Strategic Management Textbook PDF

STRATEGIC MANAGEMENT Adapted by Reed Kennedy with Eli Jamison, Joseph Simpson, Pankaj Kumar, Ayenda Kemp, Kiran Awate, and Kathleen Manning Why do some companies outperform others? In a dynamic and competitive busi- ness environment, the answer to this question can be the difference between...

STRATEGIC MANAGEMENT Adapted by Reed Kennedy with Eli Jamison, Joseph Simpson, Pankaj Kumar, Ayenda Kemp, Kiran Awate, and Kathleen Manning Why do some companies outperform others? In a dynamic and competitive busi- ness environment, the answer to this question can be the difference between success and failure. Firms that are successful generally have a strategic man- agement process that helps them set goals and execute on a clear vision. This textbook offers an introduction to the key topics and themes of strategic management. The authors draw on examples of familiar companies and person- alities to illustrate the different strategies used by today’s firms - and how they go about implementing those strategies. Students will learn hot to conduct a case analysis, measure organizational performance, and conduct external and internal analyses. In short, they will understand how organizations operate at the strategic level to be successful. Strategic Management is intended for a wide range of business students including those majoring in marketing, management, business administration, accounting, finance, real estate, business information technology, and hospi- tality and tourism. It is ideal for a senior capstone course in an undergraduate business program. It is available online for free in multiple formats and also as affordable print editions. Licensed with a Creative Commons Attribution NonCommercial-ShareAlike 3.0 License. DOI: https://doi.org/10.21061/strategicmanagement Cover design: Kindred Grey Published by Pamplin College ISBN 9781949373967 of Business in association with 90000 > 9 781949 373967  Strategic Management adapted by Reed Kennedy with Eli Jamison, Joe Simpson, Pankaj Kumar, Ayenda Kemp, Kiran Awate, and Kathleen Manning DOI: https://doi.org/10.21061/strategicmanagement Pamplin College of Business IN ASSOCIATION WITH BLACKSBURG, VIRGINIA Contents Copyright and License Information ix Acknowledgments xi Introduction 1 Instructor Resources 5 Chapter 1: Mastering Strategy: Art and Science 7 1.1 Introduction 7 1.2 What is Strategic Management? 9 1.3 Intended, Emergent, and Realized Strategies 12 1.4 The History of Strategic Management 17 1.5 Contemporary Critique of Strategic Management 25 1.6 Understanding the Strategic Management Process 27 1.7 Conclusion 31 Chapter 2: Assessing Organizational Performance 32 2.1 Introduction 32 2.2 Vision, Mission, and Goals 33 2.3 Assessing Organizational Performance 42 2.4 Competitive Advantage 50 2.5 Conclusion 52 Chapter 3: Evaluating the External Environment 53 3.1 Introduction 53 3.2 The Relationship between an Organization and its Environment 55 3.3 Evaluating the General Environment 58 3.4 Evaluating the Industry 69 3.5 Mapping Strategic Groups 83 3.6 Conclusion 87 Chapter 4: Evaluating the Internal Environment 88 4.1 Introduction 88 4.2 Managing Firm Resources 90 4.3 Resource-Based View 92 4.4 Intellectual Property & Isolating Mechanisms 101 4.5 Value Chain 110 4.6 Conclusion 114 Chapter 5: Synthesis of Strategic Issues and Analysis 116 5.1 Introduction 116 5.2 SWOT Framework 117 5.3 Strategic Issue Identification 120 5.4 Conclusion 123 Chapter 6: Selecting Business-Level Strategies 124 6.1 Introduction 124 6.2 Understanding Business-Level Strategy through “Generic Strategies” 127 6.3 Cost Leadership 131 6.4 Differentiation 136 6.5 Focused Cost Leadership and Focused Differentiation 143 6.6 Best-Cost Strategy 152 6.7 Stuck in the Middle 158 6.8 Conclusion 162 Chapter 7: Innovation Strategies 163 7.1 Introduction 163 7.2 Entrepreneurial Orientation 164 7.3 Why Innovate? 170 7.4 Types of Innovation 173 7.5 Implementing Innovation 180 7.6 Responding to Innovation in the Market 188 7.7 Conclusion 194 Chapter 8: Selecting Corporate-Level Strategies 195 8.1 Introduction 195 8.2 Corporate-Level Strategy Defined 196 8.3 Diversification 199 8.4 Implementing Corporate Strategy 211 8.5 Strategies for Getting Smaller 213 8.6 Portfolio Planning and Corporate-Level Strategy 216 8.7 Conclusion 220 Chapter 9: Competing in International Markets 221 9.1 Introduction 221 9.2 Advantages and Disadvantages of Competing in International Markets 222 9.3 CAGE Framework 234 9.4 Types of International Strategies 237 9.5 Drivers of Success and Failure When Competing in International Markets 241 9.6 Options for Competing in International Markets 249 9.7 Conclusion 257 Chapter 10: Executing Strategy through Organizational Design 259 10.1 Introduction 259 10.2 Why Organizational Design? 260 10.3 The Basic Building Blocks of Organizational Structure 264 10.4 Creating an Organizational Structure 269 10.5 Creating Organizational Control Systems 282 10.6 Legal Forms of Business 291 10.7 Conclusion 295 Chapter 11: Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social 297 Responsibility 11.1 Introduction 297 11.2 Doing Well by Doing Good 300 11.3 Corporate Governance 306 11.4 Corporate Ethics and Social Responsibility 312 11.5 Contemporary Questions of Corporate Ethics 318 11.6 Conclusion 324 About the Author 327 Primary Contributor and Content Expert Coordinator 327 Reviewers and Contributors 327 Editorial and Production Teams 330 Editorial Team 330 Version Notes 332 Glossary 336 Copyright and License Information Strategic Management (c) 2020. Reed Kennedy. This book is licensed with a Creative Commons NonCommercial-ShareAlike 3.0 License. https://creativecommons.org/licenses/by-nc-sa/3.0/legalcode. You are free: To Share — to copy, distribute and transmit the work To Remix — to adapt the work Under the following conditions: Attribution — you must attribute the work in the manner specified by the author or licensor (but not in any way that suggests that they endorse you or your use of the work). Noncommercial — you may not use this work for primary commercial purposes. Share Alike — if you alter, transform, or build upon this work, you may distribute the resulting work only under the same or similar license to this one. Adaptation Attribution: This book is adapted from an open textbook produced and distributed under a Creative Commons license (CC BY NC-SA). This adapted edition is produced by Virginia Tech Publishing (http://publishing.vt.edu) through the University Libraries’ Open Education Initiative (https://guides.lib.vt.edu/oer/grantees). It is an adaptation of an edition produced in 2015 (https://open.lib.umn.edu/strategicmanagement) by the University of Minnesota Libraries Publishing through their eLearning Support Initiative. Whereas the University of Minnesota adapted and did not significantly update a 2010 version by a publisher who has requested that they and the original author not receive attribution, this version has been significantly updated. Version notes located in the back of the book describe changes and updates implemented in this version. Third-party works: All third-party works within the book (images, illustrations, etc.) retain their original licenses. We have undertaken diligent effort to clearly identify and attribute works reproduced under an open license, works used under fair use, and those in the Public Domain. Links to external content such but not limited to videos are not covered by the overall license on this book. Trademarks are the property of their respective owners. Suggested citation: Kennedy, Reed. (2020) Strategic Management. Blacksburg, VA: Virginia Tech Publishing. https://doi.org/10.21061/strategicmanagement CC BY NC-SA 3.0 Publisher: This work is published by Virginia Tech’s Pamplin College of Business in association with Virginia Tech Publishing. Copyright and License Information | ix Pamplin College of Business Pamplin Hall, RM 1030 880 West Campus Drive Blacksburg, VA 24061, USA Virginia Tech Publishing Virginia Tech University Libraries 560 Drillfield Drive Blacksburg, VA 24061, USA Peer Review: This work benefited from peer review and contributions of five subject matter experts; one recent business graduate also reviewed and contributed to this work. Accessibility Statement: Virginia Tech Publishing is committed to making its publications accessible in accordance with the Americans with Disabilities Act of 1990. The HTML and screen reader–friendly PDF versions of this book utilize header structures and include alternative text which allow for machine-readability. Publication Cataloging Information Kennedy, Reed, author Strategic Management / Reed Kennedy Pages cm ISBN 978-1-949373-94-3 (print-color) ISBN 978-1-949373-89-9 (print-black & white) ISBN 978-1-949373-96-7 (ebook-PDF) ISBN 978-1-949373-95-0 (ebook-Pressbooks) DOI: https://doi.org/10.21061/strategicmanagement 1. Management. 2. Strategy I. Title HD30.28.K45 Cover Design: Kindred Grey x | Copyright and License Information Acknowledgments Publication of this work was made possible in part by the University Libraries at Virginia Tech through its Open Education Initiative (https://guides.lib.vt.edu/oer/grants), which provides development assistance and financial support to Virginia Tech faculty who wish to use, create, or adapt openly licensed teaching materials to support student learning. The University Libraries also contributed faculty and staff labor. Reed Kennedy’s contributions were supported by the Pamplin College of Business at Virginia Tech. Acknowledgments | xi Introduction Goals for this Book This textbook is intended for seniors in undergraduate business programs taking a capstone course in strategic management. Most business school students begin with a broad introductory business course before concentrating on courses in their major. This textbook and corresponding course, MGT 4394 “Strategic Management,” are designed for the other end of the business curriculum. More specifically, the goal is to refocus business students from their major at the end of their time in school and help them understand how businesses become successful by leveraging their competitive advantages. While it is true that strategic management functions are typically the purview of senior leadership in a company, newly minted business graduates and their employers directly benefit when new employees understand their role in helping their organization to strategically achieve its goals. About this Book The book begins with a general introduction to the key themes and topics of strategic management. In the chapters that follow students first learn how to conduct a case analysis, measure organizational performance, and conduct external and internal analyses. Next they learn the various strategies used by firms: business/ competitive level, corporate level, international, and innovation strategies. The final two chapters focus on implementing strategy and corporate ethics. Ethical considerations are integrated throughout the textbook. Target Audience This textbook is intended for a wide range of business students including those majoring in marketing, management, business administration, accounting, finance, real estate, business information technology, and hospitality and tourism. Ideally, students in each of these majors will take a strategic management course during their final semester before graduation. This book will guide them through this course as they prepare to transition from the classroom to a competitive business marketplace. Features of this Book Example-rich narrative Graphic elements which illustrate and reinforce concepts Introduction | 1  Linked online glossary (glossary appears at the end for PDF and print) Numerous case examples and ‘Strategy at the Movies’ Section-level videos, key takeaways, and exercises Linked end of section references for additional reading Embedded navigation and image alt-text for screen readers Free online and in PDF, and in print at vendor cost of production Open license, Creative Commons BY NC-SA 3.0 (https://creativecommons.org/licenses/by-nc-sa/3.0) permits customization and sharing Instructor community portal enables sharing of ancillary resources Register your Use form allows instructors to opt in to receive book updates Errata and report-an-error/share-a-suggestion forms promote currency If course modules are used, the textbook easily separates into six modules. MODULE 1 Introduction to Strategic Management: Chapters 1 and 2 MODULE 2: External Analysis: Chapter 3 MODULE 3: Internal Firm Analysis: Chapters 4 and 5 MODULE 4: Innovation, Corporate and International Strategies: Chapters 6, 7, 8, and 9 MODULE 5: Executing Strategy: Chapter 10 MODULE 6: Leading an Ethical Organization: Chapter 11 For students who prefer to learn by listening, external video links are provided at the end of each section addressing the topic of that section. Other students may find these videos helpful as an alternative source of information and as an aid for review. The short introductions at the start of each chapter are intended to assist students in understanding the flow of the course, and how the chapter builds upon previous chapters. It also helps students to have a brief overview of the chapter and its content. The vignettes, illustrations, and examples use companies and personalities that today’s student would be familiar with. The pictures in the book should add interest to the student. Major terms that students need to know are hyperlinked with definitions. These terms and definitions are also provided in a glossary at the end of the book. Textbook Development Strategic Management is an adaptation of a previously published textbook (more on this below). A group of six strategic management instructors in the Pamplin College of Business at Virginia Tech were involved in deeply adapting, revising, supplementing, and developing that work into the textbook you are now reading. Kennedy, who had taught the course multiple times and served as the course coordinator, took the role of primary contributor and chief textbook reviser. The other five, all Ph.Ds in strategy or a related field, served as editors. 2 | Introduction In addition, the Research and Editorial Assistant, a recent Pamplin graduate provided a student perspective on the text, and the Design Specialist, a graduating senior, re-worked illustrations and created new figures to make them more presentable to students. The team of six editors revised the outline of the original textbook, deciding which topics to add and which ones to delete. After solidifying the outline, the lead author deleted extraneous content, composed new content, and updated content as needed. The five editors then made suggestions on content, format, illustrations, grammar, etc. Finally, the Assistant Director of Open Education in the University Libraries at Virginia Tech guided the book through the development and production processes leading up to its publication by Virginia Tech Publishing. Multiple staff formatted the text in Pressbooks, offered feedback to the editorial team, and provided copy editing and proofreading. The resulting book has been published in both online versions (Pressbooks, ePub, and PDF) and printable on-demand versions. Attribution and Scope of Revision This textbook is adapted from the openly licensed textbook Mastering Strategic Management (https://dx.doi.org/10.24926/8668.1401) published in 2011 under a Creative Commons Attribution NonCommercial ShareAlike 3.0 (https://creativecommons.org/licenses/by-nc-sa/3.0) licence, revised and hosted by the University of Minnesota Libraries Publishing Service in 2015. The 2011 version of the book was written by two authors who held administrative and leadership roles at major U.S. universities. It was published in 2011 by a publisher who requested that neither the authors nor publisher receive attribution. This new version uses much of the same content and structure of the 2011 and 2015 versions, with the following significant changes: Alignment of book to learning outcomes Updated examples and illustrations Addition of linked section-level videos Re-ordering of some chapters Addition of Chapter 5: Synthesis of Strategic Issues and Analysis” on the SWOT framework and strategic issues. Additional mini-case studies on The Bottom of the Pyramid and COVID-19 A more detailed list of changes is available in the book’s Version Notes at the end of the book. The revision process involved adding content in certain areas while removing dated or less relevant content to better align with learning objectives. We also gave the book a general refresh by adding illustrations, examples, and applications from companies and brands more relatable to today’s students. Strategy instructors collaborated to determine which content to supplement or delete. This coordinated effort from diverse perspectives provides more consistency among instructors in teaching the content of the course. An additional goal of the editorial team was to provide an affordable alternative to existing expensive strategic management textbooks. The ever-increasing costs of a college education convinced us that a strong, no-cost textbook would benefit not only Virginia Tech students but students at other colleges and universities as well. Introduction | 3 Impact Our hope for this textbook is that it will enlighten and prepare students for entering the business world. After reading it they should come away with a much better grasp of the ways that organizations operate at the strategic level to be successful. Not only will they be better accountants, or whatever their particular major is, they will be better prepared as employees, especially as they rise in responsibility and take on more strategic roles in their organizations. Ultimately, we hope they will become better critical thinkers and have the ability to analyze the full range of situations they will face in their professional lives. Also, it is hoped that instructors in other colleges and universities will appreciate the content and structure of this textbook and adopt it for their students, providing a textbook solution for them at no cost. 4 | Introduction Instructor Resources How to Adopt This Book This is an open textbook. That means that this book is freely available and you are welcome to use, adapt, and share this book with attribution according to the Creative Commons NonCommercial ShareAlike 3.0 (CC BY NC-SA 3.0) license https://creativecommons.org/licenses/by-nc-sa/3.0. (This license does not apply to third-party works (images, illustrations, etc.) Instructors reviewing, adopting, or adapting this textbook are encouraged to register at http://bit.ly/ strategy-interest. This assists Virginia Tech’s Open Education Initiative in assessing the impact of the book and allows us to more easily alert instructors of additional resources, features and opportunities. Finding Additional Resources for your Course The main landing page for the book is http://hdl.handle.net/10919/99282. This page includes: Links to multiple electronic versions of the textbook (PDF, ePub, HTML) Ordering information for softcover print-on-demand copies Links to supplementary resources Links to the instructor resource-sharing portal Link to errata document Sharing Resources You’ve Created Have you created any supplementary materials for use with Strategic Management such as presentation slides, activities, test items, or a question bank? If so, please consider sharing your materials related to this open textbook. Please tell us about resources you wish to share by using this form: http://bit.ly/strategy-interest or by directly sharing non-assessment resources under an open license to the public-facing instructor sharing portal https://www.oercommons.org/groups/strategic-management-instructor-group/5209. Instructor Resources | 5 Customizing this Book The Creative Commons Attribution NonCommercial-ShareAlike 3.0 license https://creativecommons.org/ licenses/by-nc-sa/3.0/legalcode on this book allows customization and redistribution which is NonCommercial, that is “not primarily intended for or directed towards commercial advantage or monetary compensation.” Best practices for attribution are provided at https://wiki.creativecommons.org/wiki/ Best_practices_for_attribution. This book was created in Pressbooks and is most easily customized using the Pressbooks platform or by editing on the PDF on a page-by-page basis. For additional considerations and methods of customization, see: Modifying an Open Textbook: What You Need to Know, https://press.rebus.community/otnmodify. Feedback To report an error or omission, please use https://bit.ly/strategic-feedback. We welcome additional feedback at [email protected]. 6 | Instructor Resources Chapter 1: Mastering Strategy: Art and Science 1.1 Introduction 1.2 What is Strategic Management? 1.3 Intended, Emergent, and Realized Strategies 1.4 The History of Strategic Management 1.5 Contemporary Critique of Strategic Management 1.6 Understanding the Strategic Management Process 1.7 Conclusion Learning Objectives After reading this chapter, you should be able to understand and articulate answers to the following questions: 1. What is the difference between strategic management and strategy? 2. Why does strategic management matter? 3. What are intended, emergent, and realized strategies? 4. What is the history of strategic management? 5. What is the basic strategic management process? 1.1 Introduction Successful organizations have found that a strategic management process helps them achieve their goals within a dynamic and competitive environment. Strategic management is a comprehensive process designed for firms to best use their resources and capabilities to provide superior firm performance. Analysis of the external, competitive, and internal environments help shape the strategies that a firm pursues to be successful. Strategies are broad goals that, as accomplished, help the organization move forward toward its vision. Strategy formation goes back to ancient times, particularly used in warfare. Although not perfect, the strategic management process creates a framework for an organization to look outside of itself and set a course for success. The remaining chapters in this textbook walk students through this framework, providing tools for Chapter 1: Mastering Strategy: Art and Science | 7 diagnosing the external, competitive, and internal environments to the development and implementation of strategies. The process should always be performed with a framework of corporate ethics and values to limit the temptation to cross the line where an organization should not go. Figure 1.1: Elon Musk, CEO of Tesla Will Tesla Make It? On January 7, 2020, Tesla Inc. became the most valuable US automaker in history. Valued at $81.39 billion, Tesla passed Ford Motor Company as most valuable. Approximately two weeks later, Tesla passed Volkswagen to become the second most valuable car company worldwide. Still well behind Toyota, which has a $233 billion market capitalization, Tesla’s growth is unprecedented in the automotive industry. Can Tesla become number one worldwide? Despite tremendous growth, Tesla has its share of problems as well. Its founder, Elon Musk, tweeted that the company’s stock price was too high; sending the stock tumbling, the Model 3 lost Consumer Reports recommendations, and COVID-19 shutdowns of factories slowed production. These problems raise serious questions. Will Elon’s Twitter use continue to cause problems? Are the quality problems going to tank Tesla’s growth? Can Tesla emerge from the COVID-19 shutdown successfully? The company faces stiff competition from automakers attempting to regain their footholds in a highly aggressive market. Competitors are attempting to compete in the same areas as Tesla. Porsche’s Taycan, a Tesla competitor, got a huge win with a purchase from Bill Gates. As competitors continue to develop autonomous capabilities and better electric batteries, will Tesla continue to dominate US auto markets? 8 | Chapter 1: Mastering Strategy: Art and Science References Langley, K. (2020, January 7). Tesla is now the most valuable US car maker of all time. Wall Street Journal. https://www.wsj.com/articles/tesla-is-now-the-most-valuable-u-s-car-maker-of-all-time-11578427858. Johnson, M. (2020 January 24). Tesla becomes world’s second most valuable carmaker. The Hill. https://thehill.com/policy/transportation/automobiles/479712-tesla-becomes-worlds-second-most- valuable-carmaker. Olsen, P. (2019, November 14). Tesla Model 3 loses CR recommendation over reliability issues. Consumer Reports. https://www.consumerreports.org/car-reliability-owner-satisfaction/tesla-model-3-loses-cr- recommendation-over-reliability-issues. Siddiqui, F. (2020, May 1). Tesla stock plummets more than 10 percent after Elon Musk tweets valuation is ‘too high.’ Washington Post. https://www.washingtonpost.com/technology/2020/05/01/musk-tesla-stock. Matousek, M. (2020, February 18). Elon Musk took a shot at Bill Gates after the Microsoft founder said he bought Porsche’s electric sports car instead of a Tesla — here are the details on Gates’ new car. Business Insider. https://www.businessinsider.com/porsche-reveals-taycan-turbo-and-taycan-turbo-s-production- model-2019-9. Image Credits Figure 1.1: Maurizio Pesce. Elon Musk at Tesla Factory Fremont CA. CC BY 2.0. Retrieved from https://flic.kr/p/emx5tu. 1.2 What is Strategic Management? Defining Strategic Management Issues such as those currently faced by Tesla are the focus of strategic management because they help answer the key question examined by strategic management—”Why do some firms outperform other firms?” More specifically, strategic management examines how actions and events involving top executives (such as Elon Musk), firms (Tesla), and industries (the electric car market) influence a firm’s success or failure. Strategic management involves the utilization or planned allocation of resources to implement major initiatives taken by executives on behalf of stakeholders to improve performance of firms in an environment. Formal tools exist for Chapter 1: Mastering Strategy: Art and Science | 9 understanding these relationships, and many of these tools are explained and applied in this book. But formal tools are not enough; creativity is just as important to strategic management. Mastering strategy is therefore part art and part science. This introductory chapter is intended to enable students to understand what strategic management is and why it is important. Because strategy is a complex concept, we begin by explaining what strategy is. Types of strategies and the history and critique of strategic management are introduced. Lastly, students are presented with the process of strategic management that firms use. Figure 1.2: Strategic management within a firm is accomplished by a team of senior people. Defining strategy is not simple. Strategy is a complex concept that involves many different processes and activities within an organization. It involves goals and objectives that an organization needs to achieve to be successful in the marketplace. The development of these goals, however, requires a strategic management process to be done correctly and thoroughly. A strategy is typically a higher level, broad goal, without a lot of specifics. It is long-term in nature. It provides the direction that an organization wants to move toward to be more successful. New or revised strategies may be developed as a result of changes in the business environment, such as what happened during the COVID-19 pandemic. Firms also routinely revise or create new strategies, often annually, by assessing and reacting to external and competitive forces and to maximize organizational performance. By identifying their resources and capabilities, firms attempt to deploy these through strategies that will give them a competitive advantage, so consumers will buy their product or service instead of a competitor’s. 10 | Chapter 1: Mastering Strategy: Art and Science  Section Video What is Strategic Management? What does Strategic Management mean? [03:48] The video for this section further explains strategic management and strategies. You can view this video here: https://youtu.be/g-wf6A0ailA. Key Takeaway Strategic management focuses on firms and the different strategies that they use to become and remain successful. Firms develop strategies, or longer range goals, to achieve success in the competitive marketplace. In the dynamic environment in which firms exist, firms may alter their strategies as conditions change. Exercises 1. Have you developed a strategy to manage your career? Should you make it more detailed? Why or why not? 2. What business that you visit regularly seems to have the most successful business model? What makes the business model work? References Markoff, J. (1996, May 14). Apple unveils strategic plan of small steps. New York Times. http://www.nytimes.com/1996/05/14/business/apple-unveils-strategic -plan-of-small-steps.html. Porter, M. E. (1996, November–December). What is strategy? Harvard Business Review, 61–79. Chapter 1: Mastering Strategy: Art and Science | 11 Reuters. (2011, March 1). Philadelphia area pizza owner used mice vs. competition—police. Reuters. https://www.reuters.com/article/us-crime-pizza-idUSTRE7207MU20110301. Image Credits Figure 1.2: fauxels (2019). “Photo of people looking on laptop.” CC BY-SA 4.0. Retrieved from https://www.pexels.com/photo/photo-of-people-looking-on-laptop-3182812/. Video Credits Audiopedia. (2017, April 4). What is strategic management? What does strategic management mean? [Video]. YouTube. https://youtu.be/g-wf6A0ailA. 1.3 Intended, Emergent, and Realized Strategies A few years ago, a consultant posed a question to thousands of executives: “Is your industry facing overcapacity and fierce price competition?” All but one said “yes.” The only “no” came from the manager of a unique operation—the Panama Canal! This manager was fortunate to be in charge of a venture whose services are desperately needed by shipping companies and that offers the only simple route linking the Atlantic and Pacific Oceans. The canal’s success could be threatened if transoceanic shipping were to cease or if a new canal were built. Both of these possibilities are extremely remote, however, so the Panama Canal appears to be guaranteed to have many customers for as long as anyone can see into the future. When an organization’s environment is stable and predictable, strategic planning can provide enough of a strategy for the organization to gain and maintain success. The executives leading the organization can simply create a plan and execute it, and they can be confident that their plan will not be undermined by changes over time. But as the consultant’s experience shows, only a few executives—such as the manager of the Panama Canal—enjoy a stable and predictable situation. Because change affects the strategies of almost all organizations, understanding the concepts of intended, emergent, and realized strategies is important (Table 1.1). Also relevant are deliberate and unrealized strategies. The relationships among these five concepts are presented in Figure 1.3, “A Model of Intended, Deliberate, and Realized Strategy” (Mintzberg & Waters, 1985). 12 | Chapter 1: Mastering Strategy: Art and Science  Table 1.1 Strategic Planning and Learning: Intended, Emergent, and Realized Strategies Intended Strategy Emergent Strategy Realized Strategy The company changed its name to Avon David McConnell aspired to be a The perfumes McConnell gave out in 1939, and its direct marketing system writer. When his books weren’t selling with his books were popular, remained popular for decades. Avon is he decided to give out perfume as a inspiring the foundation of the now available online and in retail outlets gimmick. California Perfume Company. worldwide. When father and son team Scott and ESPN is now billed as the worldwide Don Rasmussen were fired from the As the network became successful, leader in sports, owning several ESPN New England Whalers, they ESPN has branched out beyond the affiliates as well as production of ESPN envisioned a cable television network local softball games and demolition magazine, ESPN radio, and broadcasting that focused on sports events in the derbies that were first broadcasted. for ABC. state of Connecticut. In 1977, a cash-strapped advertiser An idea emerged. Soon the radio The Home Shopping Network evolved gave a radio station managed by station featured a regular show into a retail powerhouse selling on their Lowell Paxson 112 electric can openers called “Suncoast Bargaineers.” In own channel on television. With the to pay off an overdue bill. The can 1982, Paxson and a partner launched increased popularity of online shopping openers were offered over the air for the Home Shopping Club on local and competitors like Amazon, their $9.95 and quickly sold out. cable television in Florida. success has faltered. Figure 1.3: A Model of Intended, Deliberate, and Realized Strategy Intended Strategy An intended strategy is the strategy that an organization hopes to execute. Intended strategies are usually described in detail within an organization’s strategic plan. When a strategic plan is created for a new venture, it is called a business plan. As an undergraduate student at Yale in 1965, Frederick Smith had to complete a business plan for a proposed company as a class project. His plan described a delivery system that would gain Chapter 1: Mastering Strategy: Art and Science | 13 efficiency by routing packages through a central hub and then pass them to their destinations. A few years later, Smith started Federal Express (Funding Universe, n.d.), a company whose strategy closely followed the plan laid out in his class project. FedEx has achieved a ranking among the World’s Most Admired Companies according to Fortune magazine. Certainly, Smith’s intended strategy has worked out far better than even he could have dreamed (Donahoe, 2011; Memphis Business Journal, 2011). Emergent Strategy Emergent strategy has also played a role at Federal Express. An emergent strategy is an unplanned strategy that arises in response to unexpected opportunities and/or challenges. Sometimes emergent strategies result in disasters. In the mid-1980s, FedEx deviated from its intended strategy’s focus on package delivery to capitalize on an emerging technology: facsimile (fax) machines. The firm developed a service called ZapMail that involved documents being sent electronically via fax machines between FedEx offices and then being delivered to customers’ offices. FedEx executives hoped that ZapMail would be a success because it reduced the delivery time of a document from overnight to just a couple of hours. Unfortunately, the ZapMail system had many technical problems that frustrated customers. Even worse, FedEx failed to anticipate that many businesses would simply purchase their own fax machines. ZapMail was shut down, and FedEx lost hundreds of millions of dollars following its failed emergent strategy. In retrospect, FedEx made a costly mistake by venturing outside of the domain that was central to its intended strategy: package delivery (Funding Universe, n.d.). Emergent strategies can also lead to tremendous success. Southern Bloomer Manufacturing Company was founded to make underwear for use in prisons and mental hospitals. Many managers of such institutions believe that the underwear made for retail markets by companies such as Calvin Klein and Hanes is simply not suitable for the people under their care. Instead, underwear issued to prisoners needs to be sturdy and durable to withstand the rigors of prison activities and laundering. To meet these needs, Southern Bloomers began selling underwear made of heavy cotton fabric. An unexpected opportunity led Southern Bloomer to go beyond its intended strategy of serving institutional needs for durable underwear. Just a few years after opening, Southern Bloomer’s performance was excellent. It was servicing the needs of about 125 facilities, but unfortunately, this was creating a vast amount of scrap fabric. An attempt to use the scrap as stuffing for pillows had failed, so the scrap was being sent to landfills. This was not only wasteful but also costly. One day, co-founder Don Sonner visited a gun shop with his son. Sonner had no interest in guns, but he quickly spotted a potential use for his scrap fabric during this visit. The patches that the gun shop sold to clean the inside of gun barrels were of poor quality. According to Sonner, when he “saw one of those flimsy woven patches they sold that unraveled when you touched them, I said, “Man, that’s what I can do” with the scrap fabric. Unlike other gun-cleaning patches, the patches that Southern Bloomer sold did not give off threads or lint, two by-products that hurt guns’ accuracy and reliability. The patches quickly became popular with the military, police departments, and individual gun enthusiasts. Before long, Southern Bloomer was selling thousands of pounds of patches per month. A casual trip to a gun store unexpectedly gave rise to a lucrative emergent strategy (Wells, 2002). 14 | Chapter 1: Mastering Strategy: Art and Science Realized Strategy A realized strategy is the strategy that an organization actually follows. Realized strategies are a product of a firm’s intended strategy (i.e., what the firm planned to do), the firm’s deliberate strategy (i.e., the parts of the intended strategy that the firm continues to pursue over time), and its emergent strategy (i.e., what the firm did in reaction to unexpected opportunities and challenges). In the case of FedEx, the intended strategy devised by its founder many years ago—fast package delivery via a centralized hub—remains a primary driver of the firm’s realized strategy. For Southern Bloomers Manufacturing Company, realized strategy has been shaped greatly by both its intended and emergent strategies, which center on underwear and gun-cleaning patches. In other cases, firms’ original intended strategies are long forgotten. An unrealized strategy refers to the abandoned parts of the intended strategy. When aspiring author David McConnell was struggling to sell his books, he decided to offer complimentary perfume as a sales gimmick. McConnell’s books never did escape the stench of failure, but his perfumes soon took on the sweet smell of success. The California Perfume Company was formed to market the perfumes; this firm evolved into the personal care products juggernaut known today as Avon. For McConnell, his dream to be a successful writer was an unrealized strategy, but through Avon, a successful realized strategy was driven almost entirely by opportunistically capitalizing on change through emergent strategy. Strategy at the Movies The Social Network Did Harvard University student Mark Zuckerberg set out to build a billion-dollar company with more than 2.6 billion active users? Not hardly. As shown in 2010’s The Social Network, Zuckerberg’s original concept in 2003 had a dark nature. After being dumped by his girlfriend, a bitter Zuckerberg created a website called “FaceMash” where the attractiveness of young women could be voted on. This evolved first into an online social network called TheFacebook that was for Figure 1.4: The Social Network demonstrates how founder Mark Zuckerberg’s intended strategy gave way to an Harvard students only. When the network emergent strategy via the creation of Facebook. became surprisingly popular, it then morphed into Facebook, a website open to everyone. Facebook is so pervasive today that it has changed the Chapter 1: Mastering Strategy: Art and Science | 15  way we speak, such as the word friend being used as a verb. Ironically, Facebook’s emphasis on connecting with existing and new friends is about as different as it could be from Zuckerberg’s original mean-spirited concept. Certainly, Zuckerberg’s emergent and realized strategies turned out to be far nobler than the intended strategy that began his adventure in entrepreneurship. Key Takeaway Most organizations create intended strategies that they hope to follow to be successful. Over time, however, changes in an organization’s situation give rise to new opportunities and challenges. Organizations respond to these changes using emergent strategies. Realized strategies are a product of both intended and realized strategies. Exercises 1. What is the difference between an intended and an emergent strategy? 2. Can you think of a company that seems to have abandoned its intended strategy? Why do you suspect it was abandoned? 3. Would you describe your career strategy in college to be more deliberate or emergent? Why? References Donahoe, J. A. (2011). Forbes: Fred Smith’s fortune grows to $.21B. Memphis Business Journal. http://www.bizjournals.com/memphis/news/2011/03/10/forbes-fred-smiths-fortune-grows-to.html. Funding Universe. (n.d.). Fedex Corporation History. http://www.fundinguniverse.com/company -histories/FedEx-Corporation-Company-History.html. Fortune: FedEx 8th ‘most admired’ company in the world. Memphis Business Journal. (2011). http://www.bizjournals.com/memphis/news/2011/03/03/fortune-fedex-8th-most- admired.html. 16 | Chapter 1: Mastering Strategy: Art and Science Mintzberg, H., & Waters, J. A. (1985). Of strategies, deliberate and emergent. Strategic Management Journal, 6, 257–272. Wells, K. (2002). Floating off the page: The best stories from the Wall Street Journal’s middle column. Simon & Schuster. pg 97. Image Credits Figure 1.3: Kindred Grey (2020). “Intended, Deliberate, Realized Strategy.” CC BY-SA 4.0. Retrieved from https://commons.wikimedia.org/wiki/File:Intended,_Deliberate,_Realized_Strategy.png. Figure 1.4: Anthony Quintano (2018). “Mark Zuckerberg F8 2018 Keynote.” CC BY 2.0. Retrieved from https://commons.wikimedia.org/wiki/File:Mark_Zuckerberg_F8_2018_Keynote.jpg. 1.4 The History of Strategic Management Those who cannot remember the past are condemned to repeat it. – George Santayana, The Life of Reason Santayana’s quote has strong implications for strategic management. The history of strategic management can be traced back several thousand years. Great wisdom about strategy can be acquired by understanding the past, but ignoring the lessons of history can lead to costly strategic mistakes that could have been avoided. Certainly, the present offers very important lessons; businesses can gain knowledge about what strategies do and do not work by studying the current actions of other businesses. But this section discusses two less obvious sources of wisdom: (1) strategy in ancient times and (2) military strategy. This section also briefly traces the development of strategic management as a field of study. Strategy in Ancient Times Perhaps the earliest-known discussion of strategy is offered in the Old Testament of the Bible (Bracker, 1980). Approximately 3,500 years ago, Moses faced quite a challenge after leading his fellow Hebrews out of enslavement in Egypt. Moses was overwhelmed as the lone strategist at the helm of a nation that may have exceeded one million people. Based on advice from his father-in-law, Moses began delegating authority to other leaders, each of whom oversaw a group of people. This hierarchical delegation of authority created a command structure that freed Moses to concentrate on the biggest decisions and helped him implement his strategies (Table 1.2 “Strategy in Ancient Times”). Similarly, the demands of strategic management today are simply too Chapter 1: Mastering Strategy: Art and Science | 17 much for a chief executive officer (the top leader of a company) to handle alone. Many important tasks are thus entrusted to vice presidents and other executives. In ancient China, strategist and philosopher Sun Tzu offered thoughts on strategy that continue to be studied carefully by business and military leaders today. Sun Tzu’s best-known work is The Art of War. As this title implies, Sun Tzu emphasized the creative and deceptive aspects of strategy. Strategic management borrows many ideas from ancient uses of strategy over time. The following anecdotes provide a few notable examples of historical actions that remain relevant for the study of modern strategy. Indeed, the Greek verb strategos means “army leader” and the idea of stratego ( from which we get the word strategy) refers to the idea of destroying one’s enemies through the effective use of resources. Table 1.2 Strategy in Ancient Times 1491 BC: Moses uses hierarchical delegation of authority during the exodus from Egypt. Dividing a large set of people into smaller groups creates a command structure that enables strategies to be implemented. 500 BC: Sun Tzu’s The Art of War provides a classic handbook on military strategy with numerous business applications, such as the idea “to win without fighting is the best.” This type of approach was used by businesses, such as Gap Inc. when they decided to create their own stores rather than competing for shelf space for their clothing within traditional department stores. 70 BC: Roman poet Virgil tells the story of the Trojan horse, a classic strategic ploy where the Greek forces hid a select number of soldiers in a large wooden horse that the Trojan army took into their heavily guarded city gates. Once inside the city, Greek soldiers were able to open the gates and allow in reinforcements which eventually led to the end of the war. c. 530: King Arthur rules Britain. Legend says he made his famed round table so that no one, including him, would be seen as above the others. His mission to find the Holy Grail serves as an exemplar for the importance of the central mission to guide organizational actions. One of Sun Tzu’s ideas that has numerous business applications is that winning a battle without fighting is the best way to win. Apple’s behavior in the personal computer business offers a good example of this idea in action. Many computer makers such as Toshiba, Acer, and Lenovo compete with one another based primarily on price. This leads to price wars that undermine the computer makers’ profits. In contrast, Apple prefers to develop unique features for its computers, features that have created a fiercely loyal set of customers. Apple boldly charges far more for its computers than its rivals charge for theirs. Apple does not even worry much about whether its computers’ software is compatible with the software used by most other computers. Rather than fighting a battle with other firms, Apple wins within the computer business by creating its own unique market and by attracting a set of loyal customers. Sun Tzu would probably admire Apple’s approach. Perhaps the most famous example of strategy in ancient times revolves around the Trojan horse. According to legend, Greek soldiers wanted to find a way to enter the gates of Troy and attack the city from the inside. They devised a ploy that involved creating a giant wooden horse, hiding soldiers inside the horse, and offering the horse to the Trojans as a gift. The Trojans were fooled and brought the horse inside their city. When night arrived, the hidden Greek soldiers opened the gates for their army, leading to a Greek victory. In modern times, 18 | Chapter 1: Mastering Strategy: Art and Science the term Trojan horse refers to gestures that appear on the surface to be beneficial to the recipient but that mask a sinister intent. Computer viruses also are sometimes referred to as Trojan horses. A far more noble approach to strategy than the Greeks’ is attributed to King Arthur of Britain. Unlike the hierarchical approach to organizing Moses used, Arthur allegedly considered himself and each of his knights to have an equal say in plotting the group’s strategy. Indeed, the group is thought to have held its meetings at a round table so that no voice, including Arthur’s, would be seen as more important than the others. The choice of furniture in modern executive suites is perhaps revealing. Most feature rectangular meeting tables, perhaps signaling that one person—the chief executive officer—is in charge. Another implication for strategic management offered by King Arthur and his Knights of the Round Table involves the concept of mission. Their vigorous search to find the Holy Grail (the legendary cup used by Jesus and his disciples at the Last Supper) serves as an exemplar for the importance of a central mission to guide organizational strategy and actions. Lessons Offered by Military Strategy Key military conflicts and events have shaped the understanding of strategic management (Table 1.3). Indeed, the word strategy has its roots in warfare. The Greek verb strategos means “army leader” and the idea of stratego (from which we get the word strategy) refers to defeating an enemy by effectively using resources (Bracker, 1980). A book written nearly five hundred years ago is still regarded by many as an insightful guide for conquering and ruling territories. Niccolò Machiavelli’s 1532 book The Prince offers clever recipes for success to government leaders. Some of the book’s suggestions are quite devious, and the word Machiavellian is used today to refer to acts of deceit and manipulation. Two wars fought on American soil provide important lessons about strategic management. In the late 1700s, the American Revolution pitted the American colonies against mighty Great Britain. The Americans relied on nontraditional tactics, such as guerilla warfare and the strategic targeting of British officers. Although these tactics were considered by Great Britain to be barbaric, they later became widely used approaches to warfare. The Americans owed their success in part to help from the French navy, illustrating the potential value of strategic alliances. Nearly a century later, Americans turned on one another during the Civil War. After four years of hostilities, the Confederate states were forced to surrender. Historians consider the Confederacy to have had better generals, but the Union possessed greater resources, such as factories and railroad lines. As many modern companies have discovered, sometimes good strategies simply cannot overcome a stronger adversary. Chapter 1: Mastering Strategy: Art and Science | 19  Two wars fought on Russian soil also offer insights. In the 1800s, a powerful French invasion force was defeated in part by the brutal nature of Russian winters. In the 1940s, a similar fate befell German forces during World War II. Against the advice of some of his leading generals, Adolf Hitler ordered his army to conquer Russia. Like the French before them, the Germans were able to penetrate deep into Russian territory. As George Santayana had warned, however, the forgotten past was about to repeat itself. Horrific cold stopped the German advance. Russian forces eventually took control of the combat, and Hitler committed suicide as the Russians approached the German capital, Berlin. Five years earlier, Germany ironically had benefited from an opponent ignoring the strategic management lessons of the past. In ancient times, the Romans had assumed that no army could cross a mountain range known as the Alps. An enemy general named Hannibal put his men on elephants, crossed the mountains, and Figure 1.5: General Hannibal from Carthage, who led his caught Roman forces unprepared. French commanders made a similar bad troops on elephants to cross assumption in 1940. When Germany invaded Belgium (and then France) in 1940, its the Alps to attack the Romans. strategy caught French forces by surprise. The top French commanders assumed that German tanks simply could not make it through a thickly wooded region known as the Ardennes Forest. As a result, French forces did not bother preparing a strong defense in that area. Most of the French army and their British allies instead protected against a small, diversionary force that the Germans had sent as a deception to the north of the forest. German forces made it through the forest, encircled the allied forces, and started driving them toward the ocean. Many thousands of French and British soldiers were killed or captured. In retrospect, the French generals had ignored an important lesson of history: do not make assumptions about what your adversary can and cannot do. Executives who make similar assumptions about their competitors put their organizations’ performance in jeopardy. Strategic management often borrows lessons as well as metaphors from classic military strategy. For example, major business decisions are often categorized as “strategic” while more minor decisions (such as small changes in price or the opening of a new location) are referred to as “tactical” decisions. Here are a few select examples of classic military strategies that hold insights for strategic decisions today. 20 | Chapter 1: Mastering Strategy: Art and Science  Table 1.3 Classic Military Strategy 1532: Machiavelli’s book The Prince offers clever recipes for success to government leaders. Some of the book’s suggestions are quite devious, and the word Machiavellian comes to refer to acts of deceit and manipulation. 1775: The American Revolutionary War between the United States and Great Britain begins. Weaker American forces win the war in part by relying on nontraditional tactics such as guerrilla warfare and the strategic targeting of British officers. They also depend on help from the French navy, illustrating the potential value of strategic alliances. 1815: Napoleon’s defeat at Waterloo demonstrates how spreading resources too thin can result in defeat of even one of the most famed militaries of all time. 1865: The American Civil War ends. Historians consider the Confederacy to have had better generals, but the Union possessed greater resources. Sometimes good strategies simply cannot overcome a stronger adversary. 1944: Following a series of deceptions designed to confuse and fool German forces, the Allies launch the D-Day invasion in an effort to liberate Europe from Nazi control. Strategic Management as a Field of Study Universities contain many different fields of study, including physics, literature, chemistry, computer science, and engineering. Some fields of study date back many centuries (e.g., literature), while others (such as computer science) have emerged only in recent years. Strategic management has been important throughout history, but the evolution of strategic management into a field of study has mostly taken place over the past century. A few of the key business and academic events that have helped the field develop are discussed next. The ancient Chinese strategist Sun Tzu made it clear that strategic management is partially art. But it is also part science. Major steps toward developing the scientific aspect of strategic management were taken in the early twentieth century by Frederick W. Taylor. In 1911, Taylor published The Principles of Scientific Management. The book was a response to Taylor’s observation that most tasks within organizations were organized haphazardly. Taylor believed that businesses would be much more efficient if management principles were derived through scientific investigation. In The Principles of Scientific Management, Taylor stressed how organizations could become more efficient through identifying the “one best way” of performing important tasks. Implementing Taylor’s principles was thought to have saved railroad companies hundreds of millions of dollars. Although many later works disputed the merits of trying to find the “one best way,” Taylor’s emphasis on maximizing organizational performance became the core concern of strategic management as the field developed. Also in the early twentieth century, automobile maker Henry Ford emerged as one of the pioneers of strategic management among industrial leaders. At the time, cars seemed to be a luxury item for wealthy people. Ford adopted a unique strategic perspective, however, and boldly offered the vision that he would make cars the average family could afford. Building on ideas about efficiency from Taylor and others, Ford organized assembly Chapter 1: Mastering Strategy: Art and Science | 21 lines for creating automobiles that lowered costs dramatically. Despite his wisdom, Ford also made mistakes. Regarding his company’s flagship product, the Model T, Ford famously stated, “Any customer can have a car painted any color that he wants so long as it is black.” When rival automakers provided customers with a variety of color choices, Ford had no choice but to do the same. The acceptance of strategic management as a necessary element of business school programs took a major step forward in 1959. A widely circulated report created by the Ford Foundation recommended that all business schools offer a capstone course. The goal of this course would be to integrate knowledge across different business fields such as marketing, finance, and accounting to help students devise better ideas for addressing complex business problems. Rather than seeking a “one best way” solution, as advocated by Taylor and Harvard’s business policy course, this capstone course would emphasize students’ critical thinking skills in general and the notion that multiple Figure 1.6: The Model T Ford, the first production car produced on an assembly line. ways of addressing a problem could be equally successful in particular. The Ford Foundation report was a key motivator that led US universities to create strategic management courses in their undergraduate and master of business administration programs. Although strategy has been important throughout history, strategic management as a field of study has largely developed over the past century. Below are a few key business and academic events that have helped the field evolve. 22 | Chapter 1: Mastering Strategy: Art and Science  Table 1.4 The Modern History of Strategic Management Year Notable event 1909 Ford first produces its classic Model T. 1911 Frederick W. Taylor publishes The Principles of Scientific Management. The precursor to the modern strategic management course was created at Harvard Business School under the title of 1912 “Business Policy.” 1925 A&W Root Beer becomes America’s first franchised restaurant chain. The Ford Foundation recommends that business school curricula include a capstone course that integrates knowledge 1959 across business fields in order to help solve complex business problems. 1962 Alfred Chandler publishes Strategy and Structure: Chapters in the History of the Industrial Enterprise. Sam Walton opens the first Wal-Mart in Arkansas, relying on a strategy that emphasized low prices and high levels of 1962 customer service. 1980 The Strategic Management Journal is created. 1995 The launch of Amazon.com by founder Jeff Bezos is perhaps the pivotal event in creating internet-based commerce. Enron Corporation declares bankruptcy after a series of disclosures reveal that the firm’s stellar performance had been 2001 a product of fraud and corruption. Thomas Friedman’s book The World is Flat: A Brief History of the Twenty-First Century suggests that many advantages 2005 that firms in developed countries like the United States take for granted are disappearing. 2010 Walmart becomes the largest company in the world. 2018 Apple becomes the first company to be worth $1 trillion. 2020 Walmart is still the highest revenue producing company in the world. In 1962, business and academic events occurred that seemed minor at the time but that would later give rise to huge changes. Building on the business savvy that he had gained as a franchisee, Sam Walton opened the first Walmart in Rogers, Arkansas. Relying on a strategy that emphasized low prices and high levels of customer service, Walmart grew to 882 stores with a combined $8.4 billion dollars in annual sales by 1985. A decade later, sales reached $93.6 billion across nearly 3,000 stores. In 2010, Walmart was the largest company in the world. In recent years, Walmart has arguably downplayed customer service in favor of cutting costs. Time will tell whether deviating from Sam Walton’s original strategic positioning will hurt the company. Two pivotal events that firmly established strategic management as a field of study took place in 1980. One was the creation of the Strategic Management Journal. The introduction of the journal offered a forum for researchers interested in building knowledge about strategic management. Much like important new medical findings that appear in the Journal of the American Medical Association and The New England Journal of Medicine, the Strategic Management Journal publishes path breaking insights about strategic management. The second pivotal event in 1980 was the publication of Competitive Strategy: Techniques for Analyzing Industries and Competitors by Harvard professor Michael Porter. This book offers concepts such as five forces analysis and generic strategies that continue to strongly influence how executives choose strategies more than thirty years after the book’s publication. Given the importance of these concepts, both five forces analysis and Chapter 1: Mastering Strategy: Art and Science | 23 generic strategies are discussed in detail in Chapter 3 “Evaluating the External Environment” and Chapter 6 “Selecting Business-Level Strategies”, respectively. Many consumers today take web-based shopping for granted, but this channel for commerce was created recently. The 1995 launch of Amazon by founder Jeff Bezos was perhaps the pivotal event in creating internet- based commerce. In pursuit of its vision “to be earth’s most customer-centric company,” Amazon has diversified far beyond its original focus on selling books and has evolved into a dominant retailer. Powerful giants have stumbled badly in Amazon’s wake. Sears had sold great varieties of goods (even including entire houses) through catalogs for many decades, as had JCPenney. Neither firm created a strong online sales presence to keep pace with Amazon, and both eventually dropped their catalog businesses. As often happens with old and large firms, Sears and JCPenney were outmaneuvered by a creative and versatile upstart. Ethics have long been an important issue within the strategic management field. Attention to the need for executives to act ethically when creating strategies increased dramatically in the early 2000s when a series of companies such as Enron Corporation, WorldCom, Tyco, Qwest, and Global Crossing were found to have grossly exaggerated the strength of their performance. After a series of revelations about fraud and corruption, investors in these firms and others lost billions of dollars, tens of thousands of jobs were lost, and some executives were sent to prison. Like ethics, the implications of international competition are of central interest to strategic management. Provocative new thoughts on the nature of the international arena were offered in 2005 by Thomas L. Friedman. In his book The World Is Flat: A Brief History of the Twenty-First Century, Friedman argues that many of the advantages that firms in developed countries such as the United States, Japan, and Great Britain take for granted are disappearing. One implication is that these firms will need to improve their strategies if they are to remain successful. Looking to the future, it appears likely that strategic management will prove to be more important than ever. In response, researchers who are interested in strategic management will work to build additional knowledge about how organizations can maximize their performance. Executives will need to keep track of the latest scientific findings. Meanwhile, they also must leverage the insights that history offers on how to be successful while trying to avoid past mistakes. Key Takeaway Although strategic management as a field of study has developed mostly over the last century, the concept of strategy is much older. Understanding strategic management can benefit greatly by learning the lessons that ancient history and military strategy provide. 24 | Chapter 1: Mastering Strategy: Art and Science  Exercises 1. What do you think was the most important event related to strategy in ancient times? 2. In what ways are the strategic management of business and military strategy alike? In what ways are they different? 3. Do you think executives are more ethical today as a result of the scandals in the early 2000s? Why or why not? References Bracker, J. (1980). The historical development of the strategic management concept. Academy of Management Review, 5(2), 219–224. Image Credits Figure 1.5: Verlag, Phaidon. “A marble bust, reputedly of Hannibal, originally found at the ancient city-state of Capua in Italy.” Public Domain. Retrieved from https://commons.wikimedia.org/wiki/ File:Mommsen_p265.jpg. Figure 1.6: ModelTMitch. “1925 Ford Model T touring, built at Henry Ford’s Highland Park Plant in Dearborn, Michigan.” CC BY-SA 4.0. Cropped. Retrieved from https://commons.wikimedia.org/wiki/File:1925_Ford_Model_T_touring.jpg. 1.5 Contemporary Critique of Strategic Management This book focuses attention on the widely accepted approaches that frame the contemporary practice and understanding of strategic management. The field of strategic management has always had its critics, and, as with any academic discipline, this criticism has challenged the field to adapt and improve over time. Over time, both practitioners and scholars have voiced concerns about various areas of the strategic management process, and this section summarizes the general critiques to deepen your own ability to critically consider the processes of strategic management in your own organizations and career. The kinds of concerns about strategic management differ depending upon who is voicing them. From the Chapter 1: Mastering Strategy: Art and Science | 25 perspective of firm managers or executives, commonly expressed concerns target the high levels of investment required in order to get more benefit than cost from an effective strategic management process. For strategic management to be done well, it is typically a complex process that is high in cost, time, and difficulty (Cameron, 2019; Katsanos, 2019). Further, some decision makers are skeptical of the ability of strategic management to achieve its goal: to accurately anticipate an unknown future (Cameron, 2019; Llopis, 2019). Some critics go so far as to suggest that committing to a strategy may limit a firm’s ability to respond to a changing environment when companies “make future decisions on obsolete data” (Cameron, 2019). In the opening paragraph of Michael Raynor’s bestselling book The Strategy Paradox, he says: “Most strategies are built on specific beliefs about the future. Unfortunately, the future is deeply unpredictable. Worse, the requirements of breakthrough success demand implementing strategy in ways that make it impossible to adapt should the future not turn out as expected. The result is the Strategy Paradox: strategies with the greatest possibility of success also have the greatest possibility of failure” (2007, p. 1). In his book, Mr. Raynor goes on to discuss that survivorship bias is an issue because the strategies of firms that survive are evaluated more than those that fail. The issue of survivorship bias also is a research area within the field of strategic management. Additionally, other strategy scholars raise concerns about how the dominant approaches to strategic management reinforce existing assumptions about power and inequalities within organizations (e.g., affecting gender, race, etc.) and in the global market (i.e., reproducing the same “winners” and “losers”) (Knights & Morgan, 1991; Levy et al., 2011; Montgomery et al., 1989). Some critiques focus on the inadequacies of specific strategic tools or theories. For example, some scholars challenge existing firm-level, resource-based approaches for its inability to adequately assess and capture changing contexts and capabilities (resource-based approaches are introduced in Chapter 5) (Bromiley & Fleming, 2002; Teece, 2019). Finally, the field of strategic management has been critiqued for being too concerned with achieving immediate, business “results” (Montgomery et al., 1989), and at other times, for not being attuned enough to the real-time, practical needs of business (Pricop, 2012). It is evident that there are plenty of reasons to think critically about how a firm’s decision makers choose to engage in their strategic management processes. Ultimately, responsibility for determining a firm’s strategic approach is left to the discretion of the firm’s executive team. While the theories, tools, and resources introduced throughout this text are well-researched, time-tested, and best practices in the field of strategic management, no approach is perfect, nor is it intended to be. References Bromiley, P., & Fleming, L. (2002). 15. The resource-based view of strategy: a behaviorist critique. The Economics of Choice, Change and Organization: Essays in Memory of Richard M. Cyert (319). Edward Elgar Publishing. Cameron, S. (2019). What are some disadvantages of strategic management? bizfluent. https://bizfluent.com/info-7933037-disadvantages-strategic-management.html 26 | Chapter 1: Mastering Strategy: Art and Science Katsanos, K. (2019). What are some disadvantages of strategic management. Chron. https://smallbusiness.chron.com/disadvantages-strategic-management-80740.html Knights, D., & Morgan, G. (1991). Corporate strategy, organizations, and subjectivity: A critique. Organization Studies, 12(2), 251-273. Levy, D. L., Alvesson, M., & Willmott, H. (2011). Critical approaches to strategic management. In M. Alvesson & H. Willmott (Eds.), Critical Management Studies, 14, 92-110. Los Angeles: Sage. Llopis, G. (2019). Corporate strategies were not designed for today’s age of personalization. Forbes. https://www.forbes.com/sites/glennllopis/2019/11/04/corporate-strategies-were-not-designed-for- todays-age-of-personalization/#5da602a51d06 Montgomery, C. A., Wernerfelt, B., & Balakrishnan, S. (1989). Strategy content and the research process: A critique and commentary. Strategic Management Journal, 10(2), 189-197. Pricop, O. C. (2012). Critical aspects in the strategic management theory. Procedia – Social and Behavioral Sciences, 58, 98-107. doi:https://doi.org/10.1016/j.sbspro.2012.09.983 Raynor, M. E. (2007). The strategy paradox: Why committing to success leads to failure (and what to do about it). Currency. Teece, D. J. (2019). A capability theory of the firm: an economics and (strategic) management perspective. New Zealand Economic Papers, 53(1), 1-43. 1.6 Understanding the Strategic Management Process Strategic management is a process that involves building a careful understanding of how the world is changing, as well as a knowledge of how those changes might affect a particular firm. CEOs, such as late Apple founder Steve Jobs, must be able to carefully manage the possible actions that their firms might take to deal with changes that occur in their environment. We present a model of the strategic management process in Figure 1.7, “Overall Model of the Strategic Management Process”. This model also guides our presentation of the chapters contained in this book. Chapter 1: Mastering Strategy: Art and Science | 27  Figure 1.7: Overall Model of the Strategic Management Process The strategic management process begins with an understanding of strategy and performance. As we have noted in this introductory chapter, strategic management is both an art and a science, and it involves multiple conceptualizations of the notion of strategy drawn from recent and ancient history. In Chapter 2 “Assessing Organizational Performance”, we focus on how the organization’s mission and vision shape the development of the firm’s strategy. Consequently, how managers understand and interpret the performance of their firms is often central to understanding strategy. 28 | Chapter 1: Mastering Strategy: Art and Science Environmental and internal scanning is the next stage in the process. Managers must constantly scan the external environment for trends and events that affect the overall economy, and they must monitor changes in the particular industry in which the firm operates. For example, Apple’s decision to create the iPhone demonstrates its ability to interpret that traditional industry boundaries that distinguished the cellular phone industry and the computer industry were beginning to blur. At the same time, firms must evaluate their own resources to understand how they might react to changes in the environment. For example, intellectual property is a vital resource for Apple. Between 2008 and 2010, Apple filed more than 350 cases with the US Patent and Trademark Office to protect its use of such terms as apple, pod, and safari (Apple Inc.). A classic management tool that incorporates the idea of scanning elements both external and internal to the firm is SWOT (strengths, weaknesses, opportunities, and threats) analysis. Strengths and weaknesses are assessed by examining the firm’s internal resources, while opportunities and threats refer to external events and trends. The value of SWOT analysis parallels ideas from classic military strategists such as Sun Tzu, who noted the value of knowing yourself as well as your opponent. Chapter 3 “Evaluating the External Environment” examines the topic of evaluating the external environment in detail, and Chapter 4 “Evaluating the Internal Environment” presents concepts and tools for managing firm resources. Synthesizing the information gained in the external and internal analysis into a SWOT framework is addressed in Chapter 5. The SWOT is then used to formulate the strategic issue(s) that the firm must deal with as it formulates strategies. Strategy formulation is the next step in the strategic management process. This involves developing specific strategies and actions. Certainly, part of Apple’s success is due to the unique products it offers the market, as well as how these products complement one another. A customer can buy an iPod that plays music from iTunes—all of which can be stored in Apple’s Mac computer (Inside CRM Editors, n.d.). In Chapter 6 “Selecting Business-Level Strategies”, we discuss how selecting business-level strategies helps to provide firms with a recipe that can be followed that will Figure 1.8: The importance of knowing yourself and your increase the likelihood that their strategies will be opponent is applicable to the knowledge of strategic successful. In Chapter 7, “Innovation Strategies”, we management for business, military strategy, and classic strategy games such as chess. present insights on the role innovation plays in strategy development and implementation. Chapter 8 “Selecting Corporate-Level Strategies” focuses on selecting corporate-level strategies, and Chapter 9 “Competing in International Markets” presents possibilities for firms competing in international markets. Strategy implementation is the final stage of the process. One important element of strategy implementation entails crafting an effective organizational structure and corporate culture. For example, part of Apple’s success is due to its consistent focus on innovation and creativity that Steve Jobs described as similar to that of a start- up. Chapter 10 “Executing Strategy through Organizational Design” offers ideas on how to manage these elements of implementation. The final chapter explores how to lead an ethical organization through corporate governance, social responsibility, and sustainability. Chapter 1: Mastering Strategy: Art and Science | 29  Section Video Strategic Management Process [04:35] The video for this lesson explains the strategic management process. You can view this video here: https://youtu.be/o0U0gwvnhek. Key Takeaway Strategic management is a process that requires the ability to manage change. Consequently, executives must be careful to monitor and to interpret the events in their environment, to take appropriate actions when change is needed, and to monitor their performance to ensure that their firms are able to survive and, it is hoped, thrive over time. Exercises 1. Who makes the strategic decisions for most organizations? 2. Why is it important to view strategic management as a process? 3. What are the four steps of the strategic management process? 4. How is chess relevant to the study of strategic management? What other games might help teach strategic thinking? References Apple Inc. Litigation. In Wikipedia. en.wikipedia.org/wiki/Apple_Inc._ litigation. Inside CRM Editors. (n.d.). Effective strategies Apple uses to create loyal customers. Retrieved from 30 | Chapter 1: Mastering Strategy: Art and Science https://it.toolbox.com/blogs/inside-crm/11-effective-strategies-apple-uses-to-create-loyal- customers-100109. Image Credits Figure 1.7: Kindred Grey (2020). “Chapter Layout for Strategic Management.” CC BY-SA 4.0. Retrieved from https://commons.wikimedia.org/wiki/File:Chapter_Layout_for_Strategic_Management.png. Figure 1.8: Shirinsokhan, Mahmoudreza. “Chess” CC BY-NC 2.0. Retrieved from https://flic.kr/p/bPNmxi. Video Credits Afra Alnaimi. (2014, November 29). Strategic Management Process [Video]. YouTube. https://youtu.be/o0U0gwvnhek. 1.7 Conclusion This chapter provides an overview of strategic management and strategy. Ideas about strategy span many centuries, and modern understanding of strategy borrows from ancient strategies as well as classic military strategies. You should now understand that there are numerous ways to conceptualize the idea of strategy, and that effective strategic management is needed to ensure the long-term success of firms. The study of strategic management provides tools to effectively manage organizations, but it also involves the art of knowing how and when to apply creative thinking. Knowledge of both the art and the science of strategic management is needed to help guide organizations as their strategies emerge and evolve over time. Such tools will also help you effectively chart a course for your career as well as to understand the effective strategic management of the organizations for which you will work. Exercises 1. Think about the best and worst companies you know. What is extraordinary (or extraordinarily bad) about these firms? Are their strategies clear and focused or difficult to define? 2. If you were to write a “key takeaway” section for this chapter, what would you include as the material you found most interesting? Chapter 1: Mastering Strategy: Art and Science | 31 Chapter 2: Assessing Organizational Performance 2.1 Introduction 2.2 Vision, Mission, and Goals 2.3 Assessing Organizational Performance 2.4 Competitive Advantage 2.5 Conclusion Learning Objectives After reading this chapter, you should be able to understand and articulate answers to the following questions: 1. What are organizational vision, mission, values, and goals, and why are they important to organizations? 2. How should executives analyze the performance of their organization? 3. What is competitive advantage and how is it calculated? 2.1 Introduction The foundation of strategic management is for an organization to answer three questions: 1. Where are we? 2. Where are we going? 3. How are we going to get there? Organizations answer the first question by assessing their organization. Often this is by looking at financial data, reviewing historical trends, and comparing the financial performance to other benchmarks such as industry averages or competitors’ performance. But financial indicators are not the only assessment measures to determine where a company is in relation to the marketplace. Other organizational performance indicators are also reviewed, such as quality measures, productivity measures, human resource indicators such as staff satisfaction and retention rates, and customer satisfaction and retention. A multitude of different measures from different perspectives allow a firm to determine how it is doing. 32 | Chapter 2: Assessing Organizational Performance Organizational leadership provides the answer to the second question; where are we going? In collaboration with other stakeholders, leadership sets the vision for the firm. The vision is what the organization aspires to be, that big goal it wants to accomplish. The vision is developed within the organization’s mission: its purpose for being. The vision must also be aligned with the organization’s core values: the principles that are important as it carries out its mission and vision. The third question, how are we going to get there, speaks to the heart of strategic management. An organization develops strategies to work toward achieving its vision. These are developed after much assessment is performed to determine the best road map to advance the organization in the marketplace. 2.2 Vision, Mission, and Goals Questions Are Brewing at Starbucks March 30, 2011, marked the fortieth anniversary of Starbucks’s first store opening for business in Seattle, Washington. From its humble beginnings, Starbucks grew to become the largest coffeehouse company in the world while stressing the importance of both financial and social goals. As it created thousands of stores across dozens of countries, the company navigated many interesting periods. The last few years were a particularly fascinating era. Figure 2.1: Starbucks’s global empire includes this store in Seoul, South Korea In early 2007, Starbucks appeared to be very successful, and its stock was worth more than $35 per share. By 2008, however, the economy was slowing, competition in the coffee business was heating up, and Starbucks’s performance had become disappointing. In a stunning reversal of fortune, the firm’s stock was worth less than $10 per share by the end of the year. Anxious stockholders wondered whether Starbucks’s decline would continue or whether the once high- flying company would return to its winning ways. Riding to the rescue was Howard Schultz, the charismatic and visionary founder of Starbucks who Chapter 2: Assessing Organizational Performance | 33  had stepped down as chief executive officer eight years earlier. Schultz again took the helm and worked to turn the company around by emphasizing its mission statement: “to inspire and nurture the human spirit—one person, one cup and one neighborhood at a time” (Starbucks). About a thousand under-performing stores were shut down permanently. Thousands of other stores closed for a few hours so that baristas could be retrained to make inspiring drinks. Food offerings were revamped to ensure that coffee—not breakfast sandwiches—were the primary aroma that tantalized customers within Starbucks’s outlets. By the time Starbucks’s fortieth anniversary arrived, Schultz had led his company to regain excellence, and its stock price was back above $35 per share. In March 2011, Schultz summarized the situation by noting that “over the last three years, we’ve completely transformed the company, and the health of Starbucks is quite good. But I don’t think this is a time to celebrate or run some victory lap. We’ve got a lot of work to do” (Starbucks, 2011). Schultz retired a second time in 2017 and was replaced by the COO, Kevin Johnson. Starbucks has continued its dominance, opening its 30,000th store in March, 2019, in Shenzhen, China. During the COVID-19 pandemic of 2020, Starbucks and Johnson were praised on how the organization handled the crisis. Phase 1: Mitigate and Contain, was implemented, limiting access to only drive-thru and delivery. Employees were paid whether they worked or not. Then Phase 2: Monitor and Adapt was implemented, with the gradual reopening of stores. The decision to open stores was made locally, not by corporate headquarters. Johnson emphasized the principles of prioritizing the health and well-being of its staff and customers and playing a positive and constructive role with the communities and government officials where they serve. References Starbucks. Our Starbucks mission statement. (n.d.). http://www.starbucks.com/about-us/ company-information/mission-statement. NPR. (2011, March 28). Starbucks CEO: Can you ‘Get big and stay small’? http://www.npr.org/2011/ 03/28/134738487/starbucks-ceo-can-you-get-big-and-stay-small. Bariso, J. (2020, April 20). Why Starbucks CEO’s Letter to Employees About Covid-19 Wins. Inc. https://www.inc.com/justin-bariso/starbucks-ceos-letter-to-employees-about-covid-19-is-a- master-class-in-emotional-intelligence.html. 34 | Chapter 2: Assessing Organizational Performance The Importance of Vision “Vision animates, inspires, transforms purpose into action.” – Warren Bennis Knowledge, skills, and abilities separate effective strategic leaders like Howard Schultz from poor strategic leaders. One of them is the ability to inspire employees to work hard to improve their organization’s performance. Effective strategic leaders are able to convince employees to embrace lofty ambitions and move the organization forward. In contrast, poor strategic leaders struggle to rally their people and channel their collective energy in a positive direction. As the quote from Warren Bennis suggests, a vision is one key tool available to executives to inspire the people in an organization (Table 2.1). An organization’s vision describes what the organization hopes to become in the future and helps guide its strategies. Well-constructed visions clearly articulate an organization’s aspirations. Avon’s vision is “to be the company that best understands and satisfies the product, service, and self-fulfillment needs of women—globally.” This brief yet powerful statement emphasizes several aims that are important to Avon, including excellence in customer service, empowering women, and the intent to be a worldwide player. Like all good visions, Avon sets a high standard for employees to work collectively toward. Perhaps no vision captures high standards better than that of aluminum maker Alcoa. This firm’s very ambitious vision is “to be the best company in the world—in the eyes of our customers, shareholders, communities and people.” By making clear their aspirations, Alcoa’s executives hope to inspire employees to act in ways that help the firm become the best in the world. The results of a survey of 1,500 executives illustrates that creating an inspiring vision creates a tremendous challenge for executives. When asked to identify the most important characteristics of effective strategic leaders, 98% of the executives listed “a strong sense of vision” first. Meanwhile, 90% of the executives also expressed serious doubts about their own ability to create a vision (Quigley, 1994). Not surprisingly, many organizations do not have formal visions. Many organizations that do have vision statements find that employees do not embrace and pursue the visions. Having a well-formulated vision employees embrace can therefore give an organization an edge over its rivals. That aspirational goal of what the company wants to become is the driver for the strategies that are developed. Accomplishing the strategies and goals drives the organization toward achieving its vision. Thus, there should be alignment between the vision of the company, its mission, values, structure, culture, and the strategies its leaders’ select. As discussed in later chapters, for example, certain structures are better for achieving organizational objectives. An organization’s vision describes what the organization hopes to become in the future. Visions highlight the values and aspirations that lay at the heart of the organization. Although vision statements have the potential to inspire employees, customers, and other stakeholders, vision statements are relatively rare and good visions are even rarer. Some of the visions being pursued by businesses today are offered below. Chapter 2: Assessing Organizational Performance | 35  Table 2.1 The Big Picture: Organizational Vision Company Vision To be the best company in the world—in the eyes of our customers, shareholders, communities and Alcoa people. To be the company that best understands and satisfies the product, service and self-fulfillment needs Avon of women—globally. Chevron To be the global energy company most admired for its people, partnership, and performance. Google To provide access to the world’s information in one click. Kraft Heinz To be the best food company, growing a better world. Foods Proctor and Be, and be recognized as, the best consumer products and services company in the world. Gamble Mission Statements In working to turn around Starbucks, Howard Schultz sought to renew Starbucks’s commitment to its mission statement: “to inspire and nurture the human spirit—one person, one cup, and one neighborhood at a time.” A mission such as Starbucks’s states the reasons for an organization’s existence, its purpose. Well-written mission statements effectively capture an organization’s identity and provide answers to the fundamental question “Who are we?”. While a vision looks to the future, a mission captures the key elements of the organization’s past and present (Table 2.2). Organizations need support from their key stakeholders, such as employees, owners, suppliers, and customers, if they intend to be successful. A mission statement should explain to stakeholders why they should support the organization by making clear wha