef,
chicken, orange juice, sugar, coffee, and tobacco, third largest aircraft
manufacturer, and worlds largest tankers and delivery speed of iron ore and
other resources to Asia
1-25
o Core competencies: manufacturing/production, distribution/transportation
and trade, research and development through green technology, biofuel
development, and mining
Identify and explain the stakeholders associated with Brazils thriving economy.
o Text: Stakeholders are those who can affect, and are affected by, a firms
strategic outcomes
o Stakeholders:
Brazilian populations: will be affected by increases in standards of
living/changes in social class, increased goods produced and
exported, increased economic opportunities (employment)
Global populations: will be affected by quality of goods produced
and exported from Brazil
Trading partners: will received greater number of products and
opportunities for exchange and appropriate supply to meet
population satisfaction
Brazilian government: higher approval ratings
Industry developers: lucrative opportunities to reside and do
business in Brazil
Brazilian industries: increased demand for production and
manufacturing resources
Describe Lula as a strategic leader and discuss what strategies you think he should
employ to handle Brazils latest issues.
o Text: Strategic leaders are people located in different areas and levels of the
firm using the strategic management process to select strategic actions that
help the firm achieve its vision and fulfill its mission. Successful strategic
leaders are decisive, committed to nurturing those around them, and are
committed to helping the firm create value for all stakeholder groups.
o Lula: With a 4th grade education and metal working expertise, encouraged
his people beyond second class citizenship, providing a confidence and
belief of accomplishment. He achieved his strategy of growth and
development through allowing all stakeholders to prosper in his
administration. There is no evidence in the video that he followed the
strategic management process.
o Strategies: These are just some examples. Instructor and student discussion
can expand the list.
Lack of skilled labor: Build on the strategy used for raising the
social class by offering incentives for increased training.
Slum violence: Offer incentives for slum building and home
ownership
Poor infrastructure: Infuse the trained into jobs that will build the
infrastructure. Provide opportunities for expanding resources to be
included in building infrastructure components. Use auto
manufacturing industry to improve public transportation.
Delays in building and renovation: Infuse the trained into
apprenticeships to work on building and renovation.
1-26
ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
1. Business success is often tied to effectively managed strategies. Using the Internet, study
Starbucks current performance. Based on analysis, do you judge Starbucks to be a
success? Why or why not?
2. Choose several firms in your local community with which you are familiar. Describe the
twenty-first century competitive landscape to them, and ask for their feedback about how
they anticipate that the landscape will affect their operations during the next five years.
3. Select an organization (e.g., school, club, or church) that is important to you. Who are the
organizations stakeholders? What degree of influence do you believe each has over the
organization and why?
4. Are you a stakeholder at your university or college? If so, of what stakeholder group or
groups are you a part?
5. Think of an industry in which you want to work. In your opinion, which of the three
primary stakeholder groups is the most powerful in that industry today? Why? Which do
you expect to be the most powerful group in five years? Why?
6. Do you agree or disagree with the following statement? I think managers have little
responsibility for the failure of business firms. Justify your view.
7. Do vision and mission have any meaning in your personal life? If so, describe it. Are your
current actions being guided by a vision and mission? If not, why not?
Ethics Questions
Internet Exercise
Internet-based services depend heavily on continuous change and rapid strategic decision
making. Companies such as Amazon.com that rely on Internet users for their customer base
have demonstrated a distinct competitive advantage in serving their customers well. Barnes &
Noble (http://www.barnesandnoble.com) is one of Amazon.coms competitors in the on-line
book and music markets. How does this Web-based expansion affect the stakeholders of each?
1-27
How does the entrance of these profitable retailers into the online market affect
Amazon.coms competitive advantage?
*e-project: Using other Web resources, such as current business press and financial reports,
discuss Amazon.coms continued growth and limited profits.
1-28