Mastering Strategic Management PDF

Mastering Strategic Management © Dave Ketchen, Jeremy Short This work is licensed under a Creative Commons-NonCommercial-ShareAlike 4.0 International License Original source: The Saylor Foundation http://open.bccampus.ca/find-open-textbooks/ ?uuid=807b5297-67ba-4e65-8dc7-c871e6c633ac&contributor=&keyword=& subject=Management Contents Preface.............................................................................................................................1 Chapter 1 Mastering Strategy: Art and Science..........................................................2 LEARNING OBJECTIVES............................................................................................................2 Strategic Management: A Core Concern for Apple..............................................................2 1.1 Defining Strategic Management and Strategy................................................................3 LEARNING OBJECTIVES....................................................................................................3 1.1.1 What Is Strategic Management?............................................................................3 1.1.2 Defining Strategy: The Five Ps................................................................................4 1.1.3 Strategy as a Plan....................................................................................................5 1.1.4 Strategy as a Ploy....................................................................................................7 1.1.5 Strategy as a Pattern..............................................................................................9 1.1.6 Strategy as a Position..............................................................................................9 1.1.7 Strategy as a Perspective......................................................................................11 KEY TAKEAWAY.......................................................................................................11 EXERCISES...............................................................................................................12 1.2 Intended, Emergent, and Realized Strategies...............................................................12 LEARNING OBJECTIVES..................................................................................................12 1.2.1 Intended and Emergent Strategies.....................................................................13 1.2.2 Realized Strategy...................................................................................................14 Strategy at the Movies...........................................................................................16 KEY TAKEAWAY.......................................................................................................16 EXERCISES...............................................................................................................17 1.3 The History of Strategic Management...........................................................................17 LEARNING OBJECTIVES..................................................................................................17 1.3.1 Strategy in Ancient Times.....................................................................................17 1.3.2 Lessons Offered by Military Strategy..................................................................19 1.3.3 Strategic Management as a Field of Study.........................................................20 KEY TAKEAWAY.......................................................................................................23 EXERCISES...............................................................................................................23 1.4 Understanding the Strategic Management Process....................................................23 LEARNING OBJECTIVES..................................................................................................23 1.4.1 Modeling the Strategy Process............................................................................23 KEY TAKEAWAY.......................................................................................................26 EXERCISES...............................................................................................................26 1.5 Conclusion.........................................................................................................................26 EXERCISES.......................................................................................................................26 Chapter 2 Leading Strategically..................................................................................27 LEARNING OBJECTIVES..........................................................................................................27 Questions Are Brewing at Starbucks...................................................................................27 2.1 Vision, Mission, and Goals...............................................................................................28 LEARNING OBJECTIVES..................................................................................................28 2.1.1 The Importance of Vision.....................................................................................29 2.1.2 Mission Statements...............................................................................................29 2.1.3 Pursuing the Vision and Mission through SMART Goals..................................31 KEY TAKEAWAY.......................................................................................................33 EXERCISES...............................................................................................................33 2.2 Assessing Organizational Performance.........................................................................34 LEARNING OBJECTIVES..................................................................................................34 2.2.1 Organizational Performance: A Complex Concept...........................................34 2.2.2 The Balanced Scorecard.......................................................................................36 2.2.3 Financial Measures...............................................................................................37 2.2.4 Customer Measures..............................................................................................37 2.2.5 Internal Business Process Measures..................................................................37 2.2.6 Learning and Growth Measures.........................................................................38 2.2.7 Measuring Performance Using the Triple Bottom Line....................................38 KEY TAKEAWAY.......................................................................................................39 EXERCISES...............................................................................................................39 2.3 The CEO as Celebrity........................................................................................................40 LEARNING OBJECTIVES..................................................................................................40 2.3.1 Benefits and Costs of CEO Celebrity...................................................................40 2.3.2 Types of CEOs........................................................................................................42 Strategy at the Movies...........................................................................................44 2.3.3 Celebrity Rehabilitation........................................................................................45 KEY TAKEAWAY.......................................................................................................47 EXERCISES...............................................................................................................47 2.4 Entrepreneurial Orientation............................................................................................47 LEARNING OBJECTIVES..................................................................................................47 2.4.1 The Value of Thinking and Acting Entrepreneurially.........................................47 2.4.2 Autonomy..............................................................................................................49 2.4.3 Competitive Aggressiveness...............................................................................49 2.4.4 Innovativeness.......................................................................................................50 2.4.5 Proactiveness.........................................................................................................51 2.4.6 Risk Taking..............................................................................................................51 KEY TAKEAWAY.......................................................................................................52 EXERCISES...............................................................................................................52 2.5 Conclusion.........................................................................................................................53 EXERCISES.......................................................................................................................53 Chapter 3 Evaluating the External Environment......................................................54 LEARNING OBJECTIVES..........................................................................................................54 Subway Is on a Roll................................................................................................................54 3.1 The Relationship between an Organization and Its Environment..............................56 LEARNING OBJECTIVES..................................................................................................56 3.1.1 What Is the Environment?...................................................................................56 3.1.2 Why Does the Environment Matter?...................................................................57 KEY TAKEAWAY.......................................................................................................58 EXERCISES...............................................................................................................58 3.2 Evaluating the General Environment.............................................................................58 LEARNING OBJECTIVES..................................................................................................58 3.2.1 The Elements of the General Environment: PESTEL Analysis..........................58 3.2.1.1 P Is for “Political”.........................................................................................59 3.2.1.2 E Is for “Economic”.....................................................................................59 3.2.1.3 S Is for “Social”............................................................................................60 3.2.1.4 T Is for “Technological”..............................................................................63 3.2.1.5 E Is for “Environmental”.............................................................................64 3.2.1.6 L Is for “Legal”.............................................................................................65 KEY TAKEAWAY...............................................................................................66 EXERCISES.......................................................................................................67 3.3 Evaluating the Industry....................................................................................................67 LEARNING OBJECTIVES..................................................................................................67 3.3.1 The Purpose of Five Forces Analysis...................................................................67 3.3.2 The Rivalry among Competitors in an Industry.................................................68 3.3.3 The Threat of Potential New Entrants to an Industry.......................................70 3.3.4 The Threat of Substitutes for an Industry’s Offerings......................................71 3.3.5 The Power of Suppliers to an Industry...............................................................72 Strategy at the Movies...........................................................................................73 3.3.6 The Power of an Industry’s Buyers......................................................................73 3.3.7 The Limitations of Five Forces Analysis..............................................................74 KEY TAKEAWAY.......................................................................................................75 EXERCISES...............................................................................................................75 3.4 Mapping Strategic Groups...............................................................................................75 LEARNING OBJECTIVES..................................................................................................75 KEY TAKEAWAY...............................................................................................................76 EXERCISES.......................................................................................................................76 3.5 Conclusion.........................................................................................................................77 EXERCISES.......................................................................................................................77 Chapter 4 Managing Firm Resources..........................................................................78 LEARNING OBJECTIVES..........................................................................................................78 Southwest Airlines: Let Your LUV Flow................................................................................78 4.1 Resource-Based Theory...................................................................................................80 LEARNING OBJECTIVES..................................................................................................80 4.1.1 Four Characteristics of Strategic Resources.......................................................80 4.1.2 From Resources to Capabilities...........................................................................82 Strategy at the Movies...........................................................................................83 4.1.3 Is Resource-Based Theory Old News?................................................................85 4.1.4 The Marketing Mix.................................................................................................87 KEY TAKEAWAY.......................................................................................................88 EXERCISES...............................................................................................................89 4.2 Intellectual Property.........................................................................................................89 LEARNING OBJECTIVES..................................................................................................89 4.2.1 Defining Intellectual Property..............................................................................89 4.2.1.1 Patents.........................................................................................................90 4.2.1.2 Trademarks.................................................................................................90 4.2.1.3 Copyrights...................................................................................................92 4.2.1.4 Trade Secrets..............................................................................................93 KEY TAKEAWAY...............................................................................................94 EXERCISES.......................................................................................................94 4.3 Value Chain........................................................................................................................95 LEARNING OBJECTIVES..................................................................................................95 4.3.1 Elements of the Value Chain................................................................................96 4.3.2 From the Value Chain to Best Value Supply Chains..........................................98 KEY TAKEAWAY.................................................................................................... 100 EXERCISES............................................................................................................ 100 4.4 Beyond Resource-Based Theory: Other Views on Firm Performance.................... 100 LEARNING OBJECTIVES............................................................................................... 100 KEY TAKEAWAY............................................................................................................ 102 EXERCISES.................................................................................................................... 102 4.5 SWOT Analysis................................................................................................................ 102 LEARNING OBJECTIVES............................................................................................... 102 KEY TAKEAWAY............................................................................................................ 103 EXERCISES.................................................................................................................... 103 4.6 Conclusion...................................................................................................................... 104 EXERCISES.................................................................................................................... 104 Chapter 5 Selecting Business-Level Strategies........................................................105 LEARNING OBJECTIVES....................................................................................................... 105 The Competition Takes Aim at Target.............................................................................. 105 5.1 Understanding Business-Level Strategy through “Generic Strategies”................... 107 LEARNING OBJECTIVES............................................................................................... 107 5.1.1 Why Examine Generic Strategies?.................................................................... 107 5.1.2 Limitations of Generic Strategies..................................................................... 109 KEY TAKEAWAY.................................................................................................... 110 EXERCISES............................................................................................................ 110 5.2 Cost Leadership............................................................................................................. 110 LEARNING OBJECTIVES............................................................................................... 110 5.2.1 The Nature of the Cost Leadership Strategy................................................... 110 5.2.2 Advantages and Disadvantages of Cost Leadership...................................... 112 KEY TAKEAWAY.................................................................................................... 113 EXERCISES............................................................................................................ 113 5.3 Differentiation................................................................................................................ 114 LEARNING OBJECTIVES............................................................................................... 115 5.3.1 The Nature of the Differentiation Strategy..................................................... 115 Developing a Differentiation Strategy at Express Oil Change....................... 117 5.3.2 Advantages and Disadvantages of Differentiation........................................ 120 KEY TAKEAWAY.................................................................................................... 122 EXERCISES............................................................................................................ 122 5.4 Focused Cost Leadership and Focused Differentiation............................................ 123 LEARNING OBJECTIVES............................................................................................... 123 5.4.1 The Nature of the Focus Cost Leadership Strategy........................................ 123 5.4.2 The Nature of the Focused Differentiation Strategy...................................... 124 Developing a Focused Differentiation Strategy at Augustino LoPrinzi Guitars and Ukuleles........................................................................................................ 126 5.4.3 Advantages and Disadvantages of the Focused Strategies.......................... 128 Strategy at the Movies........................................................................................ 130 KEY TAKEAWAY.................................................................................................... 130 EXERCISES............................................................................................................ 130 5.5 Best-Cost Strategy......................................................................................................... 130 LEARNING OBJECTIVES............................................................................................... 130 5.5.1 The Challenge of Following a Best-Cost Strategy........................................... 131 Developing a Best-Cost Strategy at Plain Ivey Jane........................................ 132 5.5.2 Pursuing the Best-Cost Strategy through a Low-Overhead Business Model............................................................................................................................ 137 KEY TAKEAWAY.................................................................................................... 138 EXERCISES............................................................................................................ 138 5.6 Stuck in the Middle........................................................................................................ 138 LEARNING OBJECTIVES............................................................................................... 138 5.6.1 Stuck in the Middle: Neither Inexpensive nor Differentiated....................... 140 5.6.2 Doing Everything Means Doing Nothing Well................................................. 140 5.6.3 Getting Outmaneuvered by Competitors........................................................ 142 KEY TAKEAWAY.................................................................................................... 143 EXERCISES............................................................................................................ 143 5.7 Conclusion...................................................................................................................... 144 EXERCISES.................................................................................................................... 144 Chapter 6 Supporting the Business-Level Strategy: Competitive and Cooperative Moves...........................................................................................................................145 LEARNING OBJECTIVES....................................................................................................... 145 Can Merck Stay Healthy?.................................................................................................... 145 6.1 Making Competitive Moves.......................................................................................... 148 LEARNING OBJECTIVES............................................................................................... 149 6.1.1 Being a First Mover: Advantages and Disadvantages.................................... 149 6.1.2 Disruptive Innovation........................................................................................ 150 6.1.3 Footholds............................................................................................................. 151 6.1.4 Blue Ocean Strategy........................................................................................... 151 6.1.5 Bricolage.............................................................................................................. 152 Strategy at the Movies........................................................................................ 154 KEY TAKEAWAY.................................................................................................... 155 EXERCISES............................................................................................................ 155 6.2 Responding to Competitors’ Moves............................................................................ 155 LEARNING OBJECTIVES............................................................................................... 155 6.2.1 Speed Kills.......................................................................................................... 156 6.2.2 So…We Meet Again............................................................................................ 157 6.2.3 Responding to a Disruptive Innovation.......................................................... 157 6.2.4 Fighting Brands: Get Ready to Rumble............................................................ 158 KEY TAKEAWAY.................................................................................................... 160 EXERCISES............................................................................................................ 160 6.3 Making Cooperative Moves.......................................................................................... 160 LEARNING OBJECTIVES............................................................................................... 160 6.3.1 Joint Ventures..................................................................................................... 160 6.3.2 Strategic Alliances.............................................................................................. 161 6.3.3 Colocation.......................................................................................................... 162 6.3.4 Co-opetition........................................................................................................ 162 6.3.5 Get Moving!......................................................................................................... 164 Key TAKEAWAY.................................................................................................... 165 EXERCISES............................................................................................................ 165 6.4 Conclusion...................................................................................................................... 165 EXERCISES.................................................................................................................... 166 Chapter 7 Competing in International Markets......................................................167 LEARNING OBJECTIVES....................................................................................................... 167 Kia Picks Up Speed.............................................................................................................. 167 7.1 Advantages and Disadvantages of Competing in International Markets............... 169 LEARNING OBJECTIVES............................................................................................... 169 7.1.1 Access to New Customers................................................................................. 169 7.1.2 Lowering Costs................................................................................................... 171 7.1.3 Diversification of Business Risk........................................................................ 172 7.1.4 Political Risk........................................................................................................ 174 7.1.5 Economic Risk..................................................................................................... 174 7.1.6 Cultural Risk........................................................................................................ 175 KEY TAKEAWAY.................................................................................................... 176 EXERCISES............................................................................................................ 176 7.2 Drivers of Success and Failure When Competing in International Markets........... 176 LEARNING OBJECTIVES............................................................................................... 176 7.2.1 Demand Conditions........................................................................................... 177 7.2.2 Factor Conditions............................................................................................... 178 7.2.3 Related and Supporting Industries.................................................................. 178 7.2.4 Firm Strategy, Structure, and Rivalry............................................................... 179 KEY TAKEAWAY.................................................................................................... 181 EXERCISES............................................................................................................ 181 7.3 Types of International Strategies................................................................................. 181 LEARNING OBJECTIVES............................................................................................... 181 7.3.1 Multidomestic Strategy...................................................................................... 182 7.3.2 Global Strategy.................................................................................................. 184 7.3.3 Transnational Strategy....................................................................................... 184 KEY TAKEAWAY.................................................................................................... 185 EXERCISES............................................................................................................ 185 7.4 Options for Competing in International Markets...................................................... 185 LEARNING OBJECTIVES............................................................................................... 185 7.4.1 Exporting............................................................................................................ 185 7.4.2 Creating a Wholly Owned Subsidiary.............................................................. 186 7.4.3 Franchising.......................................................................................................... 186 7.4.4 Licensing............................................................................................................. 187 Strategy at the Movies........................................................................................ 188 7.4.5 Joint Ventures and Strategic Alliances............................................................. 189 KEY TAKEAWAY.................................................................................................... 190 EXERCISES............................................................................................................ 190 7.5 Conclusion...................................................................................................................... 191 EXERCISES.................................................................................................................... 191 Chapter 8 Selecting Corporate-Level Strategies.....................................................192 LEARNING OBJECTIVES....................................................................................................... 192 What's the Big Picture at Disney?...................................................................................... 192 8.1 Concentration Strategies.............................................................................................. 195 LEARNING OBJECTIVES............................................................................................... 195 8.1.1 Market Penetration............................................................................................ 196 8.1.2 Market Development......................................................................................... 197 8.1.3 Product Development........................................................................................ 198 8.1.4 Horizontal Integration: Mergers and Acquisitions......................................... 199 KEY TAKEAWAY.................................................................................................... 201 EXERCISES............................................................................................................ 201 8.2 Vertical Integration Strategies...................................................................................... 201 LEARNING OBJECTIVES............................................................................................... 201 8.2.1 Backward Vertical Integration........................................................................... 204 8.2.2 Forward Vertical Integration............................................................................. 205 KEY TAKEAWAY.................................................................................................... 206 EXERCISES............................................................................................................ 206 8.3 Diversification Strategies.............................................................................................. 206 LEARNING OBJECTIVES............................................................................................... 206 8.3.1 Three Tests for Diversification.......................................................................... 206 8.3.2 Related Diversification....................................................................................... 207 8.3.3 Unrelated Diversification................................................................................... 210 Strategy at the Movies........................................................................................ 211 KEY TAKEAWAY.................................................................................................... 212 EXERCISES............................................................................................................ 212 8.4 Strategies for Getting Smaller...................................................................................... 213 LEARNING OBJECTIVES............................................................................................... 213 8.4.1 Retrenchment..................................................................................................... 213 8.4.2 Restructuring...................................................................................................... 214 KEY TAKEAWAY.................................................................................................... 215 EXERCISES............................................................................................................ 215 8.5 Portfolio Planning and Corporate-Level Strategy...................................................... 216 LEARNING OBJECTIVES............................................................................................... 216 8.5.1 The Boston Consulting Group (BCG) Matrix................................................... 216 8.5.2 Limitations to Portfolio Planning...................................................................... 217 KEY TAKEAWAY.................................................................................................... 217 EXERCISES............................................................................................................ 218 8.6 Conclusion...................................................................................................................... 218 EXERCISES.................................................................................................................... 218 Chapter 9 Executing Strategy through Organizational Design.............................219 LEARNING OBJECTIVES....................................................................................................... 219 Can Oil Well Services Fuel Success for GE?...................................................................... 219 9.1 The Basic Building Blocks of Organizational Structure............................................. 222 LEARNING OBJECTIVES............................................................................................... 222 9.1.1 Division of Labor................................................................................................. 222 9.1.2 Vertical and Horizontal Linkages...................................................................... 225 9.1.3 Informal Linkages............................................................................................... 226 KEY TAKEAWAY.................................................................................................... 226 EXERCISES............................................................................................................ 226 9.2 Creating an Organizational Structure......................................................................... 226 LEARNING OBJECTIVES............................................................................................... 226 9.2.1 Simple Structure................................................................................................. 227 9.2.2 Functional Structure........................................................................................... 228 9.2.3 Multidivisional Structure................................................................................... 230 9.2.4 Matrix Structure................................................................................................. 232 Strategy at the Movies........................................................................................ 233 9.2.5 Boundaryless Organizations............................................................................. 234 9.2.6 Reasons for C hanging an Organization’s Structure...................................... 236 KEY TAKEAWAY.................................................................................................... 238 EXERCISES............................................................................................................ 238 9.3 Creating Organizational Control Systems.................................................................. 238 LEARNING OBJECTIVES............................................................................................... 238 9.3.1 Output Control.................................................................................................... 239 9.3.2 Behavioral Control............................................................................................. 240 9.3.3 Clan Control........................................................................................................ 241 9.3.4 Management Fads: Out of Control?................................................................. 243 KEY TAKEAWAY.................................................................................................... 245 EXERCISES............................................................................................................ 246 9.4 Legal Forms of Business............................................................................................... 246 LEARNING OBJECTIVES............................................................................................... 246 9.4.1 Choosing a Form of Business........................................................................... 246 KEY TAKEAWAY.................................................................................................... 248 EXERCISES............................................................................................................ 248 9.5 Conclusion...................................................................................................................... 248 EXERCISES.................................................................................................................... 249 Chapter 10 Leading an Ethical Organization: Corporate Governance, Corporate Ethics, and Social Responsibility...............................................................................250 LEARNING OBJECTIVES....................................................................................................... 250 TOMS Shoes: Doing Business with Soul........................................................................... 251 10.1 Boards of Directors..................................................................................................... 252 LEARNING OBJECTIVES............................................................................................... 252 10.1.1 The Many Roles of Boards of Directors......................................................... 253 10.1.2 Managing CEO Compensation........................................................................ 254 10.1.3 The Market for Corporate Governance......................................................... 256 KEY TAKEAWAY.................................................................................................... 257 EXERCISES............................................................................................................ 257 10.2 Corporate Ethics and Social Responsibility.............................................................. 258 LEARNING OBJECTIVES............................................................................................... 258 10.2.1 Stages of Moral Development........................................................................ 258 10.2.2 Corporate Scandals and Sarbanes-Oxley...................................................... 259 10.2.3 Measuring Corporate Social Performance.................................................... 260 Strategy at the Movies........................................................................................ 262 KEY TAKEAWAY.................................................................................................... 262 EXERCISES............................................................................................................ 262 10.3 Understanding Thought Patterns: A Key to Corporate Leadership?..................... 263 LEARNING OBJECTIVES............................................................................................... 263 10.3.1 Generational Influences on Work Behavior.................................................. 263 10.3.2 Rational Decision Making................................................................................ 265 10.3.3 Decision Biases................................................................................................. 266 KEY TAKEAWAY.................................................................................................... 269 EXERCISES............................................................................................................ 269 10.4 Conclusion.................................................................................................................... 270 EXERCISES.................................................................................................................... 270 1 Preface Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). Teaching strategic management classes can be a very difficult challenge for professors. In most business schools, strategic management is a “capstone” course that requires students to draw on insights from various functional courses they have completed (such as marketing, finance, and accounting) to understand how top executives make the strategic decisions that drive whether organizations succeed or fail. Many students have very little experience with major organizational choices. This undermines many students’ engagement in the course. Our book is designed to enhance student engagement. A good product in any industry matches what customers want and need, and the textbook industry is no exception. It is well documented that many of today’s students are visual learners. To meet students’ wants and needs (and thereby create a much better teaching experience for professors), our book offers the following: Several graphic displays in each chapter that summarize key concepts in a visually appealingformat.Mastering Strategy: Art and Science (Page 2), for example, offers graphic displays on (1) the “5 Ps” of strategy; (2) intended, emergent, and realized strategies; (3) strategy in ancient times; (4) military strategy; and (5) the evolution of strategic management as a field of study. The idea for the graphic displays was inspired by the visually rich and popular series on business published by DK Publishing. Rich, illustrative examples drawn from companies that are relevant to many students.As part of our emphasis on examples, each chapter uses one company as an ongoing example to bring various concepts to life. In Mastering Strategy: Art and Science (Page 2), Apple is used as the ongoing example. A “strategy at the movies” feature in each chapter that links course concepts with a popular motion picture. In Mastering Strategy: Art and Science (Page 2), for example, we describe how The Social Network illustrates intended, emergent, and realized strategies. Meanwhile, working within the Flat World Knowledge business model gives our book a significant price advantage over other textbooks. Politicians in many states are paying more and more attention over time to the cost of a college education, including the high prices of most textbooks. It is therefore reasonable to expect an ever-increasing number of professors to seek modestly priced textbooks. Professors still want to be assured of quality, of course. Both of us are endowed chairs at Research I universities. We have long track records of publishing our research in premier journals, and we have served in a variety of editorial and review board roles for such journals. Finally, we recognize that professors want to minimize their switching costs when adopting a new book. Although every textbook is a little unique, our table of contents offers a structure and topic coverage that parallels what market leading books provide. 2 Chapter 1 Mastering Strategy: Art and Science Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). LEARNING OBJECTIVES After reading this chapter, you should be able to understand and articulate answers to the following questions: 1. What are strategic management and strategy? 2. Why does strategic management matter? 3. What elements determine firm performance? Strategic Management: A Core Concern for Apple Fig. 1.1: The Opening of the Apple Store ( http://www.flickr.com/photos/nechbi/2058929337 ) by Neil Bird. March 2, 2011, was a huge day for Apple. The firm released its much- anticipated iPad2, a thinner and faster version of market-leading Apple’s iPad tablet device. Apple also announced that a leading publisher, Random House, had made all seventeen thousand of its books available through Apple’s iBookstore. Apple had enjoyed tremendous success for quite some time. Approximately fifteen million iPads were sold in 2010, and the price of Apple’s stock had more than tripled from early 2009 to early 2011. But future success was far from guaranteed. The firm’s visionary founder Steve Jobs was battling serious health problems. Apple’s 3 performance had suffered when an earlier health crisis had forced Jobs to step away from the company. This raised serious questions. Would Jobs have to step away again? If so, how might Apple maintain its excellent performance without its leader? Meanwhile, the iPad2 faced daunting competition. Samsung, LG, Research in Motion, Dell, and other manufacturers were trying to create tablets that were cheaper, faster, and more versatile than the iPad2. These firms were eager to steal market share by selling their tablets to current and potential Apple customers. Could Apple maintain leadership of the tablet market, or would one or more of its rivals dominate the market in the years ahead? Even worse, might a company create a new type of device that would make Apple’s tablets obsolete? 1.1 Defining Strategic Management and Strategy Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). LEARNING OBJECTIVES 1. Learn what strategic management is. 2. Understand the key question addressed by strategic management. 3. Understand why it is valuable to consider different definitions of strategy. 4. Learn what is meant by each of the 5 Ps of strategy. 1.1.1 What Is Strategic Management? Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). Issues such as those currently faced by Apple 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 Steve Jobs), firms (Apple), and industries (the tablet market) influence a firm’s success or failure. Formal tools exist for 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 you to understand what strategic management is and why it is important. Because strategy is a complex concept, we begin by explaining five different ways to think about what strategy involves Figure 1.2 Defining Strategy: The Five Ps. Next, we journey across many centuries to examine 4 the evolution of strategy from ancient times until today. We end this chapter by presenting a conceptual model that maps out one way that executives can work toward mastering strategy. The model also provides an overall portrait of this book’s contents by organizing the remaining nine chapters into a coherent whole. 1.1.2 Defining Strategy: The Five Ps Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). Defining strategy is not simple. Strategy is a complex concept that involves many different processes and activities within an organization. To capture this complexity, Professor Henry Mintzberg of McGill University in Montreal, Canada, articulated what he labeled as “the 5 Ps of strategy.” According to Mintzberg, understanding how strategy can be viewed as a plan, as a ploy, as a position, as a pattern, and as a perspective is important. Each of these five ways of thinking about strategy is necessary for understanding what strategy is, but none of them 1 alone is sufficient to master the concept. 1. Mintzberg, H. 1987. The strategy concept I: Five Ps for strategy. California Management Review, 30(1), 11–24. 5 Fig. 1.2: Defining Strategy: The Five Ps. Images courtesy of Thinkstock (first); Dave, K., Short, J., Combs, J., & Terrell, W. (2011). Tales of Garcón: The Franchise Players. Irvington, NY: Flat World Knowledge (second); Wikipedia (third); Old Navy (fourth); James Duncan Davidson from Portland, USA (fifth).. 1.1.3 Strategy as a Plan Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). Strategic plans are the essence of strategy, according to one classic view of strategy. A strategic plan is a carefully crafted set of steps that a firm intends to follow to be successful. Virtually every organization creates a strategic plan to guide its future. In 1996, Apple’s performance was not strong, and Gilbert F. Amelio was appointed as chief executive officer in the hope of reversing the company’s fortunes. In a speech focused on strategy, Amelio described a plan that centered on leveraging the Internet (which at the time was in its infancy) and developing multimedia products and 6 services. Apple’s subsequent success selling over the Internet via iTunes and with the 2 iPad can be traced back to the plan articulated in 1996. A business model should be a central element of a firm’s strategic plan. Simply stated, a business model describes the process through which a firm hopes to earn profits. It probably won’t surprise you to learn that developing a viable business model requires that a firm sell goods or services for more than it costs the firm to create and distribute those goods. A more subtle but equally important aspect of a business model is providing customers with a good or service more cheaply than they can create it themselves. Consider, for example, large chains of pizza restaurants such as Papa John’s and Domino’s. Fig. 1.3: Franchises such as Pizza Hut provide an example of a popular business model that has been successful worldwide ( http://wikimediafoundation.org/wiki/File:Bremen-indiana-pizza-hut.jpg. ) by Derek Jensen. Because these firms buy their ingredients in massive quantities, they pay far less for these items than any family could (an advantage called economies of scale). Meanwhile, Papa John’s and Domino’s have developed specialized kitchen equipment that allows them to produce better-tasting pizza than can be created using the basic ovens that most families rely on for cooking. Pizza restaurants thus can make better- tasting pizzas for far less cost than a family can make itself. This business model provides healthy margins and has enabled Papa John’s and Domino’s to become massive firms. Strategic plans are important to individuals too. Indeed, a well-known proverb states that “he who fails to plan, plans to fail.” In other words, being successful requires a 2. Markoff, J. 1996, May 14. Apple unveils strategic plan of small steps. New York Times. Retrieved from http://www.nytimes.com/1996/05/14/business/apple-unveils-strategic -plan-of-small-steps.html 7 person to lay out a path for the future and then follow that path. If you are reading this, earning a college degree is probably a key step in your strategic plan for your career. Don’t be concerned if your plan is not fully developed, however. Life is full of unexpected twists and turns, so maintaining flexibility is wise for individuals planning their career strategies as well as for firms. For firms, these unexpected twists and turns place limits on the value of strategic planning. Former heavyweight boxing champion Mike Tyson captured the limitations of strategic plans when he noted, “Everyone has a plan until I punch them in the face.” From that point forward, strategy is less about a plan and more about adjusting to a shifting situation. For firms, changes in the behavior of competitors, customers, suppliers, regulators, and other external groups can all be sources of a metaphorical punch in the face. As events unfold around a firm, its strategic plan may reflect a competitive reality that no longer exists. Because the landscape of business changes rapidly, other ways of thinking about strategy are needed. 1.1.4 Strategy as a Ploy Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). A second way to view strategy is in terms of ploys. A strategic ploy is a specific move designed to outwit or trick competitors. Ploys often involve using creativity to enhance success. One such case involves the mighty Mississippi River, which is a main channel for shipping cargo to the central portion of the United States. Ships traveling the river enter it near New Orleans, Louisiana. The next major port upriver is Louisiana’s capital, Baton Rouge. A variety of other important ports exist in states farther upriver. Many decades ago, the governor of Louisiana was a clever and controversial man named Huey Long. Legend has it that Long ordered that a bridge being constructed over the Mississippi River in Baton Rouge be built intentionally low to the ground. This ploy created a captive market for cargo because very large barges simply could not fit under the bridge. Large barges using the Mississippi River thus needed to unload their cargo in either New Orleans or Baton Rouge. Either way, Louisiana would benefit. Of course, owners of ports located farther up the river were not happy. Ploys can be especially beneficial in the face of much stronger opponents. Military history offers quite a few illustrative examples. Before the American Revolution, land battles were usually fought by two opposing armies, each of which wore brightly colored clothing, marching toward each other across open fields. George Washington and his officers knew that the United States could not possibly defeat better-trained and better-equipped British forces in a traditional battle. To overcome its weaknesses, the American military relied on ambushes, hit-and-run attacks, and other guerilla moves. It even broke an unwritten rule of war by targeting British officers during skirmishes. This was an effort to reduce the opponent’s effectiveness by removing its leadership. Centuries earlier, the Carthaginian general Hannibal concocted perhaps the most famous ploy ever. 8 , Fig. 1.4: Hannibal’s clever use of elephants to cross the Alps provides an example of a strategic ploy. ( http://en.wikipedia.org/wiki/File:Hannibal3.jpg. ) by Wikipedia. Carthage was at war with Rome, a scary circumstance for most Carthaginians given their far weaker fighting force. The Alps had never been crossed by an army. In fact, the Alps were considered such a treacherous mountain range that the Romans did not bother monitoring the part of their territory that bordered the Alps. No horse was up to the challenge, but Hannibal cleverly put his soldiers on elephants, and his army was able to make the mountain crossing. The Romans were caught completely unprepared and most of them were frightened by the sight of charging elephants. By using the element of surprise, Hannibal was able to lead his army to victory over a much more powerful enemy. Ploys continue to be important today. In 2011, a pizzeria owner in Pennsylvania was accused of making a rather unique attempt to outmaneuver two rival pizza shops. According to police, the man tried to sabotage his competitors by placing mice in their pizzerias. If the ploy had not been discovered, the two shops could have suffered bad publicity or even been shut down by authorities because of health concerns. Although 3 most strategic ploys are legal, this one was not, and the perpetrator was arrested. 3. Reuters. 2011, March 1. Philadelphia area pizza owner used mice vs. competition—police. Retrieved from news.yahoo.com/s/nm/20110301/od_uk_nm/oukoe_uk_crime_pizza 9 1.1.5 Strategy as a Pattern Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). Strategy as pattern is a third way to view strategy. This view focuses on the extent to which a firm’s actions over time are consistent. A lack of a strategic pattern helps explain why Kmart deteriorated into bankruptcy in 2002. The company was started in the late nineteenth century as a discount department store. By the middle of the twentieth century, consistently working to be good at discount retailing had led Kmart to become a large and prominent chain. By the 1980s, however, Kmart began straying from its established strategic pattern. Executives shifted the firm’s focus away from discount retailing and toward diversification. Kmart acquired large stakes in chains involved in sporting goods (Sports Authority), building supplies (Builders Square), office supplies (OfficeMax), and books (Borders). In the 1990s, a new team of executives shifted Kmart’s strategy again. Brands other than Kmart were sold off, and Kmart’s strategy was adjusted to emphasize information technology and supply chain management. The next team of executives decided that Kmart’s strategy would be to compete directly with its much- larger rival, Walmart. The resulting price war left Kmart crippled. Indeed, this last shift in strategy was the fatal mistake that drove Kmart into bankruptcy. Today, Kmart is part of Sears Holding Company, and its prospects remain uncertain. In contrast, Apple is very consistent in its strategic pattern: It always responds to competitive challenges by innovating. Some of these innovations are complete busts. Perhaps the best known was the Newton, a tablet-like device that may have been ahead of its time. Another was the Pippin, a video game system introduced in 1996 to near-universal derision. Apple TV, a 2007 offering intended to link televisions with the Internet, also failed to attract customers. Such failures do not discourage Apple, however, and enough of its innovations are successful that Apple’s overall performance is excellent. However, there are risks to following a pattern too closely. A consistent pattern can make a company predictable, a possibility that Apple must guard against in the years ahead. 1.1.6 Strategy as a Position Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). Viewing strategy as a plan, a ploy, and a pattern involve only the actions of a single firm. In contrast, the next P—strategy as position—considers a firm and its competitors. Specifically, strategy as position refers to a firm’s place in the industry relative to its competitors. McDonald’s, for example, has long been and remains the clear leader among fast-food chains. This position offers both good and bad aspects for McDonald’s. One advantage of leading an industry is that many customers are familiar with and loyal to leaders. Being the market leader, however, also makes McDonald’s a target for rivals such as Burger King and Wendy’s. These firms create their strategies with McDonald’s as a primary concern. Old Navy offers another 10 example of strategy as position. Old Navy has been positioned to sell fashionable clothes at competitive prices. Fig. 1.5: Old Navy occupies a unique position as the low-cost strategy within the Gap Inc.’s fleet of brands. ( http://www.flickr.com/photos/theogeo/2148416495 ) by Lindsey Turner. Old Navy is owned by the same corporation (Gap Inc.) as the midlevel brand the Gap and upscale brand Banana Republic. Each of these three brands is positioned at a different pricing level. The firm hopes that as Old Navy’s customers grow older and more affluent, they will shop at the Gap and then eventually at Banana Republic. A similar positioning of different brands is pursued by General Motors through its Chevrolet (entry level), Buick (midlevel), and Cadillac (upscale) divisions. Firms can carve out a position by performing certain activities in a different manner than their rivals. For example, Southwest Airlines is able to position itself as a lower- cost and more efficient provider by not offering meals that are common among other airlines. In addition, Southwest does not assign specific seats. This allows for faster loading of passengers. Positioning a firm in this manner can only be accomplished when managers make trade-offs that cut off certain possibilities (such as offering meals and assigned seats) to place their firms in a unique strategic space. When firms position themselves through unique goods and services customers value, business often thrives. But when firms try to please everyone, they often find themselves without the competitive positioning needed for long-term success. Thus deciding what a firm is not going to do is just as important to strategy as deciding what it is going to 4 do. To gain competitive advantage and greater success, firms sometimes change positions. But this can be a risky move. Winn-Dixie became a successful grocer by targeting moderate-income customers. When the firm abandoned this established position to compete for wealthier customers and higher margins, the results were 4. Porter, M. E. 1996, November–December. What is strategy? Harvard Business Review, 61–79. 11 disastrous. The firm was forced into bankruptcy and closed many stores. Winn-Dixie eventually exited bankruptcy, but like Kmart, its future prospects are unclear. In contrast to firms such as Winn-Dixie that change positions, Apple has long maintained a position as a leading innovator in various industries. This positioning has served Apple well. 1.1.7 Strategy as a Perspective Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). The fifth and final P shifts the focus to inside the minds of the executives running a firm. Strategy as perspective refers to how executives interpret the competitive landscape around them. Because each person is unique, two different executives could look at the same event—such as a new competitor emerging—and attach different meanings to it. One might just see a new threat to his or her firm’s sales; the other might view the newcomer as a potential ally. An old cliché urges listeners to “make lemons into lemonade.” A good example of applying this idea through strategy as perspective is provided by local government leaders in Sioux City, Iowa. Rather than petition the federal government to change their airport’s unusual call sign—SUX—local leaders decided to leverage the call sign to attract the attention of businesses and tourists to build their city’s economic base. An array of clothing and other goods sporting the SUX name is available at http://www. flysux.com. Some strategists such as these local leaders are willing to take a seemingly sour situation and see the potential sweetness, while other executives remain fixated on the sourness. Executives who adopt unique and positive perspectives can lead firms to find and exploit opportunities that others simply miss. In the mid-1990s, the Internet was mainly a communication tool for academics and government agencies. Jeff Bezos looked beyond these functions and viewed the Internet as a potential sales channel. After examining a number of different markets that he might enter using the Internet, Bezos saw strong profit potential in the bookselling business, and he began selling books online. Today, the company he created—Amazon—has expanded far beyond its original focus on books to become a dominant retailer in countless different markets. The late Steve Jobs at Apple appeared to take a similar perspective; he saw opportunities where others could not, and his firm has reaped significant benefits as a result. KEY TAKEAWAY Strategic management focuses on firms and the different strategies that they use to become and remain successful. Multiple views of strategy exist, and the 5 Ps described by Henry Mintzberg enhance understanding of the various ways in which firms conceptualize strategy. 12 EXERCISES 1. Have you developed a strategy to manage your career? Should you make it more detailed? Why or why not? 2. Identify an example of each of the 5 Ps of strategy other than the examples offered in this section. 3. What business that you visit regularly seems to have the most successful business model? What makes the business model work? 1.2 Intended, Emergent, and Realized Strategies Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). LEARNING OBJECTIVES 1. Learn what is meant by intended and emergent strategies and the differences between them. 2. Understand realized strategies and how they are influenced by intended, deliberate, and emergent 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 was 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 ( "Strategic Planning and Learning: Intended, Emergent, and Realized Strategies"[Image missing in original]). Also relevant are deliberate and nonrealized strategies. The relationships among these five 5 concepts are presented in "Figure 1.6". "Strategic Planning and Learning: Intended, Emergent, and Realized Strategies" [Image missing in original] 5. Mintzberg, H., & Waters, J. A. 1985. Of strategies, deliberate and emergent. Strategic Management Journal, 6, 257–272. 13 1.2.1 Intended and Emergent Strategies Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). Fig. 1.6: A Model of Intended, Deliberate, and Realized Strategy. Reproduced with permission from Carpenter, M., Bauer, T., & Erdogan, B. 2011. Principles of Management. Irvington, NY: Flat World Knowledge.. 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 efficiency by routing packages through a central hub and then pass them to their destinations. A few years later, Smith started Federal Express (FedEx), a company whose strategy closely followed the plan laid out in his class project. Today, Frederick Smith’s personal wealth has surpassed $2 billion, and FedEx ranks eighth 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 6 dreamed. 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 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 6. Donahoe, J. A. 2011, March 10. Forbes: Fred Smith’s fortune grows to $;21_; Memphis Business Journal. Retrieved fromhttp://www.bizjournals.com/memphis/news/2011/03/10/forbes-fred-smiths-fortune-growsto.html; Fortune: FedEx 8th “most admired” company in the world; Memphis Business Journal. Retrieved from http://www.bizjournals.com/ memphis/news/2011/03/03/fortune-fedex-8th-most-admired.html 14 that ZapMail would be a success because it reduced the delivery time of a document from overnight to just a couple of hours. Unfortunately, however, 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 before long, and FedEx lost hundreds of millions of dollars following its failed emergent strategy. In retrospect, FedEx had made a costly mistake by venturing outside of the domain that was central to its intended strategy: package 7 delivery. 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, cofounder 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 8 unexpectedly gave rise to a lucrative emergent strategy. 1.2.2 Realized Strategy Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). 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 7. Funding Universe. FedEx Corporation. Retrieved from http://www.fundinguniverse.com/company histories/FedEx- Corporation-Company-History.html 8. Wells, K. 2002. Floating off the page: The best stories from the Wall Street Journal’s middle column. New York: Simon & Shuster. Quote from page 97. 15 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. A nonrealized 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 a nonrealized strategy, but through Avon, a successful realized strategy was driven almost entirely by opportunistically capitalizing on change through emergent strategy. 16 Strategy at the Movies The Social Network Did Harvard University student Mark Zuckerberg set out to build a billion-dollar company with more than six hundred million 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 Harvard students only. When the network became surprisingly popular, it then morphed into Facebook, a website open to everyone. Facebook is so pervasive today that it has changed the 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. Fig. 1.7: The Social Network demonstrates how founder Mark Zuckerberg’s intended strategy gave way to an emergent strategy via the creation of Facebook. Image courtesy of Robert Scoble, http://www.flickr.com/photos/ scobleizer/5179377698.. 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. 17 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? 1.3 The History of Strategic Management Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). LEARNING OBJECTIVES 1. Consider how strategy in ancient times and military strategy can provide insights to businesses. 2. Describe how strategic management has evolved into a field of study. 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. 1.3.1 Strategy in Ancient Times Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). Perhaps the earliest-known discussion of strategy is offered in the Old Testament of 9 the Bible. 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 9. Bracker, J. 1980. The historical development of the strategic management concept.Academy of Management Review, 5(2), 219–224. 18 helped him implement his strategies ( "Strategy in Ancient Times"[Image missing in original]). Similarly, the demands of strategic management today are simply too 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. 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, 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. 19 1.3.2 Lessons Offered by Military Strategy Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). Key military conflicts and events have shaped the understanding of strategic management ( "Classic Military Strategy"[Image missing in original]). Indeed, the word strategy has its roots in warfare. The Greek verb strategosmeans “army leader” and the idea of stratego(from which we get the word strategy) refers to defeating an 10 enemy by effectively using resources. 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 Machiavellianis 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. 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 caught Roman forces unprepared. French commanders made a similar bad assumption in 10. Bracker, J. 1980. The historical development of the strategic management concept.Academy of Management Review, 5(2), 219–224. 20 1940. When Germany invaded Belgium (and then France) in 1940, its 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. 1.3.3 Strategic Management as a Field of Study Available under Creative Commons-NonCommercial-ShareAlike 4.0 International License (http:// creativecommons.org/licenses/by-nc-sa/4.0/). 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 Modern History of Strategic Management"[Image missing in original]). The ancient Chinese strategist Sun Tzu made it clear that strategic management is part 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. 11 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 11. Short, J., Bauer, T., Ketchen, D., & Simon, L. 2010. Atlas Black: Managing to Succeed. Irvington, NY: Flat World Knowledge. 21 average family could afford. Building on ideas about efficiency from Taylor and others, Ford organized assembly 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. In 1912, Harvard University became the first higher education institution to offer a course focused on how business executives could lead their organizations to greater success. The approach to maximizing performance within this “business policy” course was consistent with Taylor’s ideas. Specifically, the goal of the business policy course was to identify the one best response to any given problem that an organization confronted. By finding and pursuing this ideal solution, the organization would have the best chance of enjoying success. In the 1920s, A&W Root Beer became the first franchised restaurant chain. Franchising involves an organization (called a franchisor) granting the right to use its brand name, products, and processes to other organizations (known as franchisees) in exchange for an up-front payment (a franchise fee) and a percentage of franchisees’ revenues (a royalty fee). This simple yet powerful business model allows franchisors to grow their brands rapidly and provides franchisees with the safety of a proven business format. Within a few decades, the franchising business model would fuel incredible successes for many franchisors and franchisees across a variety of industries. Today, for example, both Subway and McDonald’s have more than thirty thousand restaurants carrying their brand names. 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

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