PREFACE

PART ONE
OVERVIEW OF STRATEGIC MANAGEMENT
Chapter 1 : Strategic Management
The Nature and Value of Strategic Managemeni 3
Dimensions of Strategic Decisions 4
Formality in Strategic Management 7
Benefits of Strategic Management 9
Risks of Strategic Management 10
The Strategic Management Process 10
Components of the Strategic Management Model
Strategic Management as a Process 15
Summary 16
Key Terms 17
Questions for Discussion 17
Chapter I Discussion Case: Can Anyone Save HP? I8
PART Two STRATEGY FORMULATION
Chapter 2: Company Mission
What is a Company Mission? 25
The Need for an Lxplicit Mission 25
Formulating A Mission 26
Basic Product or Service; Primary Market; Principal Technology 27
Company Goals: Survival; Growth; Profitability 28
Company Philosophy 29
Public Image ill
Company Self*Concept 32
Newest Trends in Mission Components 34
An Exemplary Mission Statement 37
Hoards of Directors 3ft Agency Theory 39
How Agency Problems Occur 39
Problems That Can Result from Agency 40
Solutions to the Agency Problem 41
Summary 41
Key Terms 42
Questions far Discussion 42
Chapter 2 Discussion Case: The Future of The New York Times 4 J Appendix:
BB&T'Vision. Mission, and Purpose 47
Chapter 3: Corporate Social Responsibilits and Business Ethics 53
The Stakeholder Approach to Social Responsibility 54
Ihc Dynamics of Social Responsibility 56
Types of Social Responsibility 57
Corporate Social Responsibility and Profitability 5/t Sarbanes-Oxley Act of 2002 63
The New Corporate Governance Structure 67
CSR Effect on the Mission Statement 68
Social Audit 68 Management Ethics 69
The Nature of Ethics in Business 69
Satisfying Corporate Social Responsibility 69
The Core of the CSR Debate 70
Mutual Advantages of Collaborative Social Initiatives 72
Five Principles of Successful Collaborative Social Initiatives 72
Assembling the Components 76
The Limits of CSR Strategies 77
The Future of CSR 77
Approaches to Questions of Ethics 80
Codes of Business Ethics 82
Major Trends in Codes of Ethics 83
Summary 84
Key Terms 84
Questions for Discussion 84
Chapter 3 Discussion Case I: Wal-Mart xs. Class Actions The retail giant s ntwel
defense in a massive suit could rewrite the playhook 85
Chapter 3 Discussion Cose It BPO Workers in India 87
Appendix: Tata Code of Conduct 2008 88
Chapter 4; The External Environment 9i
The Firm s External Environment 94
Remote Environment 94
Economic Factors 95
Social Factors 95
Political Factors 97
Technological Factors 98
Ecological Factors 99
Internationa) Environment 102
Industry Environment 103
How* Competitive Forces Shape Strategy 104
Contending Forces 105
Threat of Entry 105
t\wcrfiil Suppliers 109
Powerful Buyers 109
Substitute Products HO
Jockeying for Position 110
Industry Analysis and Competitive Analysis 111
Industry Boundaries 111
Industry Structure 111
Competitive Analysis I In Operating Environment 116
Competitive Position I17
Customer Profiles l i f t
Suppliers 119
Creditors 119
Human Resources: Nature of the Labor Market 119
Emphasis on Environmental Factors 123
Summary 126 AVr Terms 126
Questions for Discussion 126
Chapter 4 Discussion Case: The Raja of Steel 127
Appetulix Sources for Environmental Forecasting 131
Chapter 5: The Global Environment 134
Globalization 135
Development of a Global Corporation 135
Why Firms Globalize 135
Strategic Orientations of Global Firms 138
At the Stan of Globalization 140
Complexity of the Global Environment 142
Control Problems of the Global Firm 143
Global Strategic Planning 145
Multidomestic Industries and Global Industries 145
The Global Challenge 149
Market Rci|uitvmcnts and Product Characteristics ISO
International Strategy Options 151
Competitive Strategics for Finns in Foreign Markcis 152
Niche Market Exporting 153
Licensing and Contract Manufacturing 153
Franchising 154
Joint Ventures 154
Foreign Branching 155
Equity Investment 155
Wholly Owned Subsidiaries 155
Globally at ion in the Indian Context 157
Summary 160 Key Terms 161
Questions for Discussion 161
i *hapter 5 Discussion Case: Fakes 162
Appendix: Components of the Multinational Environment 167
Chapter 6: Internal Analysis
SWOT Analysis: A Traditional Approach to Internal Analysis 172
Using SWOT Analysis in Strategic Analysis ITS
Limitations of SWOT Analysis 176
Value Chain Analysis 17$
Conducting a Value Cham Analysis 178
Recognizing the Difficulty in Activity-Based Cost Accounting IRI Resource-Based
View of the Firm 184
Three Basic Resources; Tangible Assets, Intangible Assets, and Organizational
Capabilities
What Makes a Resource Valuable? 186
Using the Resource-Based View in Internal Analysis 190
Internal Analysis: Making Meaningful Comparisons
Comparison with Past Performance 193
Benchmarking: Comparison with Competitors 193
Comparison with Success Factors in the Industry 194
Summary 195
Key Terms 196
Questions for Discussion 196
Chapter 6 Discussion Case: Apple s Blueprint for Genius 197
Appendix A: Key Resources across Functional Areas 200 Appendix B: Using
Financial Analysis 202
Chapter 7: Long-Term Objectives and Strategies
Long-Term Objectives 213
Qualities of Long-Term Objectives 214
The Balanced Scorccard 216
Generic Strategies 217
Low-Cost Leadership 217
Differentiation 218
Focus 219 The Value Disciplines 220
Operational Excellence 221
Customer Intimacy 222
Product Leadership 223
Grand Strategics 223
Concentrated Growth 224
Market Development 227
Product Development 230
Innovation 230
Horizontal Integration 231
Vertical Integration 233
Concentric Diversification 234
Conglomerate Diversification 234
Turnaround 237
Divestiture 239
Liquidation 240
Bankruptcy 240
Joint Ventures 242
Strategic Alliances 243
Consortia. Keiretsus, and Chaebols 246
Selection of Long-Term Objectives and Grand Strategy Sets 24$ Sequence of
Objectives and Strategy Selection 249
Summitry 249
Key Terms 249
Questions for Discussion 250
Chapter 7 Discussion Case: Rising Star 250
Appendix' Board for Industrial <X Financial Reconstruction 256
C hupler 8: Business Strategy 257
Evaluating and Choosing Business Strategics: Seeking Sustained Competitive
Advantage 25$
Evaluating Cost Leadership Opportunities 259
Evaluating Differentiation Opportunities 262
Evaluating Speed as a Competitive Advaniagc 265
Evaluating Market Focus as a Way to Competitive Advantage 267
Stages of Industry Evolution and Business Strategy Choices 270
Competitive Advantage in Fragmented Industries 274
Competitive Advantage in Global Industries 275
Dominant Product Service Businesses: Evaluating and Choosing to Diversify lo Build
Value 276
Grand Strategy Selection Matrix 276
Model of Grand Strategy Clusters 279
Opportunities for Building Value as a Basis for Choosing Diversification or
Integration 281
Summary 282
Key Terms 2S2 Questions for Discussion 2S3
C *hapter £ Discussion Case: DHLs American Adventure 283
Chapter 9: Multihusiness Strategy 287
The Portfolio Approach: A Historical Starting Point 290
Thc BCGGixmlh-Sharc Matrix 290
The Industry Attractiveness Business Strength Matrix 291
BCG*s Strategic Environments Matrix 294
Limitations of Portfolio Approaches 295
The Synergy Approach: Leveraging Core Competencies 296
The Corporate Parent Role: Can It Add Tangible Value? 304
The Parenting Franwvv'ort: $04
The Patching Approach 306
Summary 311
Key Terms 311
Questions for Discussion 311
Chapter 9 Discussion Case: Beyond Blue 312
PART THREE
STRATEGY IMPLEMENTATION, CONTROU AND INNOVATION
* haptei 10: Implementation 319
Shoft-rcrrriObjectives 321
Qualities of Effective Short-Term Objectives 322
The Value-Added Benefits of Short-Term Objectives and Action Plans 326
Functional Tactics that Implement Business Strategies 326
Differences between Business Strategics and Functional Tactics 328
Outsourcing Functional Activities 329
Empowering Operating Personnel The Role of folicics 331
Creating Policies That Empower 333
Executive Bonus Compensation Plans 334
Majot Plan Types 334
Matching Bonus Plans and Corporate Goals 340
Summary 342
Key Anns 342
Questions for Discussion 342
Chapter 10 Discussion Case: Toyota Implements a Low-Cost Strategy 343
Appendix I: Functional Tactics 346
Appendix 2: Tl^S Motor Company i Journey towards a Hbrld Class Enterprise 353
Chapter 11: Organizational Structure 355
Traditional Organizational Structures and Their Strategy-Related Pros and Cons 358
Simple Organizational Structure 358
Functional Organizational Structure 359
Divisional Structure 360
Matrix Organizational Structure Jo
Product-Team Structure 363 What a Difference a Century Makes 365
Globali/aiion 365
The Internet 368
Speed 368
Initial EBbttl to Improve the Effectiveness ofTraditional Organizational Structures
369
Redefine the Role of Corporate Headquarters from Control to Support and
Coordination 369
Balance the Demands for Control Differentiation with ihe Need for Coordination-
Integration 370
Restructure to Emphasize and Support Strategically Critical Activities 370
Reenginccr Strategic Business Processes 371
Downsize and Self-Manage: Force Decisions to Operating Level 372
Creating Agile, Virtual Organizations 374
Outsourcing Creating a Modular Organization 374
Strategic Alliances 378
Toward Boundary less Structures 380
Ambidextrous Learning Organization 383
Summary 385 Key Terms 386
Questions for Discussion 386
Chapter I I Discussion Case I: A Crash Diet tor Sara Lee 386
Chapter I I Discussion Case 2: Online Extra; Turning Two Tech Teams into One 38&
Appendix: Reconstructing DLF 390
Chapter 12: Leadership and Culture
Strategic Leadership: Embracing Change 394
Clarifying Strategic Intent 395
Building an Organization 398
Shaping Organizational Culture 401
Recruiting and Developing Talented Operational Leadership 402
Organizational Culture 406
The Rote ofthe Organizational Leader in Organizational Culture 406
Build Time in thc Organization 407
Emphasize Key Themes or Dominant Values 409
Encourage Dissemination of Stories and Legends about Core Values 409
Institutionalize Practices That Systematically Reinforce Desired Beliefs and Values
Adapt Some Very Common Themes in Their Own Unique Ways 411
Manage
Organizational Culture in a Global Organization! 411 Manage ihe Strategy-Culture
Relationship 412
Summary 417
Key Terms 417
Questions for Discussion 4I8
Chapter 12 Discussion Case. The Immelt Resolution 418
Appendix: The ITC Leadership 425
Chapter 13: Control, Innovation, and Enlrepreneiirvhip
Establishing Strategic Controls 427
Premise Control 429
Strategic Surveillance 430
Special Alert Control 430
Implementation Control 431
Thc Balanced Scorecard Methodology* 435
Innovation and Entreprencurship 437
Incremental Innovation 439
Breakthrough Innovation 445
Risks Associated with Innovation 447
Entreprcneurship 451
Imrapreneurship 456
Summary 458
Key Terms 459
Questions for Discussion 459
Chapter 13 Discussion Case I The Wimble Shall Inherit the Earth 460
Chapter 13 Dtsatssion Case 2: Building an Idea Factory 461
PART FOI'R CASES
Guide lo strategic Management Cat
Case I: Arnencan I xprcw CHARGE' 476
Case 2: Coca-Cola: Gone Flat 482
Case 3: Jutes Couture To Live and Thrive in LA. 489
Case 4: Lehman Brothers I ehntan» Ness Street Smarts 491
Case 5: Louis Vuitton: The Vuitton Money Machine 494
Case 6: NASCAR Hie Prince of NASCAR 498
Case 7: Nokia: Will Rewiring Nokia Spark Growth? 503
Case S; Outsourcing Innovation A Contentious Corporate Strategy 505
Case 9: Pfizer % Pharmaceutical Funk 512
Case 10: Siemens Corp\ New Boss: Can He Deliver? 518
Case 11: Sony's Sudden Samurai 521
Case 12 Technological I mironmenl ol Business: Hydrogen Cars Are Almost Here
Bui Case 13: UPS: Big Browns New Bag 526
Section 8; Comprehensive \
Case 14 Archies vs Vintage Are we in the Business of Greetings? 529
Case 15 Nokia and the Global Mobile Phone Industry Shirisha Regani 539
Case 16 Nanhi kali Will it Bloom? 549
Case 17: Gitanjali A Gem in India % Crown? 553
Case IS Gati limited At the Threshold of a Big Leap 577
Case 19: Defti Land A h nance Strategy or Serendipity'' 594
Case ;o The Apollo Group. Inc. (University of Phoenix) 612
Case 21; XM Radio. The Sky Is the Limn XM Radio and \\< I rscertain Future 628
Case 22 Re-imeniing Bloom 651
Case 23: Forging Tics for Global f xpansion 663
Case 24 Robin Hood 672
Case 25: Voltas Ltd,: From Turnaround to the *Big Bang* 674
Case 26: Southwest Airlines Act II— An Airline in Trouble? 693
Case 27: IKEA's Innovative Human RCMHUVC Management Practices and Work
Culltitc
Case 28: On the Fast Truck with Fast Food 716
Case 29: The Procter & Gamble f PAG) Gillette Merger 725
Case JO: General Motor* 2005 742
Glossary
Same Index
Subject Index
 STRATEGIC MANAGEMENT
After reading and studying this chapter, you should be able to Explain the concept of
strategic management. Describe how strategic decisions differ from other decisions
that manager* make. Name the benefits and risks of a participative approach to
strategic decision making Understand the types of strategic decisions for
which managers at different levels of the company are responsible. Describe a
comprehensive model of strategic decision making. Appreciate the importance of
strategic management as a process. Give examples of strategic decisions that
companies have rexentry made
THE NATURE AND VALUE OF STRATEGIC MANAGEMENT
Managing activities internal lo the firm is only part ofthe modern executives
responsibilities Thc modern executive also must respond to thc challenges posed by
the firm's immediate and remote external em ironments. The immediate external
environment includes competitors, suppliers, increasingly scarce resources, govern-
ment agencies and their ever more numerous regulations, and customers whose
preferences often shift inexplicably. The remote external environment comprises
economic and social conditions, political pnontics. and technnlogical developments,
all of which must be anticipated* monitored assessed and incorporated into the
executives decision making. However, the executive often is compelled lo subordinate
thc demands ofthe firm's internal activities and external environment to the multiple
and often inconsistent requirements of its stakeholders: owners, top managers,
employees, communities, customers, and country. To deal effectively with everything
that affects the growth and profitability of a firm, executives employ management
processes that they feel will position it optimally in its competitive environment by
maximizing thc anticipation of environmental changes and of unexpected internal and
competitive demands.
To earn profits, firms need to perfect processes (hat respond to increases in the size
and number of competing firms: to the expanded role of government as a buyer,
seller, regulator, and competitor in the free enterprise system, and to greater business
involvement in international trade. Perhaps the most significant improvement in these
management processes came when "long-range planning" "planning, programming,
budgeting^ and "business policy** were blended with increased emphasis on
environmental forecasting and external considerations in formulating and
implementing plans. This all-encompassing approach is known as strategic
management. Strategic management is defined as the set of decisions and actions that
result in Mratexic thc formulation and implementation of plans designed to achieve
a company's objee- management lives. It comprises nine critical tasks:
1. Formulate the company's mission, including broad statements about its
purpose, in the formulation and philosophy, and goals.'impkrnentauon of
designed to
2. Conduct an analysis that reflects the company s internal conditions and
capabiti- achieve a company\ ties objective. Assess the company's external
environment, including both the competitive and the general contextual
factors. Analyze the company's options by matching its resources with thc
external environment. Identify the most desirable options by evaluating each
option in light ofthe company's mission. Select a set of long-term objectives
and grand strategies that will achieve the most desirable options. Develop
annual objectives and short-term strategies that are compatible with thc
selected set of long-term objectives and grand sliatcgies Implement the
strategic choices by means of budgeted resource allocations in which thc
 matching of tasks, people, structures, technologies, and reward systems is
emphasized. 9, Evaluate the success of thc strategic process as an input for
future decisionAs these nine tasks indicate, strategic management involves the
planning, directing organizing, and controlling of a company's strategy-related
decisions and actions. By cooipetime environ- strategv. managers mean their
large-scale, future-oriented plans for interacting with merit to achieve the
competitive environment to achieve company objectives. A strategy is a
company's company objective?! game plan. Although lhai plan docs not
precisely detail all future deployments (of people, finances, and material!, il
does provide a framework for managerial decisions. A strategy reflects a
company's awareness of how, when, and where it should compete; against
whom it should compete; and for what purposes it should compete.

Dimensions of Strategic Decisions

What decisions facing a business arc strategic and therefore deserve strategic
management attention? Typically, strategic issues have the following dimensions.
Strategic Issues Require Top*Managentent Decisions fiecause strategic decisions
overarch several areas of a firms operations, ihev* require top-management
involvement. Usually only top management has the perspective needed to understand
the broad implications of such decisions and the power to authorize the necessary
resource allocations. At Marico Industries, the Kaya Skin Care initiative was the
result of a need to guard against ovrrdcpendcncc on the two mainline brands.
Parachute and Sajfola. At the time Mr Rakesh Pamley, CEO, Kaya Skin Care, was
looking for alternatives to reduce the oveixtependence, he had an offer to market laser
machines for removal of unwanted body hair However this did not appeal to him as
this was not their area of competence Instead he decided to get into the broader area
of skineare While most of the global play* ers—like COrcal and Klizabeth Arden--
followed the high-margin, low-volume route to growth, Kaya ventured into services
and 360* solutions in skincare, rather than the products. The decision was based on
his perception of the changing social environment in India, where people were
focused on becoming more presentable, and increasing their self esteem.
Strategic Issues Require Large Amounts of the firms Resources Strategic decisions
involve substantial allocations of people, physical assets, or moneys, that cither must
be redirected from internal sources or secured from outside the firm. I hey also
commit the firm to actions over an extended period. For these reasons, they require
substantial resources. Whirlpool Corporation's "Quality Express" product delivery
program exemplified a strategy ihat required 3 sltong financial and personnel
commitment from the company. The plan was lo deliver products to customers when,
where, and how they wanted them This proprietary service uses contract logistics
strategy tn deliver Whirlpool. Kitchen Aid, Roper, and Estate brand appliances to 90
percent of the company s dealer and builder customers within 24 hours and to the
other 10 percent within 4K hours. In highly competitive scrvicc-oricntcd businesses,
achieving and maintaining customer satisfaction frequently involve a commitment
from every facet of the organization
Strategic Issues Often Affect the Firm's Lang-Term Prosperity Strategic decisions
ostensibly* commit the firm for a long lime, typically five years; however, the impact
of such decisions often lasts much longer. Once a firm has committed itself to a
particular strategy, its image and competitive advantages usually arc tied lo that
strategy. Firms become known in certain markets, for certain products, with certain
technologies. They Mold jeopardize their previous gains if they shitted from these
markets, products, or technologies by adopting;! radically different strategy. Thus,
strategic decisions have enduring effects on firms for bener or worse. For example.
Commerce One created an alliance with SAP in 1994 to improve its position in the e-
marketplace for business to business <B2B) sales. After taking three years to ready its
c-portals. Commerce One and SAP were ready to take on the market in 2002.
Unfortunately, the market changed. The "foolproof strategy*' got to the market too
late and the alliance failed.
For years, Toyota had a successful strategy of marketing its sedans in Japan. With this
strategy came an image, a car for an older customer, and a competitive advantage, a
traditional base for Toyota The strategy was effective, but as its customer base grew
older its strategy remained unchanged. A younger customer market saw the image as
unattractive and began to seek out other manufacturers. Toyota s strategic task in
foreign markets is to formulate and implement a strategy that will reignite interest in
its image.
Strategic Issues Are Future Oriented Strategic decisions arc based on what managers
forecast, rather than on what they know. In such decisions, emphasis is placed on the
development of projections that will enable thc firm to select the most promising
strategic options. In the turbulent and competitive tree enterprise environment, a firm
will succeed only if it takes a proactive (anticipatory) stance toward change.
Strategic Issues Usually Have Multifunctional or Multibusiness Consequences
Strategic decisions have complex implications for most areas ofthe firm. Decisions
about such matters as customer mix. competitive emphasis* or organizational
structure necessarily involve a number ofthe firms strategic business units (SBi;sK
divisions, or program units. All of these areas will he affected by allocations or
reallocations of responsibilities and resources that result from these decisions.
Strategic Issues Require Considering the firms ExternalEnvironment All business
firms exist in an open system. They affect and are affected by external conditions that
are largely beyond their control Therefore, to successfully position a firm in
competitive situations, its strategic managers must look beyond its operations They
must consider what relevant others (e.g.. competitors, customers, suppliers, creditors,
government, and labor) are likely to do.
Three Levels o f Strategy
The dccision*rnaking hierarchy of a firm typically contains three levels, Al thc top of
this hierarchy is the cor-poratc level composed principally of a board of directors and
thc chief executive and administrative officers. They are responsible for the firm's
financial performance and for the achievement of nonftnancial goals, such as
enhancing the tirms image and fulfilling its social responsibilities. To a large extent,
attitudes at the cor* porate level reflect the concerns of stockholders and society ai
large In a inultibustness firm, corporate-level executives determine thc businesses in
which the firm should be involved. They also set objectives- and formulate strategies
that span the activities and functional areas of these businesses. Corporate-level
strategic managers attempt to exploit their firm sdistinctive competencies by attopttng
a portfolio approach to thc management of its businesses and by developing long-term
plans, typically for a three- to five-year period. A key corporate strategy of Airborne
Express's operations involved direct sale to high-volume corporate accounts and
developing an expansive network in the international arena Instead of setting up
operations overseas. Airborne s long-term strategy was to form direct associations
with national companies within foreign countries to expand and diversify their
operations.
Another example ofthe portfolio approach involved apian by state-owned Saudi
Arabian Oil to spend SI.4 billion to build and operate an oil refinery* in Korea with
its partner Ssangyong. To implement their program, the Saudis embarked on a new
"cut-out-lhe-middleman" strategy to reduce thc role of international oil companies in
the processing and selling of Saudi crude oil.
In the middle ofthe decision-making hierarchy is ihc business level, composed
principally of business and corporate managers These managers must translate thc
statements of direction and intent generated at the corporate level into concrete
objectives and strategies for individual business divisions, or SHI - In essence,
business-level strategic managers determine how thc firm will compete in thc selected
product-market arena. They strive to identify and secure the most promising market
segment within that arena. This segment is thc piece ofthe total market lhat the firm
can claim and defend because of its competitive advantages
At ihe bottom of the decision-making hierarchy is the functional level, composed
principally of managers of product, geographic, and functional areas. I hey develop
annual objectives and short-term strategies in such areas a& production, operations,
research and development, finance and accounting, marketing, and human relations.
However, their principal responsibility is to implement or execute thc firms strategic
plans. Whereas corporate- and business-level managers center their attention on
"doing the right things " managers at the functional level center their attention on
"doing things right." Thus, they address such issues as the efficiency and
effectiveness of production and marketing systems, the quality of customer service,
and the success of particular products and services in increasing the firm s market
shares
Exhibit I I depicts the three levels of strategic managemeni as structured in practice.
In alternative 1, the firm is engaged in only one business and the corporate- and
business-Jevcl responsibilities are concenliated in a single group of directors, officers,
and managers. This is the organizational format of most small businesses.
Alternative 2, the classical corporate structure, comprises three fully operative levels;
the corporate level, the business level, and the functional level- The approach taken
throughout this text assumes the use of alternative 2. Moreover, whenever
appropriate, topics arc covered from the perspective of each level of strategic
managemeni. In this way, the text presents a comprehensive discussion of the
strategic management process.
Characteristics o f Strategic Management Decisions
The characteristics of strategic management decisions vary with the level of strategic
activity* considered. As shown in Exhibit 1.2, decisions at the corporate level tend to
be more value orienled. more conceptual, and less concrete than decisions at the
business or functional level For example, at Alcoa, the world** largest aluminum
maker, chairman Paul O'Neill made Alcoa one of the nation s most centralized
organizations by imposing a dramatic management reorganization that wiped out two
layers of management. He found that this effort not only reduced costs but also
enabled htm to be closer to the fronl-line operations managers. Corporate-level
decisions arc oflen characterized by greater risk. cost, and profit potential; greater
need lor flexibility; and longer time horizons. Such decisions include the choice of
businesses, dividend policies* sources of long-term financing, and priorities for
growth.
Functional-level decisions implement the overall strategy formulated at thc corporate
and business levels. They involve act ion-oriented operational issues and are relatively
short range and low risk. Functional-level decisions incur only modest costs, because
they depend on available resources. They usually are adaptable to ongoing activities
and. therefore, can be implemented with minimal cooperation. For example, the
corporate headquarters of Sears. Roebuck & Company spent Sod million to automate
r.wo clerical jobs by installing 28.000 computerized cash registers at its 808 stores in
thc United States. Though this move eliminated many functional-level jobs, top
management believed that reducing annual operating expenses by at least S50 million
was crucial to competitive survival.
Because junctional-level decisions are relatively concrete and quantifiable, they
receive cntical attention and analysis even though their comparative profit potential is
low Common functional-level decisions include decisions on generic versus
brandnamc labeling, basic versus applied research and development i R&D), high
versus low inventory levels, general-purpose versus specific-purpose production
equipment, and close versus loose supervision.
Business-level decisions help bridge decisions at the corporate and functional levels.
Such decisions are less cosily, risky, and potentially profitable than corporate-level
decisions, but they are more costly, risky, and potentially profitable than functional-
level decisions. Common business-level decisions include decisions on plant location,
marketing segmentation and geographic coverage, and distribution channels.
Formality in Strategic Management
I he formality of strategic management systems vanes widely among companies.
Formality refers lo the degree to which participants, responsibilities, authority, and
discretion in decision making arc specified. It is an important consideration in the
study of strategic management, because greater formality is usually positively corre-
lated with the cost, comprehensiveness, accuracy, and success of planning.
A number of forces determine how much formality is needed in strategic manage-
ment. The si/c ofthe organisation, its predominant management styles, the complexity
of its environment, its production process, its problems, and thc purpose of its
planning system all play a part in determining thc appropriate degree of formality.
In particular, formality is associated with the size of the firm ami with its stage of
development. Some firms, lirlluw an rnlrcpreneiirlal mode. They arc basically under
the control of a single individual, and they produce a limited number of products or
services* In such firms, strategic evaluation is informal, intuitive, and limited. Very
large firms, on the other hand, make strategic evaluation part of a comprehensive,
formal planning system, an approach that Henry Mint/berg called the planning mode.
Minl/berg also identified a third mode (the adaptive model, which he associated with
medium-sized firms in relatively stable environments. 1 For firms that follow the
adaptive mode, the ideniideation and evaluation of alternative strategies are closely
related to existing strategy It is not umiMial to find different modes within the same
organization. For example, EwonMohil might follow an entrepreneurial mode in
developing and evaluating the strategy of its solar subsidiary but follow a planning
mode1 in the rest of the company
The Strategy Makers
Ihc ideal strategic management team includes decision makers from all three company
levels (the corporate, business, and functional)—for example, the chief executive offi-
cer (CEO), the product managers, and the heads ol" functional areas. In addition, ihe
team obtains input from company planning staffs, when they exist, and from lowcr-
Icvcl managers and supervisors. The latter provide data for strategic decision making
and then implement strategics.
Because strategic decisions have a tremendous impact on a company and require large
commitments of company resources, lop managers must give fuial approval for
strategic action. Exhibit 1.2 aligns levels of strategic decision makers with the kinds
of objectives and strategies for which they are typically responsible.
Planning departments, often headed by a corporate v ice president for planning, are
common in large corporations. Medium-sized firms ollen employ at least one lull-time
staff member to spearhead strategic data-col lection effort*. Eva in small firms or less
progressive larger firms, strategic planning often is spearheaded by an officer or by a
group of officers designated as a planning committee.
Precisely what are managers' responsibilities in the strategic planning process at the
corporate and busi* ness levels? Top management shoulders broad responsibility lor
all the major elements of strategic planning and management. They develop the major
portions of the strategic plan and reviews, and they evaluate and counsel on all other
portions. General managers at the business level typically have principal
responsibilities fur developing environmental analysis and forecasting, establishing
business objectives, and developing business plans prepared by stall groups.
An executive who understands and excels at the strategic management process is
Ratan Tata, Chairman of Tata Group. India's biggest conglomerate. You can read
about his strategic investments in l:\hibit 1.3.
A firm s president or CFO characteristically plays a dominant role in ihe strategic
planning process. In many ways, this situation is desirable. The CEO s principal duly
often is defined as giving long-term direction to the firm, and the CEO is ultimately
responsible for the firm s success and, therefore, for the success of its strategy. En
addition. CEOs arc typically strong-willed, company-oriented individuals.
However, when the dominance of the CEO approaches autocracy, the effectiveness of
the firm's strategic planning and managemeni processes is likely lo he diminished. For
this reason, establishing a strategic
In four year*, starting 2003. Ratan Tata embarked on an investment spree to build his
group from a re-
heavyweight. Thc Tata Group bought the truck unit of South Koreas Daewoo Motors,
a stake *n one of Indonesia's biggest coaJ mines, and steel milts in Singapore.
Thailand, and Vietnam. It took over a slew of hotels, including New York's Pierre*
die Rrrz-Cartton in Boston, and San Francisco's Camden Place. The 2004 purchase of
Tyco International's undersea telecom cables for $ I JO million, a price that m
hindsight looks like a steal, turned Tata into the world's biggest i rter of international
phone calls.With its $91 million buyout of British engineering firm locar Inter
national, Tata Technologies tt now a major supplier of outsourced industrial design
for American auto and aerospace companies, with 3.300 ongrieers in India, the US.
and Europe.
The crowning deal was Tata Steefs S1J biHton takeover of Dutch-British steeJ giant
Corus Group, a target that would have been unthinkable rust a few years ago in April
2007 In one swoop, the move greatly expanded Tata Steers range of finished
products, secured access to automakers across the US and Europe, and boosted As ca-
pacity fwefotd> with mills added n Pennsylvania and Oho. The group aHo planned
$28 billion in capital investments at home over the next five years in steel, autos,
tetccom, power and eherrocats.
management system implies that thc C IX) will allow managers at all levels to
participate in thc strategic posture ofthe company*
In implementing a company's strategy, the must have an appreciation for thc power
and responsibility ofthe board while retaining the power to lead the company with Ihe
guidance of informed directors The interaction between Ihe CEO and board is key to
any corporation's strategy, hmpowcrnicnt of non managerial employees has been a
recent trend across major managemenc teams. For example, in 2O0X IBM replaced
its 92*ycarnjld executive board structure with three newly created management
teams; strategy, operations, and technology. Back team combined top executives,
managers, and engineers going down six levels in some cases. This new team
structure was responsible for guiding thc creation of IBM s strategy and for helping to
implement thc strategics once they were authorized-Benefits of Strategic Management
Using the strategic management approach, managers at all levels ofthe firm interact in
planning 3nd implementing. As a result, the behavioral consequences of strategic
management are similar i» those of participative decision making. Therefore, an
accurate assessment of the impact of strategy formulation on organizational
performance requires not only financial evaluation criteria but also nonfinancial
evaluation criteria-measures of be ha vi or-based effects. In fact, promoting positive
behavioral consequences also enables the firm to achieve its financial goals. However,
regardless of the profitability of strategic plans, several behavioral effects of strategic
nunagemcnt impro\e the firm s welfare:
1. Strategy formulation activities enhance the firms ability to prevent problems
Managers who encourage subordinates* attention to planning are aided in their
monitoring and forecasting responsibilities by subordinates who are aware ofthe needs
of strategic planning.
2 Group-ha ted strategic decisions arc l:kcl> to be drawn from the best available
alternatives The straie-gic managemeni process results in better decisions because
group interaction generates a greater variety of strategics and because forecasts based
on the specialized perspectives of group members improve the screening of options.
3 Ihe involvement of employee* in strategv formulation improves their
understanding of the productivity-reward relationship in every strategic plan and thus,
heightens their motivation
4. Gaps and overlap* m activities among individuals and groups are reduced as
participation in strategy formulation clarifies ditierenccs in roles
5 Resistance lo change is reduced. Though the participants in strategy formulation
may be no more pleased with their own decisions than they would be with
authoritarian decision*, ihcir greater awareness of the parameters that limit the
available options makes them more likely to accept those decisions.

Risks of Strategic Management

Managers must be trained lo guard against three types of unintended negative
cnmcquenccs of involvement in strategy formulation
First, the time that managers spend on the strategic management proves* may have .i
negative impact on operational responsibilities Managers must be trained to minimize
that impact by scheduling their duties to allow the necessary time for strategic activ
mci
Second if the fonnuUlonof stratcg}arc not intimately involved in its implementation,
they may shirk their individual responsibility for the decisions reached Thus, strategic
managers must be trained to limit their promises to performance that the decision
makers and their subordinates can deliver
Third, strategic managers must be trained to anticipate and respond to the
disappointment of participating subordinates over unattaiitcd expectations.
Subordinates may expect their involvement in even minor phases of total strategy
tonnulaliori to result in both acceptance of their proposal** and an increase in their
rewards, c* they may expect a solicitation of ihcir input on selected issues to extend
toother areas of decision making
Sensitizing managers to these possible negative consequences and preparing them
with cfleetivc means of minimizing such consequences will greatly enhance the
potential nt strategic planning

THE STRATEGIC MANAGEMENT PROCESS

Businesses vary in the processes tlicy use to formulate and direct their strategic
management activities. So phisticated planners, such a* General Hcctrie. Procter &
(iambic, and IBM. have dcvc1i>pcil more detailed processes than less ionii.il planners
of similar size. Small businesses that rely on the strategy' formulation skills and
limited time of an entrepreneur typically exhibit more basic planning concerns ihan
those of larger firms in their industries. Understandably, firms with multiple products,
markets, ttr technologies tend to use more complex strategic management systems
However, despite differences in detail and the degree of formalization, the baiie
components, of the models used to analyze strategic management operations are very
similar
Because of the similarity among the general models of the strategic management
process, it is possible to develop in eclectic model rcpfrscnttirve of the foremost
thought in the stratce.k iiu:uecnvcni area This model is shown in l.vhihif 14. It serves
three major functions: i 11 It depicts the sequence and the relationships of the major
components of the strategic management process, i 2 i l l is the outline for this book.
This chapter provides a general overview of the strategic management process, and
the majoi components of the
model will he Ihe principal theme of subsequent chapters Notice thai the chapters
ofthe text that discuss each ofthe strategic management process component* are
shown in each block |3tThe model ofTcm one approach for analyzing Ihe case studies
in this text and thus helps the analyst develop strategy formulation skills

Components of the Strategic Management Model

This section will del me and briefly describe thc key component ofthe strategic
management model ravh of these components will receive much greater attention in a
later chapter The intention here is simply to introduce them Company Mission Thc
mission of a company is ihc unique purpose thai sets it apart from other compa
company mission mcs of its type and identifies thc scope of its operations. In short, thc
company mis- ne milon describes the company's product, market, and technological
area* of emphasis in that *ci* a company a way that reflects thc values and priorities
ofthe strategic decision makers. For exam- pie. Lee Hun-Hec, the new chairman
ofthe Samsung Group, a-vamped the companv mission by stamping his own brand
of management on Samsung. Immediately. Samsung separated Chonju Paper
Manufacturing and Shinscgae Department Store from other operations. This corporate
act of downscaling reflected a revised management philosophy that favored
specialization, thereby changing the direction and scope ofthe organization.
Social responsibility is a critical consideration for a company's strategic decision
makers since the mission statement must express how thc company intends to
contribute to thc societies lhat sustain it. A firm needs to set social responsibility
aspirations for itself, just as it docs in other areas of corporate performance. For ex-
ample. Narayana llrudyalaya Heart Hospital in Bangalore started wilh the objective of
providing affordable cardiac care to the masses Patients who can afford to pay come
to the hospital for its reputation of quality, and the surplus generated is used to
subsidize Ihc procedures performed on patients who cannot alTord lo pay Ihc full fee
ofthe procedures. For patients who find it dilTicult to even afford the subsidized
package, the Narayana Hnidalaya Trust, which is a charitable organization with its
office in the hospital complex, helps to arrange funds, cither by donations from
individuals and organizations, or from a general corpus.2
Internal Analysis
The company analyzes Ihc quantity and quality ofthe company's financial, human,
and physical resources. It also assesses the strengths and weaknesses ofthe company's
management and organizational structure. Finally, it contrasts the company s past
successes and traditional concerns with thc company's current capabilities in an
attempt to identify the company's future capabilities.
External Environment
A firm's external environment consists of all the conditions and forces that affect its
strategic options and define its competitive situation. Thc strategic management
model shows the external environment as three interactive segments: the remote,
industry, and operating environments.
Strategic Analysis and Choic
Simultaneous assessment ofthe external environment and the company profile enables
a firm to identify a range of possibly attractive interactive opportunities. These
opportunities are possiNe avenues for investment. However, they must be screened
through the criterion ofthe company mission to generate a set of possible and desired
opportunities. This screening process results in thc selection of options from which a
strategic choice is made. The process is meant to provide the combination of long-
term object i\c& and generic and grand strategies that optimally position the firm in
its external environment to achieve the company mission Strategic analysis and
choice in single or dominant product service businesses center around identifying
strategics that are most effective at building sustainable competitive advantage based
on key value chain activities and capabilities—core competencies ofthe firm.
Multibusincss companies find their managers focused on the question of which
combination of businesses maximizes shareholder value as the guiding theme during
their strategic analysis and choice.
Stunt Term Obfevmes
Short-term objectives are the desired results that a company seeks <n era period of
one year or less. They are logically consistent with the firm s long-term object rvcv
Companies typically have many short-term objectives to prov ide guidance for their
functional and operational activities. Thus, there are short-term marketing activity,
raw material usage, employee turnover, anil sales objectives, to name (list tour

J'uncfiotuit Tticlics
ithin the general framework created by ihc business's generic and grand strategies,
each business function needs to undertake activities that help build a sustainable com-
petitive advantage These shon-term, limitcd*scope plans arc called tarttrv \ radio ad
campaign, an inventory reduction, and an introductory loan rate are examples of tae*
ucs Managers in each business runction develop tactics thai delineate the functional
activ itics undertaken in their part of the husines* and usually include them as a core
part of their action plan Functional tactics arc detailed statements of the "means" or
activities that will be used to achieve short-term objectives and es'ahlish competitive
advantage.

That ftmjiouvr Action

Speed is a critical necessity lor success in today's competiliv e. global marketplace
One way to enhance speed and roponsrvenesi is to force allow decisions to he made
when* ever possible at the lowest level in organizations Policies ate broad, peecedent-
setting decisions thai guide or substitute for repetitive or nmc-*cnsittve managerial
decision nuking, treating policies thai guide and "preai*horue~ the thinking, dccisionv
and

actions of operating managers and their subordinates in implementing the business**

strategy is essential for establishing and controlling the ongoing operating process of
the firm in a manner consistent with the firm s strategic objectives. Policies often
increase managerial effectiveness by standardizing routine decisions and empowering
or expanding the discretion of managers and subordinates in implementing business
strategies. The following arc examples of the nature and diversity of company
policies:
A requirement that managers have purchase requests for items costing more than
$5,000 costgned by the controller The minimum equity position required for all new
McDonalds franchises* The standard formula used to calculate return on investment
for the 4J strategic business units of General Rlcctric. A decision that Scars service
and repair employees have the right to waive repair charges to appliance customers
they feel have been poorly served by their Sears appliance.
RestnictiiTinj;, Rccngincering, and Refocusing the Organization
Until ihis point in (he strategic management process, managers have maintained a
decidedly market-oriented focus as they formulate strategics and begin
implementation through action plans and functional tactics, the process takes an
internal focus—getting the work of the business done efficiently and effectively so as
to make the strategy successful What is the best way to organize ourselves to
accomplish the mission? Where should leadership come from? What values should
guide our daily activities—what should the organization and its people be like? How
can wc shape rewards to encourage appropriate action? The intense competition in the
global marketplace has made this traditionally ''internally focused" set of questions—
how the activities within their business are conducted—acast themselves with un
prcccdcnted attcntiveness to the marketplace. Downsizing, restructuring, and
reenginwring are terms that reflect the critical stage in strategy implementation
wherein managers attempt to recast their organization. The company's structure,
leadership, culture, and reward systems may all be changed to ensure cost
competitiveness and quality demanded by unique requirements of its strategies.
in its underlying premises* and making necessary adjust- The elements of the
strategic management process are evident in the recent activities at CM. In 2003. GM
undertook to create a strategy to lower costs* increase efficiency* improve designs*
and increase brand appeal. These improvements were needed to keep cash flows up to
cover rising pension costs. For GM to accomplish this new strategy it had to improve
operations. New executives control were brought in to lead product development and
financial controls. To break down the Tracking a strategy as bureaucratic boundaries,
a committee was created that included employees from the n is being implc- major
functional areas, and it was given the assignment to reduce the time needed to mented
detecting develop a new-concept vehicle.

Strategic control is concerned with tracking a strategy as it is being implemented de-

menu, feeling problems or changes in its underlying premises, and making necessary
adjust- ments. In contrast to postaction control strategic control seeks to guide action
on continuous behalf of the generic and grand strategics as they arc taking place and
when the end re-improvement suits are still several years away The rapid, ccelerating
change of the global market-place of the last 10 years has made continuous
improvement another aspect of strategic moaBcnj arc encour* control in many
organizations. Continuous improvement provides a way for man- aged to be
proactive in agcrs to provide a form of strategic control that allows their organization
to respond improving all opera- more proactively and timely to rapid developments in
hundreds of areas thai influence of the firm I business's success.
In 2003, Yahoo's strategy was to move into the broadband and Internet search
markets. However, even in its early implementation stages the strategy required
revisions. Yahoo had formed an alliance with SBC to provide the broadband service,
but SBC had such limited capabilities that Yahoo had to find new ways to reach users.
Yahoo also needed to continuously improve its new Internet search market, given
competitors' upgrades and rapidly rising customer expectations. Additionally, for
Yahoo to increase its market share, it needed to continually improve its branding,
rather than rely largely on its technological capabilities.

Strategic Management as a Process

A process is the flow of information through interrelated stages of analysis toward the
achievement of an aim. Thus, the strategic management model in Exhibit 1.4 depicts
flow of informa- process. In the strategic management process, the flow of
nformation involves histor-tion ihrough mum- ical, current, and forecast data on the
operations and environment of the business. Man- stag s of uulyu* agers evaluate
these daia in light of the values and priorities of influential individuals and gmup
often called stakeholders—that are vitally interested in the actions of the business The
interrelated stages of the process arc ihc 11 components discussed in the previous
section. Finally, the aim of the process is the formulation and implementation Infl
ential people *bo of strategies that work, achieving the company s long-term mission
and near-term arc vitally interested ID Objectives, ihc action* of the Viewing
Strategic Management as a process has several important implications. buwnew.
First, a change in any component will afl'ect several or all of the other components.
Most of the arrows in the model point two ways, suggesting that the flow of
information usually is reciprocal. Kor example, forces in the external environment
may influence the nature of a company's mission, and the company may, in turn,
affect the external environment and heighten competition in its realm of operation. A
specific example is Archies Greetings & Gills Limited {AGOU, India's largest
manufacturer and distributor of greeting cards, posters, soft toys, gift items, cassettes
CD* and stationery items. The company started off with selling greeting cards and
posters through mail order in 1979. However, with the advent of internet and mobiles,
consumer preferences were shifting towards e*greeimgs and SMS- AGGL diversified
into music, gifts, perfumes, toys and gifting solutions, while justifying its changed
mission "We are in the business of emotions'*. In effect, AGGL expanded the scope
of business from greeting cards to gifting solutions. This not only had an impact on
the competitive environment of the greeting business, but also changed the industry
structure for players in the business of toys, music, perfumes and gifts-1
A second implication of viewing strategic management as a process is that strategy
formulation and implementation are sequential. The process begins with development
or reevaluation of the company mission. This step is associated with, but essentially
followed by; development of a company profile and assessment of the external
environment. Then follow, in order, strategic choice, definition of long-term
objectives, design of the grand strategy, definition of short-term objectives, design of
operating strategies, institutionalization of the strategy, and review and evaluation.
The apparent rigidity ol the process, however, must be qualified.

First, a firm's strategic posture may have to be reevaluated in response to changes in

any of the principal factors that determine or affect its performance. Entry by a major
new competitor, the deaih of a prominent board member* replacement of the chief
executive officer, and a downturn in market responsiveness are among the thousands
of changes ihal can prompt reassessment of a firm's strategic plan. However, no
matter where the need for a reassessment originates, the strategic management process
begins with the mission statement Setoftd not every compoocni of the strategic
nunigerncni process deserve* equal anentran each time planning activity lakes place.
Firms in an extremely stable cm iroronent may find that an in-depth assessment is not
required every five yews. Companies often are satisfied with their original mission
statements even aftct a decade of operation and spend only a minimal amount of time
addressing this subject. In adduion4wriilc formal strategic planning may be
undertaken only every five years, objectives and strategics usually are upduicd each
year, and rigorous reassessment of the initial tinges of stmiegic planning rarely is
undertaken at these times
A third implication of viewing strategic management us a process is the necessity -of
feedback from institutionalization, review, and evaluation to the early stages of the n<
in»l>«iiof|HMi-process feedback can he defined as the analysis ol
postimplementation results that implementation retuhi can be used to enhance future
decision nuking There I ore, .1* indicated in Exhibit 1 4. thai can be used to strategic
managers should assess the impact of implemented strategies on external en- "inane*
ruiure vironmcnts Thus, future planning can reflect any chants precipitated bv
strategic ac-turns. Strategic- roinagcrs also should analyze the impact of strategics on
the possible need for modi heal ions in the company mission
A fourth implication of viewing strategic management as a process is the need to
^nmmi(
regard it as a dynamic system The term th namie characlen/es the coostanlK chang-
icrm that charac-
mg conditions that afTect interrclaied and interdependent strategic activities
Managers tenres the conM«tt>
should recogni/c thai the component of the strategic process are constantly evolving
ch n n con t,oom
*P* *
hut that formal planning artificial!) freezes those ctmponcni*, much as an action pbo-
^ *ffc* unc''tUled
~ -* . and
intcrdcpcnUeni
tograph freezes the movement ot a sw immcr Since change is continuous, the dynamic
*niC9K. acuvitie*
strategic planning process must be monitored constantly lor significant shifts in any of
its components as a precaution against implementing an obsolete strategy
Charlies in the Process
The strategic management process undergoes continual assessment and subtle
updating Although the elements of the basic strategic management model rarely
change, rhe relative emphasis that each element receives will vary with the decision
makers who use the model and with the emironmentsof their companies A recent
study describes general trends in strategic runagement summarising the responses of
more than 200 corporate csxcui iv e$ I his update vbows there has been in increasing
c-ompOTvwHk emphasis on and ap-previa! 1011 ft* the value of strategic
maiugernent aeitvities It also provides evioence thai practicing 1 have given
increasing attcrmon to the need for frequent and w idesprad involvement in the
fotmulaiion implc*mentation phases of the strategic imru^erncnt process Finally, it
indicates that as managers and their firms gain knowledge, experience, skill, and
understand me in how to design and manage their planning activities, they become
bener aNeio avoid the potential negative euoscquences of instituting a Mgorous
Muite-gic management process
SUMMARY
Strategic management is the set of decisions and actions that result in the formulation
and implementation of plans dc\ igned to achieve a company's objectives Because 11
involves long-term, future-orienlesl complex decision making and requires
considerable resources, top-management participation is essential
Strategic rnarugcrriem is a three-tier process involving corporate-, business-, and
functional-lev el planners, and support perv>nnel At each progressive!) lower level,
strategic activities were shown lobe more specific, narrow, short term, and action
oneniest with lower risks hut fewer opportunities for dramatic impact
The strategic management model presented in this chapter w ill serve a* the structure
lor understanding and integrating all the major phase* o!strategy tocmuiation and
implementation. The chapter providcda summary account of these phases, each of
which is gi\cn extensive indrv iiliul attention in subsequent chapters.
The chapter stressed that the strategic managemcni process centers on the belief that a
firm's mission can be best achieved through a systematic and comprehensive
assessment of both its internal capabilities aod its external emironmcm Subsequent
evaluation of the firm s opportunities leads, in turn, to the choice of long-term
objecliv es and grand strategies and ultimately, to annual objective* and operating
strategies. vsfeich must be implemented monitored and controlled.
QUESTIONS FOR DISCUSSION
1 Find a recent copy of MuumrtxHM and read the ^Corporate Swedes" ncctwc Wa*
the main dectsjon discussed stratepe'' At utial level in the **gjnuition was the key
decision made?
2 La what ways do VSKI think the tutyeci matter in this strategic inartagcrneni
Kismets policy course mil) differ from that of pres ini« own sou have taken?
i After gradtatioa. wi arc not likely to rnose dmaciry to a top-level minapeTrvcm
poutsnn In fact, lew rnetnbers of >t*ur class will ever reach the lop-management loci
U ny then, is it important for all business majors to study The field of strategic
mani^emeor7 4, Do >™ expect outstanding pcrfoc marvc in this course to require a
great deaf of nsemon/aiion * vs hv or why not ' 5 Sou iindovhtcdly ha\c read aK»m
individuals who seemingly have given singled-handed direction I O their corporations.
Is a partk'ipatnc strategic management approach likely lo stifle or Minorrss the
mninbuiions of such individuals?
6. Think about the course* you have uken in functional areas, such as marketing,
finance, production* personnel, and accounting. What is the importance of each of
ihew areas k> the strategic planning process?
T. Discuss wiiti practicing business managers the strategic management models used
in their finns. What arc the similarities and differences between these models and the
one in the Icxi?
&. In what way* do you believe ihc strategic planning approach of notfiir-profii
oryani rations would differ from thar of prof il-onented organisation**.1
9, How do you explain the success of firms that do not use a formal strategic planning
process1 10 Think aratui your poM graduation job search a* a strategic decision I
low would me strategic management model be helpful to yM in toVniifVing and
tecunng the most promising position**

CAN ANYONE SAVE HP?

Despite the board's insistence that it will stay the Carly course, a breakup may be the
only way to lurn the company around.
Carleton S Fiorina*s last stand at Hewlett-Packard Co look place, aptly enough, at an
airport hotel For six years the jct-scning CEO had flown the globe, smiling and
perfectly coitTcd even as she stepped off of red-eye flights. Jet lag never slowed
down her delivery or muddled her message, which desenbed the sprawling HP as
nothing less than the beating heart of the tech industry. Yet on a damp Sunday
evening in Chicago, as much of the naiion focused on the Super Bowk the 50-ycar-old
Fiorina was embroiled in urgent talks with her hoard at a conference room at
thcO'Hare Hyatii says an MP insider The next day, Feb. 7. she was fired.
Thus ends ihc stormy reign of the highest-ranking woman in Corporate America and
one of ihe boldest gamblers in the tech world. Fiorina pulled out all the stops as she
hitched her soaring ambition to Silicon Valley's most venerable icon.
Not content to banlcjust one tech giant or two. she took on a whole stable of them,
from 1UM and Dell to Sony and EMC. In the end she failed. Outside of its stellar
printing business, the SSO billion HP she leaves behind is struggling in everything
from PCs to software. The proud Fionna departs as a humbled ex-CEO. bui not a poor
one: The board softened the Mow with :i $21 million severance package.
The board which named Chief Financial Officer Robert P. YYayman. a 36-year
veteran, as interim CEO. is now searching for an exec ready and able to rescue HP
The crucial question for the next leader: Should HP remain intact? For months a
number of Wall Street analysts have pushed for a breakup, arguing that MPs pieces,
from the dynamic printer division to the Jagging computer businesses, would be
worth far more apart.
Fiorina fiercely resisted the calls, and iltc board supported her. But following the Feb.
9 announcement of bcr departure, investors bid up HP slock by 7%. to $21.53, in part
because of the possibility of a change in course believe the Jong-term probability of a
breakup of the company is rising despite indications from the board that no such move
is currently planned** wrote analyst Steven Milunovich of Merrill Lynch & Co. in a
report that day.
The force* tor a breakup may grow by the time Fiorina* successor takes over. The
logic is straight forward; HP may simply be trying to do too much. The giant lacks
both the resources and management skills to compete with the best of the besj in
nearly every industry* In tech. And investors aren't likely to wait patiently for a
gradual turnaround

Shock, Then a Party

the simplest choke would be to spin off the corporate computing businesses, which ate
struggling against Dell and IBM, and force them to make the tough choices necessary
to survive as independent entities. Then a trimmcd-down HP could plow ahead as the
world's leading printing and imaging company. No doubt analysts inside the company
and out will be slicing IIP into countless permutations over the coming months and
feeding ihcm into their computer models. "You want to organize your business around
your customers, or at least around your markets." says Ted SchadJci. a ¥JCt pic mil in
at Forrester Research tne. "To do that, you want to split up your business."
At HP where Fionna was a deeply divisive figure, news of her departure brought
starkly different res|n»nse* As the board slated its determination to stick with
Fiorina's broad-based strategy, some employees felt sorrow at her departure. For
mheiv "it was a shock, (hen it was a party" says one Then an e-mail began making the
rounds: "Dmgdong, the witch is dead."
Now HP s board is on the hunt for a rcplaceiivcnt. They're looking for a CEO who
can rescue HP. much the way* Louis V. Gcrstncr Jr. lifted a trouMed IBM from the
sick bay when he arrived in 1993. A leading candidate, say insiders, is MCI Inc. CEO
Michael A. Capcibs, who soW Compaq Computer Corp. to Fiorina in a hotly
contesied $19 billion merger three years ago and briefly served as her No. 2,
Other possibilities include IBM's global-services chief. John Joyce, and lidward J.
Zander, the former president of Sun Microsystems Inc.. who is now CEO of cell-
phone giant Motorola Inc. But even the most talented exec wilt face an uphill battle
trying to keep Fiorina's HR with its sprawling array of products in dozens of different
markets, in one piece "It1* a Herculean task." *ays Jay R. Galbraith. a management
consultant and author of Building Organization* around the Global Customer
One question is whether the board's stated commitment to Fiorinas plan will hamper
the headhunting effort. The high-powered execs being considered may be loath to
take on what has proven to be such a difficult task, particularly if they can't set their
own strategy. **If sonic executive* get the sense that their hands ate going to be
somewhat tied in making significant changes, thai will limit the pool ofchgibk
candidaies/' says analyst Tony Ursilloof Lootnis Style*.
While a miracle turnaround can never be ruled out. the more likely scenario is an
eventual breakup of HP. That would spell the end of an era. Ever since lis founding in
a Palo Alto garage 66 years ago, HP has represented the triumph of a special brand of
entrepreneurial ism that came to represent Silicon Wiley, At its heart it's an
engineering-driven culture that values teamwork and rewards ideas and inventions,
not pedigrees.
In truth, Fiorina was battling HP1* storied culture from the day she arrived. A
dynamic .sales crac from Lucent Tech' nologie*. she was the first outsider to head ihc
company* And she didn't hesitate to take out her hacksaw; Immediately she began to
reel in HP's 80-plus autonomous business units into a more centralized foundivision
gUnr She eventually bid off tens of thousands of workers.
Battling decades-old inertia. Fiorina began to centrally manage tasks M*ch a*
branding and advertising Even her critics say that these steps were needed and that
she foughi some important battles to streamline HP's organization "Carly recognized
the need to start leveraging the common strengths of the company" saysBojana
Fa/annc, HP's former director of marketing services and branding, who is now* an
independent consultant
She was decisive, no doubt about that, and a gifted communicator. But even early in
her reign at HP she began to demonstrate the weaknesses thai would lead to her fall.
First, she find or scared away execs in droves, including such prominent figures as
Antonio Perez, now* president of h.- :-n. .. Kodak, and Mary McDowell, now a senior
executive at Nokia. She also resisted changing course a dangerous trait man industry
in which the most successful leaders have been ihose who don't fall in love with their
strategies.
Throughout her tenure, say insiders, she continued to blame HPS woes on the
company s culture—not on severe managemeni shortcomings, including her own.
"She didn't develop enough effective lieutenants/' says Stephen P M l - vice-
chairman of Christian & Timbers, ihe headhunting firm that recruited Fiorina into HP.
"Twice she passed up ... opportunities to have a chief operating officer Looks like it
bit her"
The Compaq merger was the defining moment in Fiorina's reign By buying Compaq,
she created a giant with tremendous scale and all of the clout and economics mat
come with it. But she did not fundamentally change HP's ability to fend off Dell in the
low end of computing or match IBM's sophisticaiion in the enterprise. So HP has
come up short against both of them. Equally important, the battle over the merger
divided the once-collegial company into angry, partisan factions. Insiders say the
contentiousness of ihc dispute wa* a key part of why Fiorina became so wed* dedto
her plan for HP
But Fiorinas soaring vision ran into a wall of opposition Director and scion Walter
Hewlett rose up against it. and huge swaths of employees and shareholders joined the
cause. They feared that the deal would dilute I IPs lucrative printing and imaging
business and an influx of hard charging Compaq execs would turn HP's hallowed
culture upside down The dispuie spiraled into a bitter proxy battle and wound up in
the courts. Hewlcn was pushed olTihc board of the company his father founded.
While it's convenient for HP s leaders to blame poor execution for their problems,
what ails the company runs much deeper than replacing a few top executives. In
enterprise compuiing. HP has failed to improve its tot. While it is still narrowly the
market share lead in storage and in key server markets, including Unix and PC
servers, it s losing ground to EMC Corp. in storage and Dell Inc. and IBM in servers.
In some cases, its technology just hasn't kept up. In others, it ha* made bad bets
In Dell's Shadow
The biggest of those was forming a partnership with Intel Corp. T O co-develop the
Itanium processor as the brains for high-end servers. After half a decade of trying,
Itanium has gained lutle ground. Meanwhile, IIP stopped developing its own high-end
processor, called PA-RISC. Now it s stuck slugging it out for share in the market for
commodity servers that run on Microsoft s Windows—where Dell excels.
HP struggles just as much in software and services ItMiny software unit lost $125
million last year on just $922 million in sales. It's highly unusual not to make money
in enterprise software. In services it has a sizable but slow* growing maintenance and
repair business, yet it has squeezed profits in an attempt to gain market share in
managed services such as running corporations' IT operations. Acting CLO Way-man
said dunng the company's press conference on Feb 9 that while the units revenues
have been growing strongly, the company has to focus more on profits now;
Even HP's gilded S24 billion printing business, viewed by many as the company 5
savior, faces a rising number of challenges. Since Dell Jumped into the market in
early 2003. it has quickly picked up market share in Inkjet models. The low end of the
business. During Ihc first three quarters of 2004. Dell accounted for 13% of inkjet
sales m the U.S.. according to IDC While still a fraction of HP s market share, it
presents a troubling trend. A growing base of Dell printers means it could cat into
HP's lucrative business of selling ink refills IO existing customers. "DvMI is on the
radar Us a big long-term issue for Hewlett-Packard" says Ken Smith, a portfolio
manager at institutional investor Munder Capital.
HP is belling that it can stay ahead on printers by pouring resources into its labs—and
innovating constantly. In time the company expects state-of-the-art printing
technology to spread into new* domains, with printers even being harnessed to spray
out billions of precision-engineered semiconductors. Though HP spends more that $1
billion on printer R&D, analysts question whether ii can keep its edge "They have ihe
ability to carry* it oft but not indefinitely," says Joe D'F.lia of researcher iSuppti Corp
The management ouster at HP gives the company a chance io rebuild trust with
investors. Dunng Fiorina's 21 quarters atop HP, ihc company missed profit
expectations eight tunes. Sure, that's better than the 21 quarters before Fiorina arrived.
But its also more than double the cotnmncd misses of IBM and Dell over ihc same
period. "Investor credibility isa huge issue with IIP" says analyst Laura Conigharoof
Goldman SachsA Co. Indeed in 2004. HP's stock plunged ur>dcrperfonning
virtually every one of its competitors.
The good news for I IP? liven if the board clings to Fiorina \ vision, the next CEO is
sure io have a bold mandate for change w iihin the divisions. That's sorely needed
Take the PC business. Before the merger. Compaq was making significant strides
following Dell's efficient model of direct sales to customers. Vet when the companies
merged This initiative never won broad support. Why? HPcuuhhri aggressively push
PCs and bypass retailers, when it needed their help to sell printers The result: HP has
stock to the old industry model as tt battles super-efficient Dell. HP's market share is
eroding in PCs, and the division struggles to eke out a profit.
If the new CEO hangs on to the $24.6 billion PC business, ihc boss is likely* to move
quickly toward the Dell model—even at the risk of angering retailers. Should ihe
direct* sales model sputter, the choices grow starker. IBM finally resolved ihc same
issue in December, selling its PC division to China s Lenovo for SI .25 billion
More bold moves arc needed in HP's enterprise business. While the company acquired
more than a half-do/en small software companies in the past IX months, it has balked
at a bigger acquisition. Insiders say that some board members were upset that Fiorina
didn't more aggressively pursue Veritas Software Corp., a profitable maker of storage
software that was acquired by Symantec Corp. in December The bottom line is that
HP lost money in software last year, despite ii being one of the most profitable
markets for most corporate computing rivals. '*Thc software business is way behind
what you'd expect from a company this size,** says Goldman * Conigtiaro.
As HP embarks on n difficult transition, execs will be working hard to put forth an
image of calm ami stability. The company's business depends on it Indeed,
compclitors from IBM to Dell to Sun will be highlighting HPs management turmoil as
they compete on large corporate-computing deals. Ben with longtime HP veterans,
from VVayman to printers chief Vyomcsh Joshi. sticking around this promises to be a
difficult task. "\: somebody has a pen poised over a purchase order. HP doesn'i want
there to be a moment of hesitation " says Andy Butler, a vice-president at researcher
Gartner. The company will go to great pains to show the world that nothing is
changing right away.**
While execs press forward with gritted teeth, the drama at HP seems to come full
circle. Si* years ago. it was at another airport hotel in Chicago that directors hired
Fiorina. But things aren't going back to where they started Not a chance She may be
gone, but HP now carries the indelible stamp of Carly Fiorina,
COMPANY MISSION
After reading and studying this chapter, you should be able to
1. Describe a company mission and explain its value.
2. Explain why it is important for the mission statement to include the companys
basic product or service, its primary market*, and its principal technology
3. Explain which goal o( a company is most important: survival, profitability, oi
giowlh
4. Discuss the importance of company philosophy, public image, and company self-
concept to stockholders
5. Give example* of the newest trends in mission statement components: customer
emphasis, quality, and company vision
6. Describe the role of a comoany's board of directors.
7. Explain agency theory and its value in helping a board ot directors improve
corporate governance.

WHAT IS A COMPANY MISSION?

Whether a firm is developing a new business or reformulating direction for an ongo-
ing business, it must determine the basic goals and philosophies that will shape its
straicgic posture. This fundamental purpose that sets a firm apart from other firms of
its type and identifies the scope of its operations in product and market terms is
defined as the company mission As discussed in Chapter I. iheeompam mission is a
broadly (rattled but enduring statement of a firm's intent. It embodies the business
philosophy of the firm s strategic decision makers, implies the image the firm seeks to
project, reflects ihe firm's self-concept, and indicates the firm's principal product or
service areas and the primary customer needs the firm will attempt to satisfy. In short,
it describes the firm's product, market, and technological areas of emphasis, and it
docs so in a u~iy that reflects the values and priorities of the firing strategic decision
makers An excellent example is the company mission statement of Nicoi Inc., shown
in Exhibit 2.1, Strategy in Action
The Need for an Explicit Mission
No external body requires that the company mission be defined, and the process of
defining it is time-consuming and tedious. Moreover, it contains broadly outlined or
implied objectives ami ^traiegics raiher ihan
Strategy i n Action
Mission Statement of Nkur Inc.
Preamble
We. che rn^nagemerit of Nicor Inc . here set forth our belief as to the purpose for
which che company G established and the pnnripiet under which *t shouid operate.
We ptedgeour effort to the accomplishment of these purposes wrtfun them principles.
Basic Purpose
The basic purpose of Nicor loc. is to perpetuate an investor ■ owned company
engaging in vanous phases of the energy business, striving for balance among those
phases so as to render needed satisfactory produca and services and earn optimum,
long-ranee profits.
What We Do
The principal business of the company, through utility subsidiary, tt the provision of
energy through a pipe system ro meet the ni>ed* of ulumate consumer! To
accomplish its bask purpose, and to ensure its strength, the company w9i engage in
other energy.related activities, directly or through subsidiaries or m participation with
other persons, corporators, firms, or entities
Exhibit 2 . 1
All actiwoei of the company shall be consistent with iu rescomibtaes to investors,
customers* employees* and the public and its concern for the optimum development
and utilnanOn of natural resources and for environmental

Where We Do It
The company's operations shall be primarily in the Untied States, but no setf*irnposed
or regulatory geographical limitations are placed upon the acquisition, development,
processing, transportation, or storage of energy resources, or upon other energy-
related ventures in which the company may engage The company will engage in such
activities in any location where, after careful review, ic has determined that such
activity a in the best interest erf its stockholders*
Utility service voli be Offered in the territory of the company's utility subsidiary to
the best of its ability* m ac» eordanco with the requirements of regulatory agencies
and pursuant to the subsidiary's purposes and principles
specific directives. Characteristically, it is a statement, not of measurable targets but
of attitude, outlook, and orientation.
The mission statement is a message designed to be inclusive of the expectations of all
stakeholders for the company's performance over the long run. The executives and
board who prepare the mission statement attempt to provide a unifying purpose for
the company that will provide a basis for strategic objective setting and decision
making. In general terms, the mission statement addresses the following questions:
Why is this firm in business? What are our economic goals?
What is our operating philosophy in terms of quality, company image, and self-
concept? What are our core competencies and competitive advantages? What
customers do and can we serve?
How do we view our responsibilities to stockholders, employees, communities, em
irotmienl. social issues, and competitors?
FORMULATING A MISSION

The process of defining the company mission for a specific business can perhaps be
best understood hy think* ing about the business at its inception. The typical business
begins with the beliefs* desires, and aspirations of a single entrepreneur. Such an
owner-manager's sense of mission usually is based on the following fundamental
beliefs:
I. The product or service of ihc business can provide benefits at least equal to its
price,
2. The product or service can satisfy a customer need of specific market
segments that is currently not being met adequately
3. The technology that is to be used in production will provide a cost- and
quality-competitive product or service.
4. With hard work and the support of others, the business can not only survive but
also grow* and be profitable.
5. The management philosophy of the business will result in a favorable public
image and will provide financial and psychological rewards for those who are
willing to invest their labor and money in helping the business to succeed.
6. The entrepreneurs self-concept of ihe business can be communicated to and
adopted by employees andstockholders.
As the business grows or is forced by competitive pressures to alter us product,
market, or technology. re-defining the company mission may be necessary. If so. the
revised mission statement will contain the same components as ihe original. Ii will
state the basic type of product or service to be offered, the primary markets or
customer groups to be served; the technology to be used in production or delivery; the
firm's fundamental concern for survival through growth and profitability; the firm's
managerial philosophy: the public image the firm seeks; and the self-concept those
affiliated with the firm should have of it This chapter will discuss in detail these
components. The examples shown in Hxhibit 2.2, Strategy in Action, provide insights
into how some major corporations handle them.

Basic Product or Service; Primary Market; Principal Technology

Three indispensable components of ihe mission statement are specification of the
basic product or service, specification of the primary market, and specification of the
principal technology for production or delivers'. These components arc discussed
under one heading because only in combination do they describe the company's busi-
ness activity, A good example of the three components is to he found in the business
plan of ITT Barton, a division of ITT. Under the heading of business mission and area
served ihe following informaiion is presented:
The units mission is to serve industry and government with quality instruments used
for the primary measurement, analysis, and local eoniiol of fluid flow, level, pressure,
tetnpenilwe. and fluid properties. This instrumentation includes flow meters*
electronic readouts, indicators recorders, switches, liquid Icwl systems, analytical
instruments such as titrators, integrators, controllers, transmitters, and various
instruments for the measurement of fluid properties (densiiy, viscosity, gravity) used
for processing variable sensing, dala coltecling, eonirol, and transmission The unii's
mission includes fundamental loop-closing control and display devices, when
economically justified, but excludes broadline cential control room instrumentation,
systems design, and runu\ey responsibility.
Markets served include instrumentation Tor oil and gas production, gas transportation,
chemical and petrochemical pn ,. cryogenic*, power generation, aerospace,
government, and marine, as well as other instrument and equipment manufacturers.
In only 129 words, ihis segment of the mission statement clearly indicates to all
readers—from company employees to casual observers—the basic products, primary
markets, and principal technologies of 1 IT Barton.
Often the most referenced public statement nf a company's selected products and
markets appears in "silver bullet** form in the mission statement; for example.
"Dayton-Hudson Corporation is a diversified retailing company whose business is to
serve the American consumer through the retailing of fashion-oriented quality
merchandise." Such an abstract of company direction is particularly helpful to
outsiders who value condensed overviews.
Company Goals: Survival; Growth; Profitability
Three economic goals guide the strategic direction of almost every business
organization. Whether or not the mission statement explicitly states these goals, it
reflects the firm's intention to secure nrvful through gwwth and profitability.
A firm that is unable to survive will be incapable of satisfying the aims of any of its
stakeholders. Unfortunately, the goal of survival, like the goals of growth and
profitability, often is taken for granted to such an extent that it is neglected as a
principal criterion in strategic decision making. When this happens, the firm may
focus on short-term aims at the expense of the long run. Concerns for expediency, a
quick fix, or a bargain may displace the assessment of long-term impact. Too often,
the result is near-term economic failure owing to a lack of resource synergy and sound
business practice. For example. Consolidated Foods, maker of Shasta soft drinks and
L'eggs hosiery, sought growth through the acquisition of bargain businesses.
However, the erratic sales patterns of its diverse holdings forced it to divest itself of
more than four dozen companies. This process cost Consolidated Foods millions of
dollars and hampered its growth.
Profitability if the mainstay goal of a business organisation. No matter how profit is
measured or defined profit over the long term is the clearest indication of a firm's
ability to satisfy the principal claims and desires of employees and stockholders. The
key phrase here is "over the long term "Obviously, basing decisions on a short-term
concern for profitability would lead to a strategic myopia- Overlooking the enduring
concerns of customers, suppliers, creditors, ecologists, and regulator)* agents may
produce profit in the short term, hut, over rime, the financial consequences arc likely
to be detrimental.
The following excerpt from the Hewlett-Packard stater lent of mission ably expresses
the importance of an orientation toward long-term profit:
To achieve sufficient piofit to finance our company growth and IO provide the
resources wc need to achieve our other corporate objectives.
In our economic system, the profit we gcnciate from our opeiaiion is ihe ultimate
source of ihc funds we need to prosper and grow. It is the one absolutely essential
measure of our corporate performance over the long term. Only if we continue io
meei our profit objective can we achieve OUJ other corporate objectives.
A firm's growth is lied inextricably to its survival and profitability. In this context, the
meaning of growth must be broadly defined. Although product impact market studies
iPiMS) have shown that growth in market share is correlated with profitability, other
important forms of growth do exist. Growth in the number of markets served, m the
variety of products oflcred. and in ihe technologies that are used to provide goods or
scrv ices frequently lead to improvements in a firm's competitive ability. Growth
means change, and proactive change is essential in a dynamic business environment
AOL's strategy provides an example. In 2003. some analysts believed that AOL Time
Warner should change to a survival strategy because ofthe amount of debt that n was
carrying. They believed thalAOL should try to reduce debt and regain some market
share that it had lost over the previous year AOL did decide to reduce its $7 billion
debt by the end of 2004, but not simply to survive- AOL was trying to position itself
for the acquisition of either Adelphta or Cable vision. AOL felt that if it could acquire
one of these two companies or possibly both, it could increase its footprint in the
market. AOL believed that growth for its company would have to come from the
cable TV market and that the only way to grow was to serve more markets Luckily,
AOUs top competitor, Comcast, was in the same debt position asAOL and could not
immediately preempt the acquisitions.
Hewlen-Packard's mission statement provides another excellent example of corporate
regard for growth:
Objective: To let our growth be limited only by our profits and our ability to develop
and produce technical products ihat satisfy real customer needs
We do not believe thai large size is important for it* own *ake: however, for ai tcasi
two basic reasons, continuous growth is essential for us to achieve our other
objectives
In ilw firsi place, we serve a rapidly growing and expanding segment of our
technological society. To remain static would be io lose ground. Ue cannot maintain a
position of sitength and leadership in our field without growth.
In the second place, growth is important in oider to attract and hold high-caliber
people. These individuals will align ibeir future only with a company ihai offer* them
considerable opportunity for personal progrcis. Opportunities are greater and more
challenging in a growing company.
The issue of growth raises a concern about the definition ofthe company mission.
How can a firm's product, market, and technology he specified sufficiently to provide
direction without precluding the exercise of unanticipated strategic options? How can
a firm so define its mission thai it can consider opportunistic diversification while
maintaining the parameters that guide its growth decision? Perhaps such questions arc
best addressed when a firm's mission statement outlines the conditions under which
the firm might depart from ongoing operations General Electric Company\ extensive
global mission provided the foundation for its GE Appliances |GEA) in Louisville,
Kentucky GEA did not sec consumer preferences in the world market becoming
Amcricamzed. Instead, its expansion goals allowed for flexibility in examining the
unique characteristics of individual foreign markets and tailoring strategics to fit
them.
The growth philosophy of Dayton-Hudson also embodies this approach:
TTic stability and quality of the corporation's financial performance will be developed
through the profitable execution of our existing businesses, as well as through ihe
acquisition or development of new businesses. Our growth priorities, in order, are as
follows:
L Development of Ihe profitable market preeminence ofcxistin J companies in
existing markets through new store development or new strategies within
existing stores.
2. Expansion of our companies to feasible new market*
3. Acquisition of other retailing companies that are strategically and financially
compatible with Dayton-Hudson.
4. Internal development of new retailing strategies.
Capital allocations to fund jhc expansion of existing Dayton-Hudson operating
companies will he based on each company's return on investment (ROD, in
relationship to its ROI objective and its consistency in earnings growth and on
the ability of Its management to perform up to the forecasts contained in its
capital requests. Expansion via acquisition or new 1 venture will occur when
the opportunity promises an acceptable rate of long-term growth 3nd
 profitability, an acceptable degree of risk, and compatibility with Dayton-
Hudson s long-term strategy.
Company Philosophy
The statement of a company's philosophy, often called the company creed, usually ac-
statement of its companies or appears within the mission statement. Il reflects or
specifies ihe basic philosophy veliebes. values, aspirations, and philosophical
priorities to which strategic decision makers arc committed in managing the company
Fortunately, the philosophies vary little from one firm to another Owners and man-
agers implicitly accept a general, unwritten, yet pervasive code of behavior that
governs business actions and permits them to be largely selfregulated. Unfortunately,
statements of company philosophy are often so similar and so platitudinous that they
read more like public relations handouts than the commitment to values they arc
meant to be.
Ashok Lev lands statement of philosophy, presented in Exhibit 23, Strategy in Action,
indicates the company's clearly defined initiatives for satisfying ihe needs of its
customers, society, national econorrr>* and environment.
Strategy in Action
Ashok Lcyland's Statement of Philosophy
Wc have, therefore, always endeavoured to engneer products and systems that
promote progress on all these fronts We firmly befreve that this honest approach will
make the Ashok Leyiand marquee the symbol of the vary best in transportation, today
and tomorrow. The five AL values are
• International
• Speedy
• Value creator
• Innovative
• Eimcal
• Despite the similarity of these statements, the intentions of the strategic
managers in developing them do not warrant cynicism. Company executives attempt
to provide a distinctive and accurate picture ofthe firms managerial outlook One such
statement of company philosophy is that of AIM Private Assel Management. Inc. As
Exhibit 2.4, Strategy in Action, shows, AIM s hoard of directors and executives have
established especially clear directions for company decision making and action based
on growth.
• As seen in Exhibit 2.5. Global Strategy in Action, the philosophy of Nissan
Motor Manufacturing is expressed by the company's People Principles and Key
Corporate Principles. These principles form the basis of the way the company
operates on a daily basis. They address the principal concepts used in meeting the
company's established goals. Nissan focuses on the distinction between the role of the
individual and ihc corporation. In this way. employees can link their productivity and
success to the productivity and success of the company Given these principles, the
company is able to concentrate on the issues most important to its survival, growth,
and profitability.
• Strategy in Action Exhibit 2.6 provides an example of how General Motors
uses a statement of company philosophy to clarify its environmental principles.

• Public Image
Both present and potential customers attribute certain qualities to particular
badnesses, ticrbcr and Johnson & Johnson make safe products; Cross Pen makes high-
quality writing instruments. Etienne Aigner makes stylish but affordable leather
products; Corvettes are power machines; and l/od I acoste slant)* for the preppy look.
Thus, mission statements should reflect the public's expectations, because this makes
achievement of Ihe firms goals more likely. Gerbcrs mission statement should not
open the possibility for diversification into pesticides, and Cross rVns should not open
the possibility Tor diversification into S0.59 brand-name disposables.
On the other hand a negative public image often prompts firms to rccmphasi/c ihe
beneficial aspects of their mission. For example, in response to what it saw as a
disturbing trend in public opinion. Dow Chemical undertook an aggressive
promotional campaign to fortify its credibility, particularly among "employees and
those who live and work in [their] plant communities." Dow described its approach in
Us annual report:
All around the world today. Dow people are speaking up. People who care deeply
altout their company, what it stands lor, and Iww it is viewed by others. People who
are immensely proud of their company's performance. >et realistic enough to realize ii
is the public s perception of thai performance thai counts in the long run.
Firms seldom address the question of their public imaqc in an intermittent fashion.
Although public agitation often stimulates greater attention to this question, firms are
concerned about their public image even in the absence of such agitation. The
following excerpt from the mission statement oflntcl Corporation is an example of
this anitude;
Wcarc sensitive to our image H itA <w cusitmrrs and th?bu\me\t {immunity.
Commitment* to customers arc considered sacrcxL and we arc upvet with ourselves
when we do nol meel our commitment v \Ve sirive to demonstrate to the business
world on a continuing basts that wc are credible in describing the state of the
corporation, and that wc are well organized and in complete control of all things that
determine the numbers.
Exhibit 2.7, Strategy m Action, presents a marketing translation of Ihe essence of the
mission statements of six high-end shoe companies. The impressive feature of the
exhibit is that it shows dramatically how closely competing firms can incorporate
subtle, yet meaningful, differences into their mission statements.
• Company Self-Concept
• A major determinant of a firnfs success is the extent to which the firm can
relate functionally to its external environment. To achieve its proper place in a
competitive situation, the firm realistically must evaluate its competitive strengths and
weaknesses. This idea- dial the firm must know itself is ihc essence of the company
self-concept. The idea is not commonly integrated into theories of strategic
management; its importance for individuals has been recognized since ancient times.

• Bolh individuals and firms have a crucial need to kiHrwihemselves. The

ability of either to survive inady* namic and highly competitive environment would
he severely limited if they did not understand their impact on others or of others on
them.
• In some senses, then, firms take on personalities of their own. Much behavior
in firms is organizationally based; that is. a firm acts on its members in olher ways
lhan iheir individual interactions. Thus, firms arc entities whose personality
transcends the personalities of their members. As such, they can set decision-making
parameters based on aims different and distinct from the aims of their members.
These organizational considerations have pervasive effects.
• Ordinarily, descriptions ofthe company seltaoncepl perse do not appear in
mission statements. Yet such statements often provide strong impressions of the
company self-concept. For example, ARCO's environment, health, and safety (BHS)
managers were adamant about emphasizing the company's position on safely and
environmental performance as a part of the mission statement. The challenges facing
the ARCO BHS managers included dealing with concerned environmental groups and
a public that has become environmentally aware. They hoped to motivate employees
toward safer behavior while reducing emissions and waste. They saw this as a
reflection ofthe company's positive self-image.
• The following excerpts from the Intel Corporation mission statement describe
the corporate persona that its top management seeks to foster:
• Management is sclf-critkaL The leaders must be capable of recognizing and
accepting their mistakes and teaming from them
• Open (constructive 1 confrontation is encouraged al all lewis of the
corporation and « viewed as a method of problem solving and conflict resolution.
• Decision by consensus is the rule. Decisions once made arc Mipponed
Poniikin in the organization is not the basis for quality of ideas.
• A highly communicative, open management is part ofthe style.
• Management must he ethical Managing by idling the truth and trailing all
employees equitably has established credibility lhal is ethical
Commitments arc Jong term. If career problems occur at some point, reassignment is
a better alternative than termination.
We desire lo have all employees involved and partkipalrve in (heir relaiionship with
Intel. Newest Trends in Mission Components Recently, three issues have become so
prominent in the strategic planning for organizations that they are increasingly
becoming integral parts in the development ami revisions of mission statements:
sensitivity to consumer wants, concern for quality, and statements of company vision.
Customers
"The customer is our top priority" is a slogan that would be claimed by the majority of
businesses in the United States and abroad. For companies including Caterpillar
Tractor General Electric, and Johnson & Johnson this means analyzing consumer
needs before as *cll as after a sale. The bonus plan at Xerox allows for a 40 percent
annual bonus* based on high customer reviews of the service that they receive, and a
20 percent penalty if the feedback is especially bad. For these firms and many others,
the overriding concern for the company has become consumer satisfaction.
In addition many U.S. firms maintain extensive produci safety programs to help
ensure consumer satisfaction. RCA. Sears, and 3M boast of such programs. Other
firms including Calgon Corporation. Amoco, Mobil Oil, Whirlpool, and Zenith
provide toll-free telephone lines to answer customer concerns and complaints*
The focus on customer satisfaction is demonstrated by retailer KTVnney in this
excerpt from its statement of philosophy: "The Penney Idea is < I) To serve the public
as nearly as we can to its complete satisfaction; (2) To expect for the service we
render a fair remuneration, and not all the profit ;he traffic will bear; (3> To do all in
our power to pack the customer's dollar full of value, quality, and satisfaction."
A focus on customer satisfaction causes managers to realize the importance of
providing quality customer service. Strong customer service initiatives have led some
firms to gain competitive advantages in the mar* ketplace. Hence, many corporations
have made the customer service initiative a key component of their corporate mission.
Quality
"Quality is job one!" is a rallying point not only for Kurd Motor Corporation but for
many resurgmg US. businesses as well. Two US management experts fostered a
worldwide emphasis on quality in manufacturing. W. Edwards Denting and J. M.
Junin's messages were first embraced by Japanese managers, whose quality
consciousness led to global dominance in several industries including automobile, 1 V
audio equipment, and electronic components, manufacturing. Denting summarizes his
approach in 14 now well-known poinis:
I Create constancy of purpose.
2. Adopt the new philosophy.
3. Cease dependence on mass inspection to achieve quality
4. Lnd the practice of awarding business on price tag alone. Instead minimize total
cost, often accomplished by working with a single supplier,
5. Improve constantly the system of production and service.
6. Institute training on the job.
7. Institute leadership.
8. Drive out fear
v. Break down barriers between departments III. Eliminate slogans, exhortations,
and numerical targets. 11 Eliminate work standards (quotas) and
management by objective,
12. Remove barriers that rob workers, engineers, and manager* of their right to pnde
of workmanship.
13. Institute a vigorous program of education and self-improvement
14. Put everyone in the company to work to accomplish the transformation.
Firms in the United States responded aggressively. The new philosophy is that quality
should be the norm. For
example. Motorola's production goal is 60 or fewer defects per every billion
components that it manufactures.
Exhibit 2.8. Strategy in Action, presents the integration ofthe quality initiative into the
mission statements of three corporations. The emphasis on quality has received added
emphasis in many corporate philosophies since the Congress created the Malcolm
Baldrige Quality Award. Each year up to two Baldngc Awards can be given in three
categories of a company's operations: manufac- statement
luring, services, and small businesses.
Whereas the mission statement expresses an answer to the question "What business
arc energies and resources we wlT a company vision statement is sometimes
developed to express the aspirations orthe company on of the executive leadership. A
vision statement presents the firm s strategic intent that achieving a desimble focuses
the energies and resources ofthe company on achieving a desirable future
Strategy i n Action
Visions or Quality Motorola
Dcdkatkxi to qualrry is a way of life at our company, so much so that it goes far
beyond rhetorical slogan*. Our ongoing program is one of continued improvement out
for change, refinement, and even revolution in our pursuit of quality excellence.
K Is die objective of Motorob Inc. to produce and provide products and services of the
highest quality In Its actrwbes. Motorola will pursue goals aimed at the achievement
of quality excellence. These results will be derived from the dedicated efforts of each
employee in conjunction with supportive participation from management at all levels
of the corporation.
Hero Honda
Excellence in quafcty o the core value of Hero Honda's philosophy We are committed
at ai lev eh to achieve high quality in whatever we do. particularly in our products and
services* which will meet and exceed customer's growing aspirations through
nnovanon to products, processes and services; continuous improvement in total
quality systems; teamwork and responsibility*

TVS Motor Company

At TVS Motor Company, quality is a way of life At TVS Motor Company, every
department works in tandem to produce quality products. The people form the pdars
of support, strengthening the overall quality standards and moving towards totaJ
customer satisfaction. In our quest to achieve world-cta* levels tn quality as well as
improvements in design and processes, the company has formed special cask forces to
monitor quality related performance The basic tenets of TQM. including Daily work
management. Policy management, Kaizcn (continuous improvement). Training and
standardization are followed across our organization *
CONCOR
We are committed to provide reliable, responsive, safe, and vaJuc added logistic
services in a cost effective and consistent manner, using latest innovations, to ensure
complete customer convenience and satisfaction and value for money through
continual improvement of our quality management systems and processes.*
"Our mivsion is to join with our community partners and slalefK>LlcT* to make
CONCOR a conipanv ot outstanding quality. We do this by providing responsive, cost
cftceitve, efficient, and reliable logistics solutions 10 our customers through synergy
with our community partners, and ensuring profitability and growth."'*
A vision is often expressed as a unique way to combine competitive influences in a
way thai directs a firm to pursue a revolutionary* strategy, <iary Korsce. ihc chairman
and CEO of Sprinl Corporation, is credited with the creation of such a vision as
detailed in Exhibit 2,9. Top Strategist,

An Exemplary Mission Statement

WhcnHHAl merged with Southern Hank, the hoard of directors and officers
undertook the creation of a com-piehensivc mission statement I hat was designed to
include most ofthe topics thai we discussed in this chapter.
In 2003. the company updated its Mensem and mailed the resulting booklet to its
shareholders and other interested parties. The foreword Io the document expresses the
greatest values of such a public pronouncement and was signed by BB&Ts chairman
and CKO. John A, Allison:
In a rapid!) changing and unpredictable world, individuals and organizations need a
clear scl of fundamental principals to guide their actions. Ai BII& I wv know the
content of out hiunvcss will, and should experience consuni change Change is
ncvesaary for progress However, ihe conic*', our fundamental principles, is
unchanging because ihese pnncrplc* arc baaed \m basK' truths
HliA I is a mjssson-driven organization with a clearly defined *et of values We
encourage our employees to haw a strong wnv o: purpose, a high Icsel of self-esteem
and thecapatit) to trunk clearly and logically
VW believe Thj; competitive advantage is Larger) in the minds of our employees as
represented b\ their cJpactf> to turn ratxxuJ xfca* mto action towaids the
ac*oonphsJ*neni of our nusuon
The Chapter 2 Appendix presents HliA T s v ision. mission, and purpose statement in
its entirety. It alio MI-eludes detailed tsprevhions of the company \ values and views
on the role ol emotions, managcrncnt style, the management concept, attributes of an
outstanding employee, the importance of positive amtude. obligations to its
employees. \ irtucs of an ouislanding credit culture, achieving the cntiipanv goal, the
nature of a "world standard" revenuc-dnven sales organization, the iutiurcofa"v*orld
standard** chcni sen ice communiiy hank, the company's commitment to education
and learning, and its passions
BOARDS OF DIRECTORS
Who responsible for determining the firm's mission" Who b responsible for acquiring
neftm’mock' and allocating resources so the firm can thoughtfully develop and
implement a strategic holder rcprrmutisn plan? W*ho is responsible for moniionng
the firms success in the competitive market- andswetxmanagers place Io detenmne
whether that plan was well designed and activated' Hie answer to all ol these
questions i> strategic dcvisum makers Most organizations have multiple levels t of
strategic decision makers; typically, 'lie larger ihe firm, the more levels it will have, 0f
ihe company Ihe strategic managers at the highest level arc responsible for decisions
that allot t the en- mission, tliv I inn. amimit the firm and its resource* fur die
I*ingest periods, and declare ihc I irm*s sense of values In oilier wont, this group of
strategic managers is responsible for overseeing ihe creation and accomphshnseni of
the company mission The term that describes the gnmp is hoard of directors.
In overseeing the management of a firm, ihc board of directors operates as the
representatives of the firms sioektiolders Hectcdbs the stockholders. Ihc board has
these major rrs^invihihlic*

1. To establish and update the company mission

2. To clexi the com forty's top officers, the foremost of whom is the CF.O.
establish ihc compensation levels of the top officer*, including their salaries and
bonuses.
4 To determine the amouni and timing ol the dividends paid In stockholders
5- To set broad company policy on such matters as labor-management relations,
product or service lines of business, mid employee benefit package*.
I sci comes an achieves to millmri/e managers io inipleineiil the long-term sliaMftbl
mWt tmt Hp
officers and the board have found agreeable. 7. To mandate company 4 compliance
with legal and ethical dictates.
In the current business cmironmcni. boards of directors arc accepting the challenge of
shareholders and other stakeholders to become active in establishing the strategic
initiatives of the companies thai they serve
This chapter considers (he board of directors because the board s greatest impaei on
ihe beta ior of a firm results from its deicrmir +3tion ofthe company mission. The
philosophy espoused in the mission statement sets the tone by which the firm and all
of its employees will be judged As logical extensions of the mission statement, the
firm's objectives and strategies embody the board's view of proper business demeanor.
Through its appointment of top executive! and its decisions aboul their compensation,
the board reveals its priorities for organizational achievement.

AGENCY THEORY
Whenever there is a separation ofthe owners (principals) and the managers (agents) of
a firm, the potential exists tor the wishes ofthe owners H be ignored. This fact and the
recognition that agents arc expensive. esUiblished the basis for a set of complex hut
helpful ideas known as agency theory. Whenever owners lor managers) delegale
decision-making authority to oihers, an agencv relationship exists between ihc two
parlies. Agency relationships, such as those between stockholders and managers, can
be very effective as long as managers make investment decisions in ways that arc
consistent wild stockholder** interests However, when ihc interests of managers
diverge from those of owners, then managers* decisions are more likely to reflect the
managers" preferences than the owners* preferences.
In general, owners seek stock value majumuauon. When managers hold important
blocks of company stock, ihey too prefer strategies that result in slock appreciation.
However when managers better resemble "hired hands" than owner-partners, they
often prefer strategies that increase their personal payoffs rather than those of
shareholders. Such behavior can result in decreased stock performance <as when high
executive bonuses reduce corporate earnings! and in Hmiegic decisions that point the
firm in the direction of outcomes that arc suboptimal from a stockholder's perspective.
If- as agency theory argues, self-interested managers act in ways that increase their
own welfare at the expense of the gain of corporate stockholders, then owners who
delegate decision-making authority to their agents will incur both the loss of poieniial
gain lliat would have resulted from owner-optimal strategies and or the costs of
monitoring and control systems that arc designed to minimize the consequences ol
such self-centered management decisions. In combination, the cost of agency
problems ami the cost of actions taken to minimize agency problems arc called
agencv costs. These costs can often be identified by their direct benefit for the agents
and their negative present value. Agency costs are found when there are differing self-
interests between share* holders and managers, superiors and subordinates, or
managers of competing departments or branch offices.
How Agency Problems Occur
Because owners have access to only a relatively small portion ofthe information that
is available to executives about the performance ofthe firm and cannot afford to mon-
itor every executive decision or action, executives are often free to pursue their own
interests. Thiscondilion is known as the moral hazard prnblem. Ins also called shirk-
ing to suggest "self-interest combined with smile."
As a resuli of moral hazards, executives may design strategics that provide the great-
est possible benefits for themselves, with the welfare of the organization being given
only secondary consideration. For example, executives may prescll products at year-
end to trigger their annual bonuses even though the deep discounts that they must
offer
will threaten the price stability of their products for the upcoming year* Similarly,
unchecked executives may advance their own self-interests by slacking on the job,
altering forecasts to maximize their performance bonuses; unrcalistically assessing
acquisition targets'outlooks in order to increase the probability of increasing
organisational size through their acquisition; or manipulating personnel records to
keep or acquire key company personnel.
The second major reason thai agency costs are incurred is known as adverse selec
adtme tateal Mlion. This refers to the limited ability that stockholders have to
precisely determine the agency problem competencies and priorities of executives at
the time thac thev are hired. Because pnn- limued abtlilv of stockholders eipals cannot
initially verify an executives appropriateness as an agent ol the owners, to precisely o
Vierminc unanticipated problems of nonovcrlapping priorities between owners and
agents arc the competencies and likely to occur prionties of executive. The most
popular solution to moral dilemma and adverse selection problems is for owners 10
attempt to more closely align their own best interests with those of their agents
through the use of executive bonus plans*' Foremost among these approaches are
slock option plans, which enable executives to benefit directly from the appreciation
of the company's Mock just as other stockholders do. In most instances, executive
bonus plans arc unabashed attempts to align the interests of owners and executives
and to thereby induce executives to support strategics ihat increase stockholder
wealth. While such schemes are unlikely to eliminate self-interest as a major criterion
in executive decision making, they help to reduce the costs associated m ith moral
dilemmas and adverse selections.

Problems That Can Result from Agency

Prom a strategic management perspective there are five dilTereni kinds of problems
that can ansc because of the agency relationship between corporate stockholders and
their company's executives:
1. Executives pursue growth in company size rather than in earnings.
Shareholders generally want to max- imize earnings, because earnings growth
yields stock appreciation. However, because managers are typically more
heavily compensated for increases in firm sire than for earnings growth, they
may
rec-ommend strategics that yield company growth such as mergers and
acquisitions. In addition, managers' stature in the business community is
commonly associated with company size. Managers gain prominence by
directing the growth of an organization, and they benefit in the forms of career
advancement and job mobility that arc associated with increases in company
size.
Finally, executives need an enlarging set of advancement opportunities for
subordinates whom they wish to motivate with non financial inducements.
Acquisitions can pruv ide the needed positions,
2. Executives attempt 10 diversify their corporate risk Whereas stockholders can
vary* their investment risks through management of their individual stock
portfolios, managers1 careers and stock incentives are tied to the performance
of a single corporation, albeit the one that employs ihem. Consequently,
executives are tempted to diversify their corporal! on s operation, businesses,
and product lines to mod-crate the risk incurred in any single venture- While
this approach serves the executives' personal agendas, it compromises the
"pure play" quality of their firm as an investment In other words, diversifying a
corporation reduces the beta associated with the firm's return, which is an
undesirable outcome for manv stockholders,
3. Executives avoid risk. Even when, or perhaps especially when, executives arc
willing to restrict the diversification of their companies, they arc tempted to
minimize the risk that they face. Executives are often fired for failure, but
rarely for mediocre corporate performance. Therefore, executives
mayThin*depih dWussion of executive bonus compendium i*prmidcd
inOiupter 10 avoid desirable levels of risk if they anticipate little reward and
opt for conservative strategics thai minimize the risk of company failure. If
they do. executives will rarely support plans for innovation, diversification, and
rapid growth. However, from an investor's perspective, risk taking is desirable
when it is systematic. In other words, when investors can reasonably expect
that their company will generate higher long-term returns from assuming
greater risk, they may wish to pursue the greater payoff, especially when ihe
company is positioned to perform better than its competitors that face the same
nominal hsks. Obviously, the agency relationship creates a problem—should
 executives prioritise their job security or ihe company's financial returns to
stockholders?
4, Managers act to optimize their personal payoffs. If executives can gain more
from an annual perfor- mance bonus by achieving objective I than from stock
appreciation resulting from the achievement of objective 2, then owners must
anticipate that the executives will target objective I as their priority,
eventhough objective 2 is clearly in the best interest of the shareholders.
Similarly, executives may pursue a range of expensive perquisites that have a
net negative effect on shareholder returns. Hlcgant corner offices, corporate
jets, large staffs, golf club memberships, extravagant retirement programs, and
lim- ousines for executive benefit are rarely good investments for stockholders.
5. Executives act to protect their status. When their companies expand, executives
want to ensure that their knowledge, experience, and skills remain relevant and
central to ihe strategic direction of the cor- poration They favor doing more of
what they already do well In contrast, investors may prefer revolutionary
advancement to incremental improvement, for example, when confronted with
Ama- zon.com, competitor Barnes & Noble initiated a joint venture website
with Bertelsmann. In addition.Barnes & Noble used vertical integration with
the nation's largest book distributor, which supplies 60 percent of Amazon's
books. This type of revolutionary strategy is most likely to occur when
executives arc given assurances that they will not make themselves obsolete
within the changing company that they create.

Solutions to lhe Agency Problem

In addition to defining an agent s responsibilities in a contract and including elements
like bonus incentives that help align executives* and owners" interests, principals can
take several other actions to minimize agency problems. The first is for the owners to
nay executives a premium for their service. This premium helps ex* ecuuves to see
their loyally to the stockholders as the key to achieving tlieir personal financial
targets.
A second solution to agency problems is for executives to receive hackloaded
compensation. This means that executives arc paid a handsome premium for superior
future performance. Strategic actions taken in year one, which arc to have an impact
in year three, become the basis for executive bonuses in year three. This lag time
between action and bonus more realistically rewards executives for the consequences
of their decision making, ties the executive to the company for the long term, and
properly focuses strategic management activities on the future.
Finally, creating teams of executives across different units of a corporation can hc.p to
focus performance measures on organizational rather than personal goals- Through
the use of executive teams, owner interests often receive the priority that they deserve.

S UMMARY

Defining the company mission is one of the most often slighted tasks in strategic
management. Emphasizing the operational aspects of long-range management
activities conies much more easily for most executives. But the critical role of the
missiun statement repeatedly is demonstrated by failing firms whose short-run actions
have been at odds with their long-run purposes.
The principal value of the mission statement is its specification ol the firm's ultimate
aims. A firm gams a heightened sense of purpose when its board of directors and its
top executives address ehese issues: "What business are we in?" "What customers do
wc serve?" "Why doe* this organization exist?" However, the potential contribution
of the company mission can be undermined if platitudes or ambiguous generalizations
are accepted in response to these questions. It is not enough to say that Lever Brothers
is in the business of "making anything that cleans anything*' or that Polaroid is
committed to businesses that deal with "the interaction of light and matter" Only if a
firm clearly articulates its long-term intentions can its goals serve as a basis for shared
expectations, planning, and performance evaluation.
A mission statement ihat is developed from this perspective provide! managers with a
unity of direction transcending individual, parochial, and temporary needs. It
promotes a sense of shared expectations among all levels and generations of
employees. It consolidates values over time and across individuals and interest groups
It projects a sense of worth and intent that can be identified and assimilated by outside
stakeholders, that is, customers, suppliers, competitors, local committees, and the
general public. Finally, it asserts the turn's commitment to responsible action in
symbiosis with the preservation and protection of the essential claims of insider
stakeholders' survival, growth, and profitability.

Q UESTIONS FOR D ISCUSSION

1. Reread Nicor Inc/s mission statement in Exhibit 2J. Strategy in Action. List five
insights into Nice* that you feci you gained from knowing iis mission
2. Locate the mission statement of a company not mentioned in the chapter Where did
vou find it? Was it presented as a consolidated itatement. or werv you forced to
assemble U yourself from various publications of the firm 1.' How many of the mission
statement elements outlined in this chapter were discussed or revealed in the
statement you found?
Prepare a iwwpage typewritten mission statement lor your school of business or tor a
firm selected by your instructor
4. List five potentially vulnerable areas of a firm without a stated company mission
5. Mission statements arc often criticized for being lists of platitudes. What can
strategic managers do to prevent their statements from appearing lobe simple
statements of obvious truths?
6. What ev idence do you see that mission statements are valuable?
7. How can a mission statement be an enduring statement of values and
simultaneous^ provide a basis of competitive advantage?
8 If i he goal of survival refers to ability to maintain a specific legal form, what are
the comparative advantages of sole proprietorships, partnerships, and corporations?
In the Iv*>Os many Nasdaq ilrm> favored growth over profitability: in the 2000s the
goal of profitability is display mg growth Mm* might each preference be explained?
10, Do you agree that a mission statement provide* substantive guidance while a
vision statement prin ides inspirational guidance? Explain.
In essence, Sulzberger U doing what his forebears have always done: sink money into
the Times tn ihe belief thai quality journalism pays in the long run. "The challenge is
lo remember that our hisiorv is to invest during tough times/' he says. "And when
ihose limes turn—and they do. inevitably—we will be well-positioned for icoovcryr
Will it work this time? Will toughing it out Sulzbcrgcr-style revitalize the Times or
consign it to creeping irrelevance? "Despite all that has happened I still Ihink that The
\ew York Times has a stature and a position of journalistic au thorny that is greater
than any news organization in ihe world* Could that he destroyed? I believe lhat it
could be says Alex S> Jones, a former Times media enlic who is co-autbor of The
Trust, a history of the Sulzberger* and their newspaper. Jones, who now runs the Joan
Shorenstcin Center on the Press. Politics & Public r\>1icy at Harvard University,
hastens to add that he hopes that the paper will thrive again. "I tell you, I hate to think
of it not succeeding" he says.
The constancy of their commitment to high-cost journalism has put the Sulzberger* in
an increasingly contrarian position. Many of the country'* surviving big-ctiy dailies
once were owned by similarly high-mmded dynastic families thai long ago
surrendered control to big public corporations that prize earnings per share above all
else. Editorial budgets at most newspapers, as well as TV ami radio slat ions, have
been squeezed so hard for so long that asphyxiation is a mounting risk. The
proliferation of Web sites and cable-TV stations has produced an abundance of
commentary and analysis, but the kind of thorough, original reporting in which the
IfcM specializes is, if anything, increasingly scarce.
I i ^rTccuthe Sul/bergers have Mibsidi/cd the Times in valuing good journalism and
the prestige it confers over profits and ihe wealth it creates. In fact, for much of its
history, the Time* barely broke even. Recasting ihe paper into a publicly held
corporation capable of pursuing profit as determinedly as Times editors chase
Pulitzers was the signal achievement of Arthur Jr.* father. Arthur O. "Punch"
Sulzberger Sr. Still NYT Co. consisicmly fails to post the 25% profit margins of such
big newspaper comhincs as Gannett Co. and Knight-Ridder Inc. mainly because uf the
Times\ outsize editorial spending, which ihe paper does not disclose but which is
thought to exceed S300 million a year.
For a lime, Arthur Jr. enthralled Wall Street by adding double-digit growth to the
Sulzhcrgian formula. The value of NYT Co. shares soared 295% from their 199b low
to their 2002 high, boosting ihc value of ihc family's 19% holding to S 1.3 billion.
Like other Old Media families, the Sulzberger* have been able to maintain
unquestioned control of their company by creating a new class of voting stock and
reserving most of it for themselves. Among them, the various branches ofthe
Sulzberger family control 91% of the Class B voting shares
The Bancrofts of Dow Jones & Co and the Grahams of Washington Post Co share the
Sulzbcrgcrs* journalism-f km philosophy. However the Washington Post has moved
beyond new spapcring to a greater extent than has NYT Co., which in addition to the
Hernia* Tribune owns The Bttston (7/«rV, 15 small daily newspapers* and eighi
television stations. Actually, Arthur Jr has increased his company s financial reliance
on the Times by selling off magazines and other peripheral properties acquired under
hU father En short. NYT Co. is quality journalism \ purest traditional play.
In 2004, the company clearly failed to partay quality into the growth it will need to
continue supporting the Times franchise. The Wall Street consensus is that the
company will report net income ofS290 million for 2004, down 4% from the
preceding year and a good UN below the $445 million it neited in the media industry
boom year of 2001, Revenues have plateaued at S3 billion, give or take a few hundred
million, for ftvc years naming.
h wasn't thai long ago—Apr 8.2002, to be precise —that all seemed right in Arthur
Sulzberger Jr sranftcd world. On that day. most of the Times s 1.200 reporters and
editors galhered in its newsroom jusl off Times Square lo celebrate the paper's record
haul of Pulitzer Prizes. No newspaper had ever before won more than four Pulitzers in
a year, the Times won seven in 2002—six of which recognized iis Mereukan coverage
ofthe September 11 terrorist attacks and their aftermath Sulzberger was ecstatic, not
realizing thai he already had made the biggesi blunder of his tenure as publisher:
naming Howell Raines as executive editor
Raines, who had joined the paper in 197tt as a national correspondent, had deeply
impressed Sulzberger by shaking the stodginess oui of ihc editorial page as its editor
during the Clinton years. Raines campaigned hard for the promotion in 200L vowing
to root out complacency and do whatever was needed to raise the staff's "competitive
metabolism" By most accounts, Sulzberger saw Raines, then 58, as his journalistic
alier ego and collaborator in transforming the Times mio a hilly national, multimedia
franchise.
Just 18 months after self-proclaimed 'change agent** Rainc* had taken charge, the
Time* ran a devastatingly self-cntical article recounting how Jayson Blair had
plagiarized or made up ai least J6 stories. Sulzberger, who has often
In essence. Sulzberger is doing what his forebears have always done: sink money into
the Times in Ihe belief that quality Journalism pay* in the long nin. "The challenge is
to remember that our historyis to invest during tough tunes/ he says "And when those
times turn—and they do, inevitably—we will be uell-positioned for recovery.**
Will it work this time'* Will toughing it out Sulzbcrgcr-stylc revitalize the Times or
consign it to creeping irrelevance'' "Despite all that has happened I still think that Th ,
New York /litres has a stature and a position of journalistic auihoriiy that is greater
than any news organization in ihe world. Could that be destroyed"' I believe that it
could be" says Alex S, Jones, a former Times media critic who is co-author of The
Trust, a history of the Sulzberger and their newspaper. Jones, who now runs the Joan
Shorcnsicin Center on the Press* Politics & Public Policy at Harvard University,
hastens to add that he hopes that the paper will thrive again. "I tell you, I hate to think
of it noi succeeding" he says.
The constancy of their comrniimcnt to high-cost journalism has put the Sulzberger* in
an increasingly contrarian position Many of the country's surviving big-city dailies
once were owned by similarly high-minded dynastic families thai long ago
surrendered control to hig public corporation* that prize earnings per share above all
else. Editorial budgets at mosi newspapers, us well as TV and radio staiions. have
been squeezed so hard for so long that asphyxiation is a mounting risk. The
proliferation of Web sites and cable-TV station* has produced an abundance of
commentary and analysis, bul the kind of thorough, original reporting m which the
Times specializes is, if anything, increasingly scarce.
In effect, the Sulzbcrgers have subsidized the AN in valuing good journalism and the
prestige it confers over profits and the wealth it creates. En fact* for much of its
history, the Times barely broke even. Recasting ihc paper into a publicly held
corporation capable of pursuing profit as determinedly as Times editors chase
Puhi/ers was the signal achio-cmcnt of Arthur Jr/s father, Arthur O. "Punch"
Sulzberger Sr. Still. NYT Co. consistently Tails to post ihe 25% profit margins of
such big newspaper combines as Gannett Co. and Knight-Riddcr Inc. mainly because
of the times** outsize editorial spending, which ihe paper docs noi disclose but wtiieh
is thought io exceed S300 nullum a year.
For a time. Arthur Jr. enthralled Wall Street by adding double-digit growth to the
Sul/hcrgian formula. The value of NYT Co. shares soared 295% from their 1996 low
to their 2002 high, boosting ihc value of ihc family's 19% holding to SI.5 billion. Like
other Old Media families, ihe Sul/bergers have been able to maintain unquestioned
control of their company by crcaiing a new class of voting slock and reserving most
of it for themselves Among i hem, the various branches of the Sulzberger family
control 91% of the Class B voting shares.
The Bancrofts of Dow Jones & Co. and the Grahams of Washington Post Co. share
the Sulzbcrgers* joumalisnv f irsi philosophy However the Washington Post has
moved beyond newspapenng to a greater extent than has NYT Co., which in addition
to the Hemid Tribune owns The Boston Globe. 15 small daily newspapers, and eight
telesiswin stations. Actually, Arthur Jr. has increased his company's financial reliance
on ihc Times by selling off magazines and other peripheral properties acquired under
his father In short. NYT Co. is quality journalism s purest traditional play.
In 2004. the company clearly failed io parlay quality inioibe growth it will need to
continue supporting the Times franchise. The Wall Street consensus is that the
company will report net income ofS290 million for 2004. down 4% from the
preceding year and a good 35% below the S445 million it netted in the media industry
boom year of 2001. Revenues have plateaucd at %i billion, give or take a few hundred
million, for five years running.
Ii wasn't that long ago -Apr 8.2002. to be precise—that all seemed right in Arthur
Sulzberger Jr s rarificd world. On thai day, most of the Times\ 1,200 reporters and
editors gathered in iu newsroom jusi olT Times Square io celebrate the paper's record
haul of Pulitzer Prizes. No newspaper had ever before won more than four Pulitzers in
a year, the Times won seven in 2002—six of which recognized its Herculean
coverage of the September 11 terrorist attacks and thcii aftermath Sulzberger was
ecstatic, not realizing that he already had made the biggest blunder of his tenure as
publisher: naming Howell Raines as executive editor.
Raines, wtio had joined the paper in 197H av a national correspondent, had deeply
impressed Sul/berger by shaking the stodgmcss out of the editorial page as its editor
during the Clinton years. Raines campaigned hard for the promotion in 200], vowing
to root out complacency and do whatever was needed to raise the staffs "competitive
metabolism." By most accounts, Sul/berger saw Raines, ihcn 58, as his journalistic
alter ego and collaborator in transforming ihe Times inio a fully national, multimedia
franchise.
Just IS months after self-proclaimed "change agent* 4 Raines had laken charge, the
Time* ran a devasiatingly self-critical article recounting how Jayson Blair had
plagiarized or made up ai least stories. Sulzberger, who has often been accused of
lacking gravitos, will be a long lime living down his flip initial i . i lo Blair s
transgressions: ii sucks," Worse, Sulzberger hail no feel for how Raines was
perceived in Ihe newsroom, where resentment ofhis arbitrary, self*aggrandizing ways
had reached the (lash point* Three weeks 3ftcr Sulzberger had unimpamality that
tliey espouse. Now. me very notion of impartiality is under assault, blurring ihe line
between journalism and propaganda.
For its part, the Bush White House has succeeded to a degree in marginalizing Ihe
national or "elite" press by walling off public access to much ofthe workings ofthe
government and by treating Ihe fourth Estate as merely another special inierest group
ihat can be safely ignored when it isn't being exploited. The Bushies particularly
dislike the ■' ■which, in their view, epitomizes the Eastern liberal Establishment. In
his acceptance speech at tl>c Republican corrvenlioru George W Bush mocked the
limes for what he considered its overt)* pessimistic coverage of post-World War II
Germany. "Maybe that same person is still around, writing editorials.** he joked
The Times also is under attack from another branch ofthe federal government the
judiciary ihe paper figure* centrally in most of a half-do/en pending court cases that
collectively pose a dire threat to the traditional journalist*: practice of assunng
confidentiality to whistic-bJowcrs and other informants. In October, a federal judge
ordered Judiih Miller of (he :Y'.. ■ L I T I- ricd M : ■■- I S months for refusing lo
testify before a grand jury investigating the leaking of Ihc tden-lity of CIA operative
Valeric Plame to conservative columnist Robert Novak. Miller, who researched the
Plume affair but never wrote about it. rtrmains free pending a review by the federal
Court of Appeals in Washington
Sulzberger who spent six years as a reporter is outraged that journalists are being
slapped with contempt charges for refusing to yield confidential sources to
prosecutors 'Reporters arc going to jail fordoing their jobs, and thai s just wrong." he
says. The publisher has been less outspoken in responding to the paper's political
assailants. In an interview with BusinessWeek though, he denied his paper is biased
in its coverage of national politics or the war in Iraq or even that it is liberal. The term
he prefers is "urban." says Sulzberger. "What m saw play oui in ihis election was
urban vs. suburban-rural, not red state vs. blue slate." he says. "We arc from an urban
environment; it comes wnh ihc territory We recognize that, and wc can't walk away
from it but neither can wc play it politically I don't think wc do-
FOr the first time since he became publisher 12 years ago. Sulzberger must carry on
without Russ Lewis at his side. Lewis,a loquacious lawyer who got his start as a Tun*
v copy boy in l%6. stepped down on Dec 26 after seven years as president and CEO
of NYT Co. His replacement is the 54-ycar-old Janet Robinson, a former
schoolteacher who joined ihe company in 19D and worked her way up through
advertising sales. She played an important rok in the national expansion ofthe Times
broadsheet voice abroad since 1887, The Post reluctantly agreed lo relinquish its 50%
interest for S65 million after NYT Co. threatened io start I new paper to drive the IHT
out of business "The thing was going sideways and sooner or later was going to die.**
says Sulzberger, who was harshly criticized by some for lacking the gentlemanliness
of his father
Tlve company considered making the Tribune over into a foreign edition ofthe
Times, but decided in the end to maintain IHTs separate, international identity. "This
needs lo be a European paper for Europeans," says Michael Golden, a NYT Co. vice-
chairman who was named publisher of IHT in 2003. Actually, the 7hr>s 240,000
subscribers are concentrated in Europe but spread among ISO countries.
Under Golden, a slightly older first cousin of Sulzberger's, the Trib has adopicd the
Times s play-book, if not its name. The transailaniic flow of copy from the Times*,
has increased, but the Trib has enlarged its own news staff. too. It has also added
pages, color photos, and new printing sites in Sydney; Sao Paulo, and Kuwait City,
The Trib scored impressively in recent reader surveys in Europe aH Asia and ad sales
arc nsmg, but they still amount to less than SI00 million a year Golden and his cousin
yearn to turn the Trih\ operating losses into profits, but the general track record of
English-language newspapers and magazines abroad is discouraging. Even if the IHT
flourishes, it will be a long time before it contributes significantly to its parent
company's top or bottom lines.
The ■ I -u. ■ □ ii ol M I I o - R.,L umcnl in television news. The Times has built a
cadre of television professionals who, in collaboration with a revolving cast of pnnt
reporters, have produced much fine work for Frontline* \om and other programs. In
2003, the Times moved beyond production into disiribut ion. laying out SI00 million
for ha If-ownership of a digital cable channel, Discovery Times, operated in
partnership with Discovery Comrminications Inc Discovery Times reaches 35 million
homes an lrnprcssivc total lor a fledgling channel —bui its ratings arc minuscule: In
October, just 27,000 people tuned in during prime time, according to Nielsen
XeiRaimgs.
been accused of lacking gravitas, svilj be a long lime living down his Hip initial a-
action lo Blair"s transgression*: ' U sucks." Worse. Sulzbcrgei hail no feel for how
Raines was perceived in ihe newsroom, where resentment ofhts arbitrary,
self*aggrandizing ways had reached the hash point* Three weeks after Sulzberger had
unimpartialiiy that they ospousc-Now, me very notion of impartiality is under awult.
blurring ihe Itne between journalism and propaganda.
For its part, the Bush White House has succeeded to a degree in marginalizing the
national or "elite" press by walling olVpubltc access to much of the workings of the
government and by treating Ihe fourth bstate as merely another special interest group
ihat tan be safely ignored when it isn't being exploited. The Bushies particularly
dislike the ■' ■which, in their view, epitomizes the Eastern liberal Establishment, In
his acceptance speech at the Republican convention, George W, Bush mocked the
limes for what he considered its overiy pessimistic coverage of post-World War II
Germany. "Maybe that same person is still around writing editorials," he joked
The Times also is under attack from another branch of the federal government the
judiciary The paper figure-* centrally in most of a half-dozen pending court cases that
collectively pose a dire threat to the traditional journalistic practice of assuring
confidentiality to whistlc-Nowers and other informants. In October, a federal judge
ordered Judhh Miller of the Times imprisoned for up to 18 month* lot refusing to
testify before a grand jury investigating the leaking of Ihc identity of CIA operative
Valeric Plame to conservative columnist Robert Novak. Miller, who researched the
Plume affair but never wrote about it. remains free pending a review by the federal
Couit of Appeals in Washington
Sulzberger, who spent six years as a reporter, is outraged that journalists are being
slapped with contempt charges for refusing to yield confidential sources to
prosecutors "Reporters arc going to jail fordoing their jobs, and thai s just wrong." he
says. The publisher has been le:*s outspoken in responding to the papers political
assailants. In an interview with Business fffrrt though, he denied his paper is biased in
its coverage of national politics or the war in Iraq or even that it is liberal. The term he
prefers is "urban." says Sulzberger. "What we saw play oui in ihis election was urban
vs. suburban-rural, not red state vs. blue stale." he says. "Wc arc from an urban
environment: ii comes wuh ihc territory We recognize that, and wc can't walk away
from it. but neither can we play it politically, I don't think we do-
For the first time since he became publisher 12 years ago. Sulzberger must carry on
without Russ Lewis at his side. Lewis, a loquacious lawyer who got his start as a
Times copy boy in 1966. stepped down on Dec 2b after seven years as president and
CEO of NYT Co. His replacement is the 54-year-old Janet Robinson, a former
schoolteacher who joined the company in 1983 and worked her way up through
advertising sales. She played an important role in the national expansion of the Times
broadsheet voice abroad since 1887, The Post reluctantly agreed to relinquish its SOtt
interest for S65 million after NYT Co. threatened io start I new paper io dme the IHT
out of business. "The thing w as going sideways and sooner or later was going to die."
says Sulzberger, who was harshly criticized by some for lacking the gcntlemanliness
of his father.
The company considered making the Tribune over into a foreign edition of the
Times, but decided in the end to maintain IHTs separate, international identity. This
needs lo be a European paper for Europeans." says Michael Golden, a NYT Co. vice-
chairman who was named publisher of IHT tn 2003. Actually, the Trih\ 240.000
subscribers are concentrated in Europe but spread among 180 countries.
Under Golden, a slightly older first cousin of Sulzberger's, the Tnb has adopted the
Times s playbook. if not its name. The transatlantic flow of copy from the Times\ has
increased, but the Trib has enlarged its own news staff, loo. It has also added pages,
color pholos, and new printing sites in Sydney, Sao Paulo. and Kuwait City. The Trib
scored impressively in recent reader surveys in l.urupc aH Asia and ad sales arc nsing.
but they still amount to te^s than 5100 million a year Golden and his cousin yearn to
turn the Thb\ operating losses into profits, but the general track record of English-
language newspapers and magazines abroad is discouraging. Even if the IHT
nourishes, it will be a long time before it contributes significantly to its parent
company's top or bonom lines.
The same is true of NYT CaX investment in television news. Trie Times has built a
cadre of television professional* who, in collaboration with a revolving cast of pnnt
reporters, have riroduced much tine work for Fnmdine, Nova* and other programs. In
200}, the Times moved beyond production into distribution, laying out SI00 million
for half-ownership of a digital cable channel, Discovery Times, operated in
partnership whh Discovery Communications Inc Discovery Times reaches £5 million
homes - an impressive total for a fledgling channel —but its ratings arc minuscule: In
Cfciobei. just 27.000 people tuned in during prime time, according to Nielsen
KciRaimgs,

mime, ihc Time* a I read* is making scnouv money- New York limes Digital (which
include* ItoHan com as wrll as NYTimcscotn) nelfed an enviable SP 3 million on
revenue* ofSS3J CNILLKW dunng ihc fint half of 2004. the last period for which its
financial* have been disclosed All indication* are lhai the digital unit is continuing to
grow at 30% lo 40% a year, making ii NYT Co. * fastest-revving growth engine
Advertising accounts for almost all of the digital operation trevenues, but
disagreement rages wiihin the company over whether NYTifnct.rom should emulate
The Wiitf Strrei Journal and begin charging a *uh*cnn«ion fee Undoubr-edK. many
of the tiles 1 % million unique monthly visitor* would flee if hit witha$3°.95orcvcri J
M^s roooo>j\ eharwy One camp wrthin the NYT to argues that such a massive lot* of
Web traffic would cost the Turn** dearly in the loag rub. both by shrinkm? the
»xkencc for it* journalism and b> deposing it of untold mi H torn m ad rev mac The
eoun-icrargument is that the Time* would more than nuke up for |mi ad dolbn by
boosting circulation revenue -both from online fees and new pnni tub** notions paid
for by people who now read for free on the Wrh
Suizberger declines to take a side in thisdebwe. but rounds a* if he i* leaning toward
a pay site "It gets to the is-Mie of how1 comfortable are we training a generation of
reader* to get qualify informaiion for free,** he say4*. "That is troubling "
What's a platform agnostic to do'.1 The MPJF York Times, like .ill nam publications,
faces a ^iiandaiy A muiority of the papers readership now view* the paper online, but
ihc company still derives 90% of it* revenue* fmrn newspaper-tng. ~Thc busmen
model that *ccm* u> justify ihe expense of producing quality journalism is itie one
thai isn't growing, ind the one that is growing the Intcrnci—isn't prouWing enough
revenue to produce journali*m of the same quality," says John EsattcUc. a co-founder
of Hunt and other magartnev and Web vttc*
Today Sulzberger faces an even bigger challenge than wfcen be look charge of the
Times m the mrf- 1990s, Can he find a way to rekindle growth while preserving the
primacy of the lime*\ journalism^ Tnc answer will go a long way toward determining
not only the fate of Amerscas mosi important newspaper but also wliether traditional,
reporting-intcmisc journalism has a central place in the Digital Age
Source: Anthony franco. John ftotunt, and Laurtn Card. "Tht Futura of The New Vtv*
Times rVabtahor Arthur Subberfer. [¥ HM Hn Hirtdi Full VVaaker Earnnffi A OvM
^«*a VVortd A kanoalt Aftermath. Ha Also Ha* an Ambitious Plan/* AwsTOrtW*.
January 17 t Mpp 64-71
 Appendix BB&T Vision, Mission, and Purpose
BB & T Vision
To create (he best financial institution possible: "The
BB&T Mission
To make the world a better place to live by: helping our clients achieve economic
success anil financial security: creating a place where our employees can team, t>rmv
and he fulfilled in their work: making the communities in which wc work belter
places to be; and (hereby: optimizing the long-term return to our shareholders, while
providing a safe and snuud Investment*
BB&T Purpose
Our ultimate purpose is to create superior JonR-term economic rewards for our
shareholders.
This purpose is defined by ihe free market and is as it should be, <>ur shareholders
provide the capital that is necessary* to make our business possible They take the risk
if the business is unsuccessful 1 bey have ihc right to receive economic rewards for
the risk which they have undertaken*
However, our purpose, to create superior long-term economic rewards for our
shareholders, can only he accomplished by providing excellent service to our clients,
as our clients arc our source of revenues.
To have excellent clieni relations, wc must have outstanding employees to serve our
clients. To attract and retain outstanding employees, wc must reward them financially
and cieate an cmironrncni where they can learn and grow.
Our economic results are significantly impacted by the success ol our communities.
The community's "quality of life" impacts its ability to attract industry for growth.
Therefore, we manage our business in a long-term context, as an integrated whole,
with the ultimate objective of rewarding ihe shareholders for their investment, while
realizing thai the cause of this result is quality client service Uxccllcnt service will be
delivered by motivated employees working as an integrated team Ihesc results will be
impacted by our capacity to contribute to the growth and well-being ofthe
communities we serve.
Values
-"Excellence is an art won by training and habituation. WV are what wc repeatedly
do. Excellence then It nut an act, hut a habit/*—Aristotle
The great Greek philosophers saw values as guides to excellence in thinking and
action In this context, values are standards which we strive to achieve. Values arc
practical habits that enable us as individuals tn live, be successful and achieve
happiness. Fur BB&T. our values enable us to achieve our mission and corporate
purpose.
TobciiwfuL valuevmuNibeconsc*iousryhcldar>dbccon-sistent (noncontntdKiory*)
Many people have eonilicting values which prevent them from acting with clarity*
and self-confidence.
There are 1 Ij primary* values at BB&T These values are consistent with one another
and arc integrated. To fully act on one of these values. vou must also act consistently
with the other values Our focus on values grows from our belief thai ideas mailer and
mat an individuals character isofcnt-ical significance
Values are important at BB&T!
1, Reality (Fact-Based)
What is. is. If we want lo be better we must act within the context of reality (the
facts). Businesses and individuals often make serious mistakes by making decisions
bated on what they "wish was so" or based on theories which arc disconnected from
reality The foundation for quality decision making is a careful understanding of ihe
facts.
There is a fundamental difference between the law's of nature(reality), which are
immutable, and the i nan-made. The Jaw of gravity is the law of gravity. The
existence of the law of gravity docs not mean man can not create an airplane.
However, an airplane musi be ereaied within the context ofthe law* of gravity. At
BB&T we believe in being Reality grounded"
2. Reason (Objectivity)
Mankind has a specific means of survival which is his ability to think, te. his capacity
to reason logically from the facts of reality as presented to his five senses. A lion has
dam io hum A deer has svvillncss lo avoid Ihe hunicr
Man has hi* ability to think- There is only one "naniral resource"—ihc human mind.
Clear thinking is not auiomanc It requires intellectual discipline and begins with
sound premises based on observed facts. Vou must be able to draw general
conclusions in a rational manner from specific examples (induction) and be able to
apply general principles to the solution of specific problems (deduction). You musi be
able to think in an integrated way thereby avoiding logical contradictions
We cannot all be geniuses, bur each of us can develop the mental habits which ensure
that when making decisions w carefully examine the facts and think logically without
contradiction in deriving a conclusion. We must Icain to think in terms of what is
essential, re., about whai is important. Our goal is to objectively make the best de-
cision to accomplish our purpose*
Rational ihinking is a learned skill which requires mental focus and a fundamental
commitment to consistently improving the clarity of our mental processes, AI BB&T,
wc are looking for people who arc committed lo constantly improving their ability to
reason,
X Independent Thinking
All employees are challenged to use their individual minds to their optimum to make
rational decisions. In this eon-text, each of us is jVA/wjn.viWr for what we do anil
who wv art. In addition, creativity is sirongfy encouraged and only possible with
independent thought
We learn a great deal from each other. Teamwork is important at BB&T (as will be
discussed later). However, each of us thinks alone Our minds are not physically
connected, tn this regard each of us must be willing to make an independent judgment
ofthe facts based on our capacity io ihmk logically. Just because the "crowd" says it is
so. docs not make it so.
In this conic*!, each of us is responsible for our own actions. [*ach of us is
responsible for our personal successor failure, i.e., it is not the bank's fault if someone
docA nol achieve his objectives.
All human progress by definition is based on creativity, because creaiiv uy is the
source of positive change Creativ -ity is only possible to an independent thinker.
Creativity is not about just doing soiTArihing different. It is ahoui doing something
better To be belter, the new methooVprocess must be judged by its irnpoci on the
whole organi/ailon. and m to whether it contributes to ihe accomplishment of ow
mission.
There is an infinite opportuniry' for each of us to do whatever we do better A
significant aspect of Ihc selffulfillment which work can provide comes from creative
thought and action,
4, Productivity
Wc are committed to being producers of wxakh and well-being by taking the actions
necessary to accomplish our mission. The tangible evidence of our productivity is that
we have rationally allocated capita) through our lending and investment process, and
lhai wc have provided needed services to our clients in an efficient manner resulting
in superior profitability.
Profitability is a measure ofthe differences in the economic value ofthe products-
services wc produce and ihc cost of producing these produclv services. In a long-term
context and in a free market, the bigger the profit, the better. This is true not only
from our shareholders* perspective (which would be enough justification), but also in
terms of ihe impact of our work on society as a whole. Healthy profits represent
productive work. Ai BB&T we are looking for people who want to create, to produce,
and who arc ihereby committed to turning their thoughts into actions thai improve
economic well-being,
5. Honesty
Being honest is simply being consistent with reality. To be dishonest is to be in
conflict with reality, which is there* fore self-defeating. A primary reason that
individuals fail is because they become disconnected from reality, pre-Icndutg that
facts arc other lhan they are.
To be honest does nol require that wc know 1 everything. Knowledge is always
contextual and man is not omniscient. However, wc must be responsible lor saying
whai wc mean and meaning whai we say.
6- Integrity
Because we have developed our principles logically, based on reality, wc will always
act consistently with our principles. Regardless of ihe short-tcim benefits, acting
inconsistently with our principles is to our long-term deli i-mem. Wc do not,
therefore, believe in compromising our pnnciples in any situation,
Pnnciples provide carefully thought-out concepts which will lead to our long-term
success and happiness. Violating our principles will always lead lo failure. BB&T is
an organization ofthe highest integrity.
7. Justice (Fairness)
Individuals should be evaluated and rewarded objectively (for belter or woise) based
on ihekr eontnbutions toward accomplishing our mission and adherence to our values.
Those who contribute Ihe most should receive the most.
The single most significant way in which employees evaluate their managers is in
determining whether the manager is just. Employees become extremely unhappy (and
tightly so) when I hey perceive that a person who is not contributing is cncrrcwardcd
or a strong contributor is under rewarded
If wc do not reward those who contribute the most, they will leave and our
organization will be less successful Even more important, if ihcre is no reward for
superior performance, the average person will not be motivated to maximize hi*
productivity.
We must evaluate whether the food wc eat is hcalihy. the clothes wc wear attractive*
the car we drive functional, etc. and we must also evaluate whether relationships with
other people arc good for us or not.
In evaluating other people, ii is critical that we judge baseJ on essentials At BH&T we
do not discriminate based on nonessentials such as race, sex, nationality* etc, WC do
discriminate based on competency, performance and character. Wc consciously reject
egalitarianism and collectivism. Individuals must be judged individually hased im
their personal merits, not their membership in any group.
8, Pride
Pndc is the psychological reward we earn from living by our values, i.e., from being
Just, honest, ha\ ing integrity, being an independent thinker, being productive and ra-
tional.
Aristotle believed thai "earned" pride (not arrogance) was the highest of virtues,
because it presupposed all the others. Striving for earned pride simply reinforces the
importance of having high moral values.
tiach of us must perform our work in a manner as to be able to be justly proud of whai
we have accomplished. BBAT must be the kind of organization with which each
employee and client can he proud to he associated.
9. Self-Esteem <Self-Motivation)
We expect our employees to earn positive self-esteem from doing their work well We
expect and wani our employees to act in their rational, long-term self-interest. We
wani employees who have si rung personal goals and who expect to be able to
accomplish their goals within the context of our mission.
A necessary atlnbuie for self-esteem is self-motivation. W*c have a strong work ethic.
We believe that you receive from your work in proportion to how much you
contribute. If you do not wani lo work hard, work somewhere else.
While there are many trade-offs in the content of life, you need to be clear that BB&T
is the best place, all things considered, for you to work to accomplish your long-term
goals When you know this, you can be more productive and happy.
10. Teamwork/Mutual Supporttveness
While independent thought and strong personal goals are critically important, our
work is accomplished wiihin teams Each of us must consistently act to achieve the
agreed-upon objectives of the team, with respect for our fellow employees, while
acting in a mutually supportive manner.
Our work at BBAT is so complex that it requires an integrated effort among many
people to accomplish important tasks. While we are looking lor self-motivated and
independent thinking individuals, these individuals must recognize that almost
nothing at 11B&T can be accomplished without ihe help of their team members. One
of the responsibilities of leadership in our organization is to ensure that each
individual is rewarded based on tfocir contribution lo ihe success of ihe total team.
Wc need outstanding individuals working together to create an outstanding team.
Our values are held consciously and are logically consistent. To fully* execute on any
one value, you must aci consistently with alt 10 values. At BB&T values arc practical
and important
The Role of Emotions
Often people believe that making logical decisions means that we should be
unemotional and that emotions are thereby unimportant. In fact, emotions arc
important. However, the real issue is how rational arc our emotions. Emotions arc
mental habits which are often developed as children. Emotions give us automatic
responses io people and events: these responses can cither be very useful or
destructive indicators. Emotions as such arc not means of decision or of knowledge:
the issue is: How were your emotions formed? The real question is. Are wc happy
when we should be happy, and unhappy when wc should be unhappy, or are wc
unhappy when we should be happy?
Emotions arc learned behaviors. The goal is to "train up* 1 our emotions so That our
emotions objectively reinforce the best decisions and behaviors toward our long-term
success and happiness. Just because someone is unemotional does not mean that they
arc logical.
Concept* That Describe BB&T
1. Client-Driven
"World class" client service organi/aiioa
Our clients arc our partners.
Our goal is to create win'win relationships.
"You can tell wc want your business "
"It is easy to do business with BBaYl
"Respect the individual, value the relationship?
We will absolutely never, ever, take advantage of anyone, nor do we want to do
business wiih those who would lake advantage of us. Our clients arc long-term
partners and should be treated accordingly One of ihe attributes of partnerships is that
both partners must keep their agreements. We keep our agreements. When our
partners fail to keep their agreements, they arc terminating the partnership.
There are an infinite number of opportunities where we can get betier together, where
we can help our clients achieve their financial goals and where our clieni will enable
us to make a profil in doing so.
2. Quality Oriented
Quality must be built into the process.
In every aspect of our business wc warn to execute and deliver quality. It is easier and
less expensive to do things correctly than to fix what has been done incorrectly
3. Efficient
"Waste not. wani not."
Design efficiency into the system.
4. Growing Both Our Business and Our People
Grow or die.
Life requires constanl, focused ihoughl ami actions lo* wards one's goals.
5. Continuous Improvemenl
Everything can be done betier. Fundamental commitment to innovation, livery*
employee should constantly use their reasoning ability to do whatever they do better
every* day. All managers of systems processes should constantly search for belter
methods to solve problems and serve the client.
6. Objective Decision Making
fact-based and rational.
BB&T Management Style
Participative
Team Oriented racl-Based Rational i objective
Our managetneni process, by inieniion. is unsigned to be participative and team
oriented. We work hard to create consensus When people are involved in ihc decision
process, better information is available to make decisions. The participant \
understanding of ihc decision is greater and therefore, execution is better
However, there is a risk in participative decision making; the decision process can
become a popularity contest. Therefore, our decision process is disciplined. Our deci-
sions will be made based on the facts using reason. TTic best objective decision will
be the one which is enacted.
Therefore, it docs nor maner who >ou know*, who your (bends are, etc ; H matters
whether you can orTcr the best objective solution to accomplishing the goal or
solving the pruhlem at hand.
BB&T Management Concept
Hire excellent people Train them well
Give them an appropriate level of authority and responsibility
hxpeei a high level of achievement Kevvard Iheir performance
Our concept is to operate a highly- autonomous, entrepreneurial organization. In order
to execute this concept, wc must have extremely competent individuals who are "mas-
ters" of BB&T s philosophy and who are "masters" in their field of . . - r i i i expertise.
By having individuals who arc "masters" in their field, we can afford to have less
costly control systems and be more responsive in meeting Ihe needs of our clients
Attributes til an Outstanding
BB&T Employee
Purpose
Rationality
Self-Esteem
Consistent with our values, successful individuals at BB&T have a sense of purpose
for their lives, i.e. they believe that their lises matter and that they can accomplish
something meaningful through their work. We are looking for people who are rational
and have a high level of personal self-esteem. People wiih a strong personal
self-esteem get along belter with others, because they are at peace with themselves.
BB&T Positive Attitude
Since we build on the facLsof reality and our ability to reason, we are capaWe of
achieving bolh success and happiness.
Wc do not believe that ~tealism~ means pesstmism. On the contrary precisely because
our goals arc based on and consistent with reality, we (ulry expect to accomplish
them.
BB&TS Obligations to Its Employees
Wc will do our best to:
Compensate employees fairiy in relation to internal equity and market -comparable
paypractices performance' based compensation.
Provide a comprehensive and maricl-cotnpclittve ben* efit program.
Create a place where employees can learn and grow to become more productive
worlcrs and bener people
Train employees so they arc competent lo do the work asked of ihcm (Never ask
arryone to do anything they are nol trained to do.)
Evaluate and recognize performance objectively, fairly and consistently based on the
individuals contnbution to the accomplishment of our mission and adherence to our
values.
Trcai each employee as an individual with dignity and respect.
Virtues of an Outstanding Credit Culture
Just as individuals need a set of values (virtues) to guide their actions, systems should
be designed to have a set of attributes which optimize their performance towards our
goals In this regard out credit culture has seven funda* mental virtues:
1, Provides fundamental insight 10 help clients achieve their economic goats and
solve their financial prob- lems: We arc in the high-quality financial advice
business.
2. Responsive: The client deserves an answer as quickly as possible, even when ihc
answer is no.
3, FlexibkiCrcativc): Wc arc committed to finding bct- Mr ways io meet ihe client's
financial needs.
4. Reliable: Our clients arc selected as long-term part- ners and treated accordingly
BBAT must continue to cam ihc nght to be known as the mosi reliable bank.
5. Manages risk within agreed-upon limits: Clients do not want to fail financially, and
ihe bank docs not warn a bad loan.
6. (insures an appropriate economic return to Ihc bank for nsk taken: The higher the
risk, the higher the return The lower the risk, the lower the return This is an
expression of justice,
7. Creates a "premium" for service delivery: The concept is to provide superior value
to the client through outstanding service quality A rational client will fairly
compensate us when wc provide sound financial advice, are responsive, creative
and reliable* because these attributes are of economic value to the client.
Strategic Objectives
Create a high performance financial institution that can survive and prosper in a
rapidly changing, highly competitive, globally integrated environment.
Achieving Our Goal
The key to maximizing our probability of being bolh independent and prosperous over
the long term is lo cieale a supenor earnings per share (EPS) growth rate without sac-
rificing the fundamental quality and long-term compel itiv cness of our business and
without taking unreasonable risk.
While being fundamentally efficient is critical the "easy" way to rapid EPS growth is
lo artifically cut cost. However, not investing for ihc future is long-term suicide, as it
destroys our capability to compete
The intelligent process to achieve supenor EPS growth is to grow revenues by
providing (and selling) superior quality service while systematically enhancing our
margins, improving our efficiency, expanding our profitable product offerings and
creating more effective distribution channels.
The "World Standard" Revenue-Driven Sales Organization
At BBAT. selling ts aboul identifying our chems' legitimate financial needs and
finding a way to help the client achieve economic goals by providing the right
products and sen ices.
Effective selling requires a disciplined approach in which the BB&T employee asks
the client about financial goals and problems and has a complete understanding of
how our products can help the client achieve objectives and solve financial problems.
h also requires exceptional execution by support staffs and product managers, since
service and sales arc fundamentally connected and creativity is required in product
design and development.
"World Standard" Client Service Community Banks
BB&T operales as a scries of "Community 1 Banks,** The "Community Bank"
concept is the foundation for local decision making and the basis for responsive,
reliable and empaihetic client service.
By puitmg decision making closer to the client, all local factors can be considered and
we can ensure thai the client is being treated as an individual.
To operate tn this decentralized decision- making fashion, we must have highly
trained employees who undcriand BB&Ts philosophy and arc "masters" of their areas
of responsibility.
Commitment to Education/learning Competitive advantage is in the minds of our
employees.
We arc committed to making substantia] investments in employee education to create
a knowledge-based learning organization" founded on the premise that knowledge i
un-dcrstandingK properly applied, is the source of supenor performance.
We believe in systematized learning founded on Ans-torjVs concept that "excellence
is an art wxin by* training and habituation." We attempt to train our employees w ith
the best knowledge methods in their fields and lo habituate those behaviors through
consistent management reinforcement. The goal is for each employee to be a
"master"" of his or her role, whether it be a computer operator, teller, lender, financial
consultant or any other job responsibility
Our Passions
To create the best financial institution possible.
To consistently provide the client with better value thmugh rational intotalmn and
productivity improvement.
At BB&T we have two powerful passions. Our fundamental passion is our Vision: To
Create The Best Financial Institution Possible—The "World Standard"—The "Best of
the Best" We- believe that the best can be objectively evaluated by rational
performance standards in relation to the accornptishmcnt of our mission.
To be the besiof ihe best, we musl constantly find ways to deliver better value to our
clients in a highly profitable manner. This requires us to keep our minds focused at all
times on innovative ways to enhance our productivity.
CORPORATE SOCIAL 3 RESPONSIBILITY AND BUSINESS ETHICS
After reading and studying this chapter, you should be able to Understand the
importance of the stakeholder approach to social responsibility. Explain the
continuum of social responsibility and the effect of various options on company
profitability. Describe a social audit and explain its importance. Discuss the effect of
the Sarbanes-Oxley Act of 2002 on the ethical conduct of business. Compare the
advantages of collaborative social initiatives with alternative approaches to CSR
Explain the five principles of collaborative social initiatives. Compare the merits of
different approaches to business ethics. Explain the relevance of Explain the
relevance of business ethics to strategic management practice.

THE STAKEHOLDER APPROACH TO SOCIAL RESPONSIBILITY

In defining or redefining the company mission, strategic managers must recognize the
legitimate rights of the firm's claimants. These include not only stockholders and
employees but also outsiders affected by the firm's actions. Such outsiders commonly
include customer -. suppliers, governments* unions, competitors, local communities,
and the general public. Each of these interest groups has justifiable reasons for
expecting (and often for demanding) that the firm satisfy their claims in a responsible
manner In general, stockholders claim appropriate returns on their investment;
employees seek broadly defined job satisfactions; customers want what they pay for;
suppliers seek dependable buyers; governments want adherence to legislation; unions
seek benefits for their members; competitors want fair competition; local communities
want the firm to be a responsible citizen; and the general public expects the firm's
existence to improve the quality of life. According to a survey of 2 J61 directors in
291 of the largest southeastern US. companies,
1. Directors perceived the existence of distinct stakeholder groups.
2. Directors have high stakeholder orientations,
3. Directors view some stakeholders differently, depending on their occupation (CEO
directors versus non-CRO directors) and type (inside versus outside directors).
The study also found that the perceived stakeholders were, in the order of their
importance, customers and government, stockholders, employees, and society. The
results clearly indicated that boards of directors no longer believe that the stockholder
is the only constituency to whom they arc responsible.
However, when a firm attempts to incorporate the interests of these groups into its
mission statement, broad generalizations are insufficient. These steps need to be
taken:
1. Identification of the stakeholders.
2. Understanding the stakeholders1 specific claims vis-a-vis the firm.
3. Reconciliation of these claims and assignment of priorities to them.
4. Coordination of the claims with other elements of the company mission.
Identification The left-hand column of Exhibit 3.1 lists the commonly encountered
stakeholder groups, to which the executive officer group often is added. Obviously,
though, every business faces a slightly different set of stakeholder groups, which vary
in number, size, influence, and importance. In defining the company, strategic man-
agers must identity all of the stakeholder groups and weigh their relative rights and
their relative ability to affect the firm's success.
Understanding The concerns of the principal stakeholder groups tend to center on the
general claims listed in the right-hand column of Exhibit 3.1. However, strategic
decision makers should understand the specific demands of each group. They* then
will be better able to initiate actions that satisfy these demands.
Reconciliation and Priorities Unfortunately, the claims of various stakeholder groups
often conflict. For example, the claims of governments and the general public tend to
limit profitability, which is the central claim of most creditors and stockholders. Thus,
claims must be reconciled in a mission statement that resolves the competing,
conflicting, and contradicting claims of stakeholders. For objectives and strategies to
be internally consistent and precisely focused, ihe statement must display a single-
minded, though multidimensional, approach to the firm's aims.
ROL and many, many more. Although most, perhaps all, of these claims may be
desirable ends, they cannot be pursued with equal emphasis. They must be assigned
priorities in accordance with Ihe relative emphasis that the firm will give them. That
emphasis is reflected in the criteria that the firm uses in its strategic decision making;
in the firms allocation of its human, financial, and physical resources: and in the
firm's long* term objectives and strategies.
Coordination with Other Elements The demands of stakeholder groups constitute only
one principal set of inputs to the company mission. The other principal sets are the
managerial operating philosophy and the determinants of the product-market offering.
Those determinants constitute a reality test that the accepted claims must pass. The
key question is. How can the firm satisfy its claimants and at the same time optimize
its economic success in the marketplace?

The Dv^amics of Social Responsibility

As indicated in Exhibit 3.2, the various stakeholders of a firm can be divided into
inside stakeholders and outside stakeholders. The insiders are the individuals or
groups that arc stockholders or employees of the firm. The outsiders arc all the other
individuals or groups that the firm's actions affect. The extremely large and often
amorphous set of outsiders makes the general claim that the firm be socially
responsible.

Perhaps the thorniest issues faced in defining a company mission are those that
pertain to social responsibility Corporate social responsibility is the idea that a
business has a duty to serve society in general as well as the financial interests of its
stockholders. The stakeholder approach offers the clearest perspective on such issues.
Broadly stated, outsiders often demand that insiders* claims be subordinated to the
greater good of the society; that is. to the greater good of outsiders. They believe that
such issues as pollution, the disposal of solid and liquid wastes, and the conservation
of natural resources should be principal considerations in strategic decision making.
Also broadly stated, insiders tend to believe that the competing claims of outsiders
should be balanced against one another in a way that protects the company mission.
For example, they* tend to believe that the need of consumers for a product should be
balanced against ihc water pollution resulting from its production if the firm cannot
eliminate that pollution entirely and still remain profitable. Some insiders also argue
that the claims of society, as expressed in government regulation, provide tax money
that can be used to eliminate water pollution and the like if the general public wants
this to be done.
The issues arc numerous, complex, and contingent on specific situations. Thus, rigid
rules of business conduct cannot deal with them. Each firm regardless of size must
decide how to meet its perceived social responsibility*. While large, well-capitalized
companies may have easy access lo emironmental consultants, this is not an
affordable strategy for smaller companies. However, the experience of many small
businesses demonstrates that it is feasible to accomplish significant pollution
prevention and waste reduction without big expenditures and without hinng
consultants. Once a problem area has been identified* a company's line employees
frequently can develop a solution* Other important pollution prevention strategies
include changing the materials used or redesigning how operations are bid out.
Making pollution prevention a social responsibility can be beneficial to smaller
companies. Publicly traded firms also can benefit directly from socially responsible
strategies.
Different approaches adopted by different firms reflect differences in competitive
position, industry, country, environmental and ecological pressures, and a host of
other factors* In other words, they will reflect both situational factors and differing
priorities in the acknowledgment of claims. Obviously, winning the loyalty of the
growing legions of consumers will require new marketing strategies and new alliances
in the twenty-first century. Many marketers already have discovered these new
marketing realities by adopting strategics called xh* "4 Esn: (I) make it easy for the
consumer to be green, (2) empower consumers with solutions. 13) enlist the support
of the consumer, and (4) establish credibility with all publics and help to avoid a
backlash.
Occidental Petroleum faces issues of corporate social responsibility in addressing the
needs of ihe many stakeholders involved in the firm's oil exploration in developing
countries. Many parties that have potential to be affected by the company's endeavors,
including local inhabitants and government, environmental groups, and institutional
investors.
Despite differences in their approaches, most American firms now try* to assure
outsiders that they attempt to conduct business in a socially responsible manner.
Many firms, including Abt Associates, Dow Chemical, Kastcm (ras and Kucl
Associates, KxxonMobil, and ihc Bank ol America, condut t and puUivb annual mcial
audits. Such audits attempt to evaluate a firm from the perspective of social
responsibility. Private consultants often conduct them for the firm and offer minimally
biased evaluations on what arc inherently highly subjective issues.

TYPES OF SOCIAL RESPONSIBILITY

To better understand the nature and range of social responsibilities for which they
must plan, strategic managers can consider four types of social commitment:
economic, legal, ethical, and discretionary social re* sponsibiltties.
Economic responsibilities are the most basic social responsibilities of business. As wo
have noted some economists see these as the only legitimate social responsibility of
business. Living up to their economic responsibilities requires managers to maximize
profits whenever possible. The essential responsibility of business is assumed to be
providing goods and services to society at a reasonable cost. En discharging that eco-
nomic responsibility, the company also emerges as socially responsible by providing
productive jobs for its workforce, and tax payments for its local, state, and federal
governments.
Legal responsibilities reflect the firm's obligations to comply with the laws that
regulate business activities. The consumer and environmental movements focused in-
creased public attention on the need for social responsibility* in business by lobbying
for laws that govern business in the areas of pollution control and consumer safety.
The intent of consumer legislation has been to correct the "balance of power" between
buyers and sellers in the marketplace. Among the most important laws are the Federal
Fair Packaging and Labeling Act that regulates labeling procedures for business, the
Truth in Lending Act that regulates the extension of credit to individuals, and the
Consumer Product Safely Act that protects consumers against unreasonable risks of
injury in the use of consumer products.

TV cmmffimcntal movement has had a MRMLAR effect on Ihc regulation of business

This movement achieved h enforcement of existing environmental protections and it
spurred the passage of new. more cornprchen-I law* wch at the National
Eminmrncntal MKV Act. *hich i* devoted to preserving the I nttcd Slates^ ecological
balance and making emironrncntal protection A federal policy goal. It requires cm
lmnmcnial impact studies whenever new construction may threaten an existing
ecosystem, and it established the Council on I m ironmcntu! Quality to guide business
development Another product of the environmental movement was the creation of the
federal Emironrncntal Protection Agency, winch interprets and administers the
environmental protection policies of the US, government.
< le.uly. these legal responsibilities arc supplemental i>> Ihc ITTPJINAKNL AM
boifaMftses and theii cmploy-ees comply fully with the general civil and criminal
taws that apply to all individuals and institutions in the country. Yet. strangely,
individual failures to adhere to ihe law have recently produced some of the greatest
scandal* in the history of American free enterprise. Lxhibil 3 3. Strategy* in Action,
presents an overview of seven of these cases that imolvcd executives from A del phi a
Communications. Arthur Andersen. Global Crossing. ImClocvc Systems. Merrill
Lynch. WorldCom, and Xerox.
Ethical responsibilities reflect the company \ notion of ngN and proper business be-
havior fcthieal rv-srv<\sibtl itics are obligation* THAT transcend legal requirements.
Firms are expected, but not required to behave ethically Some actions that arc legal
might be considered unethical hor example, the manufacture and DITTNHUTMI ot
cigarettes is legal. But m light ol the often-lethal consequences of smoking, mum
consider the continued sale of cigarettes to he unethical. The topic of management
ethic* receives additional attention later in this chapter,
Olsmihmary responsibilities arc those that are voluntarily assumed by 3 business or-
guni/iilmti llicy include public relations activities, good citizenship, unci full
corporate social responsibility. Through public relations activities, managers attempt
to cnliance the image of their companies, products; and services by supporting worthy
causes. This form of dissrctkmary responsibility has a self-serving dimension
Companies thai adopt the good citizenship approach actively support ongoing
chanties, public service advertising campaigns, or issues in the public interest A
commitment lo full corporate responsibiliry requires strategic managers to attack
social proMom sstth the same zeal m which they ATtack business problems, for
example, learns in ihc National football League pros ide tune off tor plavers and t*her
crnployccs affl ictcd with drug or akohol addictions ufto agree lo enter rehahilrUtion
pro-\
It it important to remember that the categories on the continuum of social
responsibility overlap, creating gray areas where societal expectations on
organizational behavior are difficult to categori/e In considering the overlaps among
various demands for social responsibility, however, managers should keep in mind
that in the view of the general public, economic and legal responsibilities are required,
ethical responsibility is expected, and discretionary responsibility is desired.
Corporate Social Responsibility and Profitability CSR and the Bottom Line
Ihc GOAL of every firm is to maintain viability THROUGH long-run profitability Until
all costs and benefits are accounted FOR. however, profits may not be claimed In the
case OF corporate social responsibility K SR t . costs and benefits are both economic
and social While ecornmuc COSTS and rxnef ITS are eaajry QUANUFLABLC, sonaJ
costs and benefits are not Managers therefore risk subordinating social consequences
to other performance results thai can be more straightforwardly measured

TV eminwimental movement ha* had a similar effect on the regulation of business

This rnovrment achieved stneter enforcement of existing cm iron mental protections
and it spurred die passage of new. more comprehen-ttve laws vuch a% ihe National
Emironmcnttl Policy Act, which » devoted to preserving the I nited Slates * eco-
logical halance and makmg emironrncntal protection a federal policy goal. It requires
cm mwwncnial impact studies whenever new construction may threaten an existing
ecosystem, and it established the Council on (■mi ron mental Quality to guide
business development Another product of the environmental moveitient was the
creation of the federal Environmental Protection Agency, which interprets and
administers the emironrncntal protection policies of the U.S. government.
Clearly, these legal responsibilities arc supplemental to the requirement that
businesses and their employees comply fully with the general civil and criminal laws
that apply to all individuals and institutions in the country. Yet. strangely, individual
failures to adhere to the law have recently produced some of die greatest scandals tn
the history of American free enterprise. Inhibit 3.3. Strategy in Action, presents an
overview of seven of these cases that involved executives from Atlelphia
Communications. Arthur Andersen. Global Crossing, ImC lone Systems Merrill
Lvneh. WorldCom, and Xerox.
Ethical responsibilities reflect the companyV notion of nght and proper business be-
havior I ihsval n^ponsibilincs are obligations thai transcend legal retirements. Faros
are expected. Kit not required to behave ethically Some actions that are legal might be
considered unethical tor example, the manufacture and distribution of cigarettes is
legal. But tn light of the often-lethal consequences of smoking, mam consider the
continued sale of cigarettes to he unethical The topic of management ethic* receives
additional aneotion later in this chapter
»i m r i-i Miliary responsibilities are those that are voluntanry assumed by a business
or-gaiii/almn They include public relations activities, good citizenship, am! full
corporate social responsibility. Through public relations activities, managers attempt
to enhance the image of their companies, products, and services by supporting worthy
causes. This form of discretionary responsibility has a self-serving dimension
Companies thai adopt the good citizenship approach actively support ongoing
chanties, public service advertising campaigns, or issues in the public interest A
commitment to full corporate responsibility requires strategic managers to attack
social problems with the same zeal tn which they attack business problems. For
example, learns tn the MauonaJ football League provide time off for players and other
emplovres afflicted with drug or akohol audsctaons who agree to enter rehabilitation
programs
It I I important to remember that the categories on the continuum of social
responsibility overlap, creating gray areas where societal expectations on
organizational behavior are difficult to catcgori/c In considering the overlaps among
various demands tor social responsibility, however, managers should keep in mind
that in the view of the general public, economic and legal responsibilities are required
ethical responsibility is ex* pected and discretionary responsibility is desired.
Corporate Social Responsibility and Profitability CSR and the Bottom Line
Ihc goal of every firm is to maintain viability through long-run profitability. Until all
costs and benefits are accounted for. however, profits may not be claimed In the case
of corporate social responsibility it SR), cots and bene! its arc both economic and
social While economic costs and rxnefiU are easily quantifiable, social costs and ben-
efits are not Managers therefore risk subordinating social consequences to other per-
formance results thai can be more straij^lforwardly measured
Strategy in Action
An Overview of Corporate Scandals* Adelphia Communications
On July 24. 2002. John Riga*, the 77-year-oJd founder of the country's sixth largest
cable television operator was arrested, along w*h rwo of bis sons, and accused of
fooong the now-bankrupt company Several other former Adelphia executrves were
also arrested. The Securities and Exchange Commission (SEC) brought a civil suit
against the company jor allegedly fraudulently excluding bdlions ol dollars in lia-
bilities from its financial statements, falsifying statistics, m-flating *s earnings 10
meet Wai Streets expectations, and concealing "rampant self-dealing by the Rips
family.* The family, which founded Adelphia in 1952. gave up control of the firm in
May, and on )une 25 the company filed for bankruptcy protection. The company was
delisted by Nasdaq in June 3002
Arthur Andersen
On June 15. 2002, a Texas jury found the accounting firm guilry of obstructing justice
for its role <n shredding financial documents related to fts former client Enron.
Andersen, founded in 1913, had already been largely destroyed after admitting that it
sped up the shredding of Enron documents fotowing the launch of an SEC
investigation. Andersen fired David Duncan, who led its Houston office, saying he
was responsible for shredding the Enron documents. Duncan admitted to obstruction
of justice, turned state's evidence, and testified on behalf of the government.
Global Crossing
The SEC and the Federal Bureau of Investigation (FBI) are probing the five-year-old
telecom company Global Crossing regarcWig alleged swaps of network capacity with
other teiecommunicat*on$ firms to inflate revenue. The company ran into trouble by
becong that « could borrow bilions of dollars to build a fiber-oprx infrastructure thai
would be m strong demand by corporations Because others made the same bet. there
was a glue of fiber optics and prices plunged, leaving Global Crossing with massive
debts. It filed for bankruptcy on January 28. 2002. Chairman Gary Win-rack, who
founded Global Crossing in 1997, cashed out $734 mAon in stock before the
company collapsed Global Crossing was delisted Irom the New York Stock Exchange
(NYSE) m January 2002.
Imclone Systems
The btotech firm is be^g investigated by a congressional committee That is seeking to
find out if ImClone correctly
Exhibit 3.3

informed investors that the Food and Drug Administration (FDA) had declined to
accept for review its key experimental cancer drug. Erbltux_ Former CEO Samuel
Waksal pled guilty in June 2003 to insider trading charges related to Ertoitux and was
sentenced to seven years in prison. Also, federal investigators filed charges agarat
home decorating drva Martha Stewart for using insider information on the cancer drug
when she sold 4.000 ImOone shares one day before the FDA initially said it would
reject the drug-Merrill Lynch
On May 21. 2002. Merni Lynch agreed to pay SI00 million to settle New York
Attorney General Eliot Spitzer's charges that the nations largest securities firm
knowingly peddled Internet stocks to investors to generate lucrative investment
banking fees. Internal memos written by Mer-nil's feted Internet analyst Henry
Blodgett revealed that company analysts thought little of the Web stocks that they
urged investors to buy Merrill agreed to strengthen firewalls between its research and
investment banking divisions, ensuring advice given to investor* is not influenced by
efforts to win underwnting fees.
Woridcom
The nations second Largest telecom company filed for the nations biggest ever
bankruptcy on Jury 21. 2002. WorldCom's demise accelerated on June 25. 2002.
when it admitted rt hid $3,85 biihon in expenses, allowing ir to post net income of
$1.38 billion in 2001. instead of a loss. The company fired its CFO Scott Sullr^an and
on June 28 began cutting 17.000 jobs, more than 20 percent of its workforce. CEO
Bernie Ebbers resigned in April arrwd questions about $408 million of personal loans
he received from the company to cover fosses he incurred in buying its shares.
WorldCom was delisted from Nasdaq in Jufy 2002
Xerox
Xerox said on June 28. 2002. that it would restate five years of financial results to
reclassify more than $6 billion m revenues. In April, the company settled SEC
charges that it used "accounting incki" to defraud irweston. agreeing to pay a $10
million fine The firm admitted no wrongdoing. Xerox manufactures imag**g
products, such as copiers, printers, fax machines, and scanners.
"This section was derived in its entirety from "A Guide to Corporate Scandals,'
MSNBC. www.msnot com/news/ corpscandal front.
The dynamic between CSR and success (profit) is complex. While one concept is
clearly not mutually exclusive ofthe other, it is also clear that neither is a prerequisite
ofthe other. Rather than viewing these two concepts as competing, it may be better to
view CSR as a component in the decision-making process of business that must
determine, among other objectives, how to maximize profits.
Attempts to undertake a cost-benefit analysis of CSR have not been very suceessftil.
The process is complicated by several factors. First, some CSR activities incur no
dollar costs at all For example. Second Harvest, ihc largest nongovernment, chariiable
food distributor in ihc nation, accepts donations from food manufacturers and food
retailers of surplus food that would otherwise be thrown out due to overruns, ware*
house damage, or labeling errors. In 10 years. Second Harvest has distributed more
than 2 billion pounds of food, (hfts in Kind America is an organization that enables
companies to reduce unsold or obsolete inventory by matching a corporation's
donated products with a charity's or other nonprofit organization's needs* In addition,
a tax break is realized by the company* In the past, corporate donations have included
130,000 pairs of shoes from Nike, 10,000 pairs of gloves from Arts Isotoner, and 480
computer systems from Apple Computer.
In addition, philanthropic activities of a corporation, which have been a traditional
mainstay of CSR, are undertaken at a discounted cost to the firm since they arc often
tax deductible. The benefits of corporate philanthropy can be enormous as is shown
by the many national social welfare causes that have been spurred by corporate giv
mg While such acts of benevolence often help establish a general perception of the
involved companies within society, some philanthropic acts bring specific credit to
the firm.
Second, socially responsible behavior does not come al a prohibitive cost. In India,
women faced several constraints and injustice in their homes, markets and
communities. They often struggled to find a rightful place in the economy The SEWA
movement in India started with two main goals of full employment and self reliance
to women. Full employment referred to employment that not only provided job
security and adequate food and income, but also provided workers with social security
such as basic healthcare, childcarc, insur* ance, and shelter for themselves and their
families. Self reliance referred to Kith individual and collective strength at the
economic, political, and intellectual levels. This was done with the objective of
increasing the bargaining power of female workers in the informal economy, and also
ensuring that they had control over the decision making process across all dimensions
of their lives. All this comes through an organized self reliant organization where the
beneficiaries earn their own livelihood without incurring prohibitive costs for the or-
ganization.1
Third, socially responsible practices may create savings and. as a result, increase
profits, BILT started Farm Forestry in 1990 through lis subsidiary BILT Tree Tech
Ltd. BILT targeted marginal land belonging to farmers below the poverty line.
Unproductive land was planted with fast growing species of pulpwuod trees. The
farmers were supplied good quality plants of Subabool, Eucalyptus. Acacia,
Casuanna. and Bamboo and were assured buyback ofthe wood produce by BILT at
declared support pnee or market price. Tailor-made bank loans on long term basis
were also arranged for needy farmers.
As a result, all the stakeholders reaped some benefits. The productivity of farmers
increased, resulting in additional income. They found a source of livelihood, which
was supported by financial assistance from banks. The program reduced dependence
on natural forest, and resulted in soil and water conservation. It also helped in
reclaiming wasteland. BILT shifted its dependence for pulp from fibrous natural
forest wood to non-forcst sources, and was assured of supply of good quality
pulpwood at reasonable cost.
Proponents argue that CSR costs arc more than offset in the long run by an improved
company image and increased community goodwill These intangible assets can prove
valuable in a crisis, as Johnson & Johnson discovered with the Tylenol cyanide scare
in 19X2. Because it had established a solid reputation as a socially

The dynamic between CSR and success (profit) is complex. While one concept is
clearly not mutually exclusive oi -he other, it is also clear that neither is a prerequisite
ofthe other. Rather than viewing these two concepts as competing, it may be better to
view CSR as a component in the decision-making process of business that must
determine, among other objectives, how to maximize profits.
Attempts to undertake a cost-bencfil analysis of CSR have not been very suceessftil.
The process is complicated by several factors. First, some CSR activities incur no
dollar costs at all. For example. Second Harvest, the largest nongovernment,
charitable food distributor in the nation, accepts donations from food manufacturers
and food retailers of surplus food that would otherwise be thrown out due to
overruns* ware* house damage, or labeling errors. In 10 years. Second Harvest has
distributed more than 2 billion pounds of food. Gifts in Kind America is an
organization that enables companies to reduce unsold or obsolete inventory by
matching a corporation's donated products with a charity's or other nonprofit
organization's needs. In addition, a tax break is realized by the company. In the past,
corporate donations have included 130,000 pairs of shoes from Nike, 10,000 pairs of
gloves from Aris Isotoner, and 480 computer systems from Apple Computer.
In addition, philanthropic activities of a corporation, which have been a traditional
mainstay of CSR, are undertaken at a discounted cost to the firm since they arc often
tax deductible. The benefits of corporate philanthropy can be enormous as is shown
by the many national social welfare causes that have been spurred by corporate giving
While such acts of benevolence often help establish a general perception of the
involved companies within society, some philanthropic acts bring specific credit to
the firm.
Second, socially responsible behavior does not come al a prohibitive cost. In India,
women faced several constraints and injustice in their homes, markets and
communities. They often struggled to find a rightful place in the economy The SEWA
movement in India started with two main goals of full employment and self reliance
to women. Full employment referred to employment that not only provided job
security and adequate food and income, but also provided workers with social security
-such as basic healthcare, childcarc, insurance, and shelter for themselves and their
families. Self reliance referred to Kith individual and collective strength at the
economic, political, and intellectual levels. This was done with the objective of
increasing the bargaining power of female workers in the informal economy, and also
ensuring that they had control over the decision making process across all dimensions
of their lives. All this comes through an organized self reliant organization where the
beneficiaries earn their own livelihood without incurring prohibitive costs for the or-
ganization/
Third, socially responsible practices may create savings and. as a result, increase
profits, BILT started Farm Forestry in 1990 through ils subsidiary BILT Tree Tech
Ltd. BILT targeted marginal land belonging to farmers below the poverty line.
Unproductive land was planted with fast growing species of pulpwood trees. The
farmers were supplied good quality plants of Subabool, Eucalyptus. Acacia,
Casuanna. and Bamboo and were assured buyback ofthe WTXK! produce by BILT at
declared support pnee or market price. Tailor-made bank loans on long term basis
were also arranged for needy farmers.3
As a result, all ihe stakeholders reaped some benefits. The productivity of farmers
increased, resulting in additional income. They found a source of livelihood which
was supported by financial assistance from banks. The program reduced dependence
on natural forest, and resulted in soil and water conservation. It also helped in
reclaiming wasteland. BILT shifted its dependence for pulp from fibrous natural
forest wood to non-forcst sources, and was assured of supply of good quality
pulpwxwd at reasonable cost-
Proponents argue that CSR costs are more than otfsel in the long run by an improved
company image and increased community goodwill. These intangible assets can prove
valuable in a crisis, as Johnson & Johnson discovered with the Tylenol cyanide scare
in 19X2. Because it had established a solid reputation as a socially
Strategy in Action
Mission Statement: Johnson & Johnson
"Wc believe our first responsjbtfttv Is to the doctors, nurses and patterns, to mothers
and fathers and all others who use our product! and services In meeting their needs
everything we do must be of h^h quality. We muK constantly stnve to reduce our
cost* m order to maintain reasonable prim Customers" orders mutt be serviced
promptly and accurately. Our suppliers and distrtators must have an opportunity to
make a fair profit
"We are responsible to our employees, the men and women who work with us
throughout the worid Everyone must be considered as an individual. We must respect
their dgnity and recognize ihetr merit. They must have a sense of security m their |obs
Compensation must be lair and adequate, and working conditions clean, orderly and
safe Employees must feei free to make suggestions and complaints There must be
equal opportunity for employment, development and advancement for those qualified
We must pro* vide competent management, and their actions must be post and
ethical.
We are responsible to the communities in which we Irve and work and to the world
community as well We must be good citiierts—support good works and charities and
bear our far share of taxes. We must encourage ovk improvements and better hearth
and education. We must mantam in good order the property we are privileged to use.
protecting the environment and natural resources,
"Our final responsibility is to our stockholders. Business must make a sound profit-
We must experiment with new ideas. Research must be carried on. innovative pro-
grams developed and mistakes pa*d for. New equipment must be purchased, new
facifaties provided and new products launched. Reserves mutt be created to prowSe
for adverse times When we operate according to these principles, the stockholders
should realize a fair return."

Source: Johnson A Johnson. http-;/www+|ns|.com

responsible company before the incident, the public readily accepted the company's
assurances of public safety Consequently, financial damage to Johnson & Johnson
was minimized despite the company's $100 million voluntary recall of potentially
tainted capsules, CSR may also head off new* regulation, preventing increased
compliance costs. It may even attract investors who are ihcmsclvcs socially
responsible. Proponents believe that for these reasons, socially responsible behavior
increases ihe financial value of ihc firm in the long run. The mission statement of
Johnson & Johnson is provided as Exhibit J,4, Strategy in Action.

Performative To explore ihe relationship between socially responsible behavior and

financial performance, an important question must first be answered: How do
managers measure the financial efl'ecl of corporate social performance?
Critics of CSR believe that companies that behave in a socially responsible manner,
and portfolios comprising these companies* securities, should perform more poorly
fnancially than those that do run. The costs of CSR outweigh the benefits for
individual firms, they suggest. In addition, traditional portfolio theory holds that in-
vestors minimize risk and maximize return by being able lo choose from an infinite
universe of investment opportunities. Portfolios based on social criteria should suffer,
critics argue, because the)' are by definition restrictive in nature. This restriction
should increase portfolio risk and reduce portfolio return.
CSR Today
CSR has become a priority with American business. In addition to a commonsense
belief that companies should be able to "do well by doing good" at least three broad
trends arc driving businesses to adopt CSR frameworks: the resurgence of
cmironmcntalism, increasing buyer power, and the globalization ol" business

The Resurgence of Environmentaiism In March 1989, the Exxon Valdez ran aground
in Prince William Sound, spilling 11 million gallons of oil. polluting miles of ocean
and shore, and helping to revive worldwide concern for the ecological environment.
Six months after the Valdez incident, the Coalition for Environmentally Responsible
Economies (CERES) was formed to establish new goals for environmentally
responsible corporate behavior. The group drafted the CERES Principles to "establish
an environmental ethic with criteria by which investors and others can assess the
environmental performance of companies. Companies that sign these Principles
pledge to go voluntarily beyond the requirements of the law/4

Increasing Buyer Power The rise of the consumer movement has meant that buyers—
consumers and investors—arc increasingly flexing their cconormc muscle C
onsumers arc becoming more interested in buying products from socially responsible
companies. Organizations such as the Council on Economic Priorities (CEP) help
consumers make more informed buying decisions through such publications as
Shopping for a Better Hbrhl which providessocial performance information on 191
companies making more than 2.000 consumer products. CEP also sponsors the annual
Corporate Conscience Awards, which recognize socially responsible companies. One
example of consumer power at work is tbc effective outcry over the deaths of
dolphins in tuna fishermen's nets.
Investors represent a second type of influential consumer. There has been a dramatic
increase in the number of people interested in supporting socially responsible
companies through their investments. Membership in the Social Investment Forum, a
trade association serving social investing professionals, has been growing at a rate of
about 50 percent annually. As baby boomers achieve their own financial success, the
social investing movement has continued its rapid growth.
While social investing wields relatively low power as an individual private act (selling
ones shares of ExxonMobil does not affect ihe company), it can be very powerful as a
collective public act. When investors vote their shares in behalf of pro-CSR issues,
companies may be pressured to change their social behavior. The South African
divestiture nvovemeni is one example of how effective this pressure can be.
I ne Vermont National Hank has added a Socially Responsible Banking Fund to its
product line. Investors can designate any of their interest-bearing accounts with a
S500 minimum balance to be used by the fund. This fund then lends these monies for
purposes such as low-income housing, the environment, education, farming, or small
business development. Although it has had a "humble" beginning of approximately
800 people investing about $11 million, the bank has attracted out-of-state depositors
and is growing faster than expected.
Social investors comprise both individuals and institutions. Much of the impetus for
social investing originated with religious organizations thai wanted their investments
to mirror their beliefs. At present, the ranks of social investors have expanded to
include educational institutions and large pension tunds.
Large-scale social investing can be broken down into the two broad areas of guideline
portfolio investing and shareholder activism. Guideline portfolio investing is the
largest and fastest-growing scgmcnl of social investing. Individual and institutional
guideline portfolio investors use ethical guidelines as screens to identity possible
investments in stocks, bonds, and mutual funds. The investment instruments that
survive the social screens arc then layered over the investor's financial screens to
create the investor's universe of possible invest men is.
Screens may be negative (e.g., excluding all tobacco companies) or they may combine
negative and positive elements (e.g.. eliminating companies with bad labor records
while seeking out companies with good ones). Most investors rely on screens created
by investment firms such as Kinder, Lydenberg Domini & Co. or by industry groups
such as the Council on Economic Priorities, In addition to ecology, employee
relations, and community development* corporations may be screened on their
association with "sin*' products (alcohol* tobacco, gambling), defense/weapons
production, and nuclear power.
In contrail lo guideline portfolio investors, who passively indicate their approval or
disapproval of a company i ioctal behavior by simply including or excluding it from
their portfolios, shareholder activists seek to directly influence corporate social
behavior. Shareholder activists invest in a corporation hoping to improve specific
aspects of the company s social performance, typically by seeking a dialogue with
upper management If ihis and successive actions fail to achieve the desired results,
shareholder actis isi% may in-troducc proxy resolutions to be voted upon at the
corporations annual meeting. The goal of these resolutions is to achieve change by
gaining public exposure for the issue at hand. While the number of shareholder
activists is relatively small, they are by no means small in achievement: Shareholder
activists, led by such groups ,is the Inierfaiih Center on Corporate Responsibility,
were the driving force behind the South African divestiture movement. Currently,
there are more than 35 socially screened mutual funds ;iv.iilablc in the United States
alone.
The OioMizathn of Business Management issues, including CSR. have become more
complex as companies increasingly transcend national borders* It is difficult enough
to come to a consensus on what con* stitutes socially responsible behavior within one
culture, let alone determine common ethical values across cultures In addition to
different cultural views, the high harriers facing international CSR include differing
corporate disclosure practices, inconsistent financial data and reporting methods, and
the lack of CSR research organisations within countries Despite these problems, CSR
is growing abroad. The United King* dom hai 30 ethical mutual funds and Canada
offers 6 socially responsible funds.
One of the most contentious social responsibility issues confronting multinational
firms pertains to human rights lor example, many U.S. firms reduce then costs either
by relying on forcipn m;uui(.u hired goods or by outsourcing their manufacturing to
foreign manufacturers. These foreign manufacturers, oflcn Chinese, offer low pricing
because they pay very low wages by U.S. standards, even though they are extremely
competitive by Chinese pay rates.
While Chinese workers arc happy to earn manufacturer wages and U.S. customers arc
pleased by the lower prices charged for foreign manufactured goods, others are
unhappy. They believe that such U.S. firms are failing to satisfy their social
responsibilities. Some US workers and their unions argue that [obs in the United
Slates are being eliminated or devalued by foreign competition- Some human rights
advocates argue that Ihc working conditions and living standards of foreign workers
are so substandard when compared w ith U S standards that they serge on inhumane
Therefore, advocates apply pressure on such companies as Citibank, Coca-Cola. IBM.
and Unocal to force their contractors to improve human nghu conditions for their
employees A* discussed in Strategy in Action. Fxhibit 3.5, the pressure sometime*
takes the form of law suit*
SARBANES-OXLEY ACT OF 2002

Following a string of wrongdoings by corporate executives in 20(>0 lo 2002, and the

subsequent failures of their firms. Washington lawmakers proposed more than 50
policies to reassure investors. None of the resulting bills were able to pass both houses
of Congress until the Banking Committee Chairman Paul Sarbanes ID-MD) proposed
legislation to establish new auditing and accounting standards. The bill was called the
Public Company Accounting Reform and Investor Protection Act of 2002. Later the
name was changed to the Sarbaees-Oiky Act of 2002.
On July 30,2002, President George Bush signed the Sarbuncs-Oxley Act into law.
This revolutionary act ap- plies to public companies wrth securities registered quired
to file reports under Section 15(d) of the Section 12 of the Securities Ad of 1934 and
those re-Act. Sarbanes-Oxlcy includes Kquuvd certifications 15(d) of the
Strategy in Action Exhibit 3.5
Making a Federal Case Out of Overseas Abuse
Should U.S. multinationals be held liable for the human- and foreign companies
could be named as defendants m rights abuses of foreign governments? Victim
advocates the pending suits, experts on both sides say. charge, for instance, that
Burma's military rulers forced In the early 1990s, human-ngrtts lawyers began
apply- peasants at gunpoint to help bu*W a pipeline for Unocal mg the Alien
Oa^nsact to U.S. corporations. For example, Corp., torturing and kitting those who
resisted The com- a Colombian labor unton has brought a US lawsurt against pany
knew and approved, they claim. Unocal denies n\ Coca-Cote Co. for allegedly
hiring paramilitary urvts that This emooonaJ issue fces at the heart of a dozen
lawsuitsmurdered union organizers. And South Africans have sued that seek to hold
companies liable rf they work wrth re* Citigroup and other as-yer-unnamed
companies for al- pressivtt regimes Plaintiffs in several of these suits, indud* fegedly
profiteering from apartheid. "These lawsuits hold ing the one against Unocal, recently
have made strides in the corporate world responsible for the ultimate acudns of
establishing legal grounds for such claims under an arcane what thetr products and
money do." says Edward Fagan, a 1789 statute caied the Alien Tort Claims Act. Early
court- New York lawyer helping the plaintiffs, room victories have set off alarms
among business groups. which worry that the likes of IBM, Citibank, and Coca-Cola
Seurr^ r^usson FW making a Federal Ca» Out of may be socked with huge Jury
damages for the misdeeds of for financial statements, new corporate regulations,
disclosure requirements, and penalties for failure to comply. More details on the Act
are provided in Strategy in Action, Exhibit 3,6,
The Sarbanes-Oxley Act states that the CEO and CFO must certify every report
containing the company's financial statements. The certification acknowledges that
the CEO or CFO (chief financial officer) has reviewed the report. As pan ofthe
review, the officer must attest that the information does not include untrue statements
or necessary omitted information- Furthermore, based on the officer's knowledge, the
report is a reliable source ofthe company's financial condition and result of operations
for the period represented. The certification also makes the officers responsible for
establishing and maintaining internal controls such that they are aware of any material
information relating io the company. The officers must also evaluate the effectiveness
ofthe internal controls within 90 days ofthe release ofthe report and present their
conclusions of the effectiveness of the controls. Also, the officers must disclose any
fraudulent material, deficiencies in the reporting ofthe financial reports, or problems
with the internal control to the company's auditors and auditing committee. Finally,
the officers must indicate any changes to the internal controls or factors that could af-
fect them.

The Sarbanes-Oxley Act includes provisions restricting the corporate control of

executives, accounting Firms, auditing committees, and attorneys. With regard to
executives, the Act bans personal loans. A company can no longer directly or
indirectly issue, extend, or maintain a personal loan to any director or executive of-
ficer. Executive officers and directors arc not permitted to purchase, sell, acquire, or
transfer any' equity security during any pension fund blackout period. Executives are
required to notify fund participants of any blackout period and the reasons for the
blackout period. The SEC will provide the company's executives with a code of ethics
for the company to adopt. Failure to meet the code must be disclosed to the SEC.
The Act limits some and issues new duties ofthe registered public accounting firms
that conduct the audits ofthe financial statements. Accounting firms are prohibited
from performing bookkeeping or other accounting services related to the financial
statements, designing or implementing financial systems, appraising, internal
auditing, brokering banking services, or providing legal services unrelated to the
audit.

Strategy in Action
Sarbancs-Oxlcv Act of 2002

The following outline prwcncs oSe major dements of the Sarbanes-OxJey Act ol
2003.
Corporate Responsibility
* The CEO and CFO of each company are requeed to submit a report, based on ther
knowledge, to the SEC certifying the company's financial statements are fair
representation* of the financial condition without ratee statements or ©mitt ion*
* The CEO and CFO must reimburse the company for any bonuses or equity-based
incentives received for the last 12-month period If die company is required to
restate its financial statements due to material noncompliance with any financial
reporting requirement that resulted from misconduct.
* Directors and executive officers are prohibited from iraoVog a company s 401 (k)
pbn. profit sharing plan, or retirement pbrt during any blackout period. The plan
administrators are required to notify the plan participants and beneficiaries with
notice of all blackout periods, reasons for the blackout period, and a statement that
the participant or benenctary should evaluate their investment even though they are
unable to direct or diversify chew accounts dunng the blackout
* No company may make* extend, modify, or renew any personal loans to us
executives or directors. Limited exceptions are for loans made in the course of the
company * business, on market terms, for home improvement and home loans,
consumer credit, or extension of credit Increased Disclosure
■ Each annual and quarterly financial report filed with the SEC must disdose all
material off-balance-sheet transactions, arrangements, and obligations that may
affect the current or future financial condition of the company or -ii operations.
* Companies must present pro forma financial Information with the SEC m a manner
that is not misleading and must be reconciled with the company's financial condi-
tion and with accepted accounting prinoples (GAAP).
Exhibit 3.6
Each company is required to disclose whether they have adopted a code of ethics for
rts senior financial officers, tf not. the company must explain the reasons Any change
or waiver of the code of ethics must be dts-dond
• Each annual report must contain a statement of management's responsible/ for
establishing and maintaining an internal control structure and procedures for
financial reporting. The report must also include an assessment of the effectiveness
of the internal control procedures,
• The Form 4 will be provided wrthm two business days after the execution date of
the trading of a company's securities by directors and executive officers. The SEC
may extend this deadline if it determines the two-day period is not feasible.
• The company must disdose information concerning changes in financial conditions
or operations "on a rapid and current basis.plain English.
The SEC must review the financial statements of each reporting company no less
than once every three years. Audit Committees
• The aIKJ* crmmirtee must be composed entirely of dependent directors. Committee
members are not permitted to accept any fees from the company, cannot control 5
percent or more of the voong of the company, nor be an officer, director, partner, or
employee of the company.
• The audrt committee must have the authority to engage the outside auditing firm.
• The audit committee must establish procedures for the treatment of complaints
regarding accounting controls or auditing matters. They are responsible for
employee cornplaints concerrwtg questionable accounting and auditing.
• The audit committee must disclose whether at least one of the committee members
is a hi financial expert/1 H not. the committee must explain why not New Crimes and
Increased Criminal Penalties
* Tampering with records with intent to impede or influence any federal "westtgation
or bankruptcy will be punishable by a Tine and/or prison sentence up to 20 year*
* Faeure by an accountant to maintain ai auditing papers for five years after the end
of the fiscal period will be punishable by a fine and/or up to 10-year prison sen-
tence.
* Knowingly executing, or attempting to execute, a scheme to defraud investors wH
be punishable by a fine aneVor prison sentence of up to 25 years.
* Willfully certifying a report that does not comply with the law can be punishable
wfth a fine up to $5.000000 anoVor a prison sentence up to 20 years. New Civil
Cause of Action and Increased Enforcement Powers
* Protection will be provided to whistle-blowers who provide information or assist in
an investigation by law enforcement, congressional committee, or employee
supervisor
* Bankruptcy cannot be used to avo*d ItaNny from securities Laws violations.
* Investors are able to file a cMI action for fraud up to two years after discovery of
the facts and five years after the occurrence of fraud.
* The SEC can receive a restraining order prohibmng payments to insiders during an
investigation.
* The SEC can prevent individuals from holding an ohV cers or director's position .\ -
pubic company as are suit of violation of the securities law. Auditor Independence
* AJI audit services must be preapproved by the audit committee and most be
disclosed to investors.
* The lead audit or reviewing audit partner from the auditing accounting firm must
change at least once every five fiscal years.
* The registered accounting firms must report to the audit committee all accounting
policies and practices used, alternative uses ofthe financial information within
GAAP that has been discussed wrth management, and written communications
between the accounting firm and management
* An auditing firm Is prohibited from auditing a company If the company's CEO or
CFO was employed by the auditing firm wtthfn the past year.
A Public Com parry Accounting Oversight Board is established by the SEC to
oversee the audits of public companies. The Board will register pubec accounting
firms, establish audit standards, raped registered accounting firms, and oVsopline
violators of the rules. No person can take part in an audit if not employed by a
registered public accounting firm All critical accounting policies and alternative
treatments of financial information within generally accepted accounting principles
(GAAP), and written communication between the accounting firm and the company's
management must be reported to the audit committee.
The Act defines the composition of the audit committee and specifies its
responsibilities. The members of the audit committee must be members ofthe
company s board of directors. At least one member ofthe committee should be
classified as a "financial expert." The audit committee is directly responsible for the
work of any accounting firm employed by the company, and the accounting firm must
report directly to the audit committee. The audit committee must create procedures for
employee complaints o>r concerns over accounting or auditing matters. Upon
discovery of unlawful acls by the company, the audit committee must report and be
supervised tn its investigation by a Public Company Accounting Oversight Board.
The Act includes rules for attorney conduct. If acompany*s attorneys find evidence of
securities violations, they are required to report the matter to the chief legal counsel or
CEO. If there is not an appropriate response, ihe attorneys must report the information
to the audit committee or the board of directors.
Other sections of the Sarbanes-Oxley Act stipulate disclosure periods for financial
operations and reporting. Relevant information relating to changes in the financial
condition or operations of a company must be immediately reported in plain English.
Off-balance sheet transactions, correcting adjustments, and pro-forma information
must be presented in the annual and quarterly financial reports. The information must
not contain any untrue statements, must not omit material facts, and must meet GAAP
standards.
Stricter penalties have been issued for violations ofthe Sarbanes-Oxley Ad- If a
company must restate its financial statement* due to noncompliance, the CIO and
CFO must relinquish any bonus or incentive-based compensation or realized profits
from the sale of securities during the 12-month period following the filing with the
SRC. Other securities fraud such as destruction or falsification of records, results in
fines and prison sentences up lo 25 years.

THE N E W CORPORATE GOVERNANCE STRUCTURE

A major consequence ofthe 2000-2002 accounting scandals was the Sarbanes-Oxley
Act of2002, and a major consequence of Sarbanes-Oxley has been the restructuring of
the governance siructure of American corporations. The most significant change in
the restructuring is the heightened role of corporate internal auditors, as depicted in
Strategy in Action Exhibit 3,7. Auditors have traditionally been viewed as performing
a necessary but perfunctory function, namely to probe corporate financial records for
unintentional or illicit misrepresentations. Although a majority of US. corporalions
have longstanding traditions of reporting that their auditors operated independently of
CFO approval and that they had direct access to the board, in practice, the auditors'
w^ork usually traveled through the organization's hierarchical chain of command.
In the past, internal auditors reviewed financial reports generated by other corporate
accountants. The auditors considered professional accounting and financial practices,
as well as relevant aspects of corporate law; and then presented their findings to the
chief financial officer(CFO). Historically, the CFO reviewed the audits and deter-
mined the financial data and information that was to be presented to top management,
directors, and investors of the company.
However, because Sarbanes-Oxley requires that CEOs and audit committees sign off
on financial results, auditors now routinely deal directly with top corporate officials,
as shown in the new structure in Exhibit 37. Strategy in Action. Approximately 75
percent of senior corporate auditors now report directly to the Board of Directors'
audit committee. Additionally, to eliminate the potential for accounting problems,
companies are establishing direct lines of commimication between top managers and
the board and auditors that inform the CFO but that are not dependent on CFO
approval or authorization.
The new* structure also provides the CEO information provided directly by the
company's chief compliance and chief accounting officers. Consequently; the CFO.
who is responsible for ultimately approving all com* pany payments, is not
empowered to be the sole provider of data for financial evaluations by the CFO and
board.
CSR's Effect on the Mission Statement
The mission statement not only identifies what product or service a company
produces-, how it produces it, and what market it serves, it also embodies what the
company believes. As such, it is essential that the mission statement recognize the
legitimate claims of its external stakeholders, which may include creditors, customers,
suppliers, government, unions, competitors, local communities, and elements of the
general public. This stakeholder approach has become widely accepted by US.
business. For example, a survey of directors in 291 of the largest southeastern US.
companies found that directors had high stakeholder orientations. Customers,
government, stockholders, employees, and society, in that order, were the
stakeholders these directors perceived as most important
In developing mission statements, managers must identify all stakeholder groups and
weigh their relative rights and abilities to affect the firm's success. Some companies
arc proactive in their approach to CSR. making it an integral part of their raison d'etre
(e.g., Ben & Jerry's ice cream); others are reactive, adopting socially responsible
behavior only when they must (e.g., Exxon after the Valdez incident).
Social Audit
A social audit attempts to measure a company's actual social performance against the
social objectives it has set for itself. A social audit may be conducted by the company
it- social performance self. However, one conducted by an outside consultant who
will impose minimal biases against its social may prove more beneficial lo the firm.
As with a financial audit, an outside auditor objectives, brings credibility to the
evaluation. This credibility is essential if management is to take the results seriously
and if the general public is to believe the company's public relations pronouncements.
Carefiil. accurate monitoring and evaluation of a company s CSR actions arc
important not only because the company wants to be sure it is implementing CSR
policy as planned but also because CSR actions by their nature are open to intense
public scrutiny. To make sure it is making good on its CSR promises, a company may
conduct a social audit of its performance.
Once the social audit is complete, it may be distributed internally or both internally
and externally, depending on the firm's goals and situation. Some firms include a
section in their annual report devoted to social responsibility activities; others publish
a separate periodic report on their social responsiveness. Companies publishing
separate social audits include General Motors, Bank of America, Atlantic Richfield.
Control Data, and Aetna Life and Casualty Company. Nearly all Fortune 500
corporations disclose social performance information in their annual reports.
Large firms are not ihe only companies employing the social audit. Boutique ice
cream maker Ben & JerryV, a CSR pioneer, publishes a social audit in its annual
report. The audit, conducted by an outside consultant, scores company performance in
such areas as employee benefits, plant safety, ecology, community involvement, and
customer service. The report is published unedited.
The social audit may be used for more than simply monitoring and evaluating firm
social performance. Managers also use social audits to scan the external environment,
determine firm vulnerabilities, and institutionalize CSR within the firm. In addition,
companies themselves arc not the only ones who conduct social audits; public interest
groups and the media watch companies who claim to be socially responsible very
closely to see if they practice what they preach. These organizations include consumer
groups and socially responsible investing firms that construct their own guidelines for
evaluating companies.
The Body Shop learned whai can happen when a company^ behavior falls short of its
espoused mission and objectives. The 20-year-old manufacturer and retailer of
naturally based hair and skin products had cultivated a socially responsible corporate
image based on a reputation for socially responsible behavior In late 1994, however.
Business Ethics magazine published an expose claiming that the company did not
"walk the talk" It accused the Body Shop of using nonrenewable petrochemicals tn its
products, recycling far less than it claimed, using ingredients tested on animals, and
making threats against investigative journalists. The Body Shop's contradictions were
noteworthy because Anita Roddick, the company's founder, made CSR a centerpiece
of the company's strategy.1
MANAGEMENT ETHICS
The Nature of Ethics in Business
Central to the belief that companies should be operated in a socially responsive way
for the benefit of all stakeholders is the belief that managers will behave in an ethical
manner. The term ethics refers to the moral principles that refiect society's beliefs
about the actions of an individual or a group that arc right and wrong. Of course, the
values of one individual, group, or society may be al odds with the values of another
individual, group, or society. Hthical standards, therefore, reflect not a universally
accepted code, but rather the end product of a process of defining and clarifying the
nature and content of human interaction.
SATISFYING CORPORATE SOCIAL RESPONSIBILITY
Corporate social responsibility has become a vital port ofthe business conversation.
The issue is not whether companies will engage in socially responsible activities, but
how For most companies, the challenge is how best to achieve the maximum social
benefit from a given amouni of resources available for social projects. Research
points lo five principles that underscore better outcomes for society and for corporate
participants^
In 1999. William Ford Jr. angered Ford Motor Co. executives and investors when he
wrote that "there arc very real conflicts between Ford's current business practices,
consumer choices, and emerging views of (environmental) suslainability" In his
company citizenship report, the grandson of Henry Ford, then the automaker's
nonexecutive chairman, even appeared to endorse a Sierra Club statement declaring
that **thc gas-guzzling SUV is a rolling monument to environmental destruction/'
Bill Ford has had to moderate his strongest environmental beliefs since assuming the
company's CEO position in October 2001. just alter the Firestone tire scandal
Nevertheless, while he hasstrived to improve Ford's financial performance and restore
trust among its diverse stakeholders, he remains strongly commincd to cor* porate
responsibility and environmental protection. In his words, "A good company delivers
excellent products and services, and a great company does all that and strives to make
the world a better placed Today. Ford is a leader in producing vehicles that run on
alternative sources of fijel. and it is rjerforming as well as or better than its major
North American rivals, all of whom are involved in intense global competition. The
new CEO is successfully pursuing a strategy that is showing improved financial
performance, increased confidence in the brand, and clear evidence that the car
company is committed to contributing more broadly to society. Among Ford's more
notable outreach efforts are an innovative HIV/AIDS initiative in South Africa that is
now expanding to India, China, and Thailand; a partnership with the US. National
Parks Foundation to provide emironrncntal ly friendly transportation for park visitors;
and significant support for the Clean Air Initiative for Asian Cities.
Ford s actions arc emblematic of the corporate social responsibility (CSR) initiatives
of many leading companies today. Corporate-supported social initiatives are now a
given. For some time now; many Fortune 500 corporations have had senior manager
titles dedicated to helping their organizations "give back" more effectively. CSR is
now almost universally embraced by top managers as an integral component of their
executive roles, whether motivated by self-interest, altruism, strategic advantage, or
political gain. Their outreach is usually plain to see on the companies* corporate Web
sites. CSR is high on the agenda at major executive gatherings such as the World
Economic Forum. It is very much in evidence during times of tragedy- as seen in the
corporate responses to the Asian tsunami of December 2004—and it is the subject of
many conferences, workshops, newsletters, and more. "Consultancies have sprung up
to advise companies on how to do corporate social responsibility and how to let it be
known that they* are doing it," noted The Economist in a survey on CSR in 2005.
Executives face conflicting pressures to contribute to social responsibil ity while
honoring their duties to maximize shareholder value. These days they face many
belligerent critics who challenge the idea of a single-minded focus on profits—
witness the often violent antiglobalization protests in recent years. They also face
skeptics who contend that CSR initiatives arc chiefly a convenient marketing gloss.
However, the reality is that most executives are eager lo improve their CSR
effectiveness. The issue is not whether companies will engage in socially responsible
activities, but how. For most companies, the challenge is how best to achieve the
maximum social benefit from a given amount of resources available for social
projects.
Studies of dozens of social responsibility initiatives at major corporations show that
senior managers struggle to find the right balance between "low-engagement"
solutions such as charitable gift-giving and "high-commitment" solutions that run the
risk of diverting attention from the company's core mission. In this section, wc will
see that collaborative social initiatives (CSls)—a form of engagement in which
companies provide ongoing and sustained commitments to a social project or issue—
provide the best combination of social and strategic impact.
The Core of the CSR Debate
The proper role of CSR—the actions of a company to benefit society beyond the
requirement of the law* and the direct interests of shareholders has generated a
century s worth of philosophically and economically intriguing debates. Since steel
baron Andrew Carnegie published The Gospel of Wealth in 1899. the argument that
businesses arc the trustees of societal property that should be managed for the public
good has been seen as one end of a continuum with, at the other end the belief that
profit maximization is management's only
legitimate goal I he CSR debates had been largely confined io the background for
most of the twentieth century, making ihc news after an oil spill or when a consumer
product caused harm, or when ethics scandals reopened the ujuestson of business*
fundamental purpose
The debates surfaced in more positive ways in the last M yean as new businesses set
up shop with altruism very much in mind and on display. Firms such as ice cream
maker Ben & Jerry s argued that CSR and profits do not clash, their stance was that
doing good led lo making good money; too. Thai line of thinking has gained
popularity as more executives have come to understand the value of their companies'
reputations with customers and with investors and employees. But only recently have
business leaders begun to get a clearer understanding ofthe appropriate role of CSR
and us effect on financial performance.
In the past, research on the financial effeci of CSR produced inconsistent findings,
with some studies reporting a positive relationship, others a negative one, and others
no relationship at all. Since the mid* 1990s, improvements in theory; research
designs, data, and analysis have produced empirical research with more consistent
results * Importantly, a recent meta-analysis (a methodological technique that
aggregates findings of multiple studies) of more than 10 studies found that on balance,
positive relationships can be expected from CSR initiatives but that the primary
vehicle for achieving superior financial performance from social responsibility is via
reputation effects.'
There ts no rimtlgc of option* with which BUMNC advance their CSR goals The
greater challenge is finding the nghl balance r^tiairthropy without active engagement
cash donations, for instance -has been criticized as narrow, trlf-serving. and often
motivated to improve the corporations reputation and keep nongoveni-menlal
organization < NtiO) enbes and other nay savers at bay ? However, redirecting the
compart)' toward a socially responsible mission, while seemingly attractive, may have
the unintended consequences of diverting both managers and employees from their
core mission. Exhibit 3 8 presents a simple illustration of Ihc range of options
available to corporations as they consider their CSR commitments.

What managers need is a model that they can use to guide them in selecting social
initiatives and through which they can exploit iheir companies* core competencies for
the maximum positive impact. As a starting point, research confirms that a business
must determine ihc social causes that it will support and why and then decide how its
support should be organized." According to one perspective, businesses have three
basic support
options: donations of cash or material, usually to a nongovernmental or nonprofit
agency; creation of a functional operation within the company to assist external
charitable efforts; and development of a collaboration approach, whereby a company
joins with an organization that has particular expertise in managing the way benefits
arc derived from corporate support.10
Mutual Advantages of Collaborative Social Initiatives
The term social initiative describes initiatives that take a collaborative approach.
Research on alliances and networks among companies in competitive commercial
environments tells us that each partner benefits when the other brings resources,
capabilities, or other assets that it cannot easily attain on its own. These combinative
capabilities allow the company to acquire and synthesize resources and build new
applications from those resources, generating innovative responses to rapidly evolving
environments.
It is no different with collaborative social initiatives. While neither companies nor
nonprofits arc well-equipped to handle escalating social or environmental problems,
each participant has the potential to contribute valuable material resources, services,
or individuals* voluntary time, talents, energies, and organizational knowledge. Those
cumulative offerings are vastly superior to cash-only donations, which are a
minimalist solution to the challenges of social responsibility. Social initiatives involve
ongoing information and operational exchanges among participants and arc especially
attractive because of their potential benefits for both the corporate and not-for-profit
partners.
There is strong evidence to show that CSR activities increasingly confer benefits
beyond enhanced reputation. For some participants, they* can be a tool to attract,
retain, and develop managerial talent. The Pricc-waterhouseCooper (PwC) Project
Ulysses is a leadership development program that sends small teams of PwC partners
to developing countries to apply their expertise to complex social and economic
challenges. The cross-cultural PwC teams collaborate with NGOs, community-based
organizations, and intergovernmental agencies, working pro bono in eight-week
assignments in communities struggling with the effects of poverty, conflict, and
environmental degradation. The Ulysses program was designed in part to respond to a
growing challenge confronting professional services companies: identifying and
(raining up-and-coming leaders who can find nontraditional answers to intractable
problems.
All 24 Ulysses graduates still work at PwC; most say they have a stronger
commitment to the firm because of the commitment it made to them and because they
now have a different view of PwC s values* For PwC, the Ulysses program provides a
tangible message to its primary stakeholders that the company is committed to making
a difference in the world. According to Brian McCantt the first U.S.-based partner to
participate in Ulysses, "This is a real differentiator—not just in relation to our
competitors, but to all global organizations"

Five Principles of Successful Collaborative Social Initiatives

There are five principles that are central to successful CSIs. as shown in Exhibit 3.9.
When CSR initiatives include most or all of these elements, companies can indeed
maximize the effects of their social contributions while advancing broader strategic
goals. While most CSIs will not achieve complete success with all five elements,
some progress with each is requisite for success. Here are the five principles, along
with examples of companies that have adhered to them well:
Identify a Long-Term Durable Mission
Companies make the greatest social contribution when they identify an important,
long-standing policy challenge and they participate in its solution over the long term.
Veteran Wall Street Journal reporter and author Ron Alsop argues that companies that
are interested in contributing to corporate responsibility and thus burnishing their
reputations should "own the issue."11 Companies that step up to tackle problems that
arc clearly important to society's welfare and that require substantial resources are
signaling to internal and external constituencies that the initiative is deserving of the
company's investment.
Among the more obvious examples of social challenges that will demand attention for
years lo come arc hunger, inadequate housing, ill health, substandard education, and
degradation of the environment. While a company's long-term commitment to any
one of those problems embeds that issue in the fabric of the company, it is more
important that the company can develop competencies that allow it to become better
at its social activities yet be able to keep investing in those outputs. It is also
important to identify limited-scope projects and shorter-term milestones that can be
accomplished through direct contributions by the company. Solving global hunger is a
worthy goal, but it is too large for any individual company to make much of a dent.
Avon Products Inc., the seller of beauty and related products* offers a fine example of
a long-term commitment to a pervasive and longstanding problem. In 1992, the
company's Avon Foundation a public charity established in 1955 to improve the lives
of women and their families—launched its Breast Cancer Crusade in the United
Kingdom. The program has expanded to 50 countries. Funds are raised through a
variety of programs, product sales, and special events, including the Avon Walk for
Breast Cancer scries. The company distinguishes itself from other corporations that
fund a single institution or scientific investigator because it operates as part of a
collaborative, supporting a national network of research, medical, social service, and
cummunily-based organizations* each of which makes its own unique contribution to
helping patients or advancing breast cancer research. The Crusade has awarded more
ihan $300 million to breast cancer research and care organizations worldwide. In its
first 10 years, The Avon Walks program raised more than $250 million for research,
awareness, detection, and treatment.
Another example of a powerful CSI is found tn IBM Corpus Reinventing Education
initiative. Since 1994, IBM works with nonprofit school partners throughoul the
world to develop and implement innovative technology solutions designed to solve
some of education's toughest problems: from coping with shrinking budgets and
increasing parental involvement to moving to team teaching and developing new
lesson plans. This initiative responds to a nearly universal agreement that education
especially education of young girls and women—provides the essential foundation for
addressing a range of social and economic challenges in developing countries.
Overcoming the existing educational deficit requires a long-term commitment to
achieve school reform, such as methods for measuring learning
One element of the Reinventing Hducation initiative ^ . \\ch-bascd "Change Toolkit"
developed by IBM and Harvard Business School professor Rosabeth Moss Kanter.
with sponsorship from the Council of Chief State School Officers, the National
Association of Secondary School Principals, and ihc National Association of El-
ementary School Pnnvipals. The program has been lauded as a compelling model to
systemic school reform.
The Home Depot has identified housing as its principal CSI. In 2002. the company set
up its Home Depot Foundation with ihe primary mission of building "affordable,
efficient, and healthy homes" Thirty million Americans face some sort of challenge in
securing dependable housing, including living in substandard or overcrowded
housing: lacking hot water, electricity, toilet, or bathtub'shower: or simply paying loo
high a per* centage of their income on housing. Hence. Home Depot s long-term
commitment in this area is unassailable Its Foundation works closely with Home
Depot suppliers and with a variety of nonprofits, placing a strong emphasis on local
volunteer efforts.
2. Contribute "What We Do"
Companies maximize the benefits of their corporaie contributions when they leverage
core capabilities and contribute products and services that are based on expertise used
in or generated by their normal operations. Such contributions create a mutually
beneficial relationship between the partners; the social-purpose initiatives receive the
maximum gains while the company minimizes costs and diversions. It is not essential
that these sen ices be synonymous with those ofthe company's business, but they
should build upon some aspect of lis strategic competencies.
The issue was aired at the recent World Economic Forum gathering in Davos,
Switzerland. "We see corporate social responsibility as pan and parcel of doing
business, part of our core skills." said Antony Burgmans. chairman of consumer-
products giant Unilever NV "The major value for Unilever is the corporate reputation
it helps create"

The thinking is similar at IBM, where, as part of its Reinventing Education initiative,
the company con* tributes financial resources, researchers, educational consultants,
and technology to each site to find new ways for technology to spur and support
fundamental school restructuring and broad-based systemic change lo rat>e student
achievement. In effect. IBM leverages its technological and systems expertise, and its
experience providing systems solutions to educational clients, to meet a broader
educational challenge. Says Slanlcy Litow, vice president of Corporate Community
Relations at IBM: "IBM believes that a strong community is a key to a company s
success ... To this end a key focus of our work has been on raising the quality of
public education and bridging llie digital divide." i: IBM gains significant goodwill and
brand identity with important target markets, in some ways repeating Apple Computer
Inc. s successful strategy in the 1980s under which it donated computers to schools as
a way to gain recognition .
There arc many comparable initiatives on the procurement side. Retailers such as
Starbucks Coffee Company now source much of their bean supply directly from
producers, thereby ensuring that those farmers receive fair compensation without
being exploited by powerful middlemen. Many retail supermarkets have followed
with their own versions of the "fair trade" model.
3. Contribute Specialized Services to a Large-Scale Undertaking
Companies have the greatest social impact when they make specialized contributions
to large-scale cooperative efforts. Those that contribute lo initiatives in which other
private, public, or nonprofit organizations are also active have an effect that goes
beyond their limited contributions. Although it is tempting for a company to identify a
specific cause that will be associated only with its own contributions, such a strategy
is likely to be viewed as a "pel project" and not as a contribution to a larger problem
where a range of players have important interests.
A good example is The AbS Corp/s carbon offset program. AES. headquartered in
Arlington. Virginia, is one ofthe world's largest independent power producers, with
30,000 employees and generation and distribution businesses in 27 countries. Some
years ago. the company recognized that it could make a contribution to the battle
against global warming—a significant environmental threat with serious
consequences such as habitat and species depletion, drought, and water scarcity. AES
developed a program that offsets carbon emissions, creating carbon "sinks," a
practical and effective means of combating this global problem.
Research has concluded that planting and preserving trees (technically "forest
enhancement") provides the most practical and effective way to address the CO)
emissions problem. Trees absorb CO* as they grow and convert it to carbon that is
locked up (sequestered) in biomass as long as they live. AES leaders believed that if
their company could contnbute to increasing the standing stock of trees, the additional
trees might be able to absorb enough CO* to offset the emissions from an AES
cogeneration plant. This approach became one ofthe many mitigation measures now
accepted in the global climate change treaty—the Kyoto Protocol—as a means of
achieving legally binding emissions reduction targets.
For its part, packaged-foods giant ConAgra Foods Inc. helps to fight hunger in
partnership with America's Second Harvest, an organization that leads the food
recovery effort in ihe United States. Set up as the nationwide clearinghouse for
handling the donations of prepared and perishable foods, Cun Agra*s coordination ef-
forts enable smaller, local programs to share resources, making the food donation and
distribution process more effective. In October 1999. ConAgra joined with food bank
network Americas Second Harvest in a specific initiative, the Feeding Children Better
program, distributing food to 50,000 local charitable agencies, which, in turn, operate
more than 94,000 food programs.
4- Weigh Government's Influence
Government support for corporate participation in CSls or at least its willingness to
remove barriers—can have an important positive influence. Tax incentives, liability
protection, and other forms of direct and indirect support for businesses all help to
foster business participation and contribute to the success of CSls.
For instance, in the United States. ConAgras food recovery initiatives can deduct the
cost (but not market value) of the donated products plus one half of the product's
profii margin; the value of this deduction is capped at twice the cost of the product.
To encourage further participation of businesses in such food recovery programs,
America's Second Harvest generated a series of recommendations for the US. govern-
ment. The recommendations seek to improve the tax benefits associated with food
donation, including a proposal that tax deductions be set at the fair market value of
donations. Tax deductions provide economic enticement for companies to consider
participation, as Boston Market. KFC and Kraft Foods have publicly
74 Str-mf* Minjg*m*nL Forrnubtion. hiiu*wiwi<j6on. and Control

acknow kdgcd. Donating food also allow* companies to identify the amount of food
wasted because it is tracked for tax purposes.
Similar cfl'ura are being applied to reforms lhal will ease busmevscV concerns about
their liability from contributing to social enterprises The Bill Emerson Good
Samaritan Food Donation Ad. crucicd in IW. protects businesses from liability for
food donation* except tn Ihc case of gross negligence. Building *m this federal US.
act. all 50 slates and the Distnct of Columbia have enacied "good Samaritan" laws to
protect donors except in cases c\ idencing negligence. Many companies and
nonprofits would like lo sec more comprehensive tori reform lo support their efforts.
Government endorsements are invaluable loo Hie Home Depot's partnership with
Habitat for Humanity is actively supported by* the US Department of Housing and
Urban Development till Di This support take* the form of formal endorsement,
logistical facilitation, and implicit acknowledgement lhat the partnership** initiatives
complement HUD i own efforts. Home Depot is assured that the agency will not
burden the program with red tape In the case of AES'v efforts in the area of global
warming, organization* such at the World Bank, the Global Environmental Facility,
and the LN Environment and Development Program endorse and encourage offsets
via (trams, loans, and scientific research
5. AssrmWe and Value the Total Package of Benefit*
Companies gain ihe greatest benefits from their social contributions when they put a
price on the total benefit package I he valuation should include both the social
contributions delivered and the reputation cflcci* lhat solidify or enhance the
company's position among us rxmtf iluencies. Positive reputation—by consumers,
suppliers, employees, regulators, interest groups, and other stakeholders—is driven by
genuine commitment rather than episodic or sporadic interest: consumer* mid oilier
stakeholders see through nominal commitment* designed simply to garner short-term
posilivc goodwill. "'ITK public can smell if |a CSR effort| i s not legitimate" said
Shelly Lazarus, chairman and CEO of advertising agency Ogilvy & Mather USA.
Hence, social initialises that reflect the five pnnciples discussed here can generate
significant reputation benefits for participating companies.
AFSs commitment to carbon offsets has won it seven I awards and generates
favorable consideration from international financial institutions such as the World
Bank, International Finance Corporation, and Intcr-Amcr-ican I Vvelopmcni Bank, as
well as from governments, insurers, and NGOs, In the consumer products sector.
Avon receives extensive media recognition from the advertising and marketing of
cancer walks, nationwide special events including a gala fund-raising concert, and an
awards ceremony. Avon has become so closely associated with the bfca« cancer cause
that many* consumers, now identify the company s commitment—and the trademark
pink ribbon—as easily as its traditional door*io*door marketing and distribution
systems
While difficult lo quantify precisely, the potential value ofthe pink ribbon campaign,
and ihe brand nancss associated with it, generates economic benefits for Avon in the
form of goodwill and overall reputation. Avon's strategy of focusing on a cause that
women care ahoui. leveraging its contributions, and partnering with respected NGOs
has enabled it to gain trust and credibility in the marketplace "There needs to be a cor-
relation between ihe cause and the company." said Susan Hcany. director for
corporate social responsibility al Avon. "Ihe linkage between corporate giving ami the
corporate product creates brand recognition Both buyers and sellers want to achieve
the same goal: improving women's health care worldwide "
Assembling the Components
A range ofcorporate initialises lend themselves lo the CM model because they share
most ofthe frvt key at* tributes wv have described here: they have long-term
objectives, they are sufficient I> Urge to allow a
company to specialize in its contributions, they provide many opportunities Tor the
company to contribute from its current activities or product*, they* enjoy government
support* and they provide a package of benefits that adds value to the company
Exhibit 3.10 summarizes five very successful CSI programs and their performance
against each of the five principles.
Of the five principles, the mosl important by far ;s the second one. Companies must
apply what they do best in their normal commercial operations to their social
responsibility undertakings. This tend is consistent with research that argues that
social activities most closely related to the company s core mission arc most ef-
ficiently administered through internalization or collaboration. It is applicable far
beyond the examples in this chapter, to waste management companies and recycling
programs, for instance, or to publishing companies and 3flcrschool educational
initiatives, or pharmaceutical companies and local immunization and health education
programs.

The Limits of CSR Strategies

Some companies such as Ben & Jerry's have embedded social responsibility and
sustainability commitments deeply in their core strategics. Research suggests that
such single-minded devotion to CSR may be unrealistic for larger, more established
corporations. For example, some analysts have suggested that the intense focus on
social responsibility goals by the management team at Levi Strauss & Co. may have
diverted the company from its core operational challenges, accelerating ihe company's
closure of all of its North American manufacturing operations.
Larger companies must move beyond the easy options of charitable donations but also
steer clear of overreaching commitments. This is not to suggest that companies should
not think big—research shows that projects can be broad in scale and scope and still
succeed. Rather, it suggests that companies need to view their commitments to
corporate responsibility as one important part of their overall strategy but not let the
commitment obscure their broad strategic business goals. By starting with a well-
defined CSR strategy and developing the collaborative initiatives that support that
strategy by meeting the five criteria we have identified companies and their leaders
can make important contributions to the cornmon good while advancing their broader
financial and market objectives.
CSR strategics can also run afoul of the skeptics, and the speed with which
information can be disseminated via the Web—and accumulated in Web logs—makes
this an issue with serious ramifications for reputation management. Nike has been a
lighting rod for CSR activists for its alleged tolerance of hostile and dangerous
working conditions in its many factories and subcontractors around the world Despite
the considerable efforts the company has made to respond to its critics, it has
consistently been on the defensive in trying to redeem its reputation.
Touching on this issue at the World Economic Forum, Unilever chief Antony
Burgmans noted the importance of "making people who matter in society aware of
what you do " His point was amplified by Starbucks CEO Orin Smith, who invited the
authors of an NOO report critical of Starbucks 1 sourcing strategics to the company's
offices and showed them the books. "In many instances we ended up partnering with
them." he said.

The Future of CSR

CSR is firmly and irreversibly part of the corporate fabric. Managed properly, CSR
programs can confer significant benefits to partkipams in terms of corporate
reputation: in terms of hiring, motivation, and retention; and as a means of building
and cementing valuable partnerships. And of course, the benefits extend well beyond
the boundaries of the participating organizations, enriching the lives of many
disadvantaged communities and individuals and pushing back on problems that
threaten fijturc generations, other species, and precious natural resources.
That is the positive perspective. The more prickly aspect of CSR is thai for all of their
resources and capa* bilitics, corporations will face growing demands for social
responsibility contributions far beyond simple cash or in-kind donations. Aggressive
protesters will keep the issues hot* employees will continue to have their say, and
shareholders will passjudgment with their investment—and their votes.
The challenge for management, then, is to know how to meet the company's
obligations to all stakeholders without compromising the baste need to earn a fair
return for its owners. As research shows, a collaborative approach is the foundation
for the most effective CSR initiatives. By then adhering to the five key principles
outlined in this section, business leaders can maintain ongoing commitments to
carefully chosen initiatives that can have positive and tangible effects on social
problems while meeting their obligations to shareholders, employees, and the broader
communities in which they operate*
Unfortunately, the public's perception of the ethics of corporate executives in America
is near its all-time low, A major cause is a spate of corporate scandals prompted by*
self-serving, and often criminal, executive action that resulted in the loss of
stakeholder investments and employee jobs. The most notorious of these cases was
the failure of the Enron Corporation, as described in Exhibit 3.11, Strategy in Action.
The obvious goal of every company is to avoid scandal through a combination of high
moral and ethical standards and careful monitoring to assure that those standards are
maintained. However, when problems arise, the management task of restoring the
credibility of the company become paramount. A CEO ™ho succeeded brilliantly in
such a task is Tyco's Edward Breen as discussed in Exhibit 3.12, Top Strategist.
External stakeholders are not the only critics of the current state of business ethics.
Exhibit 3.13, Strategy in Action presents the findings of a major survey of human
resource managers in which they indicate that strategic managers have much wxirk to
do to establish high ethical standards in their organizations.
Even when groups agree on what constitutes human welfare in a given case, the
means they choose to achieve this welfare may differ. Therefore, ethics also involve
acting to attain human goals. For example, many people would agree that health is a
value worth seeking that is. health enhances human welfare. But what if the means
deemed necessary to attain this value for some include the denial or risk of health for
others, as is commonly an issue faced by pharmaceutical manufacturers? During
production of some drugs, employees arc sometimes subjected to great risk of
personal injury and infection. For example, if contacted or inhaled, the mercury used
in makmg thermometers and Wood pressure equipment can cause heavy metal
poisoning. If inhaled, ethylene oxide used to sterilize medical equipment before it is
shipped to doctors can cause fetal abnormalities and miscarriages. Even penicillin, if
inhaled during its manufacturing process, can cause acute anaphylaxis or shock. Thus,
although the goal of customer health might be widely accepted, die means (in*
volving jeopardy to production employees) may not be.
The spotlight on business ethics is a widespread phenomenon. For example, a 2004
survey by the Institute of Business Ethics helps to clarity how companies use their
codes of ethics.14 It found that more than *X) per* cent of Financial Times Slock
Exchange (FTSE) companies in the United Kingdom have an explicit commitment to
doing business ethically in the form of a code of ethical conduct. The respondents also
reported that 26 percent of boards of directors are taking direct responsibility for the
ethical programs of companies, up from 16 percent in 2001. The main reasons for
having a code of ethics were to provide guidance to staff (38 percent! and to reduce
legal liability (33 percent). Many of the managers (41 percent) also reported that they
had used their code in disciplinary procedures in the last three years, usually on
safely, security, and emironrncntal ethical issues
Enron's success depended on rnuntairarg the trust of customers that it would make good on
its dealing* in the market. But that trust evaporated In recent weeks as it shocked the market
with changes to its ncariy tncompre-heniibfc financial statements *rt you are runnng a
trading operation, you have to be Hie Caesars w*e. beyond reproach Unfortunate^ the
company didn't reafcze it." says a senior Enron employee who asked not to be identified
The tall of Enron to 61 cents a share on Nov 28. 2001 -has already wepod out mora than 99
perterg of its nockmarker value Some $3.5 Nllon of its bonds are trading at just a quarter of
their face value. Banks that lent billons to Enron ml have to fgjx for a share n bankruptcy
court Enron's biggest lencers are ). P morgan Chase & Co and Oo* group, which together
have an estimated $16 billon tn exposure Of that. $900 naftOfl is unsecured, according to
sources. Other losers; Enron's customers, who traded everything from e cefcrty gas. and
metals to telecom band-wioYiv crndt nsurance. and weather derfcexrVQ*.
W-eady the Once arrogant Enron has become vulture meat, tn addition to clamonng
crecators. it bees class at' Oora by shareholders and employees, whose pensions were heavily
irrvested in Enron stock. That tabes questions about how much value is left in the company,
which vdl ppobably be dismembered and sold oil tn parts.
Since creditors had time to shtod rnerraetos. it doesn't appear that Che tmpfcruon of Enron
wtf oVag down any other big pbyery The Wil Street firms have had pfcrcy of trne to unwnd
whatever exposure they may have had" says ftchard Strauss of Gotoman Sachs. *Vrhat they
may stil have remaning «e<h*r cctlbteralized or hedged "
Vrho's to Marne* Perhaps the biggest culprit was arrogance, which has caused Enron to be
compared to past seff-procarncd masters of the i#werse sixh as Ocxc Bcrnham Lambert Inc.
in the 1980s and Long-Term Capital Manas?-meet in the 1990s. Many tngers are pointing at
Skiting. the lorgtrne Enron financta1 wTpneer who took over as CEO in Fetrujry and then
resisted wrth little expbrfluon in ALJJB v ihoftiy before the corrpany hrt the stock Ateo
facing the music are Lay and Andrew S, Fastow. who was ousted as ch*cf *-nancoJ officer
on Oct 24.2001 Fastow p*jr together maajal mrtnersMpi that wore ntended to streamline
Errons brf-ance sheet by taking on ce tan assets ard -aoi rues Trot created a confket of
merest for Fastow who made over SM milon from Ns partnerships
Top Strategist Edward D. Breen
Chairman and CEO ol Tyco International Ltd.
When Ecward D. Broen took the helm c/ l/co snssscnattonal Ltd in the summer of 2C02.
many pcopte choughr the dti£raccd ccrsjtorntjrate vvat headed for b**nk-ruptcy, just fIke
Enron Corp, By Breen had proved item dead vnrong Under hfi kadershp. Tyco has mere than
surmed the scandalous coo duct c4 farmer Chief Executive Dennis Ko~ *Sow*k»—who WB
retried tn early 2005 on dwrg« that he tooted (he cornpany. Indeed, Tyco row ras abnght
ftjturo
Breen. who came to Tyco from Motorola Inc. where he was president, moved ageroutveFrto
clear the L>££cit clouds toomhsj over the $40 billon company He slashed debt to less than
half of its $26 btlion peak when fie look the netm at Ty<o. regaining an irr^iment-gracto
rating. He ordered a review of Koatowski's accounting, than rebuilt the audt staff* And he
worked to make lyco a model of corpora** governance, starwnj* by replacing the entre
board and virtually aJI senior axacuti VCS
Now Breen is focused on generating B/owth Sates surged 12%. to $40.2 btlion. eithe fiscal
year ended Sep* 30. 2004. and net income tripled to $2.9 billon, thanks in pan to a
resuucturvig that irnprovad margns. Breen stii has some big challenge*, including
shareholder Uwsutts. But nvestor? are clearly betting on him The stock has Ooc.rjtod since
the end of 2002. gwng lyco a market value of $73 ballon. That's not as ftgh as the $120
bison peak reached under Kozlowskj. But it* far above what anyone thought possible when
Breen arrived.
Key Accomplishments
Brought lyco back after executive scandals and a liquidity crunch nearly killed 4. Tnpled net
earnings and regained an »ivestment-graclo rating on Tyco's bonds. Managers who adopt
the utilitarian approach judge the effects of a particular action on tlie people directly
involved in terms of what provides the greatest good for the greatest number of
people. The utilitarian approach focuses on actions, rather than on the motives behind
the actions. Potentially positive resulcs are weighed against potentially negative
results. If the former outweigh the latter, the manager taking the utilitarian approach is
likely to proceed with the action. That some people might be adversely affected by the
action is accepted as inevitable. For example, the Council on Environmental Quality
conducts cost-bcncfil analyses when selecting air pollution standards under the Clean
Air AeL thereby actmcnvkrJging lhat some pollution must be accepted
Managers who subscribe to ihe moral right* approach judge wl»cthcr decisions and
actions arc in keeping with the maintenance of fundamental individual and group
rights and privileges. The moral rights approach (also referred to as deontology) in-
cludes the rights of human beings in life and safety, a standard of truthfulness, pri-
vacy; freedom to express one's conscience, freedom of speech, and private property
Managers who take the social justice approach judge how consistent actions arc with
equity, fairness* and impartiality in the distribution of rewards and costs among in-
dividuals and groups. These ideas stem from two principles known as the liberty prin-
ciple and the difference principle. The liberty principle states lhat individuals have
certain basic liberties compatible with similar liberties of other people. The diffmmie
principle holds that social and economic inequities must be addressed to achieve a
more eqniuible distribution of goods and services.
In addition to these defining principles, three implementing principles are essential lo
the socialjusticc approach. According to xhcdistrihurive'jii&ticeprinciple, individuals
should noi be treaied differently on the ha* sis of arbitrary characteristics, such as
race. sex. religion or national origin* This familiar principle is embodied in the Civil
Rights Act, Tlie fuirnext prineiftle means that employees must be expected to engage in
cooperative activities according to ihe rules of the company assuming trial the
company rules are deemed lair, Ihe most obvious example is that, in order lo further
the mutual interests of the company, themselves* and other workers, employees must
accept limits on their freedom to be absent from work- The natural-duty1 principle
points up a number of general obligations, including the duly tn help others who arc in
need or danger, ihe duty not to cause uimeeessajy suffering, and the duly io comply
with ihe Jusi rules of an institution
CODES OF BUSINESS ETHICS

To help ensure consistency in the application of ethical standards, an increasing

number of professional associations and businesses are establishing codes of ethical
conduct. Associations of chemists, funeral directors, law enforcement agents,
migration agents hockey players, Internet provident, librarians, military arms sellers,
philatelists, physicians, and psychologists all have such codes. So do companies such
as AmaAm.com, Colgate, Honeywell, New York Times, Nokia, Price
watcrbouscCoopcrs, Sony Group, and Riggs Bank
Nike faces the problems of a large global corporation in enforcing a code of conduct,
Nike s products are manufactured in factories owned and operated by other
companies, Nike's supply chain includes more than 660,000 contract manufacturing
workers in more than 900 factories in more than 50 countries, including the United
States. The workers are predominantly women, ages 19 to 25. The geographic
dispersion of iu manufacturing facilities is driven by many factors including pricing,
quality; factory capacity, and quota allocations.
With such cultural, societal, and ecoewmic uaSroity, the ethics challenge for Nike is
to "do busmess with contract fad ones that consistently demonstrate compliance with
standards wc set and that operate in an ethical and
Major Trend* In Codes of Ethics
The increaacd miereii tn codifying buauiess cihK* ha led to both the proliferation of
formal HH b> tomrsanies and to their prommence among documrriH Not long ago,
codes of dhics that exiMcd wctc usually louiul vilely incmplojee handbooks The new
irend i* forlhem to also he prominently displayed on corporate Web thm, in annual
reports, and next to Title VII posters on bulletin boards*
A tccond trend it that companies are adding enrorccinciu measures in their codes,
including policies thai arc designed lo guide employees on what to do if the) w
vinbiions occur and sanctions that will be applied* including consciences on their
empkrymcni and civil and cnmiiiaJ charges. As a cofitequcnee. businesses art
irsereastngjy requiring all erraployees to sign the ethics suatcmem aa a that they have
read and understood their obligations* In part this requirement reflects the impact of
Ihc Sarbanes-Oxlcy rule that CEOs and CFOs certify the accuracy of company
financials. Executives want employees at all levels to recognize their own obligations
to pass accurate information up the chain of command.
The ihird trend is increased attention by companies in improving employees* training
in understanding their obligations under the company's code of ethics. The objective
is to emphasize the consideration of ethics during the decision-making process
Training, and subsequent monitoring of actual work behavior, is also aided by
computer software that identifies possible code violations, which managers can then
investigate in detail.
Given the amount of time that people spend working* it is reasonable that they should
try to shape the organizations in which they work. Inanimate organ i/ations are often
hlamcd for setting the legal ethical and moral rones in the workplace when, in reality,
people determine how people behave Jusi as individuals try to shape their
neighborhoods, schools, political and social organizations, and religious institutions*
employees need to help determine the major issues of corporate social responsibility
and business ethics.
Strategic decisions, indeed all decisions, involve tradc-ofTs. We choose one thing
over another Wc pursue one goal while subordinating another. On the topic of
corporate social responsibility, individual employees must work to achieve the
outcomes thai they want By volunteering for certain community welfare options they
choose to improve that option's chances of being beneficial. Business ethics present a
parallel opportunity By choosing proper behaviors, employees help to build an
organization that can be respected and economically viable in Ihe long run.
Often, the concern is expressed that business activities lend to be illegal or unethical
and thai the failure of individuals to follow the pattern will leave them at a
competitive disadvantage. Such claims, often prompted by high-profile examples, arc
absurd. Rare hut much publicized criminal activities mask the meaningful reality that
business conduci is as honest and honorable as any other activity in our lives. The
people who are involved arc the same, with the same values, ideals, and aspirations.
In this chapter, we have studied corporate social responsibility to understand it and to
learn how our businesses can occasionally use some of their resources to make
differentia), positive impacts on our society. We also looked at business ethics to gain
an appreciation for the importance of maintaining and promoting social values in the
workplace
I Define the icon sotiat mponsibiiity. Kind an example of a company action thai
was legal but noi socially responsible. Defend your curaplc on Ihe bam of your
defmitkw.
2. Name five potcniialry valuable indicators ot a firm's social responsibility and
describe how company performance in each could he measured
3. Do you think a business organization in todays society benefits by* defining a
socially responsible role for hself? Why or why noi?
4. Which of ihe ihrve basic philosophies of social responsibility would you find nwisi
appealing as the chief executive of a large corporation* Explain.
5. Do yem think society* expectations for corporate social responsibility will change
in the next decade? Explain.
6. How much should social responsibility be considered in evaluating an
organization's overall performance"
7. Is it necessary that an action be voluntary to be termed socially responsible?
Explain
8. SL Do you think an organization should adhere to different philosophic* of
corporate re^rxnixibility when confronted with ditlerent issues, or should its
philosophy always remain the same? Explain,
9. Describe yourself asasukehnldei m a company What kind of stakeholder role do
you play now? What kind of stakeholder roles do you expect to play in the
ftiture?
10. What scis ihe affirmative philosophy* apart from the stakeholder philosophy of
social responsibility-? In what areas do the two philosophies overlap?
11. Crte examples of both ethical and unethical behavior drawn from your knowledge
of current business events.
12. How would you describe the contemporary state of business ethics?
13. How can business self-interest also serve social interests?
 Chapter 3 Discussion Case I
WAL*MART VS. CLASS ACTIONS The retail giants- novel defense in a
massive suit could rewrite the playhook
Corporate America could find it a whole loi easier to fight off employmem class
actions if Wal-Mart Stores Inc. prevails in a sex discrimination case to he heard soon
by the US. Ninth Circuit Court of Appeals. Indeed, a Wal-Mart vie* lory could tilt the
playing field for virtually all of these kinds of suns, which have? plagued Boeing*
Coca-Cola, and dozens of other large employers over ihc years.
Wal-Mart's ambitious legal strategy strikes at the heart of what it means to file a class
action. The company maintains that its constitutional rights would be violated if the
court allows a suil lo go forward involving up to 1-5 million of the retailing giani/s
currcni and former female employees. Because such a case would deprive the
company of its rights to defend itself against each woman's claim, h argues, the courts
should allow suits only on a storc-by-storc basis. If the Ninth Circuit agrees and
strikes down the muliisiuie action certified by a lower court, it would likely kill ihe
largest employment class action in US. Imlory. More broadly it would open wide the
door for all large companies to make similar argumcms* A victory for Wal-Mart
rmghi mean that plaintiffs can t bring nationwide class actions anymore and that they
might have to do them locally or regionally;* says Mark S. Dichtcr, a managemenl
side employment lawyer at Morgan, Lewis & Bockius LLP.
Wal-Mart s: case \t no slam dunk. A few* companies haw tried similar arguments in
bus and pieces and gotten novvherc. Bui Wal-Mart is the first to tackle the
constitutional issues head-on. say Dichiet and other experts Certainly, it faces lough
odds at the Ninth Cireuii. one of the nation 1* more liberal federal appeals courts.
Instead, its probably aiming for the more conservative US. Supreme Court, say
experts. At the same time. WalAlart has been hedging lis bets by engaging in
settlement talks with Ibc plaintiffs for several months, say lawyers involvcd-

Court-Clogger?
SiilL the question is whether Wal-Mart s suggested stocc-by-store alternative makes*
sense. After all the most exueme outcome—thousands of mini class actions—would
clog the U.S. courts for years. Even the company's own prediction lhat plaintiffs could
have grounds to bring discrimination claims at no more than 10% of its 3.400 US.
stores would qualify as a law-yets full-employment act. Of course. Wal-Mart may
simply believe thai few store-level cases would be filed tn the end although Wal-
Mart's lawyers deny that. Still, "if even 100 suits were brought, it would be a mess for
Wal-Mart/1 wains Joseph M. Sellers, a partner at Cohen, Milstcin, Uiusfcld & Toll
who represents the plaintiffs
The case began in 2001, when a group of female Wal-Mart employees sued, claiming
that the world's largest re-tailer somatically paid women leas than men in the same
jobs and promoted men ahead of similarly talented women. Last June a Northern
California District Court judge granted the plaintilTs class status, allowing them to
sue on behalf of all women who had worked at Wal-Mart's IS, stores since December,
1998. Wal-Mart quickly appealed the class certification to the Ninth Circuit, which is
due to set the hearing date any day.
The thrust of Wal-Mart s appeal is thai the district judge ran roughshod over the
company's constitutkmai rights to due process and to a jury trial. Despite the
company's reputation for micro-managing down to the rjenrry, it argued that pay and
promotion decisions arc made almost entirely by local store managers. So the judge
should have ignored the plaintiffs* statistics showing large nationwide disparities in
the way female employees arc paid and promoted. Instead, it should hear only store-
level suits.
Doing otherwise, the company says, would leave it unable to prove that an individual
was paid correctly or prop* cily passed over for promotion. So it could be forced to
pay for something it didn't da* That would be a clear violation ofthe Fifth
Amendment** requirement that "no person shall be . , . deprived of life, liberty, or
property without due processof law" Says Theodore J. Boutrous Jr. a Wal-Mart
lawyer at Gibson, [>imn ACnitcher LLP: "When you're talking about taking money
from one citizen and giving it to another, you can't just rely on aggregate statistics,
which don't tell you who is actually discriminated against.'*
The problem, of course, is thai this logic undercuts the very concept of class actions.
The point of grouping many employees together into one lawsuit is to deal with
complaints that they hold in common. In employment discrimi* nation cases, the
problems usually involve disparate policies or practices by the corporation. Indeed,
the plaintiffs* response ts thai broad workforce data are actually more reliable than
individual hearings in such cases. They point out. for example, that the retailer
promoted hourly workers using a "lap-on-the-shoulder" method in which employ* ccs
couldn't apply for a position and store managers singled out promising candidates
when vacancies occurred. So it would be impossible to tell now which individual
women would have qualified for a promotion even if there had been no
discrimination. "In these circumstances, the use of workforce data to compute
aggregate monetary relief'has more basis in reality... than an individual-by-individual
approach,*** the plaintiffs say, citing a prominent 1974 class action.
The two sides disagree just as strongly about which approach would be fairer to the
individual women involved. If the court uses aggregate company statistics, as is
typical in such eases, then women who never had any desire to become managers
could get back pay or damages they're not entitled to, points out John Bcisner. a class
action attorney at O'Melveny & Myers LLP who filed an amicus brief supporting
Wal-Mart on behalf ofthe U.S. Chamber of Commerce. Or those who suffered
egregious discrimination at one store would gel nothing if Wal-Mart wins. "That s the
Hobsor.V choice you get when you hand juries these giant cases." he says.
The plaintiffs argue that rough justice is better than nojusticcat alLThcy say that Ln
the nationwide class approach, Wal-Mart's total liability would be set by looking at
how all female employees fared across the company. Tf some of thai money went to
women who didn't actually suffer, then women who did experience discrimination
might get less than they should have. But Wal-Mart itself would be no worse off.
Wal-Mart's sheer size puts ii in acategory all its own. If it succeeds in cutting class
actions down to bite-sire piece*, large—and not so large—-employers could end up
benefiting.

. The Business Process OuUouremg < BPO) sector started evolsing in Irsda m the
early 1^ Over the decade. India established irxelf at a destination of choice. The
Indian BPO sector has been growing al a very rapid pace -The sector employs more
than 700.000 people and accounts for more than 35 per cent ofthe worhhvide BPO
market. While labor arbitrage ha* been a key dnver for this growth. <*her factors-
such as access to talent, terv* ice nuaht). productivity, and hme>vr>rnarici have
gained importance
2 The NASSCOM-Evercst BPO study indicates thai the sector is al an inflexion point
ft facesa unique opportu-M T v io enhance its role as a niU-wrvice. value-addmg
partner There ii a significant headroom in the addressable BPO opportunity for hovers
and rmtviderv and there are ftbxable untapped areas exist across a wide spectrum of
segments The study estimates thai the Indian BPO sector can reach around t'SS 30
billion in ex-r>ort revenues by-2012 Hosvrvrr,rtie sector can ^itself a sweh five rimes
its present size) in export revenue* by 2012.
3. This will also spur growth in the milk r Tier 2 and Tier 3 cities and result tn a six-
fold growth in the number of lie livery centers required to support the enhanced target
for the lector. A five-fold growth in the Indian BPO market will add nearty 2.5%
directly to India s GDP from export* earnings and provide employment to about 2
mil]ion people.
A . A recent media report m a leading business magazine m India jtated "lilt) India n
in trouble, Dig Trouble." The problem highlighted was that even though the industry
was growing at *i pace ol i per annum* employ-■. thousands of >oung, barely
educated workers from all over the country, it was spawning social and er-fononk
piorjlcmi on an unpicccoenied scale Young BPO workers, in the median age of 25,
often lose control ova their lives and strav into drug*, crime. depression, and ftusctdaj
tendencies lliis is n*orc prevalent in vokc-hascd call-ccnlcn, which account for about
70% revenue* ofthe industry an compared to ihc BPO* handling back-ofTice work
5. The BPO case is both alarming and unique when compared lo other workplaces.
The reason being lhat >oung workers nm an entire industry almost on their own,
working mostly during the night, often away from their small town families, in a
world of perceived glamour and relative affluence. Working through the night upsets
the natural bro-rhythrri making BPO workers sick, irritable, and depressed Often, they
assume a fake accent and a fake persona, which, over a period of time, reduces then
self-esteem.
6. The Job is monotonous repetitive, J I J target Htficoted. with very
shortbreaks,and the workers are often at the receiving end of customer** ire, and have
little or no chances of career progression. The workers work in dose proximity to each
other, and those staying away from home alio share apartment This leads to a fusion
between professional and personal lives.
Goins: forward one ofthe biggest challenge* facing the sector is the issue of
manpower. From a people perspective* (be BPO industry would involve 2 million
people, who would he exposed to similar work-related pressures. VYoutU it be wrong
io ask BPO industry lo lake ownership of these problems as part of their Corporate
Social Responsibility, or should it be left io the global partners who are offshoring
their work to India?
Appendix Tata Code of Conduct 2008*
The Tata Code of Conduct enunciates the values, wtnch govern the conduct and activities of
the companies using the lata name, and of their employees. The Management at Tata
Interactive System* strive* to create a culture thai promoter compliance, encourages
employees to raise ihcir questions and concerns, provides for counselling, and prohibits
retjibution.
The Tata Group is committed to benefit the economic development of the countries in
which it operates. No Tata company shall undertake any project or activity to the detriment
of the wider interest* of the communities in which it operates. A Tata company's
management practices and business conduct must benefit the country, localities and
communities served to the extent possible and affordable, and shall be in accordance wiih the
laws and economic development policies of the government of each country
A Tata company, in the course of its international business activities shall respect the culture,
customs and traditions of each country and region in which it operates, it shall conform to
international trade procedure*, including licensing, documentation, and other necessary
formalities, as applicable*
Clause: £ - Financial reporting aid record v
A Tata company shall prepare and maintain ns account* fairly and accurately m accordance
with the accounting and financial rcrxtfting standards whkh represent the ccn-eraUy accepted
guidcltnes, principles standards, taws and iceulatioatof the country tn which the company
conducts its business affairs.
Internal accounting and audit procedures shall reflect, fairly and accurately, all of Ibe
company % business trans* acbuns and disposition of assets, and shall have internal controls
to provide assurance ro the company's board and shareholders thai ihc transactions arc
accurate and krgvti-mate All required information shall be accessible lo company auditors
and other authorised parties and gosernment agencies. 1 here iball be no willful emissions of
any company transactions from the books and records, no advance income recognition, and
no hidden bank account and tunas.
Any willful, material misrepresentation of and or rms-information on the financial accounts
and reports shall he retarded as a violation of the code, apart from imiting appropriate civil
or criminal action under the relevant laws No employee shall nuke, authorize, or collude in
an improper payment, commission, or bribe.
Clause: % - Competition
A Tata company shall full)1 support the development and operation of compel (live open
markets and shall promote the liberalisation of trade and investment in each country and
market ii operates in. Specifically; a Tata company shall not engage in restnciivc trade
practices and activities that generate or support the formation of rnooopolies dominant market
position*, cartels, and simitar unfair trade practice*
A Tata company shall market its products and services on its own merits, and shall not make
unfair and misleading statements about competitors* products and services. Any collection of
competitive information shall be made only in the normal course of business, and shall be
obtained only through legally permitted sources and means.
Clause: 4 - Equal apporiaiiiics employer
A Tata company shall pros ioc equal opportunities to all its employees and all qualified
applicants lor employment without regard lo their race. . rv. religion, color, ancestry, marital
status, sex. age, nationality, disability, and veteran status
Human resource policies should promulc diversity and enuiry in the workplace, as well as
comply with all labor laws and international best practices Employees of • Tata company
shall be treated with dignity, and in accordance will) the Tata policy, to maintain a work env
ironmenl free of sexual harassment, whether physical, verbal, or psychological Employee
policies and practices snail be
Clause: 5 - Gifts and donations
A Tata company and Us employees shall neither receive nor oiler or make, directly or
indirectly, any illegal payments, remuneration, gift*, donations, or comparable ben-
efits, which arc intended to. or pcreeived to. obtain business or un-compelitivc favors
for the conduct of its business and shall participate in efforts to eliminate such forms
of bribery, fraud and corruption. However, a Tata company and its employees may
accept and offer nominal gifts which are customarily given, and are of commemo-
rative nature, for special events.
Clause: 6 - Government agencies
A Tata company and its employees shall not otTcr or give any company funds or
properly as donation lo any government agencies or their representatives, directly or
through intermediarws. in order to obtain any favorable performance of official duties
A Tata company shall comply wnh government procurement regulations, and shall be
transparent in alt its dealings with government agencies as applicable.
Clause: 7 - Political non-alignment
A Tata company shall be committed to and support functioning democratic const un ■
■ - - and systems with transparent and fair electoral systems. A Tata company shall
nol suppon. dueeily or indirectly, any specific political party or candidate for political
office. The company's conduct shall preclude any aetiv icy that could be interpreted as
mutual dependence favor with any political body, and shall not offer or give any
company funds or property as donations directly or indirectly, to any specific political
party: candidate, or campaign.
Clause: 8 - Health, safety and environment
A Tata company shall strive to provide a safe, healthy: and ergononiic working
crwirormcm for us people. It shall comply wiih all health, safely, and environmental
regulations in each jurisdiction, in which it operates.
A Tata company shall be committed to best practice in minimising its impact on the
environment, prevent the wasteful use of natural resoitrces. and properly and safely
control any hazardous aspects of its business.
A Tata company shall have policies and processes in place io address issues of safety,
health and environment.
and shall also have a disaster management sysiem io ad* dress any natural calamities
or business contingencies thai may arise.
A Tata company, in the process of production and sale ofiLs products and services,
shall strive for economic, social and emironmcntal sustainability.
Clause: 9 - Quality of products and services
A Tata company shall be committed to supply goods and services ofthe highest
quality siandariis. backed by1 efficient after-sales service, consistent with Ihc
requirement of customers to ensure their total satisfaction. The quality standards of
the company's goods and services should meet the required national standards, and the
company should endeavour to become world-class
A lata company shall illustrate adequate labels, caveats, and other necessary health
and safely information on Us product packaging.
Clause: 10 - Corporate citizenship
A Tata company shall be committed to be a good corporate citizen, not only in
compliance with alt relevant laws and regulations but also by actively assisting in the
improvement ofthe quality of life ofthe people in the communities in which it operates
with the objective of making them self fcliant. Such social responsibility would com-
prise, lo initiate and support community initiatives in Ihe field of community health
and family welfare, water management, vocational training, education and literacy,
and encourage application of modern scientific and managerial techniques and
expertise. This will be reviewed periodically in consonance with national and regional
priorities The company would also nol treat these activities us optional bur would
strive to incorporate them as an integral part of its business plan. The company would
also encourage volunteering amongst its employees and collaboration with
community groups. Tata companies arc encouraged to develop social accounting
systems, carry out social audit of their operations, and support public policies that
promote social and economic development.
Clause: I I - Cooperation of Tata companies A Tata company shall cooperate with
other Tata companies by sharing know ledge, physical, human, and management
resources* as Tongas ihisdocsnol adversely affect its business interests and
shareholder value. In the procurement of products and services, a Tata company shall
give preference to another Tata company, as long a* it can provide these on
competitive terms relative to third parties.
TW Tata (rtnup hmnun the information rs^nju^menti |fl the nubhc and its *tt*xr*r4dm In aJI
m public antes wnh respect io disclosing coraptiry and 1 fcrmatioo to P-JWK
cotu*itueTKic*-«uxi as the nacduu the frnarwxal cnrrartunity emplosccs and shareholder a
Tata cornpam or the Tata Group shall he represented only by spccificalK authorized
director* and employees. It will be ihe sole rc*r*on»ibi1ii\ of their authonrcd repcesentatives
lo disclose information about the company
Clause: 13 - Third party represents! inn
Parties which have businrt* dealing* wiih ihe Tata Group but are r>..t members of the
(iroup such an consultants* r.-.-r- sales representative*, distributors, contractors, suppliers, etc.
shall not be authorised Ui represent a Tata cornpany if their business ennduct and ethic* are
known to be inconsistent w tin Ihc Tata code T he third parties are ex pected lo abide by ihe
code in their intefaclion with the ccmparrv
Clause: 14 - LM «f tie Tata brand
The use of the Tata name and tiadcrtvarfc. owned by Tata Sorts, shall be enserned by
rnaaunah. codes, and agree merits to he issued by Tata Som The -is of ihe Tata brand is
defined n, and regulated hy the Tata Brand Flurry- and Business Promotion Agree HKH No
third parry is ex* pected tn use the Tata brand to further tft Merests without specific
avtthm/atioav
(law: IS-ttmuppnl^trs
A Tata cornpan*. shall riv*«nmcud lo its board of directors the adoption of policies and
guideline* rKnodkally formulated by Tata Sons.
Claasc: In-Shareholders
A Tata company shall be committed to enhance shareholder value and comply with J!1
regulations arid law * that govern shareholders* rights. The board of directors of a Tata
company shall duly and fairK inform its shareholders about all relevant aspects nf the
comr>an>\ bususess, and disclose such mformation in accordance with the Tespcc* trvc
regulations and agreements
Every cmpknee of a Tata ccasxpnny. which shall include whc4e-rjrne chrrctm and the chaef
cwotne. shall deal on bcttaIf of the company wnh profrxaaoivibscn. rurally, a> Te^nty as
weil is high moral and ethical standards Such
Every rarapioyee shall be resrv^vsiNe tor the arrr4c mentation of. and cmrpl since uith. the
code in has her professional em 'foment failure io adhere to the code could attract the most
«everr: consequences, including termination of employment
C la use: IK - Regulaiurv coniphamr
Every employee of a Tata company, in hi* her business conduct, srull comply wiih all
applicable laws and rvgula» nonv both in letter ami in spinl. in all trrntnnes in which he or
she operates If Ihe ethical and professional standards set out in the applicable laws and
regulations Tall short of the code, then the standards nf ihc code *hall prevail
( laute: I* - Concnrrenl nnplti* imnl
An employee of a Tata compart) shall nor. without the poor approsal of the chief executive
of the crsaipajry. ac* cent employment or a poaitson of rrspnrtuMity i such as a corasuhautf
or a director I wnh any other cornparrv. r**r provide "freelance" services to anyone In the
cane of a whole-time carrsXor or the chief executive, such poor ap-prcsaJ must he obtained
from the board of director* of the
Clause: 20 -1 onflid nf interna
An ernr4oyec or directcr of a laia crmpany shall not accept a position of power rrsponsibilitv
board norrunation ID any- other non Tata company or not-ftst-prtifit organization*
The above will not apply io:
— Nominations to the hoard* of lata companies. Joint ventures, or associate companies
— Memberships position* of responsibility in professional bodies wherein Mich association
will bcnefii Ihe employee T.ila enrnrsanv
— Nominations mcmherships m govemmcni commit-Ices Ksdics or organ i/atn^i
— Lxcepnonal ctrvximatanecs as determined bv the competent autHont*
— Competent authonry in case of an employee shall be the chief executive who. an torn
shall report all such exceptional cases to the board of cares tors on acniarterh basis In case of
the chitf executive and the chrectorv the Group Corporate Centre shall be the competen<
autboem
An employee of a lata company shall not engage in any business, relationship or
activity whkh might dctnmco-talry conflict with the interest of his/her company or the
Group. A conflkt of interest, actual or potential, may anse where, directly or
indirectly. fa) an employee of a Tata company engages in a business, relationship or
activity with anyone who is party to a transaction with his/her company* <b) an
employee is in a position to dense a personal benefit, or a benefit 10 any of his "her
relatives, by making or influencing decisions relating to any transaction, and (el an
independent judgement ol the companyV or (iroup % besi inierest cannot be exercised
I "he main areas of such actual or potential conflicts of interest would include the
following:
— Financial interest of an employee of a Tata company or his her relatives, including
the holding of an m> vestment in ihe subscribed share capital of any company or a
share in any firm which is an actual or potential competitor supplier, customer, disinh-
utor. joint venture, or other alliance partner of the Tata company, i The ownership of
upto I per cent of ihe subscribed share capital of a publicly held company shall not
ordinarily constitute a financial inierest for this purpose j
— An employee of a Tata company ctsnductin^ business on behalf of hisher
company or being in a position to influence a decision with regard to hisher company
s business with a supplier or customer of which his her relative is a principal olficcr or
representative, resulting in a benefil to him her or hiv her relative
— Award of benefits, such as increase in salary or other remuneration, posting,
promotion or recruit* mem of a relative of an employee of a Tata cocn-pany, where
such an individual is in a position to influence ihe decision wiih regard to such
benefit* Acceptance of gifts, deviation*, hospilahly and or enienainmeni beyond ihe
customary level from existing or potential suppliers, customers, or other third parties
whkh have business dealings with the company.
Notwithstanding that such or other instances of conflict of interest exist due to any
historical reasons, adequate and rul] disclosure by the interested employees should be
made 10 the company s management It is also incumbent upon every employee to
make a full disclosure of any interest which ihe employee or the employees im-
mediate family; which would include parents, spouse, and children, may hate in a
company or firm which is a supplier, customer, distributor of. or has other busiivess
dealings with hisher company
Every employee who is required 10 make a disclosure, as mentioned above, shall do
so, in writing, to hisher immediate superior who shall forward the information along
with hisncr comments to the person designated for this purpose by the chief executive
and or the board of three-tors- executive committee appointed by the board and upon
a decision being taken in ihe matter, the employee concerned will be required to take
necessary action, as advised, to resolve avoid the conflict
If an employee fails to make a disclosure as required (herein and the managemeni of
its own accord becomes aware of an instance of conflict of interest thai ought 10 have
been disclosed by the employee, the managemeni would take a serious view of the
mancr and consider suitable disciplinary' action a gains! ihe employee.
Clause: 21 * Securities transactions and confidential information
An employee of a Tata company and hisher immediate family shall noi dense any
bencfi; or assist others to derive any benefit from the access lo. and possession of P in-
formation about the company. Group, or client which is not in the public domain and
thus constitutes insider information.
An employee of a Tata company shall not use or proliferate information which is not
available to the investing public, and therefore constitutes insider information, for
making or giving advice on investment decisions on the securities of the respective
Tata company on which such insider information has been obtained
Such insider information might include the following:
— Acquisition and divestiture of businesses or business units
— Financial information such as pnd Us, earnings, and dividends
— Announcement ol "new product introductions or developments Asset revaluation^
— Invrstment decisions plans
— Restructuring plans
— Major supply and delivery agreements
— Raising finances
An employee of a Taia company shall also respect and observe the confidentiality of
information pertaining 10 other companies, their patents, intellectual property rights,
trademarks and inventions: and stricth observe a practice of non .disclosure.
Clause: 22 - Projecting company assets
The assets of a Tata company should not be misused but employed primarily for the
purpose of conducting the
business for which they arc duly authorised. Those include tangible assets, such as equipment aivd
machmeiy. systems, facilities, maicriak resources, a* well as intangible assets, such as information
technology and systems, proprietary information, intellectual property- rights, relationships with customers
and supplier*, etc
Clause: 23 - Ciil/rnvblp
An employee of a Tata company shall in his. her private life be fiee to pursue an active role in civic or
political affairs as long as it doe* not adversely affect ihe business 01 interests of rive company or the
Group.
Clause: 24 - Intrgri * of data furnished
Every employee of a Tata company shall ensure, at all times, the integrity of data or information furnished
by him to the company
Clause: 25 - Reporting concerns
Every employee of a Tata company shall promptly report io the management when she he becomes aware
of am actual or possible violation ofthe code or event of misconduct, act of misdemeanour, or aci not in
company* interest, which could atTcci ihc business or reputation of his-'her or any other Tata company.
Any employee can make a protected disclosure under the Whistle Blower FM-icy. The protected disclosure
should be forwarded under a covering letter which shall bear ihe identity ofthe whistle blower.
4- THE EXTERNAL ENVIRONMENT
1. After reading and studying this chapter, you should be able to Describe the
three tiers of environmental factors that affect the performance of a firm.
2. List and explain the five factors in the remote environment.
3. Give examples of the economic, social, political, technological, and ecological
influences on a business. Explain the five forces model of industry analysis
and give examples of each force.
4. Give examples of the influences of entry barriers, supplier power, buyer
power, substitute avail* ability, and competitive rivalry on a business.
5. List and explain the five factors in the operating environment. Give examples
of the influences of competitors, creditors, customers, labor, and direct
suppliers on a business.

THE FIRM'S EXTERNAL ENVIRONMENT

A host of external factors influence a firrrTs choice of direction and action and, ulti -
mately* its organizational structure and internal processes. These factors, which con-
stitute the external cm ironment, can be divided into three interrelated subcategories:
factors in the remote environment, factors in the industry environment, and factors in
the operating environment. This chapter describes the complex necessities involved in
formulating strategics that optimize a flrm^ market opportunities. Exhibit 4.1 suggests
the inteirelationshtp between the firm and its remote, its industry, and its operating en-
vironments. In combination, these factors form the basis ofthe opportunities and
threats that a firm face* in its competitive environment.

Remote Environment
The remote environment comprises factors thai originate beyond and usually irre-
spective of. any single firms operating situation: (I) economic, (2) social. (3) political.
14) technological, and <5) ecological factors. That environment presents firms with
opportunities, threats, and constraints, but rarely does u single firm exert any mean-
ingful reciprocal influence. For example, when the ccoivomy slows and construction
starts to decrease, an individual contractor is likely to sutler a dec line in business, but
that contractors efforts in stimulating local construction aclivtiies would be unable to
reverse the overall decrease in construction starts. The trade agreements that resulted
from improved relations between the United States and China and the United States
and Russia arc examples of political factors that impact individual firms. The
agreements provided individual U.S. manufacturers with opportunities to broaden
their international operations.
Economic Factors
Economic factors concern the nature and direction ofthe economy in which a firm
operates. Because consumption patterns are affected by the relative affluence of
various market segments, each firm must consider economic trends in ihe segments
that affect its industry. On both the national and international level, managers must
consider the general availability of credit, the level of disposable income, and the
propensity of people to spend. Prime interest rates, inflation rates, and trends in the
growth ofthe gross national product are other economic factors they should monitor.
For example, in 2003, the depressed economy* was hitting Crown Cork & Seal Co.
especially hard because it had S2 billion in debt due in the year and no way to raise
the money to pay it. The down market had caused its stock price to be too low to raise
cash as it normally would. Therefore, Crown Cork managers turned to issuing bonds
to refinance its debt. With the slow* market, investors were taking advantage of such
bonds because ihcy could safely gain higher returns over stocks. Not only were
investors gening a deal, but Crown Cork and oihcr companies were seeing the lowest
interest rates on bonds in years and by issuing bonds could reorganize their balance
sheets.
The emergence of new international power brokers has changed the focus of
economic environmental forecasting. Among the most prominent of these power
brokers arc ihc Huropean Economic Community (EEC. or Common Market), the
Organization of Petroleum Exporting Countries (OPEC), ami coalitions of developing
countries.
The EEC, whose members include most ofthe West European countries, eliminated
quotas and established a tariff-free trade area for industrial products among its
members* By fostering intra-European economic cooperation, it has helped its
member countries compete more effectively in non-European international markets.
Social Factors
Trie social factors that affect a firm involve the beliefs, values, attitudes, opinions,
and lifestyles of persons in the firm's external environment, as developed from
cultural, ecological, demographic, religious, educational and ethnic conditioning. As
social attitudes change, so too does (he demand for various types of clothing, books,
leisure activities, and so on. Like other forces in the remote external environment,
social forces are dynamic, with constant change resulting from the efforts of
individuals lo satisfy their desires and needs by controlling and adapting to
environmental factors. For example, in 1996, when Bangalore was growing as the IT
hub of India, Cafe Coffee Day pioneered the cafe concept in India by opening its first
cafe at Brigade Road in Bangalore. Till about the late I990*s, coffee drinking in India
was restricted to the intellectual, the .south Indian traditionalist, and the five star
coffee shop visitor. As the pure coffee cafe culture in neighboring international
markets grew, the need for a relaxed and fun hangout for the emerging urban vouth in
the country was clearly seen. Recognizing the potential that lay ahead on the horizon.
Cafe Coffee Day embarked on a dynamic journey to become a large organized retail
cafe chain with a distinct brand identity* of its own. From a handful of cafes in six
cites in the first S years, CCD became India s largest and premier retail chain of cafes
with 552 cafes in 90 cities around the country. Enthused by the success of offering a
world-class coffee experience, CCD opened a Calf in Vienna, Austria and plans U
open otherCafes in ihc Middle East, East-em Europe. Eurasia, Egypt, and South East
Asia.1

Tlic increasing awareness of the markei power of Hispanics in the US. has reached
almost every business sector. Exhibit 4.2, Strategy in Action, provides a few ofthe
details that drive many businesses* interest in attracting Hispanics as customers.
Many major corporations are realizing the importance of Hispanic consumers. An
outstanding example isUnivision. which purchased Hispanic Broadcasting in 2004 for
S3.4 billion. You can read about the executive who led this initiative in Exhibit 4.3.
Top Strategist.
One of ihc mosl profound social changes in recent years has been the entry of large
numbers of women into the labor market. This has not only affected the hiring and
compensation policies and the resource capabilities of their employers, it has also
created or greatly expanded the demand for a wide range of products and services
necessitated by their absence from the home. Firms that anticipated or reacted quickly
to this social change offered such products and services as convenience foods,
microwave ovens, and day care centers.
A second profound social change has been the accelerating interest ofconsutners and
employees in quality* of-life issues. Evidence of this change is seen in recent contract
negotiations. In addition lo the traditional de* mand for increased salaries, workers
demand such benefits as sabbaticals, flexible hours or four-day workweeks, lump-sum
vacation plans, and opportunities for advanced training
A third profound social change ha-, heen the shift in the age distribution ofthe
population. Changing so* cial values and a growing acceptance of improved birth
control methods are expected to raise the mean age of the U.S. population, which was
27.9 in 1970. and 34.9 in the vear 2000. This trend will have an increas* ingly
unfavorable effect on most producers of predominantly youth-oriented goods and will
necessitate a shift in their long-range marketing strategies Producers of hair and skin
care preparations already have begun to adjust their research and development to
reflect anticipated changes in demand.
A consequence ofthe changing age distribution ofthe population has been a sharp
increase in ihc demands made by a growing number of senior ciiwens. Constrained by
fixed incomes, these citizens have demanded that arbitrary and rigid policies on
retirement age he modified and have successfully lobbied for tax exemptions and
increases in Social Security benefits. Such changes have significantly altered the
opportunity-risk equations of many firms --often to the benefit of firms that
anticipated the changes.
Top Strategist
Jerry ftrenchio Chairman and CEO of Uniwicm Communication* Inc.
Jerry terencNo. who RUNS Urcviuon Communications Inc., has an iron p'ip on
Americas 40 mil ion Hs-pancv From a singe Sparr^h U"igu3£c TV iU-
don, he has put together a meda cdossu* whose networks outoVaw the big U.S.
networks among 18-to -49-year- olds in prime time Perenchio has added musk labels
and TV S T T T O T S I Last year, he paid $3.4 bihon fcr Ha*
panic Broadcasting, making Ltahfoton the nations Ivgest Spaniih radio company.
That wide reach has helped win over advertners such as Miller Brewing Co-, which
will spend SI 00 million over three years on Univiskon outlets. Net mcome rose 95%
through the first nine months of 2004. to S188.7 million, on safes of $1,3 billion. For
Peranchio. its good to be el rey.
Key Accomplishments
* IncreasedUrvvision's l8*to*49-yearcJdaudrenccby&%. Now draws more Hlspanics
in that group than ABC. NBC, Few. and NSC-owned Tetemundo combined.

Integrated Hispanic Radio, acquired In 2003. and boosted net *vcome by 95%. to
$189.7 mtil>on, through September.
Cutting across these issues is concern for individual health. The fast-food industry has
been the target of a great deal of public concern. A great deal of popular press
attention has been directed toward Americans* concern over the relationship between
obesity and health. As documented by the hit movie Supers*;? Met McDonald s was
caught in the middle of this new social concern because its menu consisted principally
of high-calorie, anery-clogging foods. Health experts blamed the fast food industry
for ihe rise in obesity, claiming that companies like McDonald's created an
environment that encouraged overeating and discouraged physical activity.
Specifically, McIXmalds was charged with taking advantage ol"the faci that kids and
adults were watching more TV by targeting certain piogram slots to increase sales.
McDonald's responded aggressively and successfully. The company h strategists soon
established McDonald s Corp. as an innovator in healthy food options. Ry 2005, the
world s largest fast-food chain launched a new promotional campaign touting healthy
lifestyles, including fruit and milk in Happy Meals, activity programs in schools, and
a new partnership with the International Olympic Committee. At the time ofthe an-
nouncement. McDonald's was enjoying its longest ever period of samc-siorc sales
growth In 25 wars, with 24 consecutive months of improved global sales resulting
from new healthy menu options, later hours, and better customer service, such as
cashless payment options. McDonald a healthy options included a fruil and walnut
salad Paul Newman's brand low fat Italian dressing, and premium chicken sandwiches
in the United States and chicken flatbread and fruit smoothies tn Europe.
Translating social change into forecasts of business effects is a difficult process, at
best. Nevertheless, informed estimates ofthe impact of such alterations as geographic
shifts in populations and changing work values, ethical standards, and religious
orientation can only help a stralcgizing firm in its attempts to prosper.
Political Factors
The direction and stability of political factors are a major consideration for managers
on formulating company strategy. Political factors define the legal and regulatory*
parameters within which firms must operate. Political constraints are placed on firms
through fair-trade decisions, antitrust laws, lav programs, minimum wage legislation,
pollution and pricing policies, administrative jawboning, and many other actions
aimed ai protecting employees, consumers, the general public, and the em ironment
Because such laws and regulations are most commonly restrictive, they tend to reduce
the potential profits of firms. However, some political actions arc designed to benefit
and protect firms. Such actions include patent laws, government subsidies, and
product research grants. Thus, political factors cither may limit or benefit the firms
they influence. For example, in a pair of surprising decisions in 2003, the Federal
Communications Commission (FCC) ruled thai local phone companies had lo
continue lo lease their lines to Ihe long-distance carriers at what ihc locals said was
below cost. At the same time, the FCC ruled that the local companies were not
required to lease Their broadband lines to the national carriers- These decisions were
good and bad for the local companies because, although they would lose money by
leasing to the long-distance carriers, they could regain some of that loss with their
broadband services that did not have to be leased.
The decisions did not mean that the local carriers had to remove existing lines and
replace them with broadband lines. Instead, the local earners would have to run two
networks to areas where they want to incorporate broadband because the long-
distance carriers had a right io the conventional lines as ruled in the decision* These
regulations caused the local carriers to alter their strategies. For example, they oflen
chose to reduce capital investments on new broadband lines because they had to
maintain old lines as well. The reduction in capital investments was used to offset the
losses they incurred in subsidizing their current lines to the long-distance carriers
The direction and stability of political factors are a major consideration when
evaluating the remote environment. Consider Piracy Microsoft s performance in the
Chinese market is greatly affected by the lack of legal enforcement of piracy and also
by the policies of ihe Chinese government. Likewise, the governments actions in
support of its competitor. Linux, have limited Microsoft's ability to penetrate the
Chinese market-Political activity also has a significant impact on two gcircmmcntal
functions that influence the remote environment of firms: the supplier function and
the customer function.
Supplier Function
Government decisions regarding the accessibility of private businesses to
governmentow ned natural resources and national stockpiles of agricultural products
will affect profoundly the viability of the strategics of some firms.
Customer Function
Oovcrnn>cnt demand for products and services can create, sustain, enhance, or
eliminate marry market opportunities. For example, the Kennedy administration *s
emphasis on landing a man on the moon spawned a demand for thousands of new
products: the Carter administration's emphasis on developing synthetic fuels created a
demand for new skills, technologies, and products; the Reagan administration s
strategic defense initiative (the "Star Wars" defense) sharply aceeleraled the
development of laser technologies; Clinton's federal block grants to the states for
welfare reform led to office rental and lease opportunities; and the war against
terrorism during the Bush administration created enormous investment in aviation.
Technological Factors
The fourth set of factors in the remote environment involves technological change. To
avoid obsolescence and promote innovation, a firm must be aware of technological
changes that might influence Its industry. Creative technological adaptations can
suggest possibilities for new products or for improvements in existing products or in
manufacturing and marketing techniques.
A technological breakthrough can have a sudden and dramatic effect on a firm's
environment. It may spawn sophisticated new markets and products or significantly
shorten the anticipated life of a manufacturing facility Thus, all firms, and most
particularly those in turbulent growth industries, must strive for an
understanding both ofthe existing technological advances and ihe probable future ad-
vances that can aftcct their products and services. This quasi-sctcncc of attempting to
foresee advancements and estimate their impact on an organization'$ operations is
known as technological forecasting.
Technological forecasting can help protect and improve the profitability of firms in
growing industries. It alerts strategic managers to br:h impending challenges and
promising opportunities. As examples: (I) Advances in xerography were a key to Xe-
rox's success bul caused major difficulties for carbon paper manufacturers, and (2) the
perfection of transistors changed the nature of competition in the radio and television
industry; helping such giants as RCA while seriously weakening smaller firms whose
resource commitments required that they continue to base their products on vacuum
tubes.
The key to beneficial forecasting of technological advanccmeni lies in accurately
predicting future tevhnolog-ical capabilities and their probable impacts. A
comprehensive analysis ofthe effect of technological change involves study ofthe
expected ellcct of new technologies on the remote cmironmcnt, on the competitive
business situation, and on the lxLsincsv*soctcty interface. In recent years, forecasting
in the last area has warranted particular attention. For example, as a consequence of
increased concern oxer the em ironmcnL firms must carciully investigate the probable
effect of technological advances onquality-of-lifc factors, such as ecology and public
safety.
For example, by combining the powers of Internet technologies with the capability of
downloading music in a digital format. Bertelsmann has found a creative
technological adaptation for distributing music online to millions of consumers
whenever or wherever they might he. Bertelsmann, AOL Time Warner, and EMI
formed a joint venture called Musicnet. The ease and wide availability of Internet
technologies is increasing the marketplace for online e-tailers. Bertelsmann's response
to ihe shifts in technological factors enables ii to distribute music more rapidly
through Musicnet to a growing consumer base

Ecological Factors
The most prominent factor in the remote environment is often the reciprocal relation-
ship between business and the ecology. The term ecology refers to ihe relationships
among human beings and othet BvitaJ tlriagl mti ifct m. soil, rod mtta tfett Bopporl
them. Threats to our life-supporting ecology caused principally by human activities in
an industrial society are commonly referred to as pollution. Specific concerns include
global warming, loss of habitat and biodiversity, as writ as air. water, and land
pollution.
The global climate has been changing for ages; however ii is now evident that hu-
manity's activities are accelerating this tremendously. A change in atmospheric radia-
tion, due in part to ozone depletion, causes global warming. Solar radiation thai is
normally ahsorbed into the atmosphere reaches the earth *s surface, healing the soil,
water, and air.
Another area of great importance is the loss of habitat and biodiversity. Ecologists
agree that the extinction of important tlora and fauna is occurring at a rapid rate and if
this pace is continued, could constitute a global extinction on the scale of those found
in fossil records. The earth's life-forms depend on a well-functioning ecosystem. In
addition, immeasurable advances in disease treatment can be attributed to research
involving substances found in plants As species become extinct, the life support
system is irreparably harmed. The primary cause of extinction on this scale is a
disturbance of natural habitat, for example, current data suggest thai the earth's
primary tropical forests, a prime source of oxygen and potential plant "cure." coutd be
destroyed in only five decades
Air pollution is created by dust particles and gaseous discharges that contaminate the
air Acid rain, or rain contaminated by sulfur dioxide, which can destroy aquatic and
plant life, is believed to result from coal-burning factories in 70 percent of all cases A
health-threatening "thermal blanket11 is created when the atmosphere traps carbon
dioxide emitted from smokestacks in factories burning fossil fuels. This "greenhouse
effect" can have disastrous consequence*, making the climate unpredictable and
raising temperatures.
Water pollution occurs principally when industrial toxic wastes are dumped or leak
into the nation's waterways. Because fewer than SO percent of all municipal fewer
systems are in compliance with Emironrncntal Protection Agency requirements for
water safety, contaminated waters represent a substantial present threat to public
welfare. Efforts to keep from contaminating the water supply are a major challenge to
even the most conscientious of manufacturing firms.
Land pollution is caused by ihe need to dispose of ever-increasing amounts of waste.
Routine, everyday packaging is a major contributor to this problem. Land pollution is
more dauntingly caused by the disposal of industrial toxic wastes in underground
sites. With approximately 90 percent of the annual US output of 500 million metne
tons of hazardous industrial wastes being placed in underground dumps, ii is evident
that land pollution and iis resulting endangerment of the ecology have become a
major item on the political agenda.
As a major contributor to ecological pollution, business now is being held responsible
for eliminating the loxic by-products of its current manufacturing processes and for
cleaning up the environmental damage that it did previously. Increasingly; managers
are being required by ihc government or arc being expected by the public to
incorporate ecological concerns into their decision making. For example, between
1975 and 1992, 3M cut its pollution in half by reformulating products, modifying
processes, redesigning production equipment, and recycling by-products. Similarly,
steel companies and public utilities have invested billions of dollars in costlier but
cleaner-burning fuels and pollution control equipment. The automobile industry has
been required to install expensive emission controls in cars. The gasoline industry has
been forced to formulate new low-lead and no-lead products. And thousands of
companies have found it necessary to direct their R&D resources into the search tor
ecologically superior products, such as Scars *s phosphate-free laundry detergent and
Pepsi-Cola's biodegradable plastic sod-drink bottle.
Environmental legislation impacts corporate strategies worldwide. Many companies
fear the consequences of highly restrictive and costly environmental regulations.
However, some manufacturers view these new controls as an opportunity, capturing
markets with products that help customers satisfy* their own regulatory standards.
Other manufacturers contend that the costs of environmental spending inhibit the
growth and productivity of their operations.
Despite cleanup efforts to date, the job of protecting the ecology will continue to be a
top strategic priority—usually because corporate stockholders and executives choose
ii. increasingly because ihe public and the government require it. As evidenced by
Exhibit 4.4, the government has made numerous interventions into the conduct of
business for the purpose of bettering ihc ecology. Benefits o f Eco*Efficiency
Many of the world's largest corporations arc realizing that business activities must no
longer ignore environmental concerns. Every activity* is linked to thousands of other
transactions and their environmental impact; therefore, corporate emironrncntal
responsibility must be taken seriously and environmental policy must be implemented
to ensure a comprehensive organizational strategy'. Because of increases in
government regulations and consumer environmental concerns, the implementation of
environmental policy has become a point of competitive advantage. Therefore, the
rational goal of business should be to limit its impact on the environment, thus
ensuring long-run benefits to both the firm and society. To neglect this responsibility
is to en-Sure the demise of both the firm and our ecosystem.
The External Environ merit
National Environmental Policy Act, 1969 Established Environmental Protection
Agency; ronsolidated federal environmental activities under it. Established Council on
Environmental Quality to advise president on environmental pofccy and to review
environmental impact statements. Air Pollution:
Clean Air Act, 1963 Authorized assistance to state and local governments in
fornnjlating control programs. Authorized limited federal action in correcting specific
pollution problems.
Clean Air Act, Amendments (Motor Vehicle Air Pollution Control Act), 1965
Authorized federal standards for auto exha1 st emission. Standards tint set for 1968
models.
Air Quality Act 1967 Authorized federal government to establish air quality control
regions and to set maximum permissible pollution lew* Required states and localities
to carry out approved control programs or else give way to federal controls. Clean Air
Act Amendments, 1970 Authorized EPA to establish nationwide air pollution
standards and to limit the discharge of six pnnapal pollutants into trv_ lower
atmosphere Authorized citizens to take legal action to require EPA to implement its
standards against undiscovered offenders.
Clean Air Act Amendments, 1977 Postponed auto emission requirements. Required
use of scrubbers in new toal-fired pawer plants. Drected EPA lo establish a system to
prevent deterioration of air quality in clean areas. Solid Waste Pollution:
Solid Waste Disposal Act 1965 Authorized research and assistance to state and local
control programs.
Resource Recovery Act 1970 Subsidized construction of pilot recycling plants:
authorized development of nationwide control programs.
Resource Conservation and Recovery Act 1976 Directed EPA to regulate hazardous
waste management, from generation through disposal
Surface Mining and Reclamation Act 1976 Controlled strip mining and restoration of
reclaimed land. Water Pollution:
Refuse Act 1899 Prohibited dumping of debris into navigable waters without a
permit. Extended by court decision to industrial discharges.
Federal Water Pollution Control Act 1956 Authorized grants lo states for water
pctfubon control. Gave federal governmem limited authority to correct specific
pollution problems. Water Quality Act 1965 Provided tor adoption of water quality
standards by states, subject to federal approval
Water Quality Improvement Act 1970 Provided (or federal cleanup of orlspiHs.
Strengthened federal authority over water pollution control.
Federal Water Pollution Control Act Amendments, 1972 Authonzed EPA to set water
quality and effluent standards; provided for enforcement and research Safe Drinking
Water Act, 1974 Set standards ;O T drinking water quality.
Clean Water Act, 1977 Ordered control uf towc pollutants by 1984 with best available
technology economically feasible.
Responding to this need General Electric unveiled plans in 2005 to double its research
funds for technologies that reduce energy use, pollution, and emissions tied to global
warming. GE said it would focus even more on solar and wind power as well as other
environmental technologies it is involved with, such as diesel-electric locomotives,
lower emission aircraft engines, more efficient lighting, and water purification. The
company's "ecomagination" plans for 2010 include investing $1.5 billion annually in
cleaner technologies research, up from S700 million tn 2004; and doubling revenues
to $20 billion from envirorunentally friendly products and sen ices.
Stephen Schmidheiny chairman of the Business Council for Sustainable Develop-
ment. has coined the term eco-effickney to describe corporations that produce more-
Company actions dun useful goods and services while continuously reducing resource
consumption and pollution. He cites a number of reasons for corporations to
implement environmental wnik continuously policy*: Customers demand cleaner
products, environmental regulations are increase reducing rc*>ur« ingly more
stringent, employees prefer to work for cmironmcntally conscious firms,
consumption and and financing is more readily available for eco-efficient firms. In
addition, the gov- ^ eminent provides incentives for environmentally responsible
companies*
Setting priorities, developing corporate standards, controlling property 7 acquisition
and use to preserve habitats, implementing energy -conserving activities, and
redesigning products (e.g.. minimizing packaging) are a number of measures the firm
can implement to enhance an cco-cfficicnt strategy. One of the most important steps a
firm can take in achieving a competitive position w ich regard to the eco-efficient
strategy is to hilly capitalize on technological developments as a method of gaining
efficiency.
There are four key characteristics of eco-efficieni corporations:
• Eco-eiTictcnt firms are proactive, not reactive. Policy is initiated and promoted
by business because it is in their own interests and the interest of their
customers, not because it is imposed by one or more external forces.
• Eco-efficiency is designed in, not added on. This characteristic implies that the
optimization of eeo-efficiency requires every business effort regarding the
product and process to internalize the strategy.
• Flexibility is imperative for eco-efflcicnt strategy implementation. Continuous
attention must be paid to technological innovation and market evolution.
• Eco-efficiency is encompassing, not insular. In the modern global business
environment, efforts must cross not only industrial sectors but national and
cultural boundaries as well.

International Environment
Monitoring the international environment, perhaps better thought of as ihe
international dimension of the global environment, involves assessing each
nondomestk market on the same factors that are used in a domestic assessment. While
the importance of factors will differ, the same set of considerations can be used for
each country. For example. Exhibit 4.5, Global Strategy in Action, lists economic,
political, legal, and social factors used to assess international environments. However,
there is one complication to this process, namely, that the interplay among
international markets must be considered. For example, in recent years, conflicts in
the Middle East have made collaborative business strategies among firms in tra-
ditionally antagonistic countries especially difficult to implement.
Global Strategy in Action
Used to Asses* the International Environment
Economic Environment
Level of economy development
Population
Gross national product Per capita income Literacy level Social infrastructure Natural
resources Climate
Membership in regional economic blocs (EU. NAFTA. LAfTA)
Monetary and fiscal policies Wage and salary level* Nature of competition Currency
convertibility Inflation Taxation system Interest rates
Legal Environment
LcgaJ tradition
Effectiveness of legal system Treaties with foreign nations
Exhibit 4.5
Patent trademark laws Laws affecting business firms
Political System
Form of government
Political ideology
SraMcy of government
Strength of opposition parties and groups
Social unrest
Political strife and insurgency Governmental attitude towards foreign firms Foreign
policy
Cultural Environment
Customs, norms, values. bel**fs
Language
Attitude*
Motivations
Status symbols IOUV beliefs
INDUSTRY ENVIRONMENT

Harvard professor Michael K. Porter propelled the concept ot industry environment

into the foreground of strategic thought and business planning. The cornerstone of his
work first appeared in the Harvard Business Review, in which Porter explains the five
forces lhat shape competition in an industry. well-dciined analytic framework helps
strategic managers to link remote factors to their effects on a firm's operating
environment.
With the special permission of Professor Porter and the Harrard Business Review. we
present in ibis section of the chapter ihe major portion of his seminal article on the
industry environment and its impact on strategic management
HOW COMPETITIVE FORCES SHAPE STRATEGY
The essence of strategy formulation is coping with competition. Yet it is easy to view
competition too narrowly and too pessimistically While wc sometimes hear executives
complaining to the contrary, intense competition in an industry is neither coincidence
nor bod ludt.
Moreover, in the fight for market share, competition is not manifested only in the
other players. Rather, competition in an industry is rooted in its underlying
economics, and competitive forces exist that go well beyond the established
combatants in a particular industry. Customers, suppliers, potential entrants, and
substitute products arc all competitors that may be more or less promiiwnt or active
depending on the industry.
The state of competition in an industry 1 depends on five basic forces, which are
diagrammed in Exhibit 4.6. The collective strcngJi of these forces determines the
ultimate profit potential of an industry. It ranges from intense in industries like tires,
metal cans, and steel, w here no company earns spectacular returns on investment 10
mild in industries like oil-field services and equipment, soil drinks, and toiletries,
where there is room for quite high returns.
In thc economists* "perfectly compctitnc** industry, jockeying for position is
unbridled and entry to the industry very* easy. This kind of industry structure, of
course, offers the worst prospect for long-run profitability. The weaker the forces
collectively, however the greater the opportunity for superior performance.
Whatever Iheir collective strength, the corporate strategist s goal is io find a position
in the industry where his or her company can best defend itself against these forces or
can influence them in its favor The collective strength ofthe forces may be painfully
apparent to all the antagonists: but to cope with them, the strategist must delve below
the surface and analyze the sources of competition. For example, what makes the
industry vulnerable to enlry? What determines the bargaining power of suppliers?
Knowledge of these underlying sources of competitive pressure provides the
groundwork for a strategic agenda of action They highlight the critical strengths and
weaknesses of the company, animate the positioning ofthe company in its industry*,
clarify the areas where strategic changes may yield the greatest payoff, and highlight
the places where industry trends promise to hold the greatest significance ns cither
opportunities or threats.
Understanding these sources also proves to be of help in considering areas for
diversification.
CONTENDING FORCES
The strongest ctvmpctitive force or forces determine the profitability of an industry
and so are of greatest importance in strategy formulation. For example, even a
company with a strong position in an industry in-threatened by potential entrants will
earn low returns if it faces a superior or a lower-cost substitute product as the leading
manufacturers of vacuum tubes and coffee percolators have learned to their sorrow. In
such a situation, coping with the substitute product becomes the number one strategic
priority.
Different forces take on prominence, of course, in shaping competition in each
industry. In the ocean-going tanker industry, the key force is probably the buyers (the
major oil companies), while in tires it is powerful OEM buyers coupled with tough
competitor*. In the steel industry the key forces are foreign competitors and substitute
materials.
Every industry has an underlying structure, or a set of fundamental economic and
technical characteristics, that gives rise to these competitive forces. The strategist,
wanting to position his or her company to cope best with its industry environment or
to influence that environmcnl in the company's favor, must learn what makes the
environment tick.
This view of competition pertains equally to industries dealing in services and to
those selling products To avoid monotony, I refer to both products and services as
products. The same general principles apply to all types of business.
A few characteristics are critical to the strength of each competitive force. I hey will
be discussed in this section.

Threat of Entry
New entrants to an industry bring new capacity, ihe desire to gain market share, and
often substantial resources. Companies diversifying through acquisition into the
industry from other markets ortcn leverage ihcir resources to cause a shakc-up, as
Philip Moms did with Miller beer.
The seriousness ofthe threat of entry depends on the bamers present and on the
reaction from existing competitors lhat the entrant can expect. If barriers to entry are
high and a newcomer can expect sharp retaliation from the entrenched competitors, he
or she obviously will not pose a serious threat of entering.
There are six major sources of barriers to entry: fteonomies O f Scale
I hese economics dctc:i entry byp forcing the aspirant either to come in on a large
scale or lo accept a cosi disadvantage. Scale economics in production, research,
marketing, and serv ice arc probably the key* barriers to entry* in the mainframe
computer industry, as Xerox and GK sadly discovered. Economies nf scale also can
act as hurdles in distribution, utilization ofthe sales force, financing, and nearly any
other part of a busi* ness.
Product Differentiation
Product differentiation, or biand identification, creates a barrier by forcing entrants io
spend heavily to overcome customer loyally Advertising, customer service, being first
in the industry, and product differences arc among the factors fostering brand iden-
tification. It is perhaps the most important entry barrier in so!) drinks, over-the-
counter drugs, cosmetics, investment banking, and public accounting. To create high
fences around their business, brewers couple brand identification with economies of
scale in production, distribution, and marketing.
Capital Rttjuirvrnenfs
The need to invest Urge financial resources in order to compete creates a barrier to
entry, particularly if the capital is required for unrecoverable expenditures in upfront
advertising or R&D, Capital is necessary not only for (ixed facilities but also for
customer credit, inventories, and absorbing startup losses. While major corporations
have the financial resources to invade almost any industry, the huge capital
requirements in certain fields, such as computer manufacturing and mineral
extraction, limit the pool of likely entrants.
Cost Disadvantages Independent of Size
Hntrcnched companies may have cost advantages not available to potential rivals, no
matter what their size and attainable economies of scale. These advantages can stem
from the effects of ihe learning curve (and of its first cousin, the experience curvet,
proprietary technology, access to the best raw- materials sources, assets purchased at
prcintlation prices, government subsidies, or favorable locations. Sometimes cost
advantages arc enforceable legally, as they* are through patents. (Tor analysis ofthe
much-discussed experience curve as a harrier lo entry, sec Hxhibit 4.7, Strategy in
Action.I
Access to IWsrribiition Channels
The new boy or girl on the block must, of course, secure distribution of his or her
product or service, A new food product, for example, must displace others from the
supermarket shelf via price breaks, promotions, in* tense selling efforts, or some
oilier means. The more limited the wholesale or retail channels arc and the more that
existing competitors have these lied up, obviously the tougher that entry into the
industry will be. Sometimes this barrier is so high lhat, to surmount it, a new
contestant must create its own distribution channels, as limcx did in the watch
industry.
Government Policy
The government can limit or even foreclose entry to industries, with such controls as
license requirements, limits on access to raw* materials, and lax incentives, as shown
in Strategy in Aciion Exhibit 4 8. Regulated industries like trucking, liquor retailing,
and freight forwarding are noticeable examples: more subtle government restrictions
operate in fields like ski-area development and coal mining The govcrnntent also can
Strategy in Action
The Experience Curve as an Lurry Bamcr

In recent yean the exrxsnence curve has become tfaoBftJ a a key element of Induetiy
structure According to tho concept, urat cootl ci many manufacturing industries (tome
ctofmatx adherer** say * all manufacture* inauv-tnes) as wel as an some tervke trxjustnes
decline with perience,' or a parrJeutor company i cumulative volume of prxijctcn [The
experience curve wt»th encompasses many boon, i* a broader concept than the better known
learning curve, which refers to ma efficiency achieved over rime by worker* through much
repoMion.)
Tho causes of the doc lint In unti com are a combination of akmantt. ticlud+ng economies
of scjkt. the learning curve for labor. and capital kibor uibimunon The cott ot> cline creates a
barrier to entry because new competitor* with no 'experience* 'act higher com than
estabished Ones, perwutarty the producer wKh the hrgest market Share, and have deVufcy
catcteng up wnh the entrenched
C0mpe«o^
Adherents of the experience curve concept suess the rnporrjnce of aduoveei market
leadership to rnaxxrebe rM rxvrey to entry and they recommend aggress^* ac-oon to achieve
*. uxh as pnee oumng n anoca>anon of falling costs ** order to bued volume for the
combatant that cannot achieve a l»eaJthy market share, the prescription it " i.-. . Get out*
b the ex penance curve an entry barrier on which strategic* should be bult* The amwe* isH
not n every in-dustry In (act* in tome industries, building a strategy on the experience curve
can Ike potentially disastrous That cost* decftne with experience in tome mduttnes rs not
news to corporate executives The significance of the experience curve for strategy oepenm
on what factor* are causing the cs<; m
A new entrant may we* bo more enVxtnt than the more aapartpiCtiJ cornpeotort at * nea
buet the new**t ptanc * vnl bet no Cbsachrantage havng to catch up The urateg<
prt5<roocxv "You muw have the largest, mott efficient plant" tt a lot oVfteftnt
frcm"Youmu*tpro4acath* greatest curnt#taove output of the torn to fet your com down."
Exhibit 4.7
vvhether a drop h c«u w«h cixr^rve JVM absoOtt, volume erects en entry bamer afco
depends on che wurce* of the oecfcne. IT com go o^rwn bex^uae of tecivv-cal adra/xers
known generally m the industry or became of the development of *mproved equipment that
can be copied or purchased from equipmen* suppliers the experience curve * not an entry
barrier at all—In fact, new or ken expenencod compewon may actuaty *W * cost advantage
over the leaden. Free of the legacy of heavy past rtvestments. the newcomer or lew-
experienced competitor can purchase or copy the newest .md lowest cost equ«pment and
technology
If Kowever. experience can bo kept proprietary, the leaders w*1 maertain a coat ad* an raft
Bur new encrano may re-oure M O*p*rieno> to reduce thee cents than the leaders reach d
AJI chn vugeio that the experience curve can be a ~haky entry bamer on wfxch to bued a
>cr MCgy
VVhee space does not pemM a compiete ueaonenc here. I want: to rnentjon a iew ocher
cruaai a*emenu m de-ic i iitieia^o^EAPPROPNBEANEAACT^aat/icaev butft on the en-cry
bamer provided by che experience curve

The height of the barrier dopertch on how irnportant costs are to competttton compared wnh
other arm like marketxx st*ng. and innovation
The barrier can be nuMod by product or process innovations leading to a substantially new
technotofY andr thereby, creating »n entirely new experience curve. New entrants can
leapfrog the industry leaders and alight on the new exper*"** curve, co which those leaders
may bo poorly post boned to jump
h* more than one strong company 4 budding 45 suaiegj on the expenence curve, the conse-
quences can be nearly bra* By the tme only one nval O fcghi purwr*g such a StratOfJ.
ndustry growth may have stopped and the protpects of rotpeig the spoes of victory MAY long
smce have evaporated
Strategy in Action
Tax Credits Put Wind in the Sails ol Renewable*
Fickle breezes pose a challenge for Steven Zwotaski. president of GE Wind Energy
But in 2004. he was also hit by the capricious winds of politics A tax credit for wind
energy expected to be renewed, expired in 2003 after being caught up m the
congressional stalemate over a cornprs> hensive energy bill. As a result, new wind
farm develop* ment came almost to a halt, fty summer. Zwohnski had no orders and
nearly $300 million in inventory, forcing layoffs aixi factory closings. The uncertainty
over policy makes for l "tough industry, he says.
But what governments cake away, they can also gfve. In September. Congress
renewed the wind tax credit and ex-[i -'ItxJtreci is io mostothei type^ ol renewable
enr-jjy In addition. 19 states now require that elect noty providers offer a certain
percentage of green energy And around the worfdi rwncarton-enwng aHernaove
energies are needed to meet the terms of the Kyoto Protocol, which requires cuts in
greenhouse-gas emissions
Factor in fifing clean energy costs and rising prices for coal, oil. and gas. and these
issues are turtocharging green power. Indeed, renewable energy forecaster Clean Edge
expects the overall market to grow from SI3 billion worldwide last year to $92 billion
by 2013. 'These technologies are at a tipping point," says Clean Edge's Ron Peroick.
The biggest winner: wind. ''Clearly wmd »s set to come on stronger than last year."
says Fred Mayes, chief of the Energy Dept's renewable* information team. With the
tax credit, wind power has plunged from 4$f per kilowatthour in 1990 to less than 3<
today, making it competitive w*h natural gas- or coat-fired planes Power providers
are rushing to take advantage of the credit before it n scheduled to disappear agam in
2006. "We're now seeing a 14-month sprint unci the end of 2005.*" says Jack I hie,
energy analyst at Platts (a unit of The McGraw-Hill Cos. as is BusinessWeek!. Platts
projects that the U.S. vnfl add more than 2.400 megawatts of wmd capacity in 200S.
on top of the existing 6,300 MW
Sirrstar incentives are fueling solar power, wfech re* mains more costly than fossil
lueJs and is even more dependent on government incentives, says ABl Research
analyst Josh La unto Germany* for instance, has made a major bet on the technology,
creating "such incredible demand/* he says, that it's driving up prices for solar
systems around the world. Companies like General Electric. BJ* Royal DutcrvShell.
Sharp, and Kyocera see sun power as a big chunk of their future business, and new
approaches such as plasDc-based solar panefc are spnng*ng up. Forecasters see more
than 30% growth per year for the next decaoV
The renewable industry ts largely the creation of government policies, and there's
always a chance that the po-hnca'wndt eouvj shift But gfven environmental pressures
and more competitive green energy prices, n s a good bet that the boom IN renewables
will continue.
play a major indirect role by affecting entry barriers through such controls as air and
waiei pollution standards and safety regulation*.
The potential rivals expectations about ihe reaction of existing competitors also will
influence its decision on whether to enter. The company is likely to have second
thoughts if incumbents have previously lashed out at new entrants, or if
The incumbents possess substantial resources to fight hack, including excess cash and
unused borrowing power, productive capacity, or clout w ith distribution channels and
customers.
The incumbents seem likely to cut prices because of a desire to keep market shares or
because of industrywide excess capacity.
Industry growth is slow, affecting its ability to absorb the new arrival and probably
causing Ihe financial performance of all the parlies involved lo decline.
Powerful Suppliers
Suppliers can exert bargaining power on participants in an industry by rawing prices
or reducing the quality of purchased goods and services. Powerful suppliers, thereby,
can squeeze profitability out of an industry unable to recover cost increases in its own
prices. By raising their prices, soft-drink concentrate producers have contributed to
the erosion of profitability of bottling companies because the bottlers—facing intense
competition from powdered mixes, fruit drinks, and other beverages have limited
freedom to raise ihcir prices accordingly.
The power of each important supplier lor buyer* group depends on a number of
characteristics of its mar* ket situation and on the relative importance of its sales or
purchases to the industry compared with its overall business.
A supplier group is powerful if
1. It is dominated by a few companies and is more concentrated than the industry
it sells.
2. Its product is unique or at least differentiated or ifit has huilt-up switching
costs. Switching costs arc fixed costs that buyers face in changing suppliers.
These arise because, among other things, a buyer's product specifications tic it
to particular suppliers, it has invested heavily in specialized ancillary
equipment or in learning how to operate a supplier's equipment (as in
computer software), or its production lines arc connected to the supplier's
manufacturing facilities (as in some nwnufacturingof beverage containers).
3. It is not obliged to contend w ith other products for sale to the industry. For
instance, the competition between the steel companies and the aluminum
companies to sell to the can industry checks the power of each supplier,
It poses a credible threat of integrating forward into the industry's business.
This provides a check against the industry's ability to improve the terms on
which it purchases
2. The industry is not an important customer ofthe supplier group. If the industry
is an important customer, suppliers' fortunes will be lied closely to the
industry; and ihey will want to protect the industry through reasonable pricing
and assistance in activities hkc R&D and lobbying.
3. Powerful Buyers
4. Customers likewise can force down prices, demand higher quality or more
service, and play competitors off against each other all at ihc expense of
industry profits. A buyer group is powerful if
1. It is concentrated or purchases in large volumes. Large-volume buyers arc
particularly potent forces if heavy fixed costs characterize the industry—as
they do in metal containers, corn refining, and bulk chemicals, for example--
which raise the stakes to keep capacity filled.
2. The products it purchases from the industry arc standard or undifferentiated.
The buyers, sure that they always can find alternative suppliers, may play one
company against another, as they do in aluminum extrusion.
3. The products it purchases from the industry form a component of its product
and represent a signifi-cant fraction of its cost. The buyers are likely to shop
for a favorahlc price and purchase selectively.Where the product sold by the
industry in question is a small fraction of buyers'costs, buyers are usu-ally
much less price sensitive.
4. It earns low profits, which create great incentive to lower its purchasing costs
Highly profitable buy- ers, however, are generally less price sensitive (ic„ of
course, if the item does not represent a large fraction of their costs).
5. The industry ^ product is iinimpon.im to ttic quality of the buyers' products or
services. Where the quality of ihc buyers* products is very much affected by
the industry s product, buyers are generally less price sensitive. Industries in
which this situation exists include oil Held equipment, where a malfunction
can lead to large losses, and enclosures for electronic medical and test
instruments, where the quality ofthe enclosure can influence the user's
impression about the quality of the equipment inside.
6. The industry's product does nol save the buyer money. Where the industry's
product or service can pay for itself many times over, the buyer is rarely price
sensitive, rather, he or she is interested in quality. This is tme in services like
investment banking and public accounting, where errors in judgment can be
costly and embarrassing, and in businesses like the mapping of oil wells,
where an accurate survey can save thousands of dollars in drilling costs
7. The buyers posca credible threat of integrating backward to make the industry's
product. The BigThrce auto producers and major buyers of cars often have
used the threat of self-manufacture as a bargaining Icvei. But sometimes an
industry so engenders a threat to buyers that its members may integrate
forward.
8. Most of these sources of buyer power can be attributed to consumers as a
group as well as to industrial and commercial buyers; only a modification of
the frame of reference is necessary. Consumers tend lo be more price sensitive
if they arc purchasing products that arc undifferentiated, expensive relative to
their incomes, and of a son where quality is not particularly important.
9. The buying power of retailers is determinexl by the same rules, with one
important addition. Retailers can gain significant bargaining power over
manufacturers when they can mlluence consumers' purchasing decisions, as
ihcy do in audio components, jewelry, appliances, sporting goods, and other
goods.
Substitute Products
By placing a ceiling on the prices it can charge, substitute products or services limit
Ihe potential of an industry. Unless it can upgrade the quality ofthe product or
differentiate it somehow (as via marketing), the industry will suffer in earnings and
possibly in growth.
Manifestly, the more attractive ihe price-performance tradc-olToffered by substitute
products, the firmer the lid placed on the industry's profit potential. Sugar producers
confronted with the large-scale commercialization of high-fhictosc corn syrup, a sugar
substitute, learned this lesson.
Substitutes not only limit profits in normal limes but also reduce the bonanza an
industry can reap in boom times. The producers of fiberglass insulation enjoyed
unprecedented demand as a result of high energy costs and severe winter weather But
the industry's ability to raise prices was tempered by the plethora of insulation
substitutes, including cellulose, rock wool, and Slyrofoam. TTiesc substitutes arc
bound lo become an even stronger force once the current round of plant additions by
fiberglass insulation producers has boosted capacity enough to meet demand t and
then some).
Substitute products that deserve the most attention strategically are those lhat (a) are
subject to trends improving their price-performance trade-off with the industry's
product or ( b ) arc produced by industries earning high profits. Substitutes often
come rapidly into play if some development increases competition in their industries
and causes price reduction or performance improvement.
Jockeying for Position
Rivalry among existing competitors takes the familiar form of jockeying tor position-
- using tactics like pnee competition, product introduction, and advertising slug fests.
This type of intense rivalry is related to the presence of a number of factors:
I. Competitors are numerous or are roughly equal in sue and power. In many
US. industries in recent years, foreign contenders, of course, have become part
of the competitive picture.
2 Industry growth is slow; precipitating fights for market share that involve
expansion-minded members.
3. The product or service lacks differentiation or switching costs, which lock in
buyers and pitted one combatant from raid>on its customers by another
4 Fixed costs arc high or the product is perishable, creating strong temptation to
cut prices. Many basic materials businesses, like paper and aluminum, suffer
from this problem when demand slackens.
5. Capacity normally is augmented in large mcrcmcnts. Such additions, as in the
chlorine and vinyl chloride businesses, disrupt the industry s supply-demand
balance and often lead to periods of overcapacity and price cutting.
6. Exit barriers arc high. Exit burners, like very specialized assets or management
s loyalty to a particular business, keep companies competing even though they
may be earning low or even negative returns on investment. Excess capacity
remains functioning, and the profitability of Ihe healthy competitors suffers as
the sick ones hang on. If the entire industry sutlers from overcapacity, it may
seek government help—particularly if foreign competition is present
7. The rivals arc diverse in strategies, origins, and 'personalities" They have
different ideas about how to compete and continually run head-on into each
other in the process.
8. As an industry matures, its growth rate changes, resulting in declining profits
and (often) a shakcout. In the booming recreational vehicle industry of the
early 1970s, nearly every producer did well: but slow* growth since then has
eliminated the high returns, except for the strongest members, not to mention
many of Ihc weaker companies The same profit siory has been played out in
industry after industry snowmobiles, aerosol packaging, and sports equipment
are just a few examples.
9. An acquisition can introduce a very different personality to un industry, as has
been the case w ith Black & Decker's takeover of McCullough. the producer
of chain saws. Technological innovation can boost the level of fixed costs in
the production process, as it did in the shift from hatch to continuous-line
photo finishing.
10. While a company must live with many of these factors because they are built
into the industry7 economics—it may have some latitude for improving
matters through strategic shifts. For example, it may try to raise buyers*
switching costs or increase product differentiation. A focus on selling efforts
in the fastest growing segments of the industry or on market areas with the
lowesi fixed costs can reduce the impact of industry rivalry If it is feasible, a
company can try to avoid confrontation with competitor; having high exit
barriers and. thus, can sidestep involvement in bitter price cutting.
INDUSTRY ANALYSIS AND COMPETITIVE ANALYSIS

Designing viable strategies for a firm requires a thorough understanding of the firm s
industry* and competition. The firms executives need to address four questions: < I \
What arc the boundaries of the industry? |2lWhal is the structure of the industry. 1 (3)
Which firms arcourcompcutors?(4) What are the major determinant* of competition?
The answers to these questions provide a basis for thinking about the appropriate
strategies that are open to the firm.
Industry Boundaries ._
An industry is a collection of firms that offer similar products or services. By "simi-
A group or companies lar products/* we mean products thai customers perceive to be
substiiutablc for one an- rhai provide similar other. Consider, for example, the brands
of personal computers (PCs* thai are now products and service*
being marketed. The firms thai produce these PCs, such as Hewlett-Packard, IBM,
Apple, and Dell, form the nucleus ofthe microcomputer industry.
Suppose a firm competes in the microcomputer industry. Where do the boundancs of
this industry begin and end? Does the industry include desktops? Laptops? These arc
the kinds of questions that executives face in defining industry bou;idaries.
Why is a definition of industry boundaries important? hirst, it helps executives
determine the arena in which their firm is competing. A firm competing in the
microcomputer industry participates in an environment very different from that of the
broader electronics business. The microcomputer industry comprises several related
product families, including personal computers, inexpensive computers for home use,
and workstations. The unifying characteristic of these product families is the use of a
central processing unit (CPU) in a microchip. On the other hand, the electronics
industry is far more extensive; it includes computers, radios, supercomputers,
superconductors, and many other products.
The microcomputer and electronics industries differ in their volume of sales, their
scope (some wtmld consider microcomputers a segment of the electronics industry),
their rate of growth, and their competitive makeup. The dominant issues faced by the
two industries also arc different. Witness, for example, the raging public debate being
waged on the future of the "high*ckfinitioii TV" U.S. policy makers are attempting to
ensure domestic contiol of that segment ofthe electronics industry. They also arc
considering ways to stimulate "cutting-edge" research in superconductivity These
efforts are likely to spur innovation and stimulate progress in the electronics industry.
Second a definition of industry boundaries focuses attention on the firm's competitors.
Defining industry boundaries enables the firm to identify its competitors and
producers of substitute products. This is critically important to the firm's design of its
competitive strategy.
Third, a definition of industry boundaries helps executives determine key factors for
success. Survival in the premier segment of the microcomputer industry requires skills
that arc considerably different from those required in the lower end of the industry.
Firms that compete in the premier segment need to be on the cutting edge of
technological development and to provide extensive customer support and education.
On the other hand, firms lhat compete in the lower end need to excel in imitating the
products introduced by the premier segment, to focus on customer convenience, and
to maintain operational efficiency that permits them to charge the lowest market price.
Defining industry boundaries enables executives to ask these questions: Do wc have
the skills it takes to succeed here? If not. what must we do to develop these skills?
Finally, a definition of industry boundaries gives executives another basis on which to
evaluate their firm s goals. Executives use that definition to forecast demand for their
firm's products and services. Armed with that foiccast, they can determine whether
those goals are realistic.
Problem.* in Defining Industry Boundaries
Defining industry boundaries requires both camion and imagination. Caution is
necessary because there arc no precise rules for this task and because a poor definition
will lead to poor planning. Imagination is necessary because industries arc dynamic- -
in every industry, important changes arc under way in such key factors as
competition, technology, and consumer demand
Defining industry boundaries is a very difficult task The difficulty stems from three
sources:
1. The evolution of industries over time creates new opportunities and threats.
Compare the financial services industry as wc know it today with that ofthe I Wfls,
and then try* to imagine how different the industry will be in the year 2020.
2. Industrial evolution creates industries within industries. The electronics
industry of the 1960s has been transformed into many "industries"—TV sets,
transistor radios, micro and microcomputers.
supercomputers, superconductor*, and so on. Such transformation allows some firms
to specialize and others to compete I N different, related industries.
3. Industries are becoming global in scope. Consider the civilian aircraft
manufacturing industry. For nearly three decades, U.S. firms dominated world
production in that industry'. But small and large competitors were challenging their
dominance by 1990. At that lime. Airbus Industries (a consortium of European firms)
and Brazilian, Korean, and Japanese firms were actively competing in the industry.

Dewloping a Realistic Industry Definition

Given the difficulties just outlined, how do executives draw accurate boundaries for
an industry? The starting point is a definition of the industry in global terms; that is.
I N terms that consider the industry's international components as well as its domestic
components.
Having developed a preliminary concept ofthe industry (e.g., computers), executives
flesh out its current components. This can be done by defining its product segments.
Executives need to select the scope of their firm's potential market from among these
related but distinct areas.
To understand the makeup ofthe industry, executives adopt a longitudinal perspective.
They examine the emergence and evolution of product families. Why did these
product families arise? How and why did they change? The answers to such questions
provide executives with clues about the factors that drive competition I N the industry.
Executives also examine the companies that offer ditfercni product families, the
overlapping or distinctiveness of customer segments, and the rate of subslitutabilily
among product families. To realistically define ihcir industry, executives need to
examine five issues:
1. Which pan ofthe industry corresponds to our firm s goals?
2. What are the key* ingredients of success in that part ofthe industry?
3. Does our firm have the skills needed to compete in that part ofthe industry? If not,
can wc build those skills?
4. Will the skills enable us to seize emerging opportunities and deal with tuture
threats?
5. Is our definition ofthe industry .flexible enough to allow necessary adjustments to
our business concept as the industry grows?
6. Industry* Structure
7. Defining AN industry "s boundaries is incomplete without an understanding of its
struc- structural attributes
8. tural attributes. Structural attributes arc the enduring characteristics that give an in-
The enduring charac-
9. dustry its distinctive character. Consider the cable television and financial sen ices
industries. Both industries arc competitive, and both are important tor our quality ot
character. life. But these industries have very different requirements for success. To
succeed in the cable television industry, firms require vertical integration, which
helps them lower their operating costs and ensures their access to quality programs;
technological innovation, to enlarge the scope of their services and deliver them in
new ways; ami extensive marketing, using appropriate segmentation techniques to
locale potentially viable niches. To succeed in the financial sen ices industry, firms
need io meet very different requirements, among which are extensive orientation of
customers and an extensive capital base.
10. How can wc explain such variations among industries?The answer lies in
examining the four variables that industry comprises: {I) concentration, )2>
economies of scale, 13J product differentiation, and (4) barriers to entry.
11. Concentration
12. cone en (ration The extern 10 which industry sate are dominated by a fewfirms.
Concentration refers to the ex lent to which industry sales are dominated by
only a few fitlM. In a highly concentrated industry (i.e.* an industry whose
sales arc domiruted by a handful of companies), ihe intensity of competition
declines over time. High concentration serves as a barrier io entry into an
industry because it enables ihe firms that hold large market shares to achieve
 significant economies of scale (e.g.. savings in production costs due to
increased production quantities) and. thus, to lower their prices to stymie
attempts of new-firms to enter the market.
13. The organized psiiiii industry in India is highly concentrated. Its concentration
ratio - the percent of man ket share held by the top four firms in the industry -
is 94.5% percent. Some of the critical success factor* are product and process
innovation, distribution network, brand equity, working capital management,
and service. Each player has invested tn specific value- added services,
differentiating it from the rest Exhibit 4,9 gives an example of how Asian
Paints sustained their edge in the Indian Paint Industry
This variable refers to the savings that companies within an industry achieve
due to increased volume. Simply put, when the volume ofproduction increase*, the
long-range average cost of a unit produced will decline.
Economies of scale result from technological and nontechnological sources. The
technological sources are a higher level of mechanization or automation and ; greater
up-to-dateness of plant and facilities. The nontechnological sources include better
managerial coordination ofproduction functions and processes*
long-term contractual agreements with suppliers, and enhanced employee
performance arising from specialization
Economies of scale are an important determinant ofthe intensity of competition in
an industry. Firms that enjoy such economies can charge lower PRIM than their
competitors. They also can create barriers to entry by reducing their prices
temporarily or permanently to deter new firms from entering the industry.
Product I>t/ferenrifltion
This variable refers lo the extent to which customers perceive products or services
ofTcrcd by firms in Ihe industry as different.
The differentiation of products can be real or perceived. Ihe differentiation between
Apple's Mac in* tosh and IBM's PS/2 Personal Computer was a prime example of real
differentiation. These products differed significantly in their technology and
performance. Simi larly. the civilian aircraft model* produced by Boeing differed
markedly from those produced by Airbus>. The differences resulted from the use of
different design principles and different construction technologies. For example, the
newer Airbus planes followed the principle ui tly by wire," whereas Boeing planes
utilized the laws of hydraulics. Thus, in Boeing planes, wings were activated by
mechanical handling of different parts ofthe plane, whereas in the Airbus planes, this
was done almost automatically.
Perceived differentiation results from the way in which firm*, posit AMI their
products and from their success in persuading customers that their products differ
significantly from competing products. Marketing strategies provide the vehicles
through which this is done. Witness, for example, the extensive advertising campaigns
ofthe automakers, each of which attempts to convey* an image of distinctiveness.
BMW ads highlight the excellent engineering ofthe BMW and its symbolic value as a
sign of achievement. Some automakers focus on roominess and durability, which arc
desirable attributes for the family segment of ihe automobile marled.
Keal and perceived differentiations often intensify competition among existing
firms. On the other hand successful differentiation poses a competitive disadvantage
for firms that ai tempt to enter an industry.
Barriers to Entry
As Porter noted earlier in this chapter, barriers (o entry are the obstacles that a firm
must overcome to enter an industry. The barriers can be tangible or intangible The
tangible barriers include capital requirements, technological know-how; resources,
and the laws regulating entry into an industry. The intangible barriers include the
reputation of existing firms, the loyalty of consumers to existing brands, and access to
the managerial skills required for successful operation in an industry.
Entry barriers both increase and reflect the level of concentration, economies of
scale, and product differentiation in an industry; and such increases make it more
difficult for new firms TO enter the industry. Therefore, when high barriers exist in an
industry, competition in that industry* declines over lime.
En summary, analysis of concentration, economies of scale, product differentiation,
and barriers to entry in an industry enable a firm's executives to understand the forces
that determine competition in an industry and set the siage for identifying the firm s
competitors and how they position themselves in the marketplace
Industry regulations are a key element of industry structure and can constitute a
significant barrier to entry for corporations* Escalating regulatory standards costs
have been a serious concern for corporations for years. As legislative bodies continue
their stronghold on corporate activities, businesses feel the impact on their bottom
line. In-house counsel departments have been perhaps the most significant additions
to corporate structure in the past decade. Legal fees have skyrocketed and managers
have learned the hard way about the importance of adhering to regulatory standards

Competitive Analysis How to Identify Competitors

In identifying their firm's current and potential competitors, executives consider
several important variables:
1. How do other firms define the scope of Ihcir market'. 1 The more similar the
definitions of firms, the more likely the firms will view each other as competitors,
2. How similar are the benefits the customers derive from the products and
services that other firms offer? The more similar the benefits of products or services,
the higher the level of substttutabtlity between them. High substitutability levels force
firms to compete fiercely for customers.
3. How committed are other firms to the industry? Although this question may
appear to be far removed from the identification of competitors, it is in fact one of the
most important questions that competi* tivc analysis must address, because it sheds
light on the long-term intentions and goals. To size up the commitment of potential
competitors to the industry, reliable intelligence data are needed. Such data may relate
to potential resource commitments (e.g. planned facility expansions).

Common Mistakes i n Identifying Competitors

Identifying competitors is a milestone in the development of strategy. Bui it is a
process laden with uncertainty and risk, a process in which executives sometimes
make costly mistakes. Examples of these mistakes arc:
1. Overemphasizing current and known competitors while giving inadequate
attention to potential entrants.
2. Overemphasizing large competitors while ignoring small competitors.
3. Overlooking potential international competitors.
4. Assuming that competitors will continue to behave in the same way they have
behaved in the past.
5. Misreading signals that may indicate a shift in the focus of competitors or a
refinement of their present strategics or tactics.
6. Overemphasizing competitors' financial resources, market position, and
strategies while ignoring their intangible assets, such as a top managemeni team.
7. Assuming that all of the firms in the industry are subject to the same constraints
or are open to the same opportunities.
8- Believing that the purpose of strategy is to outsmart the competition, rather than to
satisfy customer needs and expectations.
OPERATING ENVIRONMENT

The operating environment, also called the comjtetitiw* or task environment comprises
factors in the competitive situation that affect a firm's success in acquiring needed
resources or in profitably marketing its goods and sen ices. Among the most important
of these factors arc the firm's competitive position, the composition of its customers,
its reputation among suppliers and creditors, and its ability to attract capable
employees. The operating environment is typically much more subject to the firm's
influence or control than the remote environment. Thus, firms can be much more
proactive (as opposed to reactive) in dealing with the operating environment than in
dealing with the remote environment.
Competitive Position
Assessing its competitive position improves a firm's chances of designing strategies
that optimize its environmental opportunities. Development of competitor profiles
enables a firm to more accurately forecast both its short- and long-term growth and its
profit potentials. Although the exact criteria used in constructing a competitor's
profile arc largely determined by situational factors, the following criteria are often
included:
1. Market share.
2. Breadth of product line.
3. Effectiveness of sales distribution.
4. Proprietary and key account advantages.
5. Price competitiveness.
6. Advertising and promotion effectiveness.
7. Location and igc U! facility
8. Capacity and productivity.
9. Experience.
10. Raw materials costs.
11. Financial position.
12. Relative product quality.
13. R&D advantages position*
14. Caliber of personnel.
15. General images.
16. Customer profile.
17. Patents and copyrights.
18. Union relations.
19. Technological position.
20. Community reputation.
This type of competitor profile is limited by the subjectivity of id criteria selection,
weighting, and evaluation approaches. Nevertheless, the process of developing such
profiles is of considerable help to a firm in defining its perception of its competitive
position. Moreover, comparing the firm's profile with those of its competitors can aid
its managers in identifying factors that might make the competitors vulnerable to the
strategies the (Inn might choose to implement.
Customer Profiles
Perhaps the most vulnerable result of analyzing the operating cmironrncnt is the
understanding of a firm's customers that this provides. Developing a profile of a firm's
present and prospective customers improves the ability of its managers to plan
strategic operations, to anticipate changes in the size of markets, and to reallocate
resources so as to support forecast shifts :n demand patterns. The traditional approach
to segmenting customers is based on customer profiles constructed from geographic,
demographic, nsychographic, and buyer behavior information.
Lnterpnsing companies have quickly learned the importance of identifying target
segments. In recent jvars, market research has increased trcnicndousry as companies
realize the benefits of demographic and psycho* graphic segmentation. Research by
American Express (AMEX) showed ihat competitors m stealing a prime segment of
the company's business, affluent business travelers. AMEXt competing companies,
includingVisa and Mastercard, began uttering high-spending business trawlers
frequent flier programs and other rewards including discounts on new cars. In turn.
AMfcX began to invest heav ih in rewards programs, while also focusing on its
strongest capabilities, assets, and competitive advantage. Unlike most credit card
companies. AMEX cannot rely on charging interest to nuike money because its
custontcrs pay in full each month. Therefore, the company charges higher transaction
Ices to its merchants. In this way, increases in spending by AMEX customers who pay
ofl their balances each month are more profitable to AMEX than to competing credit
card companies-
Assessing consumer behavior is a key clement in the process of satisfying your target
market needs. Many firms lose market share as a result of assumptions made about
taiget segments. Market research and industry7 surveys; can help to reduce a firms
chances of relying on illusive assumptions. Firms most vulnerable are those that have
had success with one or more products in the marketplace and as a result try to base
consumer behavior on past data and trends.
It is important to define the geographic area from which customers do or could come.
Almost every product or service has some quality thai makes it variably attractive to
buyers from different locations. Obviously, a Wisconsin manufacturer of snow skis
should think twice about investing in a wholesale distribution center in South
Carolina, On the other hand advertising in the Milwaukee Journal-Sentinel could
significantly expand the geographically defined customer market of a major Myrtle
Beach hotel in South Carolina.
Demographic
Demographic variables most commonly arc used to differentiate groups of present or
potential customers. Demographic information (e.g.. information on sex. age. marital
status, income, and occupation) is comparatively easy to collect, quantify, and use in
strategic forecasting, and such information is the minimum basis for a customer
profile.
Personality and lifestyle variables often arc better predictors ol customer purchasing
behavior than geographic or demographic variables In such situations, a
psychographie study is an important component of the customer profile. Advertising
campaigns by soft-drink producers— Pepsi-Cola ("the Pepsi generation"). Coca-Cola
f'the real thing**), and 7UP ("America's turning 7UF*)—reflect strategic
management's attention to the
psychographic characteristics of (heir largest customer segment—physically active,
group-oncnted nonprofessionals.
Buyer Behavior
Buyer behav ior data also can be a component of the customer profile. Such data are
used to explain or predict some aspect of customer behavior with regard to a product
or service. Information on buyer behavior (e.g., usage rate, benefits sought, and brand
loyalty) can provide significant aid in the design of more accurate and profitable
strategics.

Suppliers
Dependable relationships between a firm and its suppliers are essential to the firm's
tong-ierm survival and growth A firm regularly relies on its suppliers for financial
support, sen ices, materials, and equipment In addition, it occasionally is forced to
make special requests for such favors as quick delivery, liberal credit terms, or
broken-lot orders. Particularly at such times, it is essential for a firm to have had an
ongoing relationship with its suppliers.
In the assessment of a firm s relationships with its suppliers, several factors, other
than the strength of that relationship, should be considered. With regard to its
competitive position with its suppliers, the firm should address the following
questions:
Are the suppliers* prices competitive? Do the suppliers offer attractive quantity
discounts?
How costly are their shipping charges? Arc the suppliers competitive in terms of
production standards?
in terms of deficiency rates, are the suppliers* abilities, reputations, and services
competitive?
Are the suppliers reciprocally dependent on the firm?
An important way for suppliers lo increase their power over customers is lo extend
them credit. Many suppliers provide their customers a type of loan by allowing them
to defer payments if they pay an interest charge An example of this practice, and of
the power that it can create for suppliers is provided in Exhibit 4 A ]. Strategy in
Action, which describes GE's loans to members of the airline industry

Creditors
Because the quantity, quality; price, and accessibility of financial, human, and
material resources are rarely ideal, assessment of suppliers and creditors is critical to
an accurate evaluation ofa firm's operating environment. With regard to its
competitive position with its creditors, among the most important questions that the
firm should address are the following:
Do the creditors fairly value and willingly accept the firm '$ stock as collateral? Do
the creditors perceive the firm as having an acceptable record of past payment? A
strong working capital position? Little or no leverage?
Are the creditors* loan terms compatible with the firm's profitability objectives? Are
the creditors able to extend the necessary* lines of credit?
The answers to these and related questions help a firm forecast the availability of the
resources it will need to implement and sustain its competitive strategies.

Human Resources: Nature of the Labor Market

A firm s ability to attract and hold capable employees is essential lo us success.
However, a firm's personnel recruitment and selection alternatives often are
influenced by the nature of its operating environment A firm's
Strategy i n Action
Why G€ Is Kccrtni L«r Airline* Aloft
General Elsctnc Cot arrrarr enejne* may power the countryi major .t**ne*. but * s GE s
money that s keeping many of them aJo4 Smce September 1I. 200lr GE Cemmeroai France
and es aircraft leasing arm. GE Com-merciai Aviaoon Services, have tunk more than S3
bHtar into global airlines, with 3 tug chunk Of that going to money-losers such as Delta Air
lines kx and United A rimes kc GE has also allowed taec*» airanes to deftr payments on
leased aircraft* thus helping them keep more planes tn the air and continue a price war on
cht ground But while extending lifelines may be good for GE. rt may be bad for the airline
industry.
AJrtne executives roundly blame their losses on too much capacity, arguing thai they can't
boost airfares to cover their costs because there1* afways someone willing ea orW bargain
octet prices But lately, whenever an air-ene nam at a* it may actuaty go out of business and
pve survhang carriers tome prsong leverage. GE steps m_ The r went*? offered new money
ttiat helped rescue : US Always Group he and FLY1 Inc. 1 siTuggtng Low-rare unc
LfeeeperySence *r Heenrme * helped to LestjpDefcaoutofba^
detrirnentaf to the rtduavy" says one former aeine CEO Wfeh capacity now Ikery to grow
rather than shrink, arta-ryscs predict amines w*L Lose some $4 b*Vn n 200S
Why t* G€ so eager to lend a hand? h makes money off the well coJUrerafcied loans and
wants to keep as wide a customer base as possible. The Fairfield (Conn.f* based giant owns
about 1.100 aircraft, a massrve aircraft-engine unit and hat more than $29 billion Lo Loans
and leases to lirfcnes. It's more exposad than rivals like International Lease Finance Corp. a
un*i of American International Group, which has 88% ol lis e7e-pUjne fleet leased to
airlines outside the U S But GE also demands so much coXateraJ and pbee* so many
conditions on assistance that analysts believe tts downside is limned. The loans to Delta, for
eaarnpto are backed by S3 S billion in assets, ranging from spare para to landing slots,
GE teases that * isn't getting n the way ol industry oV narr*c*v Says Henry A rtubeehrnari
president of GE Com-merrsai Aviation Servxea. "Nve don't faeasve we are the ones who
can ttraoapcaey rrwigjiutate the marVet"

access to needed perMmnel is afTected primarily by four factors: the firm a reputation
as jn employer, local employment rate*, the ready availability of people with the
needed skills, and il* relationship with labor unions.
Reputation
A firm's reputation within it* operating environment is a major clemenl of itst ability
10 satisfy its personnel needs. A firm is more likely lo attract and retain valuable
employees if it 12 wen as permanent in the commu* nity. competitive in its
cornpenaalian package, and concerned with ihc welfare ol ib employees, and if it is
respected for us product or service and appreciated for its overall conlnhulion to the
general welfare. An example of this iiprmidcd in Kxhihit4J2. Strategy In Action,
which describes lnfoay*Tehnologi«" rcputa-boo in the Global sphere.
The readily available supply of skilled and experienced penomel may vary
considerably with the stage of a community \ growth. A new manufacturing firm
would find it far more ditTiciilf to obtain skilled employees in a vigorous
industrialized community than in an economically depressed community in which
similar firms had rccenll> cut back operations
Strategy in Action
Global Business Foundation School o( Infbsys Technologies*
freih grad u-ates< The Global Business Founcbrtion School of infosys technologies is
a 14-16 week entry leveJ. formal, struc-cured programme to enhance technical and
behavioral competencies of fresh engineering graduates. The school requires
participants to integrate the technology, method-ofogy. people, and r^c<ess elements
h\ rhus, comprises of generic conceptual courses, platform specific courses, mint-
projects for application, and an end-term project based on real-life protects* In
addition to technical courses, fresh entrants are also exposed to courses on
communication skills. Interpersonal stalls, customer iota racoon etiquette,
management development, and ooairty systems to enable them to absorb the
important elements of the company! corporate culture* It focuses on real-life
situations and helps the employees to find the best ways to solve the problems The
Global Business Foundation Schools uniqueness l*e$ *i its abbey to act as an engine
that supports the organizations growth in the number of employees, preparing a highly
competent workforce trained in both technical and behavioral competences, and
providing employees with a strong foundation for building a long-term career* New
employees learn how to work in an organrza-0Onh how to work with clients, and how
to work wiCh other employees. The spirit of learnabilicy among the people and an
organizational commitment to continuous personal and profess^onaJ development
keeps Infosys at the forefront of the fast-changing industry. In 2003, Intosys won rhe
first annual .American Sooery for Training and Development Award* The award
recognises organization* that demonstrate enterprise-wide success as a result of
Axwtabitity
The skills of some people arc so specialized that relocation may be necessary to
secure the jobs and the compensation that those skills commonly command People
with such skills include oil drillers, chefs, technical specialists, and industry*
executives, A firm that seeks to hire such a person is said to have broad tabor market
boundaries; that is, the geographic area within which the firm might reasonably
expect to attract qualified candidates is quite large. On the other hand people with
more common skills arc less likely to relocate from a considerable distance to achieve
modest economic or career advancements. Thus, the labor market boundaries arc
fairly limited for such occupational groups as unskilled laborers, clerical personnel,
and retail clerks.
Labor Unions
Approximately 12 percent of all workers in the United States belong to a labor union;
the percentages are higher in Japan and western Kuropc at about 25 and 40 percent,
respectively, and extremely low in developing nations. Unions represent the workers
in their negotiations with employers through the process of collective bargaining.
When managers' relationships with their employees are complicated by the in-
volvement of a union, the company's ability to manage and motivate the people that it
needs can be compromised.
A look at how an important union views its role in business is seen in the new strategy
of one of America's largest unions, the AFL-CIO. as described in Strategy in Action
Exhibit 4.13.
EMPHASIS ON ENVIRONMENTAL FACTORS
This chapter has described the remote, industry, and operating environments as
encompassing five components each. While that description is generally accurate, it
may give the false impression that the components are easily identified, mutually
exclusive, and equally applicable in all situations. In fact, the forces in the external
environment are so dynamic and interactive that the impact of any single element
cannot be wholly disassociated from the effect of other elements. For example, arc
increases in OPEC oil prices the result of economic, political, social, or technological
changes? Or are a manufacturer's surprisingly good relations with suppliers a result of
competitors', customers*, or creditors' activities or ofthe suppliers own activities? The
answer to both questions is probably thai a number of forces in the external
environment have combined to create the situation. Such is the case in most studies
ofthe environment.
Strategic managers are frequently frustrated in their attempts to anticipate the
environments changing influences. Different external elements affect different
strategies at different times and with varying strengths. The only certainty is thai the
effect of the remote and operating environments will be uncertain until a strategy is
implemented. This leads many managers, particularly in less powerful or smaller
firms to minimize long-term planning, which requires a commitment of resources.
Instead, they favor allowing managers to adapt to new pressures from the
environment. While such a decision has considerable merit for many firms, there is an
associated trade-off, namely that absence of a strong resource and psychological
commitment to a proactive strategy effectively bars a firm from assuming a leadership
role in its competitive environment*
There is yet another difficulty in assessing ihe probable impact of remote, industry,
and operating environments on the effectiveness of alternative strategics. Assessment
of this kind involves collecting information that can be analyzed to disclose
predictable effects. Except in rare instances, however; it is virtually impossible for
any single firm to anticipate the consequences of a change in the environment; for
example, what is the precise effect on alternative strategies of a 2 percent increase in
the national inflation rate, a 1 percent decrease in statewide unemployment, or the
entry of a new competitor in a regional market?
Still, assessing the potential impact of changes in the external environment offers a
real advantage. It enables decision makers to narrow the range of the available options
and to eliminate options that are clearly inconsistent with the forecast opportunities.
Environmental assessment seldom identifies the best strategy, but it generally leads to
the elimination of all but the most promising options.
Exhibit 4.14 provide* a set of key strategic forecasting issues for each level of
environmental assessment— remote, industry, and operating. While the issues that arc
presented arc not inclusive of all ofthe questions that arc important, they provide an
excellent set of questions with which to begin. Chapter 4 Appendix, Sources for
Environmental Forecasting, is provided to help identify valuable sources of data and
information from which answers and subsequent forecasts can be constructed. It lists
governmental and private marketplace intelligence lhat can be used by a firm to gain a
foothold in undertaking a strategic assessment of any level ofthe competitive
environment.
Key Issues in the Remote Environment Economy
What are the probable future ckectiom of the economies in the firms reojonal. national and international
market? What changes m economic growth, infiatoa interest rates, capjUt avarfability. credit avadability.
and ccxnumer purchasing power can be expected? What *K0me drfteretxes can be expected between the
wealthy upper rnridte dass, the working class, and the underdass m various region*? What shifts in relative
demand for olfferenr. categories of goods and servces can be expected?
Society and demographies
What effects will changes m sooal values and attitudes regarding chiklbearmg, rriamage. lifestyle, work,
ethics, sex rote, racial equality, education, retirement pollution, and energy have on the firms development?
What effects will population changes have on major social and political expectations—at home and
abroad? Vrftat constraints or oppor-tunrbes develop? What pressure groups wilt increase in power?
Ecology
What natural or pc*ution-caused disasters threaten the firms employees, customers, or facilities? How
rigorously w#J existing env*onmerit legislature be enforced' What new federal, state, and local laws will
affect the firm, and in what ways?
Politics
What changes in government policy can be expected wrth regard to Industry cooperation, antitrust activities,
foreign trade, taxation, depreciation, environmental protection, deregulated defense, foreign trade barriers,
and other important parameters* What success will a new administration have In achieving its staled
goafs? Wtiat effect will that success have on the firm? Wil specific international climates be hostile or
favorable? h there a tendency toward instatdty, corruption, or violence? What is the lew of poHocal risk in
each foreign market? What other political or legal constraints or supports can be expected in international
business (e.g.. trade barriers, equity requirements, nationalism, patent protection)?
Technology
What is the current state of the an? How win it change? vvhat pertinent new products or services are likely
to become technicaly feasible in the foreseeable future? What future impact can be expected from
technological breakthroughs in related product areas? How will those breakthroughs interface with the other
remote cccrstderations, such as ecooorrwc issues, social values, public safety, regulations, and court
interpretations?
New entrants
Will new technologies or market demands enable competitors to minimize the impact of iraoVJonai
economies of scale in the industry? Will consumers accept our claims of product or service differentiation?
will potential new entrants be able to match the capital requirements mat currently exist? How permanent
are the cost cksaoVantages (^dependent of sis) in our industry? Will conoVbons change so that all
competitors have equal access to marketing channels? ts government policy toward competition #n our
industry likely to change? Bargaining power of suppliers Hew stable are the size and composrbon of our
supplier group? Are any suppliers likely lo attempt forward integration into our business level? How
dependent will our suppliers be in the future? Are substitute suppliers likely to become available? Could we
become our own supplier?
Substitute products or services
An» NEW substitutes kfcery? Will they be price competitive? Could WE fight off
substitutes by price ccn^x?til)0n? By aovertsing to sharper* product drfte^liaton?
Wlwt actons could we take to reduce the potential for havng artematrve prcxxxts seen
AS letftrmate substitutes?
Bargaining power of buyers
Can we break FREE of overtommftment to a few large buyers? How wouW our buyers
react to attempts by us to differentiate our products? What possib*txn exist that our
buyers might verticaDy integrate backward? Should we consider forward integration?
How can we make the vaaue of our components greater in the products of our buyers?
Rivalry among existing firms
Are major ccmpetrtors kfcery to undo the established balance of power in our
industry? IS growth in our industry slowing such that competition mil become fiercer?
What excess capacity exists in our irxJustry? How capable are our major competftors
of withstanding intensified price corrrpetition? How unique are the object ws and
strategies of our major competitors?
Competitive position
What strategic moves are expected by existing rivals—rack? and outside the United
States7 What ccvnpetruve advantage is necessary M selected foreign markets? What
w#1 be our competitors* pnorrtjes and ability to change? is the behavior O* our
CRJRRPETTTORS predctable?
Customer profiles and market change
What will our customer regard as needed value? IS marketing research done, or do
managers talk to each other to discover what the customer wants? Which customer
needs are not being met by exrsting products? why? Are R&D activities under way to
develop means for fulfilling these needs? What rs the status of these activities? What
marketing and distnbuion channels should WE USE? What do demographic and
population changes portend for the sue and sales potential OF our market? What new
market segments OR products rmcjh t develop as a result of these changes? What wrt
be the buying power of our customer groups?
Supplier relationships
What A the ikHnood of rnajor cost INCREASES because of owindfng supplies OF a
needed natural RESOURCE? Will sources of supply, especially OF enerov. be reliable?
An? there reasons to expect major changes m the cost or availabikty of inputs as a
result OF money, peope, or subassembly problems* vvftch suppkers can be expected
to respond to emergency requests?
Creditors
What lines OF credit are available to hetp finance our growth? What changes may
occur in our creditworthiness? Are creditors likely to feel comfortable with our
strategic pian and performance? What 5 the stock market likely to fed about our firm?
What fiextjiity would our creditors show toward us during a downturn? DO we have
sufficient cash reserves to protect our creditors and our credit rating? Labor market
Are potential employees with desired skids and abilrtxrs available in the geographic
areas ei whch our titMm are totaled? Are cotteoes and vcx^txx^WechnjcaJ schools that
can aid n rneeting our training needs located near our plant or stcxe sites? Are labor
retatOTs in our industry conductrve to meeung our expanding needs for errpjoyees?
Are workers whose skills WE need shffting toward OR away from the geographic
location OF our fadates
SUMMARY
A firm's external environment consists of three interrelated sets of factors that play a
principal rote in deter* mining the opportunities, threats, and constraints that the f rm
faces. The remote environment comprises factors originating beyond and usually
irrespective of, any single firm's operating situation—economic, social, political,
technological, and ecological factors. Factors that more directly influence a firm's
prospects originate in the environment of its industry, including entry barriers,
competitor rivalry, thc availability of substitutes, and the bargaining power of buyers
and suppliers. Thc operating emironmcnt comprises factors that influence a firm's
immediate competitive situation—competitive position, customer profiles, suppliers,
creditors, and the labor market. These three sets of factors provide many of the
challenges that a particular firm faces in its attempts to attract or acquire needed
resources and to prof taWy market its goods and services. Environmental assessment
is more complicated for multinational corporations (MNCs) than for domestic firms
because multinationals must evaluate several environments simultaneously.
Thus, the design of business strategies is based on thc conviction that a firm able to
anticipate future bust-ness conditions will improve its performance and profitability.
Despite the uncertainty and dynamic nature of thc business environment, an
assessment process that narrows, even if it docs not precisely define, future ex-
pectations is of substantial value to strategic managers.
QUESTIONS FOR DISCUSSION
l, Briefly describe two important recent changes in the remote environment of
U.S. business in each of thc following areas:
a. Economic. K Social
c. Political.
d. Technological.
e. Ecological*
2 Describe two major environmental changes that you expect to have a major
impact on ihe wholesale food industry in ihe next 10 years.
3. Develop a competitor profile for your college and for ihe college geographically
closest to yours. Next, prepare a brief strategic plan to improve ihe
competitive position of the weaker of the two colleges.
4. Avvume the invention of a competitively priced synthetic fuel that could supply 25
percent of U.S. energy needs within 20 years. In what major ways might this
change thc external environment of U.S. business?
5. With your instructors help, identify a local firm that has enjoyed great growth in
recent years. To what degree and in what ways do you think this firm's success
resulted from taking advantage of favorable conditions in its remote, industry,
and operating environments?
6. Choose a specific industry and relying solely on your impressions, evaluate thc
impact ofthe five forces that drive competition in that industry
7. Choose an industry m which you would like to compete. Use the five-forces
method of analysis to explain why you find lhat industry attractive 8h Many
firms neglect industry analysts. When docs this hurt them? When docs ii not?
9. The model below depicts industry analysis as a funnel that focuses on remote-
factor analysis to better understand the impact of factors in the operating cm
ironmcni Do you find this model satisfactory? If not, how would you improve
it?
10. Who in a firm should be responsible for industry analysis? Assume that the
firm docs not have a strategic planning department.
THE RAJA OF STEEL
Lakshmi Mittal it building the biggest steel company on earth. What will he do when
the glut comes?
The tabrowa Gcmucza steel plant near Katowice, Poland is a cathedral of Soviet-era
rust bell industry. An enormous building, lit by gray skylights and navigated by
catwalks* houses a hot rolling milt nearly a kilometer long. The heart of the operation
is a giant conveyor belt that trundles steel bars, glowing bright orange with beat.
Sparks fly and sicam rises when the bars hit rollers that squeeze the metal into I-
beams and raik The air is filled with the groans of machines.
This part of the world is littered with dinosaur steel plants like Dabrowi. Such
Communist relics looked doomed to extinction not long ago, but under all that
corroded metal, Lakshmi N. Mittal spied gold. The Indian-bom steel baron has been
building his own Jurassic Pari, picking up five plants in Poland and the Czech
Republic in just two years, to add to a col Lection that spans four continents.
Nobody outside the steel bvJustry paid much attention to Mittal s sad sack of
properties until October Thai s when Mrt-tal Steel announced a S4,5 billion deal to
buy International Steel Group (ISO), a package of five orcc-rxinkrupt stcd companies
assembled by US. workout specialist Wilbur L Row Jr. The share price of Isjxsi
InterrafconaK a publicly traded Mittal company, jumped 27% on the announcement I
spat will be merged with Mittal s private holding company, LNM Holdings, to form
Mittal Steel Co.. which will take oser 1SG. Assuming the transaction is Finalized on
schedule in carry 2005, Mittal will stand at the helm of the worlds No. 1 steel
company, annual shipments of 52 million metric tons, some $32 billion m annua]
sales, and 2004 pro forma profits in excess of $6.8 billion. Guy Dolle, the chief
executive of Luxembourg-based Arcclor, dasbed off a congratulatory e-mail as soon
as he got wind of the deal—a magnanimous gesture corakfcring Mittal had just
deposed him as steel king. "Mitral has bad a vision for the industry that goes back a
long way, well before the majority of his peers," says Dolte
That vision, in one word, is cor^idauotv The word steel connotes strength and
permanence, but the companies that make everything from construction beams to
color-coated sheets for appliarices and rustproof tfnps for car* have long been among
the worst-performing businesses. For decades steel has been fragmented financially
weak, and plagued by over* supply Suppliers of coal and iron ore and customers such
as carmakers were far stronger than steelmakers and dictated terms. Not surprisingly,
each downturn sent waves of companies to the wall.
Many steel execs thought Mittal was deluded as they watched him snap up distressed
mills from Trinidad lo Kazakhstan But through tbc yean, MittaJ patently perfected his
techniques of reviving plants rr>rrrjkirig quick capital injections dispatching
emergency teams of managers to stabilize factories, and exploiting the efficiencies in
purchasing and expertise that come with an expanding network of mills; The global
market has favored Mittal. too. A doubling of steel prices in the last year thanks to a
strong world economy and insatiable demand from China is now making him look
like a genius.
Still it took the ISG deal to truly vindicate Miital s vision "Wc need much larger
companies, hcahhier companies. They will bring sustainability lo the mdustryT says
the soft-spoken steel mogul in his modest offices on London's Berkeley Square "What
I am boptng is for consolidation to continue." There's certainly room for more: Even
after acquiring ISO. MittaJ will have just 5% of the I billion metric ton world market
for steel.
Questions linger about ihc long-term viability of his strategy, which depends cm
success in thc U.S. and on thc group1* ability to thrive even in a downturn What's
more. MittaJ will have to spend about S3 billion over the next five years to upgrade
and maintain his aging plants around the world. Yet the massive deal is a triumph for
Mitral, who has come a long way since his birth in the Sadulpur chstrici of India's
Rajnsthan state in 1950. His father started a steel business in Calcutta decades ago,
Mittat set up his own Indian minimi!) in 1971. But then the eldest son struck out on
his own, setting up a small mill in Indonesia in 1975. On that tiny foundation* Mittal
has built an empire spanning 14 countries.
With the news ofthe ISG deal, Miosis net worth has soared to around %22 billion. A
resident of tendon since 1995. thc magnate has become a British tabloid staple Mittal
is said to have paid SI30 million for a mansion in London's West End and spent
millions on the nuptials of his only daughter—a six-day affair that included a party at
Versailles for 1.500 guests.

Top of the Heap

Now Mittal is ready to make his name in the u s Ispat already has a presence stateside
through its SI 2 billion acquisition of Inland Sled Co. in 1998 Overnight thc ISG deal
catapults MittaJ from a bit player lo the lop ofthe heap. Inland suffered during the
2000-2002 collapse in steel prices* but with a bigger base Mittal may be able to wring
out more efficiencies^ as he has done in other parts ofthe globe Industry insiders
wonder, though, whether he will be able to realize the huge savings at ISO that he is
accustomed to achieving in emerging markets. ISG already has gone through a rigor-
ous cost-cutting exercise under Ross, who bought bankrupt companies and offloaded
their retiree liabilities onto the government.
Mittal declined to discuss his plans for ISG m derail, citing ihe nsk of antitrust action.
But a source close to the company says Mittal executives figure more than SI billion a
year in cost savings and revenue gains can still be found. Mittal wants to integrate his
eight U.S. mills—mostly clustered around thc Great I jko—to mine regional
economies of scale, a formula he\ applying in Eastern Europe as well. By running the
facilities as a single unit, he seeks to extract better terms from suppliers of iron ore,
coal, and electricity. And with the plants no longer competing against each other for
customers, Mittal should be able to negotiate better prices and guarantee clients a
ttabJe source of supply "Our customers and suppliers arc very happy that we arc
consolidating the business in the i s This land of merger sees strong and fmancially
healthy companies emerging," says Mittal. The new Mittal Steel Co. will have about
40% ofthe U.S. market for flat-rolled steel used in autos. "The industry will have
more pricing power over autos than it has had in decades;* says Michael F.
Gambarddla. an analyst at 1 P Morgan Chase & Co. in New York- Gambardella
thinks Washington will welcome more concentration in the industry because it will
reduce the need for government inter* vent ion lo protect U.S. steel companies from
imports.
ISGs plants arc hardly state-of-thc art. The company logged margins of 8.6% for the
first nine months of 2004. compared with a combined 27.5% at Mittal Is Ispat and
LNM According to a source close io thc deal, Ross hasn't made much headway in
integrating his steel plants, and faced ma)or capital outlays for computer systems and
coking batteries., among other things. Those challenges influenced Ross's decision to
selL "It would lake very many yean to approach what they had. and at the end of the
day we would still be in in inferior position " says Ross.
Upgrading JSG looks relatively easy to Mittal and his execs. After all, they often
performed major surgery on the plants they acquired in emerging markets. Thc
changes being wrought on the Polish plants purchased in March arc prime examples
ofthe Mittal way. With tens of thousandsof jobs at Make, Warsaw looked for a deal
with someone who could make thc old beasts work. Mittal beat out U.S, Steel Corp.,
bidding S35I million for a controUing stake in ran Huty Stall, apackage of four
separate companies close to bankruptcy. As part of the deal, MitUl agreed lo take on
S1,27 billion tn debt and pledged about $770 million in fresh capital.
Then it was time to apply the time-tested Mittal method. A 15-strong SWAT team,
many of them Indian, was dts-paiched to Silesia- Led by K. A. R Singh, a veteran of
the Indian stale steel industry who had already worked for Mil-tal in Mexico and the
Czech Republic, the team's first pnonty was to stabilize the patient. The Polish plants
weren't even generaiing enough cash to pay for supplies or employee benefits.
Dunning letters arrived every day. As agreed, Ispat injected about $100 million in
emergency capital.
Then new Chief Financial OtTicer Augustine Kochuparampil began calling on angry
suppliers to regain their confidence - including the gas company, which was
threatening to turn off the taps. One by one be won ihem over by promptly paying
fresh invoices and working out an installment plan to whittle down the mountain of
back debt Kochuparampil also moved quickly to nut an end to the barter arrangement
by which the company was selling some 70% of its output. Such deals produce no
cash, give most of the profits to a welter of middlemen, and breed cor-ruphon The
solution was simple: no noncash transactions permitted without the CFOs signature.
Mixed Reviews
Meanwhile, Sanjoy Mitra, director of sales and marketing, is sharpening pricing
tactics, identifying new customers, and tilling the product mix toward higher-margin
goods like cold-rolled and galvanized steel. He's melding the Poland sales operation
with those of Mittalh Czech plants so the two outfits won't compete Plani staff will be
reduced to 10,000 from 14,500 through a combination of buyouts and attrition.
Workers give the changes mixed reviews. "At least wc arc being paid on lime:* says
Slawomrr Ukszton. a foreman at the Darjrowa plant. But he says the pay—about $900
a month—is poor compared with Mittal plants in Germany and France: This is the
[European Union], not Kazakhstan*
Senior managers like Singh arc the first to admit that the Mittal method is based
mostly on common sense business practices. Indians don't need to teach the Poles and
the Czechs how to make steef Says Singh: "What we can bring is managemeni
knowhow in commercial areas. Mr. Mittal knows the world market as no one else."
The steel king piays a very hands-on role in these turnarounds. Malay Mukhcrjcc,
Mittal s longtime chief operating officer, says his boss meets with hundreds of
managers at the plants he buys to figure out who the real leaders are. MiuaJ also takes
a close inlcrcst in figuring out the optimum mix for plants. Indeed, the Polish
operation is profitable just eight months after being acquired earning $121 million a
month before interest, depreciation, and taxes, according to a Mittal exec.
While the turnaround in Eastern Europe has required little capital up to now, major
spending lies ahead. Mittal 5 plants in Poland and the Czech Republic turn out
relatively low-end steel used for construction and highway barriers— not up to spec
for the more demanding auto and white-goods industries To retool ihern, Mittal will
have to spend hundreds of millions. But he figures thai with Poland and the Czech
Republic finally in the EU their economics will gradually catch up with the West,
leading steel consumption to soar.
Mittal has built his career on spotting such opportunities. He recalls his 10 year* in
Indonesia as "energizing.*1 The economy was wide open, and he learned to produce at
low cost. Mis nexi stop was Trinidad, where he took control of a state-owned plant in
1989, Thai led to purchases in Mexico and Canada Then came Kazakhstan in 1995
The plant was a notorious pariah where the workers were paid in scrip. But nearly a
decade and a lot of sweat equity later, he has a large, profitable 5 million-ton plant.
"No one would have believed the story if they hadn't been around," says Christopher
Beau-man, a banker at the European Bank for Reconstruction A Devdoprneni in
London who helped finance Mittal s work at steel plants in Kazakhstan and Romania.
The Kazakhstan operation was hit by misfortune on Dec. 5. when an explosion in a
company-owned coal mine killed 23 workers. Mittal rushed to die scene to offer his
ccHKiolcnces
One of Mittal s biggest challenges is to make the empire work together. A key pan of
meeting the challenge is Mittal himself. Both associates and nvals give him high
marks for determination and an elephant-like memory. During the due diligence
process in the Czech Republic, the manager of a rolling mill gave a wildly optimistic
assessment of the units capacity When Mittal visited later as the owner, he surprised
the man by demanding to know how close he was to achieving that target
Mittal knows how to pool knowledge and resources. Each Monday managers
worldwide have a conference call lo hash over the world market and report on
performance If one area is short of iron ore or coal, for example, supplies can be
diverted from elsewhere. The group also locates export markets for production that is
in Mrrplus in its home region. Another advantage: Mitels group control* 40% of its
iron ore supplies and is self-sufficient in coke, a big edge when these materials are not
available at reasonable prices, Frantisek Chowaniec. the Mittal executive who
oversees the Czech and Polish orxratiotw. estimates that being part ofthe group
slashes his input costs by 10%, This industry also has pockets of excellence around the
world The Romanians are very advanced in blast-furnace technology; the Poles get
lop grades for manufacturing coke. Mitlal has brought in an cx-McKinscy consultant.
Bill Scorting. to make sure such insights are exploited throughout his companies.
Investors will now find it easier to put their money alongside Mitel's, whose holdings
will be listed on Ihc New York Stock Exchange. Ispat. traded on the Amsterdam
Stock Exchange and the N V Si:. groups most of the family\ Western operations,
accounting for about 40% of revenues. The stock price has gone from S7 a year ago to
more than $36 today. More profitable LNM Holdings, a private company, has Ihe non-
Western assets. In a complex deal. Ispat will acquire control of LNM. and the resulting
Mitel Steel Co. will acquire ISG in a 50-50 cash and shares iransac-lion. Mittal s eldest
son, Aditya, will be president and chief financial officer of thc group. The 28 year-old
Wharton School graduate had a big hand in negotiating the ISG deal.
Mittal will doubtless keep seeking ways to expand- Dolle of Arcelor thinks that in 10
years ihc industry will be dominated by four or five majors. The candidates include
Mittal. Arcelor, Shanghai Uaosteel Group, a Japanese entry, and, possibly. Posco in
South Korea.
Mittal still has holes to fill m Iris D million finished steel operation Liaoning province.
But acquisitions arc getting more cornpetrttve A bid by US. Steel drove up thc price
ofthe Polish plants, and Mittal lost out to thc ftttsburg-bascd rival on a plant that he
coveted m Slovakia in 2000.
And while Mittal has low costs, big capital commitments could be a stretch during a
dow-ntum. In the last sted slump his companies straggled. Mittal figures that
consolidation and a focus on profits rather than volume in thc industry will head off
supply gluts in thc next crunch. Others, including some Mittal insiders, think the next
downturn could be vicious. A wildcard is China, which i n the last decade has added
capacity equal to 90% ofthe curozonc
Still, even competitors concede that, compared with just four >ears ago, Mittal now
has a broader-based group with margins that are the envy of the industry. When Mittal
vows to do a deal, his rivals have learned to listen. **Hes a man of his word*' says
Daniel R. DtMiceo, CEO of Charlotte (N.C>based Nucor Corp. And Lakshmi Mittal
hasn't finished yet.
Source Copyrtfrt (c) 2004 Thc McGraw-HI Corr^™*. Inc. All nghtt reserved Scarfey
tad with Michael Arudc. ~Th§ Pa|* of Statl,* fttfrfwswre*. OvxnyUr 20. 2004. pp. S0-
52.

Appendix Sources for Environmental Forecasting

Remote and Industry Environments

A. Economic considerations;
1. Preditasts (most complete and up-to-date review of forecast*)
2. National Bureau of Economic Research
3. Handbook ofBasic Economic Statistics
4. Statistical Abstract of the United Stales (also in* eludes industrial, social, and
political statistics)
5. Publications by Department of Commerce agencies:
a. Office of Business Economics (e.g ,Sur\eyof Business)
h Bureau of Economic Analysis (e.g.. Business Conditions Digest)
c. Bureau of thc Census (e.g,, Survey of Manufacturers and varwus reports on
population, housing, and industries)
d Business and Defense Services Administration (e.g.. United Stales Industrial
Outlook) & Securities and Exchange Commission (various quarterly reports on
plant and equipment, linan-cial reports, working capital of corporations)
7. The Conference Board
8. Survey of Buying Pmer
9. Marketing Economic Guide 10. Industrial Arts Index
IL US. and national chambers of commerce
12. American Manufacturers Association
13. Federal Reserve Bulletin
14. Economic Indicators, annual report
15. Kiplinger Semletttr
16 International economic sources:
a. Hbrlacasts
h. Master key index for business international
publications c Department of Commerce
(1) Overseas business reports
(2) Industry awl Trade Administration
(3) Bureau of the Census—Guide to Foreign Trade Statistics
17 Business Periodicals Index
B. Social considerations:
1. Public opinion polls
2. Surveys such is Social Indicators and Social Re-partingi the annaU of the
American Academy of Political and Social Sciences
3. Current controls: Social and behavioral sciences
4. Abstract services and indexes for articles in sociological, psychological, and
political journals
5. Indexes for The Hall Street Journal, New York Times, and other newspapers
6 Bureau of the Census reports on population, housing, manufacturers, selected
services, construction, retail trade, wholesale trade, and enterprise statistics
7. Various reports from such groups as thc Brookings Institution and the Ford
Foundation
g World Bank Atlas (population growth and GNP data)
9. World Bank- World Development Report
C Political considerations:
L Public Affairs Information Services Bulletin
2. CIS Index (Congressional Information Index i
3. Business periodicals
4. Funk & Scott (regulations by product breakdown) 5 Weekly compilation of
presidential documents
6. Monthly Catalog of Government Publications
7. Federal Register (daily announcements of pending regulations)
8. Code of Federal Regulations (final listing of regulations)
9. Business International Master Key Index (regulations, tariffs)
10. Various state publications
IJ Various information sen kes (Bureau of National
Affairs, Commerce Clearing House, Prentice Hall)
D- Technological considerations:
1. Applied Science and Technology Index
2. Statistical Abstract of the United States
3. Scientific and Technical Information Service
4. University reports, congressional reports
5. Department of Defense and military purchasing publishers
6. Trade journals and industrial reports
7. Industry contacts, professional meetings
8. Computer-assisted information searches
9. National Science Foundation annual report
10. Research and Dewlopment Directory patent records
E. Industry considerations:
1 Concentration Ratios in Manufacturing (Bureau of the Census)
2. Input-Out/mt 5Wi^«Mprodiiaivity ratios)
3, Monthly Labor Review (rjroductiviry ratios)
4, Quarterty Failure Report (Dun & Bradstrect j
5. Federal Reserve Bulletin (capacity utilization)
6* Report on Industrial Coneentration and Product Diversification in the 1,000
Largest Manufacturing Companies (Federal Trade Commission)
7. Industry trade publication*
8, Bureau of Economic Analysis, Department of CooTmcrcc (specialization
ratios)
Industry and Operating Environments
A. Competition and supplier considerations:
1. Target Group Index
2. US. Industrial Outlook
3. Robert Morris annual statement studies
4+ Troy, Leo Almanac of Business e$ Industrial Ft* nanctal Ratios
5. Census of Enterprise Statistics
6. Securities and Exchange Commission (10-K reports)
7. Annual reports of specific companies
8. Fortune 500 Directory. The Wall Street Journal Barron st Forbes. Dun's Review
9. uTvcstmcnt services and directories: Moody's, Dun & Bradstrcct, Standard &
Poor's, Starch Marketing, Funk & Scoii Index
10. Trade association surveys
11. Industry surveys
12. Market research surveys 15. Country Business Patterns

14. Country and City Data Book

15. Industry contacts, professional meetings, salespeople
16. SFIB Quarterty Economic Reportfor Small Business
B. Customer profile:
L Statistical Abstract of the United States, first source of statistics
2. Statistical Sources by Paul Masserman (a subject guide to data—both domestic
and international)
3. American Statistics Index (Congressional Information Service Guide to statistical
publications of U.S. government— month ly)
4. Office of Ihe Departmcnl of Commerce;
a. Bureau of the Census reports on population, housing, and industries
b. US. Census of Manufacturers (statistics by industry, area, and products)
C Survey of Current Business (analysis of business trends, especially February
and July issues)
5. Market research studies ( A Basic Bibliography on Market Revie*. compiled by
Robert Ferbcr et al., American Marketing Association)
6. Current Sources of Marketing Information; A Bibliography of Primary Marketing
Data by Gun-ther & Goldstein. AMA
7. Guide to Consumer Markets. The Conference Boaid (provides statistical
information with demographic, social, and economic data annual)
8. Survey of Buying /bmr
9. Predfcasis (abstracts of publishing forecasts of all industries, detailed rjroducis,
and end-use data)
10. Predicants Basebook (historical data from I960 to present, covering subjects
ranging from popu- lation and GNP to specific products and services; series
are coded by Standard Industrial Classifi- cations)
11 Market Guide (individual market surveys of over 1,500 US. and Canadian
cities; includes population, location, trade areas, banks, principal industries,
colleges and IBhmWet, department and chain stores, newspapers* retail
outlets, and sales)
12. Country and City Data Book (includes bank deposits, birth and death rates,
business firms, education, employment, income of families, manufacturers,
population, savings, and wholesale and retail trade)
13. Yearbook of International Trade Statistics ( U N )
14. Yearbook of Motional Accounts Statistics {Utfy
15. Statistical Yearbook WW—covers population, national income, agricultural and
industrial production, energy, external trade, and transport)
16. Statistics of (Conumenii) Sources for Market Research (include* separate books on
Africa, Amenca, Europe)
C. Keynatural resource*
L (Beraucri Mines. Depertnscnt of che Intenor ft 2. Agmthml Ahmet (Peretftiucnt of
Agricul-turc)
3. Statistic* of electric utihnei end gas pipeline companies 1 Federal Power
(orrmussaon)
4 Micarjons of venous institutions: Anscncan Petroleum Institute. Atomic Enenjy
CommtssKrtx CoeJ Mtnin| Institute of Arnerica. Aroencan Secel Institute, and
Brooks*** laatrtistson
THE GLOBAL ENVIRONMENT
1. After reading and studying this chapter, you should be able to
2. Explain the importance of a company* decision to globalize.
3. Describe the four main strategic orientations of global firms.
4. Understand the complexity of the global environment and the control
problems that are faced by global firms.
5. Discuss major issues in global strategic planning, including the differences for
multinational and global firms* Describe the market requirements and product
characteristics in global competition.
6. Evaluate the competitive strategies for firms in foreign markets, including
niche market exporting, licensing and contract manufacturing, franchising,
joint ventures, foreign branching, private equity, and wholly owned
subsidiaries.
GLOBALIZATION
Special complications confront a firm involved in the globalization of its operations-
obaJhution Globalization refers to Ihe strategy of approaching worldwide markets with
slan- The *traiegy of dardized products. Such markets arc most commonly created
by end consumers that aPpn>*ehing prefer lower-paced, standardized products over
higher-pricetL customized products and by global corporations that use their
worldwide operations to compete in local products markets. Global corporations
headquartered in one country with subsidiaries in other
countries experience difficulties that axe understandably associated with operating in
several distinctly different competitive arenas.
Awareness ofthe strategic opportunities faced by global corporations and of thc
threats posed to them is important to planners in almost every domestic U.S, industry.
Among corporations headquartered in Ihe United States that receive more than 50
percent of their annual profits from foreign operations are Citicorp, Coca-Cola,
ExxonMobil, Gillette. IBM. Otis Elevator, and Texas Instruments. In fact, thc 100
largest U.S. globals earn an average of 37 percent of their operating profits abroad.
Equally impressive is the effect of foreign-based globals that operate in thc United
States. Their "direct foreign investment" in the United States now exceeds S90 billion,
with Japanese, German, and French firms leading thc way.
Understanding thc myriad and sometimes subtle nuances of competing in global
markets or against global corporations is rapidly becoming a required competence of
strategic managers. For example, experts in the advertising community contend that
Korean companies only recently recognized the importance of making their names
known abroad. In thc 1980s, there was very little advertising of Korean brands, and
thc country had very few recognizable brands abroad. Korean companies tended to
emphasize sales and production more than marketing. The opening of the Korean
advertising market in the 1990s indicated that Korean firms had acquired a new
appreciation for the strategic competencies that arc needed to compete globally and
created an influx of global firms like Saatchi and Saalchi, I W. Thompson, Ogilvy and
Mather, and Bozell. Many of them established joint ventures or partnerships with
Korean agencies. An excellent example of such a strategic approach to globalization
by Philip Morris's KGF1 is described in Exhibit 5.1, Global Strategy in Action. The
opportunities for corporate growth often seem brightest in global markets. Exhibit 52
reports on the growth in national shares ofthe world's outputs and growth in national
economies to the year 2020. While the United States had a commanding lead in thc
size of its economy in 1992, it was caught by China in the year 2000 and will be far
surpassed by 2020. Overall, in less than 20 years* rich industrial countries will be
overshadowed by developing countries in their produced share of the world's output.
Because thc growth in thc number of global firms continues to overshadow other
changes in thc competitive environment, this section will focus on the nature, outlook,
and operations of global corporations.
DEVELOPMENT OF A GLOBAL CORPORATION
The evolution of a global corporation often entails progressively involved strategy
levels. The first level, which often entails export-import activity, has minimal effect
on ihe existing management orientation or on existing product lines. Thc second level,
which can involve foreign licensing and technology transfer, requires little change in
management or operation. The third level typically is characterized by direct
investment in overseas operations, including manufacturing plants. This level requires
large capital outlays and the development of global management skills. Although thc
domestic operations of a firm at this level continue to dominate its policy, such a firm
is commonly categorized as a true multinational corporation (MNC). The most
involved strategy level is characterized by a substantial increase in foreign
investment, with foreign
Global Strategy in Action
The Globalization of Philip Morris's KGF1
Outside of* tts core Western markets. Kraft General Foods International s (KGFI)
food products have a growing presence in one of the most dynamic business
environments in the world—the As ta-Pacific reg>on Its operations there are
expanding rapj&y. often aided by links with local manufacturers and distributors.
Japan and Korea are important examples. In both countries, local alliances can be
crucial to market entry and success. IW<z<ng this fact in the early 1970s. General
Foods established joint ventures in bom Japan and Korea. These joint ventures,
combined with Kraft General Foods International's (KGFI) stand-alone operations,
generate more than $1 bifcon in revenues. In the aggregate, their combined food
operations ci japan and Korea are larger than many fortune 500 companies.
Whereas soluble coffee accounts for JJSI over 25 percent of the coffee consumed In
U.S. homes, it fills over 70 percent of the cups consumed in the homes of
convttnience-minded japan. Additionally. Japan ts the origin of a unique form of
packaged coffee—liquid—and a unique channel of cfatrfoution—vending machines.
Japanese consumers have purchased packaged liquid coffee for years, and it amounts
to a $5 bJion category. Some 2 million vend ng machines dispense 9 billion cans of
liquid coffee annuafly—an average of 75 cans per person.
Japan offers a culturally unique distribution channel for coffee products—the oft-set
market. Many Japanese exchange speoaly packaged food or beverage assortments at
least tvnee a year to commemorate holidays as well as special personal or business
occasions. The gift-set business has helped Maxim products reinforce ther quality
image: rt aho will be a launching pad and support vehicle for Carte Noire coffees.
Outside the Ajinomoto General Foods joint venture. KGFI 3 devcJopmg a
frecstanoVig food business under the name Kraft Japan It is building a cheese
business with imported Philadelphia Brand cream cheese, the leading cream cheese m
the Tokyo mecropokan market, as well as kxalry manufactured and licensed Kraft M*
Farm cheese slices. The cheese market Is expected to grow approximately 5 percent
per year. This is a rapid growth rate for a large food category. In addition to cheese.
KGFI also imports Oscar Mayer prepared meats and Jocobs Such and chocolates.
KGFI s |cml venture *i Korea. Doug Suh Foods Corporation h it one of the top 10
food companies in die country. Doug Suh manufactures coffees and cereals and has
its own distribution network One of Doug Suh s other businesses in Korea. Post
Cereab. 0 also a strong number two. with a 42 percent category share.
Korea s $400 million coffee market is the fastest-growing major coffee market in the
world, expandng at an average annual rate of 14 percent Growing with the market.
Maxim and Maxwell soluble coffees, m both traditional "aggkxrieriie" and freexe-
dried forms, account for more than 70 percent of the country s soluble coffee sates
The strength of these brands also brings the company a strong number one position in
coffee mot. a mixture of soluble coffee* creamer* and sugar, in addition, its Frima
brand leads the market in the nondairy creamer segment.
Beyond Japan and Korea, KGFI tt targeting many other countries for geographic
expansion. In Indonesia, for instance, KGFI has established a rapidly growing cheese
bus*-ness through a licensee and introduced other KGR products. In Taiwan, the joint
venture company. Premier-Foods Corporation, holds a 34 percent share of the soluble
coffee market and a aggressively developing a Kraft cheese and Jocobs Suchard
import business KGFI Philippines, a wholly owned subsidiary, has a leading position
m the cheese and powdered soft-drink markets in its country. In the People s Republic
of China, the company produces and markets MaxweU House coffees and Tang
powdered soft drinks through two successful and rapidly growing joint ventu assets
comprising a significant portion of total assets. At this level, the Firm begins to
emerge as a global enterprise with global approaches to production, sales, finance,
and control.
Some firms downplay their global nature (to never appear distracted from their
domestic operations), whereas others highlight it. For example. General Electric^
formal statement of mission and business philosophy includes the following
commitment
To carry out a diversified, growing, and profitable worldwide manufacturing business
in electrical apparatus, appliances, and supplies, and in related materials, products,
systems, and services for industry, commerce, agriculture, government, the
community, and the borne.
A similar global orientation is evident ai IBM which operates in 125 countries,
conducts business in 30 languages and more than 100 currencies, and has 23 major
manufacturing facilities in 14 countries.

WHY FIRMS GLOBALIZE

The technological advantage once enjoyed by thc United States has declined
dramatically during the past 30 years. In thc late 1950s, more than 80 percent of the
world's major technological innovations were first introduced in the United States. By
1990, the figure had declined to less than 50 percent. In contrast, France is making
impressive advances in electric traction, nuclear power, and aviation. Germany leads
in chemicals and pharmaceuticals, precision and heavy machinery, heavy electrical
goods, metallurgy, and surface transport equipment- Japan leads in optics, solid-state
physics, engineering, chemistry, and process metallurgy. Eastern Europe and thc
former Soviet Union, the so-called COMECON (Council for Mutual Economic
Assistance) countries, generate 30 percent of annual worldwide patent applications.
However, the United States has regained some of its lost technological advantage.
Through globalization, US, firms often can reap benefits from industries and
technologies developed abroad. Even a relatively small service firm that possesses a
distinct competitive advantage can capitalize on large overseas operations.
Diebold Inc. once operated solely in the United States, selling ATM machines, bank
vaults, and security systems to financial institutions. However, with the U.S. market
saturated, Diebold needed to expand internationally to continue its growth. Thc firm's
globalization efforts led to both the development of new technologies in emerging
markets and opportunistic entry into entirely new industries that significantly im-
proved Dicbold'S sales.
In many situations, global development makes sense as a competitive weapon. Direct
penetration of for- eign markets can drain vital cash flows from a foreign competitor's
domestic operations. The resulting lost opportunities, reduced income, and limited
production can impair the competitor's ability to invade US. mar- kets. A case in point
is IBM's move to establish a position of strength in thc Japanese mainframe computer
in- dustry before two key competitors. Fiyitsue and Hitachi, could dominate il. Once
IBM had achieved asubstantial share of the Japanese market, it worked to deny its
Japanese competitors thc vital cash and pro* duction experience they needed to
invade thc U.S. market.
Firms that operate principally in the domestic environment have an important decision
to make with regard to their globalization: Should they act before being forced to do
so by competitive pressures or alter? Should they (I) be proactive by entering global
markets in advance of other firms and thereby enjoy thc first-mover advantages often
accruing lo risktaker firms that introduce new products or services or (2) be reactive
by taking thc more conservative approach and following other companies into global
markets once customer demand has been proven and thc high costs of new-product or
new-service introductions have been absorbed by competitors? Although the answers
to these questions are determined by thc specifics of thc company and the context, thc
issues raised in Exhibit 5.3 arc hclpiul to strategic decision makers faced with thc
dilemma.
Wal-Marfs dominance of the discount retail market in the United Stales has led it to
go global. In addition to its many successes in international markets, it has had some
difficulties. One example of its problems is discussed in Exhibit 5 A

Strategic Orientations of Global Finns

Multinational corporations typically display one of four orientations toward their
overseas activities. They have a certain set of beliefs about how the management of
foreign operations should be handled. A company with an ethnocenlric orientation
believes that thc values and priorities ofthe parent organization should guide thc
strategic decision making of all its operations. If a corporation has a poly centric
orientation, then the culture ofthe country in which a strategy is to be implemented is
allowed to dominate the decision-making process. In contrast, a reglocentrk
orientation exists when the parent attempts to blend its own predispositions with those
of the region under consideration, thereby arriving al a region-sensitive compromise.
Finally, a corporation with a geocentric orientation adopts a global systems approach
lo strategic decision making, thereby emphasizing global integration.
American firms often adopt a regioccntric orientation for pursing strategics in Europe.
U.S. c-tailcrs have attempted to blend their own corporate structure and expertise with
that of European corporations. For example, Amazon has been able to leverage its
experience in the United States while developing regionally and culturally specific
strategies overseas. By purchasing European franchises that have had regional
success, E*Trade is pursuing a foreign strategy in which they insert their European
units into corporate structure. This strategy requires the combination and use of
culturally different management styles and involves major challenges for upper
management.
Exhibit 5.5 shows Ihe effects of each ofthe four orientations on key activities of the
firm. It is clear from the figure that the strategic orientation of a global firm plays a
major role in determining the locus of control and corporate priorities ofthe firm's
decision makers.

Chasing AMI
In a market where local discounters dominate, the chain to beat is Akfc, which sells a
limited selection of high-
Exhibit 5.4
quality but inexpensive products, h boasts a 19% snare through Its 4.000 stores, which
are much smaller than Wal-Mart's. Even when Wal-Mart can undercut Aldt. the price
differences are often too slight to move consumers to travel the extra distance to a
Supercenter. True. Wal-Mart's annua] turnover of S28S billion gives it a scale ad-
vantage on globally sourccd products. But that purchasing clout does not extend to
regional brands of brarvvurst and beer.
Company officials say the pbn is to improve dbtribu* ton and buVd relationships with
iocal suppliers, then consider expanding. But the ethics-code fiasco shows that Wal-
Mart is still prone to do things the Wal-Mart way without enough consideration to
local customs. According to the ver.rj union. Wal-Mart repeatedly ignores German re-
determination rules, which give workers some say in corporate decisions.
What WaJ Mart realty needs Is more stores so it ca/i advertise more emaendy and
exert more purchasing power. Yet building new Supercenters e a laborious process
because of restrictive building codes and a dearth of locations, Wal-Mart won't leave
Germany. Bur. unless it can fguro out the Germans, it won1! be a local success story,
either.
AT THE START OF GLOBALIZATION

External and internal assessments arc conducted before a firm enters global markets.
For example, Japanese investors conduct extensive assessments and analyses before
selecting a U.S. site for a Japanese-owned firm. They prefer states with strong
markets, low unionization rates, and low taxes. In addition, Japanese manufacturing
plants prefer counties characterized by manufacturing conglomeration; low
unemployment and poverty rates; and concentrations of educated, productive workers.
External assessment involves careful examination of critical features ofthe global
environment, particular attention being paid to the status ofthe host nations in such
areas as economic progress, political control, and nationalism. Expansion of industrial
facilities, favorable balances of payments, and improvements in technological
capabilities over the past decade arc gauges ofthe host nation^ economic progress.
Political
Internal assessment involves identification of the basic strengths of a firm's
operations. These strengths are particularly important in global operations, because
they arc often Ihe characteristics of a firm that the host nation values most and thus,
offer significant bargaining leverage. TTic firm Is resource strengths and global
capabilities must be analyzed. The resources that should be analyzed include, in
particular, technical and managerial skills, capital, labor, and raw materials. The
global capabilities that should be analyzed include the firm's product delivery and
financial management systems.
A firm that gives serious consideration to internal and external assessment is Business
International Corporation, which recommends that seven broad categories of factors
be considered. As shown in Exhibit 5.6. Global Strategy in Action, these categories
include economic, political, geographic, labor, tax, capital source, and business
factors.
COMPLEXITY OF THE GLOBAL ENVIRONMENT
By 2003, Coke was finally achieving a goal that il had set a decade earlier when it
went to India. That goal was to take the market away from Pepsi and local beverage
companies. However, when it arrived. Coke found that the Indian market was
extremely complex and smaller than it had estimated. Coke also encountered cultural
problems, in part because the chief of Coke India was an expatriate. The key to
rvvercoming this cultural problem was promoting an Indian to operations chief. Coke
also changed its marketing strategy by pushing their % Thums Up" products, a local
brand owned by Coke. Then, they began to focus their efforts on creating new
products for rural areas and lowering the prices of their existing products to increase
sales. Once Coke had new products in the market, they focused on a new advertising
campaign to better relate to Indian consumers.
Cokeexperience highlights the fact thai global strategic planning is more complex
than purely domestic planning. There are at least five factors that contribute to this
increase in complexity:
I* Globals face multiple political, economic, legal, social, and cultural
environments as well as various rates of changes within each of them.
Occasionally, foreign governments work in concert with their militaries to
advance economic aims even at the expense of human rights. International
firms must resist the temptation to benefit financially from such immoral
opportunities. Specifics of just one abusive situation are presented in Exhibit
5.7-
2. Interactions between the national and foreign environments arc complex,
because of national sovereignty issues and widely differing economic and
social conditions.
3. Geographic separation, cultural and national differences, and variations in
business practices all tend to make communication and control efforts between
headquarters and the overseas affiliates difficult.
4. Globals face extreme competition, because of differences in industry structures
within countries, FW an example of the challenges for global firms in India,
sec Exhibit 5.8*
5. Globals are restricted in their selection of competitive strategies by various
regional blocs and economic integrations, such as the European Economic
Community, the European Free Trade Area, and the Latin American Free
Trade Area.
CONTROL PROBLEMS OF THE GLOBAL FIRM
An inherent complicating factor for many global firms is that their financial policies
typically are designed to further the goals of the parent company and pay minimal
attention to the goals of the host countries This built-in bias creates conflict between
the different parts of the global firm, between the whole firm and its home and bust
countries, and between the home country and host country themselves The conflict is
accentuated by the use of various schemes to shift earnings from one country to
another in order to avoid taxes, minimize risk, or achieve other objectives.
Moreover, different financial environments make normal standards of company
behavior concerning the disposition of earnings, sources of finance, and the structure
of capital more problematic. Thus, it becomes increasingly difficult to measure the
performance of international divisions
In addition, important differences in measurement and control systems often exist.
Fundamental lo thc concept of planning is a well-conceived, futurc-oricntcd approach
lo decision making that is based on accepted proccdurcH and methods of analysis.
Consilient approaches to planning throughout a firm arc needed for effective review
and evaluation by corporate headquarters. In the global firm, planning is complicated
by difference* in national attitudes toward work rneasurrrnent. and by differences in
government rcquirerrieno. ahotil disclosure of information.
Although auch problems are an aspect of the globe! em irutimeni, rather than a
consequence of poor management, they arc often rnoa effectively reduced through
increased anennon to strategic planning Such planning will aid in coordinating and
integrating the firm * direction, objectives, and policies around the world It enable*
the firm to antic ipaic and prepare for change It facilitate* the creation of programs to
deal with worldwide doctoprncnt Finally, it helps the manaimnenl of oversees
affiliates become more actively involved :i: vrtlmi: goals and in developing means to
more effectively utilize the firms total resources. A company that share*; this v iew is
General Electric. GE s Top Strategist, Jeffrey launch, is profiled in Exhibit 5.9.
An example ofthe need for coordinaiioti in global ventures and evidence that firms
can successfully plan for global collaboration (eg* through rationalized production) is
ihc Ford Escort (Europe), the bc&usclling an* tomohile in ihc world which has a
component manufacturing network that consists of plants in 15 countries
Top Strategist
Jeffrey R. Immelr. Chairman and CEO of General Electric Co.
Nobody quite knew what to expect of Jeffrey R. lm-melt when he took over the top
job at General Electric Co w\ September. 2001. GE had long thrived under the
legendary Jack Wdch. making * tempting to ex-pea more of the same tVom his young
successor. But Immeh. 48. has put ha distinct imprmt on GE*s cul* turc and strategy'.
Moreover, he has done it through a period of intense uncertainty—from the Sept em-
ber 11 attacks through new rcgiianorvs and a shaky economy
Through it all. Immelt has stuck to his agenda for transforming GE in the 21 st
century. That has meant creatwg a much more customer-driven, global and diverse
culture—one that spawns innovation, embraces technology, and has the goods to
grow internally in a slow-growth world. He has shaken up the portfolio, too. by
edging out of lower-return businesses like insurance with the spin-off of Genworth
Financial in 2004, while buying stronger plays such as Vrvendi Universalis
entertainment assets and Amersham PLC a British diagnostics and btocech giant. He
even broke up the massive and often opaque GE Capital mto four transparent
businesses. "The bggest challenge is continuing to drrve consistent growth in a world
that is more vofade and has less economy growth.** says Immeft.
Key Accomplishments
• ReposfUoned GE's portfolio with major acquisitions in health care H entertainment
and cornmerciaJ finance.
• Created a more dime, global, and customer-driven cuhv.e.

GLOBAL STRATEGIC PLANNING

It should be evident from ihc previous sections that the strategic decisions of a firm
competing in the global marketplace become increasingly complex. In such a firm,
managers cannot view global operations as a set of independent decisions. These
managers are faced with trade-off decisions in which multiple products, country
environments, resource sourcing options, corporate and subsidiary capabilities, and
strategic options must be considered.
A recent trend toward increased activism of stakeholders has added to the complexity
of strategic planning for the global firm. Stakeholder activism refers to demands
placed on the global firm by the foreign environments in which it operates, principally
by foreign governments. This section provides a basic framework for the analysis of
strategic decisions in this complex setting.
Multidomestic Industries and Global Industries Multidomestic Industries
International industries can be ranked along a continuum that ranges from
multtdo-tncstic to global.
A mullidomestic industry is one in which competition is essentially segmented from
country to country. Thus, even if global corporations are in the industry.
competition tn one country is independent of competition in other countries.
Examples of such industries include retailing, insurance, and consumer finance.
In a multidomestic industry, a global corporation's subsidiaries should be managed as
distinct entities; thai is, each subsidiary should be rather autonomous, having the
authority to make Independent decisions in response to local market conditions. Thus,
the global strategy of such an industry is the sum of the strategies developed by
subsidiaries operating in different countries. The primary difference between a
domestic firm and a global firm competing in a multidomestic industry is that the
latter makes decisions related to the countries in which it competes and to how it
conducts business abroad-
Factors that increase the degree to which an industry is multidomestic include 1
* The need for customized products to meet the tastes or preferences of local
customers,
* Fragmentation of the industry, with many competitors in each national market.
* A lack of economies of scale in the functional activities of firms in the industry,
* Distribution channels unique to each country.
* A low technological dependence of subsidiaries on R&D provided by the global
firm. Global Industries
A global Industry is one in which competition crosses national borders. In fact, it oc-
curs on a worldwide basis. In a global industry, a firm's strategic moves in one coun-
try can be significantly affected by its competitive position in another country. The
very ccrnpetiboci rapidly expanding list of global industries includes commercial
aircraft, automobiles, national borders on a mainframe computers, and electronic
consumer equipment. Many authorities arc con- wortowiee basis, vinced that almost
all product-oriented industries soon will be global. As a result, strategic management
planning must be global for at least six reasons
1 The increased scope of the global management task. Growth in the size and
complexity of global firms made management virtually impossible without a
coordinated plan of action detailing what is expected of whom during a given
period. The common practice of management by exception is impossible with-
out such a plan.
2. The increased globalization of firms. Three aspects of global business make
global planning necessary: (a) differences among the environmental forces in
different countries* (b) greater distances, and \ c ) the interrelationships of
global operations*
3. The information explosion. It has been estimated that the world's stock of
knowledge is doubling every 10 years. Without the aid of a formal plan,
executives can no longer know all that they must know to solve the complex
problems they face. A global planning process provides an ordered means for
assembling, analyzing, and distilling the information required for sound
decisions*
4. The increase in global competition. Because of the rapid increase in global
competition, firms must constantly adjust to changing conditions or lose
markets to competitors. The increase in global competition also spurs
managements to search for methods of increasing efficiency and economy. For
example. Carlos Ghosn is using his unusual position of CEO of both Nissan
and Renault to blend French design with Japanese-style quality and efficiency
as discussed in Exhibit 5.10, Strategy in Action.
The rapid development of technology. Rapid technological development has
shortened product life cycles. Strategic management planning is necessary to ensure
the replacement of products that are moving into the maturity siage, with fewer sales
and declining profits. Planning gives management greater control of all aspects of
new product introduction
Strategic management planning breeds managerial confidence. Like the motorist with a
road map, managers with a plan for reaching their objectives know where they are
going* Such a plan breeds confidence, because it spells out every step along the way
and assigns responsibility for every task. The plan simplifies the managerial job.
A firm in a global industry must maximize its capabilities through a worldwide
strategy. Such a strategy necessitates a high degree of centralized decision making in
corporate headquarters so as to permit trade-off decisions across subsidiaries.
Among the factors that make for the creation of a global industry are
• Economies of scale in the functional activities of firms in the industry.
• A high level of R&D expenditures on products that rcq uirc more than one market
to recover development costs*
• The presence in the industry of predominantly global firms that expect consistency
of products and services across markets*
• The presence of homogeneous product needs across markets, which reduces the
requirement of customizing the product for each market. The presence of a small
group of global competitors.
A low level of trade regulation and of regulation regarding foreign direction
investment

1. Global Management Team

Possesses global vision and culture. Includes foreign nationals.
Leaves management of subsidiaries la'foreign nationals, frequently travels
internationally Has cross<ottural training,
2. Global Strategy
Implement strategy as opposed to Independent country strategies. Oevelop
significant cross-country alliances. Select country targets strategically
rathef than opportunistically Perform business functions where most
efficient—no home<ountty bias. Emphasize participation in the triad—
North Amenta. Europe, and Japan.
3. Global Operations and Products
Use common core operating processes worldwide to ensure quantity and
uniformity Product globally to obtain best cost and market advantage.
4. Global Technology and R&D
Design global products but take regional differences into account.
Manage development work centrally but carry out globally
Do not duplicate R&D and product development; gain economies of scale.
5. Global Financing
Finance globally to obtain lowest cost.
Hedge when necessary to protect currency risk.
Price in local currencies.
List shares on foreign exchanges.
6. Global Marketing
Market global products but provide regional discretion if economies of
scale are not affected Develop global brands.
Use core global marketing practices and themes. Simultaneously introduce
new global products worldwide.
Six factors that drive thc success of global companies axe listed in Exhibit
5.11. They address key aspects of globalizing a business^ operations and
provide a framework within which companies can effectively pursue the
global marketplace.
The Global Challenge
Although industries can be characterized as global or mullidomestic, few "pure" cases
of either type exist. A global firm competing in a global industry must be responsive,
to some degree, to local market conditions. Similarly, a global firm competing in a
mullidomestic industry cannot totally ignore opportunities to utilize intracorporate
resources in competitive positioning. Thus, each global firm must decide which of its
corporate functional activities should be performed where and what degree of
coordination should exist among them.
Location and Coordination of Functional Activities
Typical functional activities of a firm include purchases of input resources,
operation*, research and development, marketing and salev and after-sales service. A
multinational corporation had a wide range of possible location option* foe each of
these activities and must decide which sets of activities will be performed in how
many and which locations A multinational corporation may have each location
perform each actn iry, or it may center an activity in one location to serve thc
organization worldwide. For example, research and development centered in one
facility may serve the entire organization.
A multinational corporation also must determine the degree to which functional
activities are to be coordinated MfOH location*. Such coordination can be extremely
low. allowing each location to perform each activity autonomously, or extremely
high, tightly linking the fiinctional activities of different locations. Coca-Cola tightly
links its RAD and marketing functions worldwide to offer a standardized brand name,
concentrate formula, markel positioning and advertising theme. However, its
operations function is more autonomous, with thc artificial sweetener and packaging
differing across locations
Exhibit 5.12 presents some of the issues related to the critical dimensions ol location
and coordination in multinational strategic planning. It also shows the functional
activities that the firm performs with regard to each of these dimcnuoru For example,
in connection with thc service function, a firm must decide where to perform after-tale
crvicc and whether to standardize such service
How a particular firm should address location and coordination issues depends on the
nature of its industry and on the type of international strategy that the firm is pursuing.
As discussed earlier, an industry can be ranked along a continuum that ranges
between multidomestic at one extreme and global at the other Little coordination of
functional activities across countries may be necessary in a multidomestic industry,
since competition occurs within each country in such an industry. However, as its
industry becomes increasingly global, a firm must begin to coordinate an increasing
number of functional activities to effectively compete across countries.
Going global impacts every aspect of a company's operations and structure. As firms
redefine themselves as global competitors, workforces are becoming increasingly
diversified. The most significant challenge for firms, therefore, is the ability to adjust
to a workforce of varied cultures and lifestyles and the capacity to incorporate cultural
differences to the benefit of the company's mission.
Market Requirements and Product Characteristics
Businesses have discovered that being successful in foreign markets often demands
much more than simply shipping their well-received domestic products overseas.
Firms must assess two key dimensions of customer demand: customers 1 acceptance of
standardized products and the rate of product innovation desired. As shown in Exhibit
5.13, Global Strategy in Action, all markets can be arrayed along a continuum from
markets in which products are standardized to markets in which products must be
customized for customers from market to market. Standardized products in all
markets include color film and rxitrochcmicats. while dolls and toilets arc good
examples of customized products.
Similarly, products can be arrayed along a continuum from products that are not
subject lo frequent product innovations to products that arc often upgraded. Products
with a fast rate of change include computer chips and industrial machinery, while
steel and chocolate bars are products that fit in thc slow rate of change category.
Exhibit 5.13 shows that the two dimensions can be combined to enable companies to
simultaneously assess both customer need for product standardization and rate of
product innovation. Thc examples listed demonstrate the usefulness of the model in
helping firms to determine the degree of customization that they must be willing to
accept to become engaged in transnational operations.
International Strategy Options
Exhibit 5.14 presents the basic multinational strategy options that have been derived
from a consideration of the location and coordination dimensions* Low coordination
and geographic dispersion of functional activities arc implied if a firm is operating in
a multidomcstic industry and has chosen a country-centered strategy. This allows each
subsidiary' to closely monitor the local market conditions it faces and to respond
freely to these conditions.
High coordination and geographic concentration of functional activities result from
the choice of a pure global strategy Although some functional activities, such as after-
sale service, may need to be located in each market, tight control of those activities is
necessary to ensure standardized performance worldwide- For example, IBM expects
thc same high level of marketing support and service for all of its customers,
regardless of their location,
Two other strategy options arc shown in Exhibit 5.14* High foreign investment with
extensive coordination among subsidiaries would describe thc choice of remaining at
a particular growth stage, such as that of an exporter. An export-based strategy with
decentralized marketing would describe the choice of moving toward globalization,
which a multinational firm might make.
COMPETITIVE STRATEGIES FOR FIRMS IN FOREIGN MARKETS
Strategics for firms that arc attempting to move toward globalization can be
categorized by the degree of complexity of each foreign market being considered and
by the diversity in a company's product line (sec Exhibit 5.15). Complexity refers to thc
number of critical success factors that are required to prosper in a given competitive
arena. When a firm must consider many such factors, the requirements of success
increase in complexity. Diversity, the second variable, refers to thc breadth of a firm's
business lines. When a company offers many product lines, diversity is high Together,
the complexity and diversity dimensions form a continuum of possible strategic
choices. Combining these two dimensions highlights many possible actions.
Niche Market Exporting
The primary niche market approach for thc company that wants to export (s to modify
select product performance or measurement characteristics to meet special foreign
demands. Combining product criteria from both the U.S. and the foreign markets can
be slow and tedious. There are. however, a number of expansion techniques that
provide the U.S. firm with thc know-how to exploit opportunities in the new*
environment. For example, copying product innovations in countries where patent
protection is not emphasized and utilizing nonequity contractual arrangements with a
foreign partner can assist in rapid product innovation. N. V. Philips and various
Japanese competitors, such as Sony and Matsushita, now are working together for
common global product standards within their markets. Siemens, with a centralized
R&D in electronics, also has been very successful with this approach*
Thc Taiwanese company. Gigabyte, researched thc US. market and found that a
sizable number of computer buyers wanted a PC that could complete the basic tasks
provided by domestic desktops, but that would be considerably smaller Gigabyte
decided to sent this niche market by exporting their mini-PCs into the United States
with a price tag of $200 to $300. This price was considerably less than ihe closest US-
manufacturer, Dell, whose minicomputer was still larger and cost S766.
Exporting usually requires minimal capital investment. The organization maintains its
quality control standards over production processes and finished goods inventory, and
risk to the survival of the firm is typically minimal. Additionally, the U.S. Commerce
Department through its Export Now Program and related government agencies lowers
the risks to smaller companies by providing export information and marketing advice.
Licensing and Contract Manufacturing
Establishing a contractual arrangement is the next step for US- companies that want to
venture beyond exporting but arc not ready for an equity position on foreign soil.
Licensing involves the transfer of some industrial property right from ihe US. licensor
to a motivated licensee. Most tend to be patents, trademarks, or technical know-how
that are granted lo the licensee for a specified time in return for a royalty and for
avoiding tariffs or import quotas. For an example, read Exhibit 5.16. Bell South and
US.West, with various marketing and service competitive advantages valuable to
Europe, have extended a number of licenses to create personal computer networks in
the United Kingdom.
Another licensing strategy open to U.S. firms is to contract the manufacturing of its
product line to a foreign company to exploit local comparative advantages in
technology, materials, or labor.
US. firms lhat use cither licensing option will benefit from lowering the risk of entry
into the foreign markets. Clearly, alliances of this type arc not for everyone. 1 hey arc
used best in companies large enough to have a combination of international strategic
activities and for firms with standardized products in narrow margin industries.
Tm major problems exist with licensing. One is the possibility that thc foreign partner
will gain thc experience and evolve into a major competitor after thc contract expires.
The experience of some US. electronics firms with Japanese companies shows lhat
licensees gain Ihc potential to become powerful rivals. The other potential problem
stems from the control that the licensor forfeits on production, marketing, and general
distribution of its products. This loss of control minimizes a company's degrees of
freedom as it reevaluates its future options.
Franchising
A special form of licensing is franchising, which allows the franchisee to sell a highly
publicized product or service, using the parent's brand name or trademark, carefully
developed procedures, and marketing strategies. In exchange, the franchisee pays a
fee to the parent company, typically based on the volume of sales of the franchisor in
its defined market area. The franchise is operated by the local investor who must
adhere to thc strict policies ofthe parent.
Franchising is so popular that an estimated 500 U.S. businesses now franchise to over
50.000 local owners in foreign countries. Among the most active franchisees are Avis,
Burger King. Canada Dry, Coca-Cola. Hilton, Kentucky Fried Chicken, Manpower,
Marriott, Midas, Muzak, Pepsi, and ServiceMaster. However, the acknowledged
global champion of franchising is McDonald^ which has 70 percent of its company-
owned stores as franchisees in foreign nations.
Joint Ventures
As the multinational strategics of U.S. firms mature, most will include some form of
joint venture (JV) with a target nation firm. AT&T followed this option in its strategy
to produce its own personal computer by entering into several joint ventures with
European producers to acquire the required technology and position itself for
European expansion. Because JVs begin with a mutually agreeable pooling of capital,
production or marketing equipment, patents, trademarks, or management expertise,
they offer more permanent cooperative relationships than export or contract
manufacturing.
Compared with full ownership ofthe foreign entity. JVs provide a variety of benefits
to each partner. US. firms without the managerial or financial assets to make a
profitable independent impact on the integrated foreign markets can share
management tasks and cash requirements often at exchange rates that favor the dollar.
The coordination of manufacturing and marketing allows ready access to new
markets, intelligence data, and reciprocal flows of technical information.
For example. Siemens, thc German electronics firm, has a wide range of strategic
alliances throughout Europe to share technology and research developments. For
years. Siemens grew by acquisitions, but now, to support its horizontal expansion
objectives, it is engaged in joint ventures with companies like Groupc Bull of France,
International Computers of Britain. General Electric Company of Britain, IBM, Intel),
Philips, and Rolm. Another example is Airbus Industries, which produces wide-body
passenger planes for thc world market as a direct result of JVs among many
companies in Britain, France. Spain, and Germany.
JVs speed up the efforts of US, firms to integrate into the political, corporate, and
cultural infrastructure of thc foreign environment, often with a lower financial
commitment than acquiring a foreign subsidiary. General Electric^ (GE) 3 percent
share in thc European lighting market was very* weak and below expectations.
Significant increases in competition throughout many of their American markets by*
the European giant. Philips Lighting, forced GE to retaliate by expanding in Europe.
GE*s first strategy was an attempted joint
venture with thc Siemens lighting subsidiary, Osram, and with thc British electronics
firm. Thorn EMI. Negotiations failed over control issues. When recent events in
Eastern Europe opened the opportunity for a JV with thc Hungarian lighting
manufacturer, Tungsram, which was receiving 70 percent of revenues from the West.
GE capitalized on it.
Although joint ventures can address many of the requirements of complex markets
and diverse product lines. U.S. firms considering cither equity- or non-cquity-based
JVs face many challenges. For example, making full use ofthe native firm's
comparative advantage may involve managerial relationships where no single
authority exists to make strategic decisions or solve confiicts. Additionally, dealing
with host-company management requires the disclosure of proprietary* information
and the potential loss of control over production and marketing quality standards.
Addressing such challenges with well-defined covenants agreeable to all parties is
difficult. Equally important is thc compatibility of partners and their enduring
commitments to mutually supportive goals. Without this compatibility and
commitment, a joint venture is critically endangered.
Foreign Branching
A foreign branch is an extension ofthe company in its foreign market—a separately
located strategic business unit directly responsible for fulfilling the operational duties
assigned to it by corporate management, including sales, customer service, and
physical distribution. Host countries may require that the branch be "domesticated,"
that is, have some local managers in middle and uppcr-lcvcl positions. Thc branch
most likely will be outside any US. legal jurisdiction, liabilities may not be restricted
to the assets of the given branch, and business licenses for operations may be of short
duration, requiring the company to renew them during changing business regulations.
Equity Investment
Small and medium-size enterprises with strong growth potential frequently have
thcprivate equity need for additional funds to be able to grow turthcr before deciding
to trade their stock Money from private publicly in the marketplace. These firms often
enlist thc support of a venture capital firm or private equity company that invests its
shareholders- money in start-ups and other risky but potentially very profitable small
and medium-size enterprises. In ex-change for a private equity stake, which is
sometimes a majority or controlling posi-start^s and other tion, the VC or private
equity company provides investment capital and a range ofrisky—but potentially
business services, including management expertise. Exhibit 5.17 provides an example
of thc importance of private equity firms to business development and strategic re-
ncwal and of thc difficulties that they can face in international situations.
Wholly Owned Subsidiaries
Wholly owned foreign subsidiaries arc considered by companies that are willing and
able to make the highest investment commitment to the foreign market. These
companies insist on full ownership for reasons of control and managerial efficiency.
Policy decisions about local product lines, expansion, profits, and dividends typically
terrain with the US. senior managers.
Fully owned subsidiaries can be started cither from scratch or by acquiring established
firms in the host country. U.S. firtns can benefit significantly if the acquired company
has complementary product lines or an established distribution or service network.
US. firms seeking to improve their competitive postures through a foreign subsidiary
face a number of risks to their norMal mode of operations. First, if the high capital
investment is to be rewarded, managers must attain extensive knowledge of the
market, thc host nation's language, and its business culture. Second, the host country*
expects both a long-term commitment from the US. enterprise and a portion of their
nationals to be employed in positions of management or operations rwtunater), hiring
or mining foreign managers for leadership i ' i ' is comrnonly a good policy, imcc they
arc close to both the market and contacts This is especial K important for smaller
firms when markets are regional. Third changing sundards mandated by foreign
regulations may eliminate a company's protected market niche. Product design and
worker protection liabilities also may extend hack to the home office.
The strategics shown In Exhibit 5.15 arc not exhaustive. For example, a firm may
engage in any number of joint ventures while maintaining an export business.
Additionally, there are a number of other strategics thai a firm should consider before
deciding on us long-term approach to foreign markets These will be discussed in
detail in t haptcr f> under the topic of grand strategies. However, the strategies
discuvtcd in this chapter provide the most popular starting points for planning the
globalization of a firm.
GLOBALIZATION IN THE INDIAN CONTEXT3
India undertook a cascading set of economic reforms beginning in June l°°l. Industrial
controls over most investments were removed. Controls over diversification and
expansion were also removed. Import controls, except for most consumer goods, were
dismantled* Foreign investment restrictions came to an end in an effort to attract
investment* Alongside, financial sector reforms were initiated with thc objective of
greater management efficiency. The government also sought better management by
introducing competition to areas of public sector monopoly, by allowing thc entry of
new private sector firms.4 Structural reforms, aimed al deregulating thc economy and
shifting from a path of relatively protected inward looking industrialization to a new
phase-based on greater competition in the domestic market*, openness to trade and
investment, and fuller integration with the global economy-were implemented.*
Economic liberalization, which entailed a large number of economy-wide policy and
administrative changes, was initiated to bring in a significant shift in the regulatory
framework ofthe Government. These reforms were mainly aimed at ending thc era of
central planning through persistent measures towards deregulating thc domestic
markets, increasing their integration with global economy, reducing the role of
Government, and promoting market mechanisms to regulate the economy*The policy
changes, in force in India since July 1991, could be classified into two broad
categories, stabilization policy and structural reforms policy. While the stabilization
policy was intended to correct the grim financial situation being faced by the
economy in the short term, the structural reforms policy was intended to accelerate
economic growth over the medium term* Structural policies cannot succeed unless a
degree of stabilization has been brought about. But stabilization itself will not be
adequate unless structural reforms are undertaken to avoid the recurrence of
problems.1 Structural reforms were brought about in the areas of industrial licensing
and regulation, foreign trade and investment, and thc financial sector. The aim ofthe
foreign trade policy was to liberalize thc regime with respect to imports and bring
about a closer link between exports and imports, and also to reduce tariffs. A
piogressive reduction in import duty had become imperative to avoid a high-cost
economy. Financial sector reforms were also brought in to provide greater autonomy
to financial institutions in terms of interest rate structures and operational matters,
particularly loan losses and losses on account of cross subsidization in lending rates.
A borderless economy meant allowing free access to global players in various
economic activities. There was reduction in tariff and rationalization of protectionist
measures, including modification of various Government policies. Globalization has
two distinct phenomena: scope (or stretching) and intensity (or deepening). On one
hand, it defines a set of processes that embrace most of the globe, or which operate
worldwide—the concept therefore has a spatial connotation. On the other hand, it also
implies an intensification ofthe levels of interaction, interconncctcdness, or
interdependence between thc states and societies that constitute thc world community.
Accordingly, stretching and deepening of global processes go sidc-by-sidc. This made
il imperative for all firms, irrespective of their geographic location, to become
globally
competitive as they were forced to play on the wider global turf. While this was a
healthy sign, indicating a trend towards near perfect competition, it proved to be a
source of anxiety For firms in India that had always lived under ihc protectionist
umbrella. These firms were not geared up in terms of financial muscle and orientation
to compete globally
During the regulated regime, firms were operating in a sellers* market, but after thc
reforms took place, there was stiff competition among national as well as global
players due to availability of imported products of high quality at competitive prices.
A number of new players entered the Indian market, thereby intensifying competition.
Global players were showcasing their products to Indian consumers, who. with higher
disposable income and attractive finance schemes, could afford high quality imported
products. Due to reforms in duty structures, imports became cheaper and were also of
higher quality While the market remained price sensitive, thc dominant basis of
competition changed from price to thc price-value concept. With firms positioning
themselves uniquely fragmentation of markets into sub-segments increased. Declining
prices, increasing population, increase in literacy rates, rising aspiration levels, and
westernization ted to a shift in customer preference. In urban areas, demand shifted
from ccorwmy class to premium segment. Lifestyle changes in rural markets became
ihe focal point for firms looking at expansion. Emergence of new technologies and
patenting of products led to obsolescence of existing products. Continuous
modernisation and upgrading was required to maintain a stable position in the market.
Indian companies looking at export markets had to match the value delivered to
consumers by companies on their home turf also, thereby making it imperative for
them to adhere to global safety and environment standards. As a result of these
reforms, the veil of protection thrown around Indian Industry in terms of high import
tariffs, licensing of industries etc.. was gradually lifted, bringing in competition—both
within India and from outside. Competitiveness, technology upgradation,
modernization, economics of scale, and rationalization of operations became thc keys
for survival.9 Firms in India had to strive to become competitive. In addition, they
were forced to play on a global battlefield due to the advent of multinationals, which
made their survival even more difficult.
Though there was a positive response from industry to gear itself to meet thc new
challenges, thc manufacturing sector had a difficult time. It had to contend with
adverse factors—like severe import compression, reduced domestic demand because
of slow GDP growth, decline in public sector investment outlays, and reduced
overseas demand.10 In anticipation of a large number of Non-Performing Assets,
banks made lending rules stringent which made getting loans from banks and
financial institutions difficult- The following decade witnessed many companies close
shop or become targets for acquisition* This was evident from data created from thc
12-ycar indices of all listed companies in India, of the Centre for Monitoring Indian
Hconomy (CMIE).
The industry went through a period of decline during thc decade. This fact was
inferred from the percentage of profitable companies in the country. An analysis of
CMIE database for the period 1990-2002 revealed that during 1990. there were 1,682
firms in business, out of which 1,329 (79%) were profit making. As com* pared to
this, by thc closing of FY 2001. 5.196 firms had reported, out of which only 3029
(58.3%), were sheming profits, while 2307 firms had nol reported. In case they were
still in business, thc percentage of profitable firms had further declined to 40.4%. The
other even more dismal scenario could be that these have closed down* 11 In thcprc-
libcralizationcra, 79% ofthe domestic companies were profit making (positive PAT)
while 18% were loss making, while in the post-liberalization era. only 40%
companies were profit making, 60% were not in good condition-including the 32%
that were not reporting. Only 278 companies (4%) had positive PAT all through 1990-
2001.
The combined impact of all these factors was that due to changes in Government
policies, there were changes in fiscal and monetary policies and import-export
policies. Changes in import-export policies facil* itatcd technology transfer across the
globe, which brought in better quality products at lower prices, (hereby increasing
competition for local players. Il also led lo availability of inputs of better quality,
though at a higher cost. Lower rate of inflation improved the economic status and
provided higher disposable income in the hands of consumers. There was a
perceptible shift from sellers' market to buyers' market as with liberalized imports,
customers had a wider range of products to choose from. Improved customer
awareness brought in a sociological shift in purchasing patterns of the consumers,
who, equipped with more disposable income, were dc* manding value-added
products.
Firms that were successful in facing the challenges of globalization, understood the
impact of the reforms and adapted themselves to become cximpctitivc. These firms
rationalized their businesses by hiving-off non-core and non-r>erforming businesses
and used the capital generated for enhancing the competitiveness of their core
business. Exhibit 5.18 provides an example of BILT, which restructured its operations
while optimiying its business processes to generate value. The resource, thus
generated, was utilized for gaining access to scarce and valuable resources in line with
the critical success factors for the industry. New products were launched with a better
understanding of the customer needs and crossing the identified needs with high
quality research, in association with laboratories and educational institutes of high
standing, as per international standards. The products so generated were launched in
the market with a slew of value-added services-including financing options, buy-back
schemes and lifetime service facilidcs-spcciftcally catering to the needs of Indians
growing economy. Simultaneously, global quality standards were adopted to optimize
costs and generate products that could be sold at competitive prices.
The aim of Indian firms was two-fold - to establish presence in the country to
compete directly with multinationals which had found access to the Indian market due
to liberalization and having established foothold in India, lo move to global markets
and compete with the leading players in the industry internationally.
To understand thc strategic planning options available to a corporation, its managers
need to recognize that different types of industry-based competition exist-
Specifically, they must identify the position of their in* dustry along thc global versus
multidomcstic continuum and then consider thc implications of that position for their
firm.
The differences between global and multidomestic industries about the location and
coordination of functional corporate activities necessitate differences in strategic
emphasis. As an industry becomes global, managers of firms within that industry must
increase the coordination and concentration of functional activities.
The Appendix at the end of this chapter lists many components of the environment
with which global corporations must contend. This list is useful in understanding the
issues that confront global corporations and in evaluating the thoroughness of global
corporation strategies*
As a starting point for global expansion, the firm's mission statement needs to be
reviewed and revised. As global operations fundamentally alter the direction and
strategic capabilities of a I inn, its mission statement, if originally developed from a
domestic perspective, must be globalized.
The globalized mission statement provides the firm with a unity of direction that
transcends the divergent perspectives of geographically dispersed managers. It
provides a basis for strategic decisions in situations where strategic alternatives may
appear to conflict. It promotes corporate values and commitments that extend beyond
single cultures and satisfies the demands of the firm's internal and external claimants
in different countries. Finally* it ensures the survival of the global corporation by
asserting the global corporation s legitimacy with respect to support coalitions in a
variety of operating environments.
Movement of a firm toward globalization often follows a systematic pattern of
development. Commonly, businesses begin their foreign nation involvements
progressively through niche market exporting, license-contract manufacturing,
franchising, joint ventures, foreign branching, and foreign subsidiaries
1. How does environmental analysis at the domestic level differ from global analysis?
2. Which factors complicate environmental analysis at the global level? Which
factors arc making such analysis easier?
y Do you agree with the suggestion that soon all industries will need to evaluate
global environments?
4. Whkh industries operate almost devoid of global competition? Which inherent
immunities do they enjoy?
5. Explain when and why it is important for a company to globalize.
6. Describe the four main strategic orientations of global firms.
7. Explain the control problems that arc faced by global firms.
8. Describe the differences between multinational and global firms.
9. Describe the market requirements and product characteristics in global
competition.
10. Evaluate the competitive strategies for firms in foreign markets:
a. Niche market exporting
b. Licensing and contract manufacturing
c. Franchising
d Joint ventures
e. Foreign branching
f. Private equity investment
g. Wholly owned subsidiaries
 Chapter 5 Discussion Case
A year and a half ago. Pfizer Inc. got a disturbing call on its customer hotline. A
woman who had been taking its cholesterol-lowering drug Lipitor complained that a
new* bottle of tablets tasted bitter. She sent the suspicious pills to the company,
which tested them at a lab in Groton, COWL The white oblong tablets looked just like
the real thing—and even contained some of the active ingredient in Lipitor. But Pfizer
soon determined that they were counterfeits. Over the next two months, distributors
yanked some 16,5 million tablets from warehouses and pharmacy shelves nationwide.
An isolated case? Hardly. Last October, Brazilian polkcgot au>offabc*rtahoardof
bogus Hewlett-Packard Co. tnkjet cartridges and seized more than S1 million worth of
goods. Chinese police last year conducted raids confiscating evcrylhing from
counterfeit Buick windshields to phony Viagra, tn Guam, the Secret Service in Jury
uncovered a network selling bogus North Korean-made pharmaceuticals, cigarettes,
and $100 bills. In June. French customs seized more than 11,000 fake parts for Nokia
Corp. cell phones—batteries, covers, and more. In January, US. Commerce Secretary
Donald Evans blasted the Chinese on a visit to Beijing, demanding they step up
efforts to police intellectual-property violations, Evans singled out the case of a
General Motors Corp. subsidiary that is suing Chinese carmaker Chery Automotive
for ripping off the design of its Chevrolet Spark minicar The uncanny resemblance
between the two cars, said Evans. **dcfics innocent explanation "

Critical Mass
Kiwi Shoe Polish, Callaway Golf clubs. Intel computer chips, Bosch power drills, BP
oil. Pick any product from any well-known brand and chances arc there's a
counterfeit version of it out there. Of course, as anyone who has combed the back
alleys of Hong Kong, Rio, or Moscow knows, fakes have been around for decades.
Only the greenest rube would actually believe thai the $20 Rolcx watch on Silora
Road in Bangkok or the $30 Louis Vuitton bag on New York s Canal Street is
genuine.
Bui counterfeiting has grown up- and that's scaring ihe multinationals. "We've seen a
massive increase in the last five years, and there is a risk it will spiral out of control."
says Anthony Simon, marketing chief of Unilever Bestfoods. "Its no longer a cottage
industry." The World Customs Organization estimates counterfeiting accounts for 5%
to 7% of global merchandise trade, equivalent to lost sales of as much as $512 billion
last year—though experts say this is only a guess. Seizures of fakes by US. customs
jumped by 46% last year as counterfeiters boosted exports to Western markets.
Unilever Group says knock-offs of its shampoos, soaps, and teas are growing by 30%
annually The World Health Organization says up to 10% of medicines worldwide arc
countcrfcited—a deadly hazard lhat could be costing the pharmaceutical industry $46
billion a year. Bogus cat parts add up to S12 billion worldwide. "Counterfeiting has
gone from a local nuisance to a global threat," says Hanns Glaiz, DaimlerChryslers
point man on intellectual property.
The scale of the threat is prompting new efforts by multinationals to slop, or at least
curb, the spread of counterfeits. Companies arc deploying detectives around the globe
in greater force than ever, pressuring governments from Beijing to Brasilia to crack
down, and trying everything from electronic tagging to redesigned products to
aggressive pricing in order to thwart the counterfeiters. Even some Chinese
companies, stung by fakes themselves, are getting into the act. "Once Chinese
companies start to sue other Chinese companies, the situation will become more
balanced" says Stephen Vickcrs, chief executive of International Risk, a Hong Kong-
based brand-protection consultant.
China is key to any solution. Since ihe country is an economic gorilla, its
counterfeiting is turning into quite the beast as well—accounting for nearly two^hirds
of all the fake and pirated goods worldw idc. Daimler s Glatz figures phony Daimler
parts—from fenders to engine blocks- have grabbed 30% of the market in China,
Taiwan, and Korea. And Chinese counterfeiters make millions of motorcycles a year,
with knockolTs of Honda\ workhorse
CG12S—selling for about $300. or loss than half the cost of a real Honda especially
popular. Its tales like this that prompt some trade hawks in the US. to call for a World
Trade Organization action against China related to counterfeits and intellectual-
property rights violations in general. Such pressure is beginning to have some effect
"The Chinese government is starting lo take things more seriously because ofthe
unprecedented uniform shouting coming from the U.S.. Europe, and Japan" says
Joseph Simonc, a lawyer specializing in I PR issues at Baker & McKcnzic in Hong
Kong.Yd slowing down thc counterfeiters in China and elsewhere will take heroic
efforts. Thais because counterfeiting thrives on ihe whole process of globalization
itself. Globalization, after all, is the spread of capital and know-how to new* markets,
which in rum contribute low-cost labor to create thc ideal export machine,
manufacturing first the cheap stuff, then moving up thc value chain. That's the story
of Southeast Asia It1* ihe story of China. Now it s the story of fakes. Counter fciring
packs all ihe punch of skilled labor, smart distribution, and product sarvvy without
getting bogged down in costly details such as research and brand-building.
Thc result is a kind of global industry that is starting to rtval the multinationals in
speed reach, and sophistication, Factories in China can copy a new model of golf club
in less than a week, says Scu Hcrrington, who oversees brand protection for Callaway
Golf Co, "The Chinese arc extremely ingenious. imcntivc.and scientifically oriented,
and they arc becoming the worlds manufacturer." he says. The company has found
counierfetiers with threenlimcnsjonal design software and experience cranking out
legitimate clubs for other brands, so "back<ngmeering a golf club is a piece of cake"
for them, he says. And counterfeiters are skilled at duplicating holograms, "smart"
chips, and other security devices intended to distinguish fakes from thc genuine
article. "We've had sophisticated technology that took years to develop knocked off in
a matter of months" says Unilever marketing boss Simon.
Thc ambition ofthe counterfeiters just keeps growing. In China, recent raids have
turned up everything from fake Sony PlayStation game controllers to Cisco Systems
router interface cards. "If you can make it, they can fake it," says David Fetiiyhoughv
director of brand protection at investigation firm Hill & Associates Ltd. in Hong
Kong. Don't believe him? Shanghai Mitsubishi Elevator Co. discovered a counterfeit
elevator after a building owner asked thc company for a maintenance contract. "It
didn't look like our product," says Wang Chung Heng, a lawyer for Shanghai
Mitsubishi. "And it stopped between floors"
Many fakes, though, art getting so good that even company cms say it takes a forensic
scientist to distinguish them from the real McCoy. Armed with digital technology,
counterfeiters can churn out perfect packaging—a key to duping unwitting
distributors and retail customers. GM has come across fake air filters, brake pads, and
batteries. "Wc had to cur them apart or do chemical analysis lo icll" they weren't real,
says Alexander TheiL director of investigations at General Motors Asia Pacific Thc
parts might last half as long as the real thing, but that's not apparent until long after
the sale.
The counterfeiters even ape the multinationals by diversifying their sourcing and
manufacturing across borders. Last August, Philippine polke raided a cigarette factory
in Pampanga, two hours outside of Manila, What they found was a global operation in
miniature. Thc factory was producing fake DavidotTs and Mild Sevens for export to
Taiwan. The 56 million plant boasted a statc-of-thc art German cigarette-rolling
machine capable of producing some 3 billion fake smokes, worth S600 million,
annually. Thc top-quality packaging came from a printer in Malaysia. Thc machinery
itself was manned by 23 Chinese brought in by a Singapore-based syndicate, says
Josef Gueta, director of Business Profile* Inc. a Manila ftrni that tracks counterfeit
rings for muJtrnattonaU. 'They have shipping, warehousing, and the knowledge and
network to move things around easily." be says.
As such counterfeiters get more entrenched and more global, they will be increasingly
hard to eradicate. Financing comes from a variety of sources, including Middle East
middlemen, local entrepreneurs, and organized crime. Sometimes Ihe counterfeiters
are fly-by-mght operations^ but just as often they're Legitimate companies that have a
dark side. In fact, many are licensed producers of brand-name goods thai simply run
an extra, unauthorized shift and sell out thc back door Or they arc former licensees
who have kept thc molds and designs that allow* them to go into business for
mcmsclvcs. Shoemaker New' Balance Athletic Shoe Inc. is suing a former contract
manufacturer in Guangdong province for selling unauthorized New Balance sneakers
that ha%e turned up at Tar away as Australia and Europe. In the Philippines,
semiconductor distributor Sardtdo Industries says it has been frunrcd tjy counterfeiters
lhat haw sold it microprocessors resected by inspectors from thc likes of Intel and
Advanced Micro Devices. These are doctored with logos and serial numbers to look
like genuine parts and sold off cheaply as returns or production overruns Other
counterfeiters are generic manufacturers who moonlight as makers of takes. Yamaha
Corp, has licensed five plants in China to make its motorcycles, but almost 50
factories have actually produced bikes branded as Yamaha.
It^ easy to find the counterfeiters, too. The Ziyuangang market in the sprawling city
of Guangzhou, two hours north of Hong Kong, looks pretty much like any recently
built Chinese shopping mall. But venture inside, and you'll find row upon row of
shops offering bogus Gucci, Versace. Dunhill, Longines, and more. Each shop has
just a few dozen samples but offers vast catalogs of goods that can be made and
delivered in less than a week. At one outlet, a clerk offers counterfeit Louis Vuitton
bags in various sizes. "Even fakes have many grades of quality, and these takes arc re-
alty, really good," she boasts. Exports? She s happy to arrange shipping to the country
of your choice.
Once those goods leave China, they can sneak into the legitimate supply chain just
about anywhere. Sometimes, phony components get used in authentic products. Last
year, for example. Kyoccra Corp.. had to recall a million cellphone batteries that
turned out to be counterfeit, costing the company at least S5 million. Unscrupulous
wholesalers will fob off fakes on small auto-repair shops, office-supply stores, or
independent pharmacies by saying they have bajgam-prrecd—*but not suspiciously
cheap—oil fillers, printer cartridges, or bottles of shampoo that another ictailcr
returned, or which are close to their sell-by date. Some traders mix phonies in with
authentic goods- "It's easy to slide a slack of fake Levis under the real ones/* says one
investigator based in Shanghai. "Most inspectors and buyers can't tell the difference."
Counterfeiters can also disguise their wares before they reach their final destination.
Some ship unmarked counterfeit parts in several consignments to be assembled and
labeled at then destination And last May. Shanghai customs officials were inspecting
a Dubai-bound shipment of 6? lOOcc rnotorcyclcs labeled with the brand name
Honling. But when they peeled back stickers on the machines* crank cases, they
found "Yamaha"* engraved on Ihc casting. "They arc very sneaky and cunning, and
that V very frustrating/* laments Masayuki Hosokawa. chief representative ofYamaha
Motor Co. in Beijing.
Strategic Defense
Tney arc also making big bucks. Counterfeiting has become as profitable as trading
illegal narcotics, and is a lot less risky. In most countries, convicted offenders get off
with a slap on the wrist and a fine of a few thousand dollars. Counterfeiters, after all,
don't have to cover research and development, marketing, and advertising costs, and
most of the expense goes into making goods look convincing, not performing well
Fake Mariboro* that cost just pennies a pack to make m China could end up selling
for $7.50 in Manhattan. Phony New* Balance shoes can be stitched together for about
S8 a pair and retail for as much as S$0 in Australia, while real ones cost between S11
and S24 to make, and sell for up to $120. Gross margins for knockofT printer
cartridge* are north of 60%. Counterfeiters "use low-paid employees and cut comers
on safety;" say's Richard K. Willard, general counsel for Gillette Co., which turns up
hundreds of thousands of imitation Duraccll batteries every week. "If they can push
them off as a higb-quahty product, there is a big margin for them."
While the counterfeiters are piling up profits, the mullinalionata iie <]>;tiJir.g ever
more on stopping them. Luxury house LVMH Moct llennessy Louis Vuitton spent
more than $16 million last year on investigations, busts, and legal fees. GM has seven
full-time staffers sleuthing the globe, and Pfizer has five people working in Asia
alone. Last September, Nokia started making batteries with holographic images and
20-digit identification codes that can be authenticated online. Cigarette maker IT
International has boosted its anti-counterfciting budget from $200,000 to S15 million
in the past six years, spending ihe money on a network of investigators, lawyers, and
informants in factories suspected of making fakes.
Pfizcrwill soon introduce ratio-frequency ID tags on all Viagra sold in the US., which
will enable it to track drugs all the way from the laboratory to the medicine cabinet.
Other companies simply try to make life as difficult as possible for manufacturers and
distributors by raiding factories and warehouses or by slightly altering the look of
products, making it tough for counterfeiter* to keep up with the changes, IT
International—which sells Camels and Winston* outside the US sometimes digs
through dumpsters at suspect factories looking for counterfeit packaging. Callaway
pairols the Web looking for suspiciously cheap clubs bearing its brand—though as
soon as it shuts one dealer down, another is sure to pop up. "Getting nd of thc problem
altogether is too much to ask/* says Callaway's Hcmnguin. I-W i JSI try to do our best
and give the counterfeiters a realty bad day"
One tactic is lo outwii the counterfeiters tn thc marketplace. Anhcuscr-Busch Cos, lor
instance, was plagued by knockoff Budwcisct in China A big proWcm was lhat
counterfeit T> wvre refilling old Bud bonks, so thc company started using expensive
imported foil nn the rumles lhat was very hard to find in China. I he company also
added a lemrxTJlure-sensilivc label thai lumcd red when cold. The result; "We've
been able En keep (counterfeit mg| at a pretty low level/' says Stephen J. Burrows,
chief executive and prcsidcnl of Anheuser-Busch International lamaha. meanwhile,
overhauled ihe way u manufactures and designs moionycles to lower costs. Now ii
charge* S725 lor its cheapest bikes in China, down from about $I,8U0. Tu stay
compctiiive. counterfeiters have since lowered (heir prices from around SI ,000 to
roughly half thai.
The biggest challenge is getting cooperation from China. For years, Chinese
authorities ruined a blind eye to the problem, largely because most ofthe harm was
inflicted on foreign brand owners and most counterfeiting was seen as a victimless
olTcnsc The only lime China got lough on counierfeilcrs was when tliere was a clear
danger to Chinese. Last year, for example, 15 infants died from phony milk powder.
Thc nnglcadcr was sentenced to eight years in prison. But when thc victim is a
company not an individual, the courts arc far less severe. Last June, a Guangdong
businessman was found guilty of producing fake windshields under 15 different brand
names, including General Motors. Daim-lerChrysler. anil Mitsubishi Motors, lie was
fined lust S97.000 and grven a suspended sentence, lis unclear just how much he
made selling fakes, but GM gumshoe Theil says "there i* no way thc fine is
conuraensurate w sch the profits he mack:*
But more Chinese corporate interests have seen profits till because of counterfeiting—
which may lead to a tougher response from Beijing Li-Ning Co., Chinas No.l
homegrown athletic footwear and apparel compart), has gotten thc ultimate
compliment from countcrfctkrs; They're faking ris shoes. So today, Lt-Ning has three
full-tiro* employees who track counterfeiters. The state tobacco monopoly is
conducting jotm raids with big mternational tobacco companies, since counterfeiters
have starred cranking out Double Happiness. Chunghwa, and other Chinese smokes.
The crackdown, invesligators believe, has forced some cigaretie counterfeiters to
decamp tu Vietnam and Burma And ihe government is finally realizing that piracy—
which accounts for 92% of all software used in thc mainland isn't just setting hack the
likes of Microsoft Corp. "Piracy is a big problem for the development ofthe local
software industry," says Victor Zhang, senior representative for China of the Business
Software Alliance, an iruhisUy group. Some fear that Western companies may cut
research spending in China if thc mainland doesn't crack down.
Now, China is toughening its legal sanctions. In December, Bening lowered thc
threshold for criminal prosecution of counterfeiter* Prior to ihe changes, an individual
needed to have SI 2.000 worth of goods on hand before police could prosecute. Il was
easy to skin lhai rule by spreading thc warn around. Today, that threshold stands at
$6*000 for counterfeiters caught with one brand and - ' 1 1 ■ for I hose with two or
more. And in lute January, Beijing began thc Uial of two Americans who are accused
of selling SB40.00U in knockoff CDs and DVDs made in China over the In* icrnci.
The two could face up to 15 years in jail if convicted.
One big problem: Too marry stammer* have ties lo local officials, who see cuumctfeil
operations as a major source of employment and pillars ofthe local economy. 'Two or
three of our raids have failed because of local protection" says Joseph Tsang chairman
of Marksman Consultants Ltd., a Hong Kong-based company that has helped conduct
raids on behalf of Titkisi and Nike Golf. Take Ihe example of a raid IAM August in
h'ujian pffOVfcWti The police found a dirt-covered hatch hiding a stairway that led
into a pitch-black cave. Inside was a rolling machine, cigarette paper, and a die for
stamping Marl hot os and Double Hapr>ITICSS packaging Rut the counterfeiters
themselves had cleared out and taken the smokes with them. "1 Ticy knew* wc were
coming," sighs a Hung Kong-bnaI imesltgahw who participated in the raid.
Embattled Beijing
Beijing says it's doing what it can. The government has raised inlcllccrual-propem
issues to thc highest levels: Trade czar and Vice-Premier Wu Vi, for instance, has
held regular meetings with the Quality Brand* Protection Committee since 2003.
"China customs is taking thc fight seriously." says Mcng Yang, director general for
ihc Policy & Legal
Affairs IVpi of the General Administration of Chinese Customs. Thc agency in
November held a conference in Shanghai with brand owners and customs officer*
from around the world to irup out xiiaietjCies. But delegate* acknowledged then
biggest challenge is finding thc funds to fight counterfeiting, as most governments are
more con-ccrncd with preventing thc smuggling of drugs and arms.
Could the U.S. apply stronger pressure 10 get China to crack down? The answer is for
ihe Administration to bring a WTO case against thc Chinese/* says one leader of the
intctlcctual-propcrty bar in Washington. Thc challenge is to secure evidence from US.
companies* which desperately want relief but dun i want to anger Ucijmg More calls
for a WTO action may come soon, after thc IS. Trade Representative \ office finishes
a review of] PR in China in March
Hard as it is. there's every reason io try to keep up the fight to slop counterfeiting One
is safety. Novarti* says counterfeiters have used yellow highway paint to get the right
color match for fake pain-killers. And in some African countries, counterfeit or illegal
medicines account for as much as 40% of the drugs on the market. "You even haw
antibiotics without thc ingredients." says Daniel L Vasella. chairman of Novartis.
Pfizer says police and regulators in Asia uncovered more than 1.5 million counterfeit
doses of us hypertension drug Norvasc in 21HI.V v*You are seeing counterfeiters
exploit a k*»sc supply chain and moving from lifestyle drugs to life-saving drugs."
says Pfizcrs vice-president for global security, John Thcriault. "That should make
people nervous"
ITie Other reason to mount anoffi rw igamsl the i u n' - Ictls - obviously, the hit to
coronate prolils and the like-I i hood developed markets will one daybe seriously
contaminated Its already happening In June. 2(X)S. Tommy Hilfiger Corp.
successfully sued Goody's Family Clothing Inc. for Si I million for cairying fake shins
Trie ireidencc of fake pre-scription drugs in the U.S.. though small is nstng sharply.
Thc US Food & Drug Adminisiraiion began 58 investigations of counterfeit drugs in
its fiscal 20W. up from 22 in 2003.
More alarming, say police, is counterfeitingt conneciion to thc underworld.
"Organued vnme ihnves on counlcrfcit-tng" says Ronald K NoMc* Secretary vjcncral
of Interpol. So docs terrorism Nook says profits from pirated CDs sold tn Central
America have funded lic/boilah in the Middle Fast One cigarette executive estimates
North Korea earns $ 100 milium per vvar in lees from puaics pnvducing there. That
kind of activity proves that buying fakes "isnt innocent, and lis not a game " says
Bernard Amauh. chairman of luxury goods maker LVMH.
Thc counlcrfciling scourge, meanwhile, continues to spread Pakistan and Kus*ia arc
huge producers ol fake pharmaceuticals while in Italy an estimated I0°oofall designer
clothing is fake, much of it produced domestically. Gangs in Paraguay funnel phony
cosmetic*, designer ieanv and toys from (lima lo the rest of South America
Bulgarian^ are masters at honi legging U.S. liquor brands. This is one fight lhat will
take years to win
 Appendix

Components of the Multinational Environment

Multinational firms must operate within an environment that has numerous
components; These components include the following:
I. Government, laws, regulations, and policies of home country (United States, for
example) a. Monetary and fiscal policies and their etTeci on price trends interest
rales, economic growth, and stability BaUncc-of-payincms policies (11 Mandatory
controls on ditcct investment t2l Interest equalization tax and other policies c
Commercial policies, especially tariffs, quantitative import restrict ions, and voluntary
import control*
I- xnort controls and other restrictions on trade i Tax policies and their impact on
overseas business
Antitrust regulations, their administration, and
their on inicmalional business Invcstmcni guarantees, investment survey*, and other
programs to encourage pnv.ite investments in less-developed countries A Export-
import and government export expansion programs « Oihcr changes in government
policy that alTccl international business
2 Key political and legal parameters in foreign countries and ihcir projection
a Type of political and economic system, political
philosophy; national ideology b Major political panics, ihcir philosophies, and
their policies r. Stabiliiy of ihc government {1) Changes tn political parties (2|
Changes in governments J. Assessment of nationalism and ils possible impact on
political environment and legislation Assessment of political vulnerability i 11
Possibilities of expropriation (2i) Unfavorable and discriminatory' national legislation
and tax laws
(3) Labor laws and problems / Faxorablc political aspects
(1) Tax and other concessions io encourage foreign investment
(2) Credit and other guaianlees
X Differences in legal system and commercial law h. Jurisdiction in le^al disputes L
Antitrust laws and rules of competition / Arbitration clauses and ihcir enforcement
kProtection of patents, trademarks, brand names, and other industrial properly
3. Key economic parameters and their projection u. Population and its distribution by
age gioups, density, annual percentage increase, percentage ol ttwkmg age. percentage
of total in agnculture. and percentage in urban centers k Level of economic
development and industrialization
c Gross national product, gross domestic pcoducl. or national income in real terms
and also on a per capita basis in recent years and projections over future planning
period
d Distribution ol personal income
r. Measures of price stability ami inflation* wholesale price index, consumer price
index, older price indexes
/ Supply of labor wage rates
I
J. Balancc-of-pa> mcnts equilibrium or disequilibrium, level of international monetary
reserves, and balance-of-payments policies
h. Trends in exchange rates, currency stability, cv al-uaiion of povsibilii\ of
depreciation of currency
INTERNAL ANALYSIS
After reading and studying this chapter, you should be able to
1. Understand how to conduct a SWOT analysis, and be able to summarize its
limitations.
2. Understand value chain analysis and how to use it to disaggregate a firm's activities
and determine which are most critical to generating competitive advantage.
3. Understand the resource-based view of a firm and how to use it to disaggregate a
firm's activities and resources to determine which resources are best used to build
competitive advantage.
4. Apply four different perspectives for making meaningful comparisons to assess a
firm's internal strengths and weaknesses.
5. Refamiliarize yourself with ratio analysis and basic techniques of financial analysis
to assist you in doing internal analysis to identify a firm's strengths and
weaknesses.
Ihc laic R David Thomas was once ridiculed by many restaurant industry veterans and
analysts as he set about building "yet another" hamburger chain named after his
young daughter, Wendy. While they thought the name was fine, critics argued that
North America was already saturated with hamburger outlets such as McDonald's.
Burger King. Hardccs. Dairy Queen. White Castle, and others. Yet. as things turned
out, Wendy's became Ihe fastest growing restaurant chain in the history of the world
having recently replaced Burger King as the second largest chain. Cisco, the global
leader in networking equipment and switching devices linking wired and wireless
computer systems worldwide, twice entered and tried to dominate the homc-
nenvorking market. It failed each lime, wasting more than S250 million in the
process. Finally, just a few yea re ago. it acquired Link-Sys, the market leader, with
Ihc promise it would never try In hring Link-Sys into the normal Cisco company
structure for fear of destroy ing Uie extraordinary' success Lmk-Sys had achieved not
the least of which was vanquishing the much moN powerful ami wealthy Cisco twice
in the last decade. Apple Computer was being written off in the increasingly
competitive personal computer industry when it introduced, io a lukewarm reception,
its new iPod de\ ice and iTunes sen ice. Written off by many as u cute fad that modest
start pioneered a vast new global industry—much like Apple's original personal
computer did three decades earlier.
Common to each of these diverse settings were insightful managers and business
leaders who based their firm's pursuit of market opportunities not only on ihe
existence nf external opportunities but also on a very sound awareness of their firms
competitive advantages arising from the firm's internal resources, capabilities, and
skills. A sound, realistic manual andappreciation oftheir firm's internally generated
advantages brought Wendy's. Apple, and Link-Sys immense success while its
absence brought much the opposite to Cisco's homc-nei working ventures and to the
competitors ami critics of R. David I bonus and Steven Jobs. This chapter, then,
focuses on how managers identify the key resources and capabilities around which to
build successful strategies.
Managers often do this subjectively, based on intuition and "gut feel" Years of
seasoned industry experience positions managers to make sound subjective
judgments. But just as often, or more often, this may not be the case. In fust-changing
cn\ ironmenls. reliance on past experiences can cause management myopia or a
tendency lo accept the status quo and disregard signals that change is needed. And
with managers new to strategic decision making, subjective decisions are particularly
suspect. A lack of experience is easily replaced by emotion, narrow functional
expertise, and the opinions of others, thus creating the foundation on which newer
managers build strategic recommendations. So it is that new managers' subjective
assessments often come bock to haunt them.
In 2004. John W. Henry broke the most fabled curse in sports when his Boston Red
Sox won their first World Championship since 1918. Mosi sports analysts, sports
business managers, and regular fans (if they are honest now) would have bet a small
fortune, based on their own subjective assessment, that there v^s no way ihe Boston
Red Sox. having already lost three games, would win four straight games to beat the
New York Yankees and then go on io win the World Series. That subjective
assessment or "feeF would lme Ted ilieni to believe there were just too many reasons
to bet the Red Sox could pull it out. At the same lime, a seasoned global futures
market trader John W, Henry, relied on applying his systematic global futures market
approach to baseball player selection along with selected other resources and
capabilities unique to the Boston area and situation in his bet that the Red Sox could
win it all His very systematic approach to internal analysis of the Boston Red Sox
sports enterprise and the leveraging of his their sirengihs led to the 2004 World Series
championship and perhaps many more, as described in Lxhibit 6.1. Top Strategist.
Managerofien start their internal analysis with questions like. How well is the current
strategy working? What is our current situationT Or what are oui sirengths and
weaknesses? The chapter begins l ith a review of a long-standing, traditional approach
managers have frequently used to answer these questions. SWOT

Top Strategist
John \V. Henry. CEO ot" thc Bintun RcJ Sox
John W Henry long ago earned ho fortune— and a reputation as one of thm naoon s
premier players >n the global futures markets But »n 2004, Henry may have achieved
immortality by leading the Boston Rod Sox to their first World Championship smce
1918. reversing the most tabled Curse in sports. This triumph was due to more than
in* spired play of a team that rafted from 0-3 in the American League Championship
Series to beat the New York Yankees.
Henry. 55. set the wage for victory by aggressively boosting revenues after he and his
partners—including TV pro ducor 16m Werner and veteran baseball exec Larry
Lucchmo bought thc Red Sox for a record $690 million n early 2002. They made the
most of Fenway Park, theoatac stadium in Major League Baseball* by squeezing in
more seats and than charging the highest prices for home games, al of which sold out.
At the same time, they started broad* casting home games in high definibon on thetr
80 percent-owned cable sports network. Mew England Sports Network helping it
routinely win in regional pnrne-tene ratings.
All of this turned the Red Sox *ito baseball's second-most-lucrative franchise and
gave it the financial muscle to take on the Yankees, who opened the season with a
record SI 84 million payro*. The Sox were second, at $127 million.
Henry—a numbers genius, whose proprietary futures -trading system consittenriy
produces doubfe-dgit returns— closed the gap with sabcrmetrics. That's a system for
miring b.uebal1 stats to find undervalued players while avc+dir-? iog conrjacts lor
a$ng stars—such as pitcher rVdro Martfiei— whose performance is likely to deefcne
Henry built base* ball's most effective team but won't settle tor one championship.
after ending an 86-year drought he's ainsng for a dynasty.
analysis. This approach is a logical framework intended to help managers thoughtfully
consider their company's internal capabilities and use thc results to shape strategic
options. Its value and continued use is found in iis simplicity. At ihe same time.
SWOT analysis has limitations that have led strategists io seek more comprehensive
frameworks for conducting internal analysis.
Value chain analysis is one such framework. Value chain analysts views a firm as a
"chain" or sequential process of value-creating activities. The sum of alt of these
activities represents thc "value" thc firm cxisis lo provide it> customers. So
undertaking an internal analysis that breaks down the firm into these distinct value
activities allows for a detailed, interrelated evaluation of a firms internal sircnglhs and
weaknesses that improves upon what strategists can create using only SWOT analysis.
The resource-based view |RBV) of a firm is another important framework for
conducting internal analysis. This approach improves upon SWOT analysis by
examining a variety of different yel specific types of re* sources and capabilities any
firm possesses and then evaluating ihc degree to which they become thc basis for
sustained competitive advantage based on industry and competitive considerations. In
so doing, it provides a disciplined approach to internal analysts. SWOT is an acronym
for ihc internal Strengths and Weaknesses of ■ firm and the environmental
Opportunities and Threats facing that firm. SWOT analysis is a historically popular
technique through which managers create a quick overview of a civnpanyV strategic
Miuatituv It i* based on the a*uimption thai an effective strategy derives from a sound
"fit" between a firms internal resources (strengths and weaknesses) and its externa)
situation locponuniiics and threats). A good tit maximizes a firms strengths and
opportuniuci and minimises its weaknesses and threats. Accurately applied this simple
assumption has sound, insightful implications for the design of a successful strategy
Environmental and industry arulysti in Charier* 3 and 4 provide* the information
needed lo identify oprtortunihe* and threats in a firm * environment the tint runda-
menia I focu* in SWOT analysis
Opportu nines
An opportunity tt a major favorable tiiuaiinn in a firms environment. Key trend* arc
one source of opportunities. Identification of a previously overlooked market
segment, changes in competitive or regulatory circumstance*, technolopcal changes,
and improved buyer or supplier relationships could represent opportunities for the
firm. Ashok LcyUnd saw an opportunity in customising buses for BEST (See Exhibit
6.2).
stow market growth, increased bargaining power ot" key buyers or suppliers,
technological changes, and new* or revised regulations could represent threats to a
firm s success.
Large national residential home builders have seen lower interest rules as a major
opportunity driver in single-family housing developments nationwide. These same
residential home builders have had lo face an increasing threat of rapidly accelerating
energy and materials costs brought on both by their collective, fast-paced
development activities, further exacerbated by the exploding demand for these same
building supplies in the Chinese marketplace. So these large national home builders
had lo era A strategies built around these opportunities and thrcals among perhaps
several others.
Once managers agree on key opportunities and threats facing their firm, they* have a
frame of reference or context from which lo evaluate their him ■ ability to take
advantage of opportunities and minimize the effect of key threats. And vice versa;
Once managers agree on their firm s core strengths and weaknesses, they can logically
move to consider opportunities lhat best leverage their firm s strengths while
minimizing the effect certain weaknesses may present until remedied
A strength is a resource or capability controlled by or available to a firm that gives it
an advantage relative to competitors in meeting the needs ofthe customers it serves, A
resource advaniagc Strengths anse from thc resources and competencies available to
the firm Pantaloons reiaiive tocompetiton was one of India s earliest leading retailers
with presence across multiple formats and ihcnccthohhe stores tn large and medium
cities throughout India, with thc hypermarket format in- inttroduced through Big
Ba/aar. Thc only other Indian player with similar stores was Trent, bui it was limited
to Ahmcdabad only. It oftered a wide range of merchandise— including apparel,
accessories, food products, home and kitchen produces, dry and fresh groceries,
consumer durables and non-durahlcs—with over 2.70,000 SKUs complemented by
services offerings Presence in both Lifestyle and Value retailing enabled them to cater
to a large segment of ihc population, besides leveraging thc synergies which existed
between the two segments. The two other players. Shoppers Stop and Trent either did
not eater to ihe entire consumer requirements or did not have geographic spread. A
strong networked distribution and logistics network, with 13 scalable Distribution
Centres covering 2,60,000 sq. A. and working 24 hours a day and 7 days a week, was
capable of delivering merchandise to the store within 24 hours of rc-cciprgeneration
of auto replenishment order, to optimize m-store availability of merchandise.
Efficiencies of supply chain helped in reducing inventory while ensuring availability
of products at all stores as per customer needs, as well as reducing operational costs.
Using SWOT Analysis in Strategic Analysis
The most common use of SWOT analysis is as a logical framework guiding
discussion and reflection about a firm s situation and hasic alternatives. This often
takes place asa scries of managerial group discussions. What one manager sees as an
opportunity, another may sec as a potential threat. Likewise, a strength to one man-
ager may be a weakness to another. Thc SWOT framework pros ides an organized
basis for insightful discussion and information sharing, which may improve the
quality of chokes and decisions managers subsequently make COMMBT what initial
discussions among Apple Computer s management team might have been that led to
thc decision to pursue thc rapid development and introduction of the iPod. A brief
SWOT analysis of their situation might have identified;
Strengths
Sizable miniature storage expertise
User-friendly engineering skill
Reputation ami image with youthful consumers
Brand name
Wcb-savvy organization and people
Jobs s Pixar experience Weaknesses
Economies of scale versus computer rivals
Maturing computer markets
Limited financial resources
Limited music industry expertise Opportunities
Confused online music situation
Emerging file-sharing restrictions
Few core computer-related opportunities
Digitalization of movies and music Threats
Grow ing global computer companies Major computer competitors
It is logical to envision Apple managers' discussions evolving to a consensus that thc
combination of Apple s storage and digitalization strengths along with their strong
brand franchise with "hip" consumers, when combined with the opportunity
potentially arising out ofthe need for a simple way to legally buy and download music
on the Web would be the basis for a compelling strategy for Apple to become a first
mover in the emerging downloadable music industry.
Exhibit 6.3 illustrates how SWOT analysts might lake managerial planning
discussions into a slightly more structured approach to aid strategic analysis. Thc
objective is identification of one of four distinct patterns in thc match between a firm
s internal Resources and external situation Cell I is ihe most favorable situation; thc
firm faces several environmental opportunities and has numerous strengths that
encourage pursuit of those opportunities. This situation suggests growth-oriented
strategies to exploit the favorable match. Our example of Apple Com-pmers intensive
market development strategy in the online music services and thc iPod is ihc result of
a favorable match of its strong technical expertise, early entry, and reputation
resources with an opportunity for impressive market growth as millions of people
sought a legally viable, convenient way- to ohtain, download, store, and use their own
customi/cd music choices.
Sun Microsystems applied SWTOT analysis in 2005, creating an advertisement
responding to the Hewlett-Packard (HP) hoard of directors* ongoing search for a new
CEO after their 20O5 dismissal of celebrity CEO Carly Fiorina. The ad shows Sun
Microsystems attempting a Cell I strategic response pursuing a key opportunity made
available by* thc uncertainty for HP corporate clients during this lime (see Exhibit 64,

In cell 2. a firm that has identified several key strengths faces an unfavorable
cmironmem. In this situation, strategies would seek to redeploy those strong resources
and competencies io build long-term opportunities in more opportunistic product
markets. IBM. a dominant manufacturer of mainframes, servers, and PCs worldwide,
has nurtured many strengths in computer-related and software-related markets for
many years- Increasingly, however, it has had to address major threats that include
product commodittzation. pricing pressures, accelerated pace of innovation, and the
like. IHM CI O Sam Palmisano's 20O5 decision to sell its PC business to a Chinese
company, focusing instead on continued development of ISSC. better known now as
IBM Global Services, hasallowed IBM to build a long-term opportunity in the
{hopefully* more profitable, growing markets of the next decade. In the 10 years
since Palmisatio took over. Global Services has become the fastest-growing division
of the company; its largest employer, and the keystone of IBM's strategic future. The
group docs everything from running a customer's IT (information technology)
depanmetvi to consulting on legacy system upgrades to building custom supply-cltain
management applications. As IBM's hardware divisions struggle against price wars
and commodi-tizattun and its software units fight to gain share beyond mainframes, it
is Global Services that drives the company's growth.
A firm in cell 3 faces impressive market opportunity 4 but is constrained by weak
internal resources. The focus of strategy for such a firm is eliminating the internal
wraknesscs so as to more effectively pursue the market opportunity; Microsoft has big
problems with computer viruses. Alleviating such problems, or weaknesses, is driving
massive changes in how Microsoft writes software—to make it more secure before it
reaches ihe market mthcr than fix it later with patches. Microsoft is also shaking up
the security software in-duslry by acquiring several smaller companies to accelerate
its own I t i s lo create specialized software that detects finds, and removes malicious
code*1

Limitations of SWOT Analysis

SWOT analysis has been a framework of choice among many managers for a long
time because of its simplicity and its portrayal of the essence of sound strategy
formulation—matching a firm's opportunities and threats with its strengths and
weaknesscs. But SWOT analysts is a broad conceptual approach, making it sus-
ceptible lu some key limitations.
I. A SWOT analysis can overemphasize internal strengths and downplay
evternal threats. Strategists in every company have to remain vigilant against
building strategies around what the firm does well now tits strengths) without
due consideration of the external environments impact on those
II. strengths. Apple's success with thc iPod and its iTunes downloadable music
Web site provides a good example of strategists who placed a major emphasis
on external considerations—thc legal requirement* for downloading and
subsequently using imllv idual songs, what music to make available, and the
 evolution of thc use ofthe Web to download music—as a guide to shaping
Apple's eventual strategy. What would Apple's success have been like if its
strategy had been built substantially with a focus on its technology in making
thc iPod device and offering it in thc consumer marketplace—without
bothering with the development and creation of iTunes?
III. A SWOT analysis can be static and can risk ignoring changing circumstances.
A frequent admonition about thc downfall of planning processes says that
plans are one-time events to he completed typed, and relegated to their spot on
a manager's shelf while s he goes about the actual work ofthe firm. So it is not
surprising thai critics of SWOT analysis, with good reason, warn that it is a
one-time view of a changing, or moving, situation. Major LIS* airlines
pursued strategies built around strengths that were suddenly much less
important when airline deregulation look place. Likewise, those airlines built
huge competitive advantages around "hub and spoke" systems for bringing
small-town livers to key* hubs to be redistributed to flights elsewhere and yet
allow for centralized maintenance and economies of scale. The change
brought about by discount airlines that "cherry-picked" key routes, and
eventual outsourcing of routine maintenance to Latin America and the
Carribean. did great harm to those strategies. Bottom line: SWOT analysis,
along with most planning techniques, must avoid being static and ignoring
change
IV. .1 A SWOT analysis can overemphasize a single strength or element of
strategy. Ihc Hewlett-Packard Compaq merger created the world's largest PC
company, and its strategy for PC success was built around thc economies of
scale afforded by that size. That strategy has failed to work. Creating one of
the largest PC computer companies in Ihc world while a potential strength,
proved to be an over* simplified basis around which 10 base ihe company's
strategy for survival and growih in thc global PC industry ofthe last five years.
Dell's business model built on direct sales, and the multiple aspects of making
that model work globally yet with one customer at a time, thwarted any
success thc combined I IP- Compaq strategy could attain, even though the
global PC industry is brutally price competitive and low cost driven.
V. 4. A strength is not necessarily a snurce of enmpetitivc advantage. Cisco
Systems Inc. has been a dominant player in providing switching equipment
and other key networking infrastructure items around which the global
computer communications system has been able to proliferate. It has
substantial financial, technological, and branding expertise. Cisco Systems
twice attempted lo use its vast strengths in these areas as thc basis to enter and
remain in the market for home computer networks and wireless home-
networking devices. It failed both times and lost hundreds of millions of
dollars in the process. It possesses several compelling sncugtlis. but none were
sources of sustainable competitive advantage in thc homc*com|MUcr-
neiwonking industry. After leaving thai industry for several y*ars. it recently
chose to reenter it by acquiring Link-Sys. an early pioneer in lhat industry.
Cisco management acknow ledged that it wns doing MI precisely because it
did nol possess those sources of competitive advantage and that, furthermore,
it would avoid any interference with that business lest it disrupt thc advantage
around which Link-Syss success has been built
VI. In summary. SWOT analysis is a longtime, traditional approach to internal
analysis among many strategists, it offers a generalised elTort to examine
internal capabilities in light of external factors, most notably key opportunities
and threats. It has limitations that must be considered if SWOT analysis is to
be the basis for any firms strategic decision-making process. Another
approach to iniernal analysis that emerged, in pan. to add more rigor and depth
in thc identification of competitive advantages around which a firm might
build a successful straiegy is value chain analysis. Wc examine it next.
VALUE CHAIN ANALYSIS
The term value chain describes a way of looking at a business as a chain of activities
lhat transform inputs into outputs that customers value. Customer value derives from
three basic sources: activities that differentiate thc product, activities that lower its
cost, and activities that meet the customers need quickly. Value chain Analysis (VCA)
attempts to understand how a business creates customer value by* examining the
contributions ofdifferent activities within thc business to that value.
VCA takes a process point of view: It divides (sometimes called disaggregates) ihc
business into sets of activities that occur within Ihe business, starting with the inpuls
a firm receives and finishing with thc firm s products (or sen ices) and after-sales
service to customers. VCA attempts to look at its costs across thc series of activities
the business performs to determine where low-cost advantages or cost disadvantages
exist. It looks at the attributes of each of these different activities to determine in what
ways each activity that occurs betwven purchasing inputs and after-sales sen ice helps
differentiate the company s products and services. Proponents of VCA believe it
allows managers to better identify their firm's competitive advantages by looking at
the business as a process -a chain of activities of what actually happens in the
business rather than simply looking at it based on arbitrary organizational dividing
lines or historical accounting protocol
Exhibit 6.5 shows a typical value chain framework. It divides activities within ihc
firm into two broad categories: primary* activities and support activities. Primary ac-
tivities i sometimes called line functions) are those involved in thc physical creation
of thc product* marketing and transfer to thc buyer, and after-sale support. Support
activities (sometimes called staffor m^erheadfunctions! assist the firm as a whole by
providing infrastructure or inputs that allow thc primary activities to take place on an
ongoing basis. Thc value chain includes a profit margin because a markup above the
cost of providing a firm's value-adding activities is normally part ofthe price paid by
thc buyer—creating value thai exceeds cost so as to generate a return for thc effort/
ludgrnent is required across individual firms and different industries because what
may be seen as I support activity tn one firm or industry may he a primary 1 activity in
another. Computer operations might typically1 be seen as infrastructure support, for
example, but may be seen as a primary activity in airlines, newspapers, or banks.
Exhibit 6 6. Strategy in Action, describes how Federal Express reconceptualized its
company using a value chain analysis thai ultimately saw its information support
become its primary activity and source of customer value.
Conducting a Value Chain Analysis Identify Activities
Thc initial step in value chain analysis is lo divide 3 company's operations into
specific activities or business processes, usually grouping them similarly lo the
primary and support activity categories shewn earlier in Exhibit 6.5. Within each
category, a firm typically performs a number of discrete activities that may be key to
thc finn's success. Service activities, for example, may include such discrete activities
as installation, repair
Different "value chain" or value activities may become the focus of value chain
analvii* For example, companies using H.invmci * fieeoQineenng the Corporation
mighi use 11) order piocurenwtiL \2) otdcr fulfillment* (3l cwaofner trrvicc, M)
produci design* and 15) irraicpir planning phi* tiqiport activities
 Primary Activities
Primary Activities
• inbound logistics—Activities, costs, and assets associated with obtaining fuel,
energy, raw materials, parts components, merchandise, and consumable items
from vendors; receiving, storing, and disseminating inputs from suppliers;
inspection; and inventory management
• Operations—Activities, costs, and assets associated with converting inputs
into final product form (production, assembly, packaging, equipment
maintenance, facilities, operations, quality assurance, environmental
protection),
• Outbound logistics— Activities, costs, and assets dealing with physxaNy
distributing the product to buyers (finished goods warehousing, order
processing, order picking and packing, shipping, delivery veh<ie operations).
• Marketing and sales—Activities, costs, and assets related to sales force efforts,
adveo tismg and promotion, market research and planning, and
dealer/distributor support.
• Service—Activities, costs, and assets associated with providing assistance to
buyers, such as installation, spare parts delivery, maintenance and repair,
technical assistance, buyer inquiries, and complaints.
Support Activities
• General administration—Activities, costs, and assets relating to general
manage-ment, accounting and finance, legal and regulatory affairs, safety and
security, management information systems, and other "overhead" functions.
• Human resources management—Activities, costs, and assets associated with
the recruitment, hiring, training, development, and compensation of all types
of personnel; labor relations activities; development of knowledge-based skills
• Research, technology, and systems development—Actrvities, costs, and assets
relating to product R&D. process R&D. process design improvement,
equipment design, computer software development, telecommunications
systems, computer-assisted design and engineering, new database capabilities,
and development of computerized support systems
• Procurement—ActMbes. costs, and assets associated with purchasing and
proving raw materials, supplies, services, and outsourcing necessary to support
the firm and rts activities. Sometimes tho activity is assigned as part o# a
firm* inbound logistic purchasing activities.
• pans distribution. ;itul upgrading am ot which could be a major source of
competitive advantage or disadvantage. The managers challenge ;it this point
is to be ver>* detailed aitcmpilng to '^liw^gieiUi^' ^hal actually £oes on inu>
miinertHitt distinct, anuK/able activities nitber than settling for A broad,
general categorization
• Alocott Cosfs
• The next step is to nttempl to altnch o>sts to each discrete activity Each
activity in the val tie elunu incurs costs nrnl ties up lime und a\sei> Value
chain onalyiis require^ niarwgers to assign costs ami aHscts to each activity,
thereby providing a very dinVrent way of viewing costs than traditional cost
accounting methods would produce. Exhibit 6.7 helps illustrate this
ditltiklsoiL Uoth approaches in Lxhibit 6.7 tell \+ that the purchasing
depanment tpnxureriKnl activities) civst 5*20.075. Tlvc tnidittonal method
 lets us sec lhat payroll c\peRatt» are 73 pea-cnt [(SI 75 + $57 t5a'S3C<»)of
uurcsrsls with "other TLXCAI char>xsFI the sccorsJ Jarstcst cost. || percent
(S6;S320| ofthe Mai rvtK'urcmcnl cosis. VCA prorxwffls w^mlij argue that
the tHnielit olthis infoc-maiion ts limited Their afuiirrKiii mieht be thc
following
• debate w nhout ever examining what il is those people do in accomplishing ihc
procurcmcm function, what va! uc that pros ides, and how cost effective each
activity it.
• VCA proponent hold that the activity-based VCA approach would provide a
more meaningful analysis of the procurement functionk costs and consequent
value added. The activity-based side of Exhibit 67 shows that approximately
21 percent of the procurement cost or value added involves evaluating supplier
capabilities. A rather sizable cost, 20 percent, involves internal administration,
with an additional 17 percent spent re* solving problems and almost 15
percent spent on quality control efforts. VCA advocates sec this information as
being much more useful than traditional cost accounting information,
especially when compared with the cost information of key competitors or
other "benchmark" companies. VCA supporters assert ihc following argument
thai the benefit of this activity-based information is substantial:
• Ralhcr lhan analyzing just "people" and "other charges " wc arc now looking
at meaningful cat egofi/ai ions of the rak that procurement actually does. \Vc
sec. for example, lhai a key value-added activity land cost) involves
"evuluaimg supplier capabilities" The amount ipeni on "internal
administration" and "resolving problems** seems high and may indicate a
weakness or area for improvement if the other activities' costs are in line and
outcomes favorable The bottom line is thai this approach lets us look at wnat
we actually "do" in the business thc specific activities- to create customer
value, and lhai in turn allows more specific internal analysis ilian traditional,
accounting-based cost categories.
Recognizing the Difficulty in Activity .-Based Cost Accounting
It is important to mite lhai existing financial management and accounting systems in
many firms arc not set up io easily provide activity-based cost breakdowns. Likewise,
in virtually all firms; ihc information requirements to support activity-based cos*
accounting can create redundant work because of the financial reporting requirements
thai may force firms lo retain the traditional approach for financial statement
purposes. The time and en-crgyto change to an stctivity-bascd approach can be
fonnidaWe and still typically im +olvc arbitrary cost allocation decisions- trying lo
allocate selected asset or people costs across multiple activities in which they arc
involved. Challenges dealing wiih a cost-based use of VCA have noi deterred use nf
the framework to identify sources of differentiation. Indeed conducting a VCA to
analyze competitive advantages that diflercntiatc ihc firm is compatible with the
resource-based view's examination of intangible assets and capabilities as sources of
distinctive competence.
Identify the Activities That Differentiate the Firm
Scrutinizing a Firm's value chain may not only reveal cost advantages or
disadvantages, it may also bring attention to several sources of differentiation
advantage relative to competitors. Dell Computer considers its Internet-based after-
sales service (activities) to be far superior to any competitor's. Dell knows it has a cost
advantage because of the time and expense replicating this activity would lake. But
Dell considers it an even more important source of value lo the customer because of
the importance customers place on this activity, which differentiates Dell from many
similarly priced competitors. Likewise. Federal Express, as we noted in Exhibit 6.6.
considers its information management skills to have become Ihe core competence and
essence of the company because of ihe value ihesc skills allow FedEx to provide its
customers and the importance they in turn place on such skills. Exhibit 6,8 suggests
some factors for assessing primary* and support activities* differentiation and
contribution.
Examine the Value Chain
Once the value chain has been documented managers need to identify the activities
that arc critical TO buyer satisfaction ami market success. It is those activities that
deserve major scrutiny in an internal analysis. Three considerations arc essential at
this stage in the value chain analysis. First, the company's basic mission needs to
mnuence managers* choice of activities to be examined in detail If the company is
focused on being a low-cost provider* then management attention to lower costs
should be very visible and missions built around commitment to differentiation should
find managers spending more on activities that are differentiation cornerstones.
Retailer Wal-Mart focuses intensely on costs related to inbound logistics, advertising,
and loyalty to build us competitive advantage (see Exhibit 6.11, page 190). while
Nordstrom builds its distinct position in retailing by emphasizing sales and support
activities on which they spend twice the retail industry
average.
Second the nature of value chains and the relative importance of the activities within
them vary1 by industry Lodging firms like Holiday Inn have major costs and concerns
that involve operational activities—it provides its service instantaneously at each
location—and marketing activities, while having minimal concern for outbound
logistics. Yet for a distributor, such as the food distributor PYA, inbound and
outbound logistics are the most critical area. Major retailers like Wal-Mart have built
value advantages focusing on purchasing and inbound logistics, while the most
successful personal computer companies have built via sales, outbound logistics, and
service through the mail-order process.
Third the relative importance of value activities can vary by a company's position in a
broader value system that includes the value chains of its upstream suppliers and
downstream customers or partners involved in providing products or sen ices to end
users. A producer of roofing shingles depends heavily on the downstream activities of
wholesale distributors and building supply retailers to reach roofing contractors and
do-it-yourselfers. Maytag manufactures its own appliances, sells them through
independent distributors, and provides warranty service to ihe buyer Sears outsources
the manufacture of its appliances while il promotes its brand name—Kcnmorc—and
handles all sales and service.
As these examples suggest, it is important that managers take into account their level
of vertical integration when comparing their cost structure for acm iltes on their value
chain to diose of key competitors. Comparing a hilly integrated rival with a partially
integrated one requires adjusting for the scope of activities performed to achieve
meaningful comparison. Il also suggests the need for examining costs associated wiih
activities provided by upstream or downstream companies, these activities ultimately
determine comparable, final costs lo end users. Said another way, one company's
comparative cost disadvantage (or advantage) may emanate more from activities
undertaken by upstream or downstream "partners" than from activities under the
direct control of that company—therefore suggesting less of a relative advantage or
disadvantage within the company*s direct value chain.
RESOURCE-BASED VIEW OF THE FIRM
Coca-Cola versus Pepsi is a competitive situation virtually all of us recognize. Stock
analysts look at the two and frequently conclude that Coke is the clear leader They
cite Coke's superiority in tangible assets (warehouses, bottling facilities,
computen/ation, cash, etc.) and intangible assets (reputation, brand name awareness,
tight competitive culture, global business system, etc.). TOicv also mention that Coke
leads Pepsi in several capabilities to make use of these assets effectively managing
distribution globally: influencing retailer shelf space allocation, managing franchise
bottler relations, marketing savvy, investing in bottling infrastructure, and speed of
decision making to take quick advantage of changing global conditions are just a few
thai are frequently mentioned The combination of capabilities and assets, most
analysts conclude, creates several competencies that give Coke key competitive
advantages over Pepsi that are durable and not easily imitated.
The Coke-Pepsi situation provides a useful illustration for undcisianding several
concepts central to the resource-based view iKBV)of the firm. The RBV is a method
of analyzing and identifying a firm's strategic advantages based on examining its dis-
tinct combination of assets, skills, capabilities, and intangibles as an organization. The
KHV's underlying premise is thai firms differ in fundamental ways because each firm
possesses a unique "bundle" of resources tangible and intangible assets and organi-
zational capabilities to make use of those assets. Each firm develops competencies
from these resources, and when developed especially well, these become the source of
the firms competitive advantages. Cokes decision to buy out weak botlling franchisees
and regularly invest in or own newer bottling locations worldwide has given Coke a
competitive advantage analysts estimate Pepsi will take at least 10 years or longer to
match. Coke s strategy for the last 15 years was based in part on the identification of
this resource and the development of it into a distinctive competence—a sustained
competitive advantage. Let's look al the basic concepts underlying the RBV
Three Basic Resources: Tangible Assets, Intangible Assets, and Organizational apabilities
Executives charting the strategy of their businesses historically cot icentrated their
flunking on the notion of a "core competence" Core competence was seen as a
capability or skill running through a firms businesses that -once identified nurtured
and deployed throughout ihe firm became the basis for lasting competitive advantage.
Executives, enthusiastic about the notion that ihcir job as strategists was to identify
and leverage core competencies, encountered difficulty applying ihe concept because
of the generality of its level of analysis. The RBV emerged as a way to make the core
competency concept more focused and measurable creating a more meaningful
internal analysis. Central to the RBV \ ability to do this is the delineation of three
basic types of resources, some of which may become the building blocks for
distinctive competencies. These resources arc defined below and illustrated in Kxhibu
6.9.
tangible asset* are the easiest "resources" to identify and arc often found on a firm's
balance sheet. They include production facilities, raw materials, financial resources,
real estate, and computers. Tangible assets aie the physical and financial means a
company uses to provide value to its customers
experience within an organization. While they are not assets that you can touch or sec.
organizational
they are very often critical in creating competitive advantage.Capabilities
Organl/arlonal capabilities are not specific "inputs" like tangible or intangible as-
Skill* (the ability and sets; rather, they are the skills—the ability and ways of
combining assets, people, and of combining processes -that a company uses to
transform inputs into outputs. Dell Computer built its first 10 years of unprecedented
growth by creating an organization capable of speedy and inexpensive manufacture
and delivery of custom-built PCs. Gateway and preform inputs into Micron attempted
to copy Dell for most of that time but remain far behind Delias di-outputs verse
organizational capabilities. Dell subsequently revolutionized its own "system" using
the Internet to automate and customize service, creating a whole new level of
organizational capability that combines assets, people, and processes throughoui and
beyond their organization. Concerning this org?* nizational capability, Michael Dell
said, "Anyone who tries lo go direct now will find it very difficult—like trying to
jump over the Grand Canyon" Finely developed capabilities, such as Dell's Internet-
based customer-friendly system, can be a source of sustained competitive advantage.
They enable a firm to take the same input faciors as rivals (such as Gateway and
Micron) and convert them into products and services, either with greater efficiency in
thc process or greater quality in thc output, or both.

What Makes a Resource Valuable?

Once managers identify their firm's tangible assets, intangible assets, and
organizational capabilities, thc RliV applies a set of guidelines to determine which of
those resources represent strengths or weaknesses- -which resources generate con
competencies lhai are sources of sustained competitive advantage. These RBV
guidelines derive from the idea that resources arc marc valuable when they
1. Arc critical tn being able to meet a customer k need better than other alternatives.
2. Are scarce—few others if any possess thai resource or skill to ihe decree you do.
3. .Drji* a key portion uf overall profits, in a manner controlled by your firm.
4. Are Jumble or susiainable over time.
Before proceeding to explain each basis for making resources valuable, we suggest
that you keep in mind a simple, useful idea: Resources arc most valuable when they
meet all four of these guidelines We will return to this point after we explain each
guideline more thoroughly
RBV Guideline 1: Is the resource or skill critical to fulfilling a customer's need
better than that o f the firm's competitors?
Iwo restaurants offer similar food, at similar prices, bul one has a location much more
convenient to downtown offices than the other. The tangible asset, location, helps
fulfill daytime workers' lunch-eating needs better ihan lis competitor, resulting in
greater profitability and sales volume for thc conveniently located restaurant. Wal-
Mart redefined discount retailing and ouipcrformcd the industry in profitability by 4.5
per* cent of sales—a 200 percent improvement, lour resources store location*, brand
recognition, employee loyalty, and sophisticated inbound logistics allowed Wal-Mart
to fulfill customer needs much better and more cost effectively ihan Kmart and other
discount retailers (sec Exhibit 6.1 U page 1901. In both of these examples, it is
important to recognize thai only resources that contributed to competitive superiority Mm
valuable* At thc same lime, other resources such as the restaurant s menu and specific
products or parking space al Wal-Mart were esseniial to doing business but
contributed little to competitive advantage because Ihcy did not help fulfill customer
needs better than those of thc linns key competitors.
RBV Guideline 2: Is the resource scarce? b ft in short supply or not easily substituted
for or imitated?
Short Supply When a resource is scarce, it is more valuable. When a firm possesses a
resource and few if any others do. and it is central TO fulfilling customers' needs, then
il can become the basis of a competitive advantage for the firm. Literal physical
scarcity is perhaps the mosi obvious way a resource might meet this guideline. Very
limited natural resources, a unique location, skills thai are truly rare- all represent
obvious types of scarce resource situations.
Availability of Substitutes We discussed the threat of substitute products in Chapter 3 as
part of the fi\-e forces model for examining industry profitability. This basic idea can
be taken further and used to gauge the scarcity-based value of particular resources.
Del itc's of America was once a hot IPO: a new fast-food restaurant chain focused
exclusively on selling lite food—salads, lean sandwiches, ami so on The basic idea
was to offer, in a fast-food format, food low in calories and saturated fat. Investors
were very excited about this concept because of the high-caloric, high-fat content of
the foods offered by virtually every existing chain Unfortunately for these investors,
substitutes for DcLttc'soffcnngs were quickly and casi ly available from several key
fast-food players. Wendy's—and later McDonald's. Burger King, and Hardees -easily
adapted (heir operations to offer salad bars or prcmadc salad* and other lean"
sandwich offerings without disrupting their more well-known fare. With little change
and adaptation of their existing facility and operational resources, these chains quickly
created alternatives to DeLite*s offering*, and the initial excitement about those
offerings faded DeLite s was driven out of business by substitute resources and
capabilities readily created by existing fast-food operators.
Imitation A resource that competitors can readily copy can only generate temporary
value. It is "scarce" for only a short time. It cannot generate a long-term competitive
advantage. When Wendy's first emerged it was the only major hamburger chain with
a drive-through window. This unique organization a J capability was part of a
"bundle" of resources that allowed Wendy's to provide unique value to its target
customers: young adults seeking convenient food service. Hut once this resource, or
organizational capability* proved valuable to fast-food customers, every fast-food
chain copied the feature. Then Wendy's continued success was built on other
resources that generated other distinctive competencies.
Dells unmatched customer service is, in effect, a path*dcpcndem organizational
capability. It would take any competitor years to develop thc expertise, infrastructure,
reputation, and capabilities necessary to compete effectively with DelL Coca-Cola's
brand name, <ierhcr Baby Food's reputation for quality; and Steinway s expertise in
piano manufacture would take competitors many years and millions of dollars to
match. Consumers* many years of experience drinking Coke or using Gerber or
playing a Steinway would also need to be matched.
• Causa/ ambiguity is a third way resources can be very difficult to imitate. This
refers to situations in which it is difficult for competitors to understand exactly how a
firm has created the advantage it enjoys. Competitors can't figure out exactly what the
uniquely valuable resource is or how resources aie combined to create the competitive
advantage. Causally ambiguous resources are often organizational capabilities that
arise from subtle combinations of tangible and intangible assets and culture,
processes, and organizational attributes Ihc firm possesses. Southwest Airlines has
regularly faced competition from major and regional airlines, with some like United
and Continental eschewing their traditional approach and attempting to compete by
using their own version ofthe Southwest approach—same planes, routes, gate
procedures, number of attendants, and so on They have yet to succeed. The most
difficult thing to replicate is Southwest's "personality." or culture of fun. family, and
frugal yet focused services and attitude Just how that works is hard for United and
Continental to figure out.
• Economic deterrence is a fourth source of inimitabiliry. This usually involves large
capital investments in capacity to provide products or services in a given market that
are scale sensitive. It occurs when a competitor understands the resource that provide
a competitive advantage and may even have thc capacity to imitate, but chooses not to
because ofthe limited market size that realistically would nol support two play* ers
the size of the first mover.
While we may be inclined to think ofthe ability to imitate a resource as a yes-or-no
situation, imitation is more accurately measured on a continuum that reflects difficulty
and time. Exhibit 6.1U illustrates such a continuum. Some resources may have
multiple imitation deterrents. For example, 3 NTs reputation for innova-tiveness may
involve path dependencies and causal ambiguity.
RBV Guideline 3; Apprapriabitity: Who actually gets the profit created by a
resource?
Warren Buffet is known worldwide as one ofthe most successful investors of thc last
25 years. One of his legendary investments was the Walt Disney Company, which he
once said he liked "because the Mouse does not have an agent." 1 What he was really
saying was thai Disney owned the Mickey Mouse copyright, and all profits from that
valuable resource went directly to Disney. Other competitors in the "entertainment"
industry generated similar profits from their competing offerings, for example,
movies, but they often "captured" substantially less of those profits because of the
amounts that had to be paid to well-known actors or directors or other entertainment
contributors seen as thc real creators ofthe movie's value.
Disney's recent split with Pixar illustrates just the opposite situation for the home
ofthe Mouse. Pixars expertise in digital animation has proven key lo the impressive
success of several major animation films released by Disney in thc last few- years.
While Disney apparently thought its name and distribution clout justified its sizable
share ofthe profits this five-year joint venture generated. Steve Jobs and his Pixar
team felt otherwise. Pixar % assessment was lhat their capabilities were key drivers
ofthe huge profits by Ants and Finding Xemo. leading them not to renew thc Disney*
partnership. For now; Pi\ar*s unmatched digitalization animation expertise has
"appropriated" the profits generated by this key competitive advantage, and Disney
Studios is struggling to catch up.
Sports teams, investment services, and consulting businesses are other examples of companies
that generate sizable profits based on resources (e.g.. key people, skills, contacts) that are not
inextricably linked to the company and therefore do not allow thc company to easily capture the
profits. Superstar sports players can move ftom one team to another or command excessively
high salaries, and this circumstance could arise in other personal services business situations. It
could also occur when one firm joint ventures with another* sharing resources and capabilities
and the profits that result. Sometimes restaurants or lodging facilities tliat are franchisees of a
national organization are frustrated by the fees ihcy pay the franchisor each month and decide to
leave the organization and go "independent." They ollen find, to their dismay, thai thc business
declines significantly. The value of the franchise name, reservation system, and brand
recognition is critical in generating the profits of the business.
Wal-Mart s success in appropriating profits associated with five key resources or capabilities I
see Exhibit 6.11) lias meant an additional 4.5 cents out of every sales dollar more than its
average competitor accrues to Wal-Mart (Wal-Mart "appropriates it") and that money* in turn
flows to Us bottom line. The discount retailing industry is extremely competitive, and this
means that Wal-Mart's profitability is two to three times the industry average—a sizable
competitive advantage for Wal-Mart that is durable and largely under Wal-Mart's control (at
this point).
RBV Guideline 4: Durability: Hon- rapidly uill the resource depreciate?
Thc slower a resource depreciates, the more valuable il is. Tangible assets, such as
comnKxlilies or capital, can have their depletion measured. Intangible resources, such as
brand names or organizational capabilities, present a much more difficult depreciation
challenge. The Coca-Cola brand has continued lo appreciate, whereas technical laxiw-how in
various computer technologies depreciates rapidly. In thc increasingly hypercompeiiiive
global economy of ihe twenty-first century*, distinctive competencies and
competitive advantages can fade quickly, making the notion of durability a critical
lest of the value of key resources and capabilities. Some believe that this reality
makes well-articulated visions and associated cultures within organizations potentially
the most imponant contributor to long-term survival.*
Using the Resource-Based View in Internal Analysis
To use the RBV in internal analysis, a firm must first identify and evaluate its
resources to find those that pro-vide the basis for future competitive advantage. This
process involves defining the various resources the firm possesses and examining
them based on the preceding discussion to gauge which resources truly have strategic
value. It is usually helpful in this undertaking to
• Disaggregate resources- break them down into more specific competencies
rather than stay with broad categorizations. Saying that Domino's Pizza has better
marketing skills than Pizza Hut conveys little information. But dividing thai into
subcategories such as advertising that, in turn, can be divided into national
advertising, local promotions, and coupons allows for a more measurable assessment.
Kxhihit 6,12 provides a useful illustration of this at Whitbread s Restaurant.
• Utilize afunctional perspective. Looking at different functional areas of the firm,
disaggregating tangible and intangible assets as well as organizational capabilities thai
are present, can begin to uncover important value-building resources and activities
that deserve further analysis Appendix 6A lists a variety' of functional area resources
and activities that deserve consideration.
• Look at organizationalfJrVMIMI and combinations of resources and not only at
isolated assets or capabilities. While disaggregation is critical, you must also take a
creative, gcstalt look at what competencies the firm possesses or has the potential to
possess that might generate competitive advantage,
Use the value chain approach to uncover organizational capabilities, activities, and
processes that arc valuable potential sources of competitive advantage,
Once ihe resources are identified managers apply the four RBV guidelines lor
uncovering "valuable" resources. The objective for managers at this point is to
identify resources and capabi lilies lhai arc valuable for most if not all of the reasons
our guidelines suggest a resource can be valuable.
If a resource creates the ability to meet a unique customer need, il has value But if it is
noi scarce, or if it is easily imitated it would be unwise lo build a firm s strategy on
that resource or capability unless that
strategy included plans to build scarcity or inlmitability into it. If a resource provided
(he basis for meeting a unique need Ml scarce, was not easily imitated, and was easily
sustainable over tunc* managers would be attracted to build a strategy on it more than
likely. Our example of Pixar* relationship with Dis* ney earlier in this chapter would
seem to suggest this w^Pixars position early in IU joint venture with Disney, Yet even
with all of thine source* coof inning a very high value in its digital animation
expertise and intellectual property resource*, Pixar w« not "appropriating" the share
of the animation movie profits that were attributable lo those resources Pixar was
fortunate It had che choice not to renew us five-year contract with Disney, and >o il
did.
The key point here is that applying RBV analysis should focus on identifying
resources that contain all sources of value identified in our tour guidelines. Consider
the diagram tn Inhibit 6.13. l^ch circle in that diagram represents one way resources
have value. The area where all circles intersect or overlap would represent resource*
that derive value in all four ways. Such resources are the ones managers applying the
RBV should sock lo identify They arc powerful sources around which 10 build
competitive advantage and crafl successful strategies. And resources that possess
some hut not all sources of value become points of emphasis by J management team
able to identify ways to build ihe missing source of value into that resource over time
much like Pixar did in its relationship wiih Disney
INTERNAL ANALYSIS: MAKING MEANINGFUL COMPARISONS
Managers need objective standards to use when examining internal resources and
value-building activities. Whether applying ihc SWOT approach, VCA. or the RBV
strategists rely on three basic perspectives to evaluate how their firms stack up on
internal capabilities. These three perspectives arc discussed in this section.
Comparison wilh Past Performance
Strategists use thc firm's historical experience as a basis for evaluating internal
factors. Managers are most familiar with the internal capabilities and problems of
their firms because they have been immersed in the financial marketing, production,
and R&I) activities. Not surprisingly, a manager's assessment of whether a certain
internal factor such as production facilities, sales organization, financial capacity,
control systems, or key personnel—is a strength or a weakness will be strongly
influenced by his or her experience in connection with that factor. In the capital-
intensive package delivery industry, for example, operating margin is a strategic
internal factor affecting a firms flexibility to acWca^
gins {down from 16 percent to 13 percent in 2005) as a potential weakness, limiting
its flexibility lo aggres-sivcly continue to expand us overnight air fleet. FedEx
managers view its considerably lower 2005 operating margin of 8,4 percent as a
growing strength because it has almost doubled from us 5.0 percent level five years
earlier.
Although historical experience can provide a relevant evaluation framework,
strategists must avoid tunnel vision in making use of it. NBC, Japan's IBM. initially
dominated Japan's PC market with a 70 percent market share by using a proprietary
hardware system, much higher screen resolution, powerful distribution channels, and
a large software library from third-party vendors. Far from worried Hajime Ikeda,
manager of NEC's planning division at Ihe time, was quoted as saying, "We don't hear
complaints from our users." By 2001. IBM, Apple, and Compaq filled thc shelves in
Japan's famous consumer electronics district. Akihabara. Hi-roki Kamata, president of
a Japanese computer research firm, reported that Japan's PC market. wx>rth more
than S35 billion, saw Apple. I)cll. IBM. and HP with more market share than NEC
because of better technology, software, and thc restrictions created by NEC's
proprietary technology. Clearly, using only historical experience as a basis for
identifying strengths and weaknesses can prove dangerously inaccurate.
Benchmarking: Comparison with Competitors
A major focus in determining a firm's resources and competencies is comparison with
existing (and potential} competitors. Firms in the same industry often have different
marketing skills, financial resources, operating facilities and locations, technical
know-how, brand images, levels of integration, managerial talent, and soon. These
different internal resources can become relative strengths (or weaknesses* depending
on the strategy a firm chooses. In choosing a strategy, managers should compare the
firm's key internal capabilities with those of its rivals, thereby isolating its key
strengths and weaknesses.
In thc US. home appliance industry, for example. Sears and General Electric have
been major rivals. Scars's principal strength is its retail network. For GE, distribution
—through independent franchiscd dealers—has traditionally been a relative
weakness. QBl possession of the financial resources needed to support modernized
mass production has enabled it to maintain both cost and technological advantages
over its rivals, particularly Sears.
This major strength for (il: is a relative weakness for Scan, which depends solely on
suhconiraxiin^ to produce itsKcnmorc appliances. ()n the other hand immtcnancc and
repair service are important in the appliance industry Ihstunvally. Sears has had
strength in this area because it maintains fully staflcd service comrvoncnts and
spreads the costs of components over numerous departments at each retail location.
GE, on die other hand has had to depend on regional service centers and on local
contracting with independent service firms by iis independent local dealer*. Among
ihe internal factors that Sears and lit must consider in developing a strategy arc
distribution mi winks, technological capabilities, operating costs, and service facilities
Kir example, Ob fe major mow creating alliances with Home Depot and Lowe * to
sell appliances lias been a major factor in turning what has been a relative wvakness
into what now appears io be a major strength. Managers in hnth VMTS and GE have
huh successful strategics, set those strategics are quite dirtercnt bVnchmarijng each
other, they have identified My* m build on relative ftrengths while avoiding
dependence on capabilities at which the other ftnn excclv
Benchmarking, or comparing the "our" company perfonns a specific activity with a
competilm If other compam doing ibc same thing, has become a central con- ceni of
manages* in tjuahty commitment companies worldwide Particularly as the value
chain framework has taken hold in structuring internal analysis, managers seek to
systematica My benchmark the costs and results of the smallest value activities imv
against relevanl compchtors or other uselul standards bec^une il has proven to bean cl
fcctive way to continuously improve that activity Ihe ullimatc objective in bench-
marking i* to identify ihc "best practices" in performing an activity and to learn how
lower costs, lover detects, or other outcome* linked to excellence are achieved Com-
compiin Joing the panics commuted to benchmarking anempt to isolate and identity
where their costs or outcomes art out of line w ith what the best practices of a
particular activity experience (competitors and m>ncompetitors) and then attempt lo
change their activities to achieve Ihc new best practices standard (icncral Hcvtnc
sends managers to henchmark Fedhx'scustomer service practices, seeking lo compare
and improve on its OMTI practices within a diverse set of businesses none of which
compete directly wiih FedEx It earlier did Ihc same thing with Motorola, leading it to
embrace Motorola's Six Sigma program for quality control and continuous
improvement.
Industry analysis {see Chapter 41 involves identifying the factors associated with
successful participation in a given industry. As was true for the evaluation methods
discussed earlier, the kevh determinants of success in an industry may He used to
identify a firm s internal strengths and weaknesses. By scrutinizing industry com-
petitors as well at customer needs, vertical industry structure, channels of distribution,
costs, berncrx to entry, availability of substitutes, and suppliers, a strategist seeks to
Jctemunc whether a firm's current internal capabilities represent strengths or
weaknesses in new competitive arenas. The discussion in Chapter 4 provides a useful
framework five industry' forces against which to examine a firm's potential strengths
and weaknesses (General Cinema Corporation, the largest US. movie theater operator,
determined that its inter* nal skills in marketing, site analysis, creative financing, and
management of geographically dispersed opera-tions MfB key strength* relative to
major success faciors in the soft-drink bottling industty Thi* assessmenl proved
accurate Within 10 years after it entered the soft-drink bottling industry, (icncml
Cinema became the largest fmnchiscd bottler of Mill drinks in ihe United Stales,
handling Pepsi, 7UR Di Pepper, and Sunkist. Kx* hihit 6.14, Strategy in Action,
describes a ma)or emerging strategic success factor in the global consumer products
industry for companies such as P&CK Unilever, und Saru Lee, just to mention a few.
as a result of the emergence of a lew major global retailers The bottom line i* that
internal analysis ai each of these firms focuses intensely on which product lines are
established with reasonable sales volumes, margins, and growth
This chapter looked at several ways managers achieve greater objectivity and ngor as
ihcy analy/c their company's internal resources and capabilities. Managers often start
their internal analysis with questions like, Hon well is the current strategy working?
What is our current situation? What arc our strengths and weaknesses? SW rOT
analysis is a traditional approach thai has been in use for decades to help structure
managers' pursuit of answers to these q jestions, A logical approach still used by
many managers today, SWOT analysis has limitations linked to Ihe deplh of its
analysis and thc risk of overlooking key considerations.
Two techniques for internal analysis have emerged that overcome some ofthe
limitations of SWOT analysis, oflering more comprehensive approaches that can help
managers identify and assess their firm s internal resources and capabilities in a more
systematic, objective, and measurable manner Value chain analysis has managers look
al and disaggregate their businevs as a chain of activities that occur in a sequential
manner lo create thc products or services they sell The value chain approach breaks
down ihe firm's activities into primary and support categories of activities, ihen breaks
these down further into specific types of activities with thc objective to disaggregate
activity into as many meaningful subdivisions as possible-Once done, managers
attempt to attribute costs lo each. Doing this gives managers very distinct ways of
isolating the things they do well and not so well, and it isolates activities that are truly
key in meeting customer needs- true potential sources of competitive advantage.
The third approach covered in this chapter was the resource-based view (RBV), RBV
is based on thc premise that firms build competitive advantage based on the unique
resources, skills, and capabilities they control or develop, which can become thc basis
of unique, sustainable competitive advantages lhat allow them to craft successful
competitive strategies. The RBV provides a useful conceptual frame to first inventory
a firm's potential competitive advantages among its tangible assets, intangible assets,
and its organizational capabilities. Once inventoried Ihe RBV provides four
fundamental guidelines thai managers can use to "value" these resources and
capabilities. Those with major value, defined as ones that arc valuable for several
reasons, be* come the bases for building strategics linked to sustainable competitive
advantages.
Finally, this chapter covered three ways objectivity and realism arc enhanced when
managers use meaningful standards for comparison regardless of the particular
analytical framework they employ in internal analysis. This chapter is followed by
two appendixes. The first provides a useful inventory of thc types of activities in
different functional areas of a firm that can be sources of competitive advantage. The
second appendix covers tiadilional financial analysis to serve as a refresher and
reminder about this basic internal analysis tool.
When matched with managements environmental analyses and mission priorities, the
process of internal analysis provides thc critical foundation for strategy formulation.
Armed with an accurate, thorough, and timely internal analysis, managers are in a
better position to formulate effective strategies. Thc next chapter describes basic
strategy alternatives that any firm may consider.
QUESTIONS FOR DISCUSSION
1. Describe SWOT analysis as a way to guide internal analysis. How docs this
approach reflect the basic strategic management process?
2. Whai arc potential weaknesses of SWQT analysis?
J Describe the difference between primary and support activities using value chain
analysis 4 How is VCA different from SWOT analysis?
5. What is the rcsouivc-bascd view? Give examples of three different types of
resources, tv Whai ate ihree Mgn resources become more valuable? Provide an
example of each.
7. Explain how you might use VCA, RBV. and SWOT analysis to gel a betier sense
of what mipjtt he a firm's key building Mock* for a successful strategy. Attempt to
apply SWOT, VCA. and RBV lo yourself and >vur career aspirations. What arc
major strengths and weaknesses? How might you use your knowledge of these
strengths and weaknesses to develop your future career plans?
Designed by Apple in California
The Midi arc printed in such small type on the hack of Apple's tiny new iPod Shuffle
MP? player tliut you have to squint tn icad them Hut they speak volume* about why
Apple is standing so far out from the crowd these days. At a time when rivals arc
outsourcing as much design as possible to cut costs. Apple remain* at Us core a
product company—one that would never give up control of how ihov products are
created
In this age of commodity tech products design, alter all. i* whai nukes Apple Apple
Thi% focus is apparent to anyone who has used one of its trailWojing product* While
the Silicon Valley pioneer sells only a tew do/cn models, compared H the hundred*
ottered by many of its rivals, many of those 'designed in California" products are
startling departure* fn>m the nora—and they often set the direction* foe the resi of
the induEOry. V sample* abound from the ifVct to the tfat *creea look of the new
iMac. to the umpk vrullncss of the new Mac mini K
Insanely Great
Out the general Uicincs are clear. Most CEOs are fix used on achieving their financial
and operational goals, and on executing a Mralcgy But Apple\ Steve Jobs believes his
company's ultimate advantage com** fnmi its ability lo make unique, or as he call*
them, ~insoncty great" products
Jobs i entire company b focused on that task That means while rival computer
makers increasingly rery oo sc-cmJIed outsourced design rmnufacturcr* IUOMM tor
key dougn decision*. Job* keeps meal of those tasks in-nousc. Sure, he relics on
ODMs to rmimfacturc b*s products, but iSe big deostoas on Apple products "^dc is
Silicon Valley
Jotn hm i it a crucial part of the formula Iks unaquc among hg-trrnc hardware CFOs
for hi* hanaVon nv voNemcnt m the de**gn process. Evm product-dr*ign cspcrts
mar*rl at the power of the
First, An Idea
'Tve been ihinkin|{ hard about die Apple product-devcUipinent process since I left."
says design guru Donald Norman, co-founder the design consultants Nielsen Norman
(in>up, who left Apple in IW7, "If you follow my [guidelines], it will guarantee good
design. But Steve Johs doesn't want pmd design He wants great design, and iiry
method will never give you thai I luil lake* a rare leader, who can bnng both the
cohesion and commitment and *1yle And Steve has it" Many executives believe that
outsourcing design allow* ihcm to lower the salaries they m u*t pay and lets them
hove working on the products across all time rones Joes thinks that's short-sighied.
Me argue* ihar ihe cost-It worth what you grvc up in term* of teamwork,
conirrumieation, and the ability to get group* of people wtriing together So bring a
new ideatoliLe Indeed wnh (op-notch nvcchamcal.electrical, software, aad industrial
Oe *ignen all boused at Apple* Infinite Loop campus m Cupertino, Calif.,
dweoasawy ls design capability is nsorc ver-ncalh interrated than almost any other
tech outfit
T^ptcahy a new Apple product starts w Hi a big idea fur an unmet customer raced, h
■* the anginal iPod. it was for art MPt E % -1 that, unlike earlier models, could hold
and eauh manage war entire mas* collection Then, Apple* product architects and
industrial designers figure out wttai thai product should look like and what failure* 11
should
have—ami importantly, not have, "Apple has a much more holistic view of
product design " says David Carey, president of design consulting firm Bwtclligcnt.
"Good product design starts from the outside, and works its way insider
Half Measure
Already, that's different from the process by which the bulk of tccb products are
made- Increasingly, tech companies meet w ith ODMs to see whnt designs they have
cooked up. Then, the ODMs are asked to iwvak those basic blueprints to add a few
features and to match the look and feel of the company\ other products.
That's wheic Hie "design** input might end for most companies. But since it's almost
always trying to create one-of-a-kind products. Apple has to ask its own engineers to
do the critical eketneal and mechanical work to bring products to life.
In the iPod Shuffle, for example, designers cut a circuit card in two and slacked the
pieces, bunk-bed style, to make use of the empty air space created by the height of the
battery in the device, "They realized they could erase the height penalty (of ihe
battery] to help them win the battle of the bulge," says Carey, whose company did a
detailed engineering analysis of the iPod Shuffle.
Screw-Free
Even more important. Apple s products are designed to run a particular set of
programs or services. By contrast, a Dell or Ottawa} PC! must be ready for whatever
new features Microsoft comes out wiih or whatever Windows program a customer
opts to install
But Apple makes much of its own software, from the Mae operating system to
applications such us i Photo and iTunes, "Thai s Apples trump card." says one Apple
rival. "The ODMs just don't have the world-class indusuial design, the style, or the
ability to make easy-to-use software- or the ability* to integrate il all They may some
day. but they don't haw ii now"
Of course. Apple also sets its self apart by designing machines that arc also little
works of an—even if it means making lile difficult for manufacturers contracted to
build those designs. During a trip to visit ODMs in Asia, one executive told securities
analyst Jim Grossman of Thriven! Investment Management about Steve Jobs s
insistence that no screws be visible on ihc laptop his company was manufacturing for
Apple. The executive said his company had no idea how to handle the job and had lo
invent a new* tooling process for the Job. "They had to learn new way* io do ihings
just to meet Apple** design," says Grossman.

Tough Customer
Thai's not to say Apple is completely bucking the outsourcing trend. All its products
arc manufactured by ODMs in Asia. Just as it buys chips and disk drives from other
suppliers, sources say Apple lets ODMs take some role in garden* variety engineering
work bul not much. "This is an issue for Apple, because live A-team engineers [at the
ODMs) don't ttkc working with Apple. It's like when you weie a kid, all your dad let
you do was hold the llashhght, rather than let you try to fix the ear yourself" says an
executive at a rival MP3 maker.
In fairness, Apple's reliance on a smaller number of products than its rivals and go-it-
alone design means t - always a dud or two from disaster. But at the moment, its
proving that "made in Cupertino" is a trademark for success.
 Appendix A Key Resources across Functional Areas
Marketing
Firm's products-services, breadth of product line
Concentration of sales in a few products or to a few* customers
Ability to gather needed information about markets Market share or submarket shares
Product-service mix and expansion pi Hernial life cycle of key products; profit-sales
balance in producl-scrvicc
Channels of distribution: number, coverage, and control
Effective sales organization: knowledge of customer needs
Internel usage
Product-service image, reputation, and quality Imaginativeness, efficiency, and
effectiveness of sales promotion and advertising Pncing strategy and pricing
flexibility Procedures for digesting market feedback and developing new products,
services, or markets
After-sale service and follow-up Goodwill brand loyalty
Financial and Accounting Ability to raise short-icrm capital Ability to raise long-term
capital, debt-equity Corporate-level resources^mulrtbusincss firmi Cost ofeapital
relative lo that of industry and competitors Tax considerations
Relations with owners, investors, and stockholder
Leverage position: capacity' lo utilize alternative financial strategies, such as lease or
sale and leaseback
Cost of entry and barriers to entry Price-earnings ratio
Working capital; flexibility of capital structure
Effective cost control: ability to reduce cost Financial size
Efficiency and effectiveness of accounting system for cost, budget, and profit
planning
Production* Operations, Technical
Raw materials' cost and availability, supplier relation*
ships
Inventory control systems, inventory turnover Location of facilities, layout and
utilization of facilities
Economies of scale
Technical efficiency of facilities and utilization of capacity
Effectiveness of subcontracting use IJcgrve of vertical integration; value added and
profit margin
Efficiency and cost-benefit of equipment
Effectiveness of operation control procedures: design, scheduling, purchasing, quality
coniroL and efficiency Costs and technological competencies relative 10 those of
industry' and competitors Research and development technology innovation Menu,
trademarks, and similar legal protection Personnel Management personnel
Itmployees* skill and morale
Labor relations cons compared with those of industry and cot open tors
Efficiency and effectiveness of personnel policies
Effectiveness of incentives used to motivate performance
Ability to level peaks and valleys of employment Employee turnover and absenteeism
Specialized skills Experience
Quality Management
Relationship with suppliers, customers
Internal practices lo enhance quality of products
and services
Procedures for monitoring quality
Information Systems
Timeliness and accuracy of information about sales, operations, cash, and suppliers
Relevance of information for tactical decisions Information to manage quality issues:
customer sen ice
Ability of people lo use the information that is provided
Linkages lo suppliers and customers
Organization and General Management
Organizational structure
Firm's image and prestige
Firms record in achieving objectives
Organization of communication system
Overall organizational control system i effectiveness and utilization!
Organizational climate; organizational culture Use of systematic procedures and
technique** in decision making
Top-management skill, capabilities and interesi
Strategic planning system
Intraorganizational synergy I mu hi business firms)
Appendix B Using Financial Analysis
One of Ihc mo si impoiuiti t ...K fur assevMn^ Ihc strength of an organization w ithin
its industry is financial analysis Managers, investors, and creditors all employ some
form of this analysis as thc beginning point for their financial decision nuking*
Investors use financial analyses in making decisions about whether to buy or sell
slock* and crcd-hots use them in deciding whether or not to lend They provide
managers with a measurement of how the company is doing in comparison w ith lis
performance in past years and with thc performance of competitors in the industry.
Although financial analysis is useful for decision making, some weaknesses should he
noted. Any picture that it provides of the company is based on past data. Although
trends may be noteworthy, this picture should not automatically be assumed to be
applicable tn thc timn e. In addition, the analysis is only as good as the accounting
pfoccdures lhal have provided thc information. Whn making comparisons between
companies, one should keep in mind ihe variability of accounting procedures from
firm to firm*
There arc four basic groups of financial ratios: liquidity, leverage, acliviiy, ;ind
profitabilny.
Depicted in Exhibit 6.DI arc the specific ratios calculated for each of the basic groups
Liquidity and leverage ratms represent an assessment of the risk of the firm. Activity
and profitability ratios arc measures of thc return generated by rhe assets of ihe firm
The inicnwitun between certain groups of ratios is indicated by arrows.
Typically, two common financial staicii>cnis arc used in financial analyses: the
balance sheet and the income statement, l-lxhihit 6*B2 is a balance sheet and Exhibit
6*B3 an income statement lor the ABC Company These statements will he used to
illustrate ihe financial analyses.
Liquidity Ratios
Liquidity ratios ate used as indicators of a firms ability to meet its short-term
obligations. These obligations include any current liabilities, including currently
maturing long-lerm debt. Current assets move through a normal cash cycle of
imcmorics--sales- accounts receivable—cash. The firm then usees cadi to pay olTm
reduce its current liabilities. Ihe best-known liquidity ratio is ihe current ra
tio: current assets divided by curreni liabilities* For ihc ABC Company, the curreni
ratio U calculated as follows:
Most analysts suggest a curreni ratio of 2 to 3. A large curreni ratio is not necessarily'
a good sign: it may mean thai an organization is not making the most efficient use of
its assets. The optimum current ratio will vary from industry to industry, with the
more volatile industries requiring higher ratios
Because slow -moving or obsolescent inventories could oversale a firms ability lo
meet short-term demands, the ouick raiio is sometimes ptelerred lo as*cs* a firms liq-
uidity The quick ratio is current assets minus im en i ernes, divided hv current
liabilities* Thc quick ratio tor the ABC Companv ts calculated as follows'
(. iinvni ossrrx invenlones
Cmnr.u liL*hiliiies
A quick ratio of approximately I would be typical for American industries Although
iherv less variability in the quick ratio than in the current ratio, stable industries would
he able to operate safely with a lower ratio.
Leverage Ratios
Leverage ratios identify the source of a firm * capital-owners or outside creditors. The
term tnrmgr refers to the fact thai using capital with a fixed interest charge will
"amplify" cither profits or losses in relation to thc equity ot holders of common stock.
The most commonly used ratio is total debt divided by total assets* Total debt in-
cludes current liabilities and long-term liabilities. This nv
turnover is calculated by dividing sales by total assets. For the ABC Company, asset
turnover i\calculated as follows:
higher rate than larger, expensive ones. Because invenro* ncs normally are curried at
cost, n would be more accurate io use the cost of goods sold in place of sales in the
nu-mciaior of this ratio, hxiahhshed compilers of industry ratios, such as Dun &
Bradstreet. however, use ihc ratio of sales to inventorv
The ratio of sales to fixed assets is a measure of the turnover on plant and equipment.
It is calculated by dividing sales by net fixed assets;.
Industry figures for asset turnover will vary with capital-intensive Industrie*, and
those requiring large inventories will have much smaller ratios.
Anoiher activity ratio is inventory turnover, estimated by dividing sales by average
inventory 1 he norm for US. industries is 9, Kit whether the ratio for a particular firm
is higher or lower normally depends on the product Mild. Small, inexpensive iiems
usually turn over at a much
The accounts receivable turnover is a measure of the average collection period on
sales. If the average number of days vanes widely from the industry norm, il may be
an indication of poor management. A too-low ratio could indicate the loss of sales
because of a Uxvrcstnctive credit policy. If the ratio is too high, too much capital is
being tied up in account* receivable, and management may be increasing the chance
of bad debts. Because of varying industry credit policies, a comparison for the firm
over time or within an industry is the only useful analysis. Because information on
credit sales for other firms generally is unavailable, total %ales must be used. Because
not all firms have the same pcrccniage of credit sales, there is only approximate
comparability among firms:
Profitability' Ratios
Profitability is the net result of a large number of policies and decisions chosen by an
organization\ management. Profitability ratios indicate how effectively the total firm
is being managed. The profit margin for a firm is calculated by* dividing net earnings
by sales, Triis ratio is often called return <#% sofas (ROSi. There is wide variation
among industries, bul Uic average for U.S. firms is approximately 5 percent.
A second usctul ratio for evaluating profitability is thc return tm imYstment or ROI. as
it is frcqucntlv called— found by dividing net earnings by loial assets The A IK"
Company's ROI is calculated as follows:
The ratio of net earnings tn net worth is a measure of the rate of return or profitability
of the stockholders" rn-vestment It is calculated by dividing net earnings by net
worth, thc common stock equity and retailed earnings account. ABC Company's
return M net nnrth or refurn on equity* also called ROE. ts calculated as follows:
It is often difficult to determine causes for lack of profitability. The Du Pont system of
financial analysis provides management w ith clues to the lack of success of a firm.
This financial *ool ^ings together activity, profitability, .md leverage it ensures and
slmws how these ratios interact to determine rhc overall profitability of the firm. A
depiction ofthe system is set for lb in Exhibit 6.B4h
The rijthi side of the exhibit develops ihc turnover ratio. This seciion breaks down
total assets into current as* sets leash, marketable securities accounts receivable, and
inventories) and fixed assets. Sales divided by these total assets gives the turnover on
assets.
The lell side ofthe exhtbil develops the profit margin on sales. Thc individual expense
items plus income taxes are subtracted from sales to produce nei profits after taxes.
Net profits divided by sales gives thc profit margin on sales. When the asset turnover
ralio on the right side of Exhibit 6.1*4 is multiplied by the profit margin on sales de-
veloped on the left side of thc exhibit, the product is thc return on assets i ROI > for
the firm. This can he shown by the following formula:
The other approach is to evaluate a firms financial condition and compare il with Ihe
financial conditions of similar firms or with industry averages in the same period.
Such a comparison gives insight into the firm s relative financial condition and
pr^formancc. Financial ratio* for industries arc provided by Robert Morris
Associates. Pun & Isradsifcci. Prentice Hall, and various trade association
publicaiions (Associations and their addressee are Iivied in the EncyctopeUia
ofAssociations and in thc/^frrrforyo/ Satitmai Trade Associations) Information about
individual firms is available through Moody's Manual. Standard
& Poors manuals and surveys, annual reports to stock-holdcis. and thc major
brokerage house*.
To thc extent possible, accounting data from different companies must be so
standardized thai companies can be compared or so a specific company can be
compared with an industry average. It is important to read ins footnotes of financial
statements, because various accounting or management practices can have? an elTccc
on the financial picture of Ihe company. For example, firms using sale-leaseback
methods may Have Icscra^e pictures quite different from what is shown as debts or
assets on the balance sheet
Analysis of ihe Sources and Uses of Funds
The purpose of ihis analysis is to determine how ihc company is using its financial
resources from year to yean By comparing balance sheets from one scar to ihe next,
we can determine how funds were obtained and how these funds were employed
during the year.
To prepare a stalemenl of ihc sources and uses of funds, it is necessary to |l> classify
talancc sheet changes lhat increase and decrease cash. (2) classify from thc income
statement those factors that increase or decrease cash, and ii\ consolidate this
information on a sources and uses of funds statement form.
Sources of Funds I hat increase Cash
1. A net decrease in any other asset than a depreciable fixed asset.
2. A gross decrease in a depreciable fixed asset. i. A net increase in any liability.
4. Proceed) from the sale of slock
5. Thc operation of thc company met income, and depreciation if the company is
profitable) UN of Funds
I. A net increase tn any other asset thin a depreciable fixed asset.
2 A gross increase in depreciable fixed assets.
3. A net decrease in any liability
4. A rctiienient or purchase of stock.
5, Payment of cash dividends.
We compute gross changes to depreciable fixed assets by adding depreciation from
the income statement for thc period to net fixed assets at ihe end of the period and
then subtracting from the total net fixed assets at the beginning of the period. Thc
residual represents the change in depreciable fixed assets for the periccL
For the ABC Company, the following change would be calculated:

To avoid double counting, the change in retained earnings is not shown directly in thc
funds statement, when the funds statement is prepared this account is replaced by the
earning* after lave*, or net income, as a source of funds, and dividends paid during
the year as a use of funds. Thc diftcrcncc between net income and the change in ihe re-
tained earnings account will equal the amount of dividends pawl during ihe year The
accompanying sources and uses of funds statement was prepared for the ABC Com*
parry.
A funds analysts is useful for determining trends in working-capila! positions and for
demonstrating how the firm has acquired and employed ns funds during some period.
Conclusion
It is recommended that you prepare a chart such as mat shown in ( vhihit 6>B5, MI
you can develop a useful portrayal of these financial analyses. The chart allows a dis-
play/ of the ratios overtime The "Trend" column could be used to indicate your
evaluation of the ratios over time 'e.g., "favorable." "neutral/* or "unfavorable"). The
"Industry Average" column could include recent industry av* crages on these ratios or
those of key competitors. These would provide Information to aid interpretation of the
analyses. Trie "Interpretation" column could be used to de* scribe your interpretation
ofthe ratios for this firm. Overall this chan gives a basic display of the ratios that
provides a convenient format for examining the firm's financial condition.
Finally. Fatnbii 6 B6 is included to providea quick reference summary of thc
calculations and meanings of the ratios discussed earlier
LONG-TERM OBJECTIVES AND STRATEGIES
After reading and studying this chapter, you should be able to
2. Describe the seven qualities of long-term corporate objectives that make them
especially useful to strategic managers.
3. Explain the generic strategies of low-cost leadership, differentiation, and focus.
4. Discuss the importance of the value disciplines.
5. List, describe, evaluate, and give examples of the 15 grand strategies that decision
makers use as building blocks in forming their company's competitive plan.
Understand the creation of sets of long-term objectives and grand strategies options
specific statement of aims presented in that chapter appeared as the goals of thc firm
However, these goals, which commonly dealt with profitability, growth, and survival,
were stated without specific targets or time frames. They were always to be pursued
but could never be fully attained. They gave a general sense of direction but were not
intended to provide specific benchmarks for evaluating thc firms progress in
achieving its aims. Providing such benchmarks is thc function of objectives,1
Ihc first pan of this chapter will focus on long-term objectives. These are statements
ofthe results a firm seeks to achieve over a specified period, typically three to five
years. The second pan will focus on the formulation of grand strategics. In
combination* these two components of long-term planning provide a comprehensive
general approach in guiding major actions designed to accomplish the firm's long-
term objectives. The chapter has two major aims: (I) to discuss in detail thc concept of
long-term objectives, the topics they cover and the qualities they should exhibit; and
12) to discus* the concept of grand strategics and to describe the 15 principal grand
strategy options that arc available to firms singly or in combination, including three
newly popularized options that are being used to prov ide the basis for global
competitiveness,
LONG-TERM OBJECTIVES
Strategic managers recognize that short-run profit maximization is rarely the best
approach to achieving sustained corporate growth and profitability. An often repeated
adage states that if impoverished people arc given food they will cat it and remain
impovenshed; however, if they are given seeds and tools and shown how to grow
crops, they will be able lo improve their condition permanently. A parallel choice
confronts strategic decision makers:
1. Should they eat the seeds to improve the near-term profit picture and make
large dividend payments through cost-saving measure* such as laying off workers
during periods of slack demand selling off inventories, or cutting back on research
and development?
2. Or should they sow* thc seeds in the effort to reap long-term rewards by
reinvesting profits in growih opportunities, committing resources to employee
training, or increasing advertising expenditures?
For most strategic managers, thc solution is clear—distribute a small amount of profit
now but sow most of it to increase the likelihood of a long-term supply. This is the
most frequently used rationale in selecting objectives.
To achieve long-term prosperity, strategic planners commonly establish long-term
objectives in seven areas:
Profitability Trie ability of any firm to operate in the long run depends on attaining an
acceptable level of profits. Strategically managed firms characteristically have a profit
objective, usually expressed in earnings per share or return on equity.
Productivity Strategic managers constantly try to increase the productivity of their
systems. Firms that can improve Ihc input-output relationship normally increase
profitability. Thus* firms almost always state an objective for productivity.
Commonly used productivity objectives are the number of items produced or thc
number of services rendered per unit of input. However, productivity objectives
sometimes arc stated in terms of desired cost decreases. For example, objectives may
be set for reducing defective items, customer complaints leading to litigation, or
overtime. Achieving such objectives increases profitability if unit output is
maintained.

Competitive ftnition One measure of corporate success is relative dominance in ihe

marketplace Larger firms commonly establish an objective m terms of competitive
position, often using total sales or market short as rncasure* of their competitive
position An obiectne with regard to competitive position may indicate a firm s Ion g-
rcrm paonitcs For example. Gulf Oil set a five-year objective of moving from third to
second place as a producer of high-slensiry rsobpropylene. Total sales were the
nvisure.
Employ-re Development I mployccs v alue cAscation and training, in part taeniae they
lead to increased compensation and fob security Providing >uch opportunities olten
increases productivity and decreases turnover. Therefore, strategic deem ion maker*
frequent!)' include an employe* oVietopment objective in (heir long-range plans For
example. PPG lus declared an objective of developing highk skilled and flexible
employees and, thus, providing steady employment for a reduced number of workers.
Employee Relations Whether or noi they arc bound by union contracts, firm* actively
seek good employee relations. In fact proactive steps in anticipation of employee
needs and expectations arc characteristic of strategic managers- Strategic managers
believe that productivity is linked to employee loyalty and to appreciation of
managers' interest in employee welfare. They, therefore, set objectives to improve
employee relations. Among the outgrowth* of such objectives arc safety programs,
worker representation on management committees, and employee stock option plans.
Technohn*ic*t Leadership Firms must decide whether to lead or follow in Ihe
marketplace, hither approach can be successful, hut each miuires a different strategic
posture. Therefore, many firms state an objective with regard to technological
lcwlcrship hw example. Caterpillar Tractor Company c^aN.shcd its early reputation
and dominant pnATt'on m its industry by being in the ftxefroni of technological
intimation in the mamfavture of large eanhmosers l :-commerce technology officers
*UI have more of a strategic rale tn the rnanagcmeni hierarchy of the future.
ATtvonurating that the Internet has become an integral aspect of corporate long-term
objective setting In offering an cMcxhnology manager higher-level resportsibiliiies. a
firm is pursuing a Leadership position in terms of innovation m computer network*
and systems. Officers of c<ornmcrcc technology at OF and Dcha Air have shown
their a^liiy to increase profits by chiving down transactson^reiatcd costs w ith Web-
based technologies that seamiesvS' integrate their finnV supply chains. These
technologies have the potential lo "lock in" certain suppliers and uisiomcre and
heighten competitive position through supply chain efficiency
Public Responsibility Manager* reeogni/c their re*ponsibilitH:s to their customers and
to society at large. In fad. many firms seek to exceed gt* crnmcnt requirements. They
work not only lo develop reputations for fairly priced products and services hul
alMiioctfablish themselves as responsible eoi-pormeciii/ens. For example, they may
establish objectives lm charitable and educational contributions, minority* training,
public or political activity, community welfare, or urban rcvitalizarion. In an attempt
to exhibit their public responsibility in the United States. Japanese companies, such is
loyoia. Hitachi, and Matsushita, contnbute more than S500 million annually to
American criucatHinal projects, charities, and nonprofit organuatiom.
Qualities of Long/Term Objectives
What distinguishes a good objective from a bad one? What qualities of an objective
improve its chances of being attained".' These questions are best answered in relation
to seven criteria that should be used in preparing long-term objectives acceptable,
flexible, measurable over time, motivating, suitable, understandable, and
Acceptable Managers are most likely lo pursue objectives that arc consistent w ith their
preferences. They may ignore or even obstruct the achievement of objectives that
offend them le g , promoting a high-sodium ifwd product i or that ihev believe to be
inappropriate or unfair (eg . reducing spoilage 10 offset a disprop r-taoote allocation
of fixed overhead) In addition, long-term corporate objectives frequently are designed
to be acceptable to groups external to the firm. An example is efforts to abate air
pollution that are undertaken at the insistence ofthe Environmental Protection
Agency;
FlexiMe Objectives should be adaptable to unforeseen or extraordinary changes in the
firm's competitive or environmental forecasts. Unfortunately, such flexibility usually
is increased at the expense of specificity. One way of providing flexibility while
minimizing its negative effects is lo aliow for adjustments in the level, rather than in
the nature-of objectives. For example, the personnel department objective of
providing managerial de-velopmcnt training for 15 supervisors per year over the next
five-year period might be adjusted by changing the number of people to be trained. In
contrast, changing thc personnel department's objective of "assisting production
supervisors in reducing job-related injuries by 10 percent per year" after three months
had gone by would understandably create dissatisfaction.
Measurable Objectives must clearly and concretely state whai w ill be achieved and
when il will be achieved. Thus, objectives should be measurable over time. For
example, thc objective of "substantially improving our return on investment" would
be better stated as "increasing the return on investment on our line of paper products
by a minimum of I percent a year and a total of 5 percent over thc next three years,**
Motivating fVopleare most productive wtien objectives are set at a motivating lewl—
one high enough to challenge but nol so high as to frustrate or so low as to be easily
attained. The problem is that individuals and groups diller in their perceptions of what
is high enough. A broad objective that challenges one group frustrates another and
minimally interests a third. One valuable recommendalion is that objectives be
tailored lo specific groups. Developing such objectives requires time and effort, but
objectives of this kind 3re more likely to motivate.
Suitable Objective* must be suited to the broad aims ofthe firm, which arc expressed
in its mission statement. Each objective should be a step toward the attainment of
overall goals. In fact, objectives that arc inconsistent with the company mission can
subvert the firm saims. For example, if the mission is growth oriented, the objective
of reducing the debl-to*equiiy ratio to 1.00 would probably be unsuitable and
counterproductive.
tnderstandable Strategic managers ai all levels must understand what is to be
achieved. They also must understand the major criteria by which their performance w
ill be evaluated- Thus, objectives must be so slated that they arc as understandable to
the recipient as (hey are to ihe giver Consider thc misunderstandings that might arise
over the objective of "increasing thc productivity ofthe credit card department by 20
percent within two years" What does this objective mean? Increase the number of
outstanding cards? Increase thc use of outstanding cards? Increase the employee
workload? Make productivity gains each year? Or hope that the new computer-
assisted system, which should improve productivity, is approved by year 27 As this
simple example illustrates, objectives must be clear, meaningful, and unambiguous.
Achievable Finally, objectives must be possible to achieve. This is easier said than
done. Turbulence in the remote and operating environments affects a firm's internal
operations, creating uncertainly and limiting thc accuracy ofthe objectives set by
strategic management. To illustrate, the rapidly declining U.S. economy in 2000 2003
made objective setting extremely difficult, particularly in such areas as sales
projections.
Motorola provides a good example of well-constructed company objectives. Motorola
saw its market share of Ihe mobile telephone market shrink from 26 percent to 14
percent between 19% and 2001, while its main rival Nokia captured all of Motorola's
lost share and more. As a key part of a plan to recapture its market position.
Motorola's CEO challenged his company with the following long-term objectives:
1. Cut sales, marketing, and administrative expenses from $2,4 billion to SI. 6 billion
in the next fiscal year.
2. Increase gross markings from 20 percent to 27 percent by 2002.
3 Reduce the number of Motorola telephone styles by M percent to 20 and the number
of silicon components by 82 percent to 100 by 2003,
• The learning and growth box at the bottom of Exhibit 7.1 answers the question "To
achieve our vision, how will we sustain our ability to change and improve?"
* The box at the lefl reflects the customer perspective and responds to the question
"To achieve our vision, how should we appear to our customers?"
All of the boxes are connected by arrows to illustrate that the objectives and measures
of the Tour perspectives arc linked by causc-and-eflect relationships that lead to the
successful implementation ofthe strategy. Achieving one perspective s targets should
lead to desired improvements in the next perspective, and so on. until the company's
performance increases overall
A properly constructed scorecard is balanced between short- and long-term measures,
financial and non-financial measures, and internal and external performance
perspectives.
Thc balanced storecard is a management system that can be used as thc central
organizing framework for key managerial processes. Chemical Bank. Mobil
Corporation's LS Marketing and Refining Division, and CIGNA Property and
Casualty Insurance have used the Balanced Scorecard approach to assist in individual
and team goal setting, compensation, resource allocation, budgeting and p lannmg,
and strategic feedback and learning.
GENERIC STRATEGIES
Many planning experts believe that thc general philosophy of doing business declared
by thc firm in the mission stateinent must be translated into a holistic statement of the
firm's strategic orientation before it can be further defined in terms of a specific long-
term strategy. In other words, a long-term or grand strategy must be based on a core
idea about how the firm can best compete in the marketplace.
Thc popular term for this core idea is generic strategy. From a scheme developed by
Michael Porter, many planners believe that any long-term strategy should derive A
core idea about bow from a firms attempt to seek a competitive advantage based on
one of three generic * firm can br*I Striving for overall tof «W leadership in the
industry.
1. Striving to create and market unique products for varied customer groups through
differentiation.
2. Striving to have special appeal to one or more groups of consumer or industrial
buyers, focusing on their cost or differentiation concerns.
Advocates of generic strategies believe lhat each of these options can produce above
average returns for a firm in an industry. However, they arc successful for very
different reasons.

Low-Cost Leadership
Low-cost leaders depend on some fairly unique capabilities to achieve and sustain
their low-cost position. Examples of such capabilities are having secured suppliers of
scarce raw materials, being in a dominant market share position, or having a high
degree of capitalization. Low-cost producers usually excel at cost reductions and
efficiencies. They maximize economics of scale, implement cost-cutiing technologies,
stress reductions in overhead and in administrative expenses, and use volume sales
techniques to propel themselves up thc earning curve. The commonly accepted
requirements for successful implementation of the low-cost and the other two generic
strategics arc ovcrvicwed in Kxhibit 7,2.
share or if already dominant in the industry, simply benefit from exceptional returns.
As an extreme case, it has been argued that National Can Company, a corporation in
an essentially stagnant industry; is able to generate attractive and improving profits by
being the low-cost producer.
In the wake of the tremendous successes of such low-cost leaders as Wal-Mart and
Target, only a rare few companies can ignore the mandate to reduce cost. Yet doing
so without compromising the key attributes of a company's products or services is a
difficult challenge. One company that has succeeded in its efforts to become a low-
cost leader while maintaining quality standards is Home Depot. The company's Top
Strategist Robert Nardelli, is profiled itt Exhibit 73.
Differentiation
Strategies dependent on differentiation are designed to appeal to customers with a
special sensitivity for a particular product attribute. By stressing the attribute above
other product qualities, the firm attempts to build customer loyalty Often such loyally
translates into a firm's ability to charge a premium price for its product. Cross-brand
pens. Brooks Brothers suits, Porsche automobiles, and Chivas Regal Scotch whiskey
are all examples.
The product attribute also can be the marketing channels through which it is delivered
its image for excellence, the features: it includes, and the service network that
supports it. As a result of the importance of
Top Strategist\
Robert NarJelli, Chairman, CEO, and President of Home Depot Inc.
Focus
A focus strategy, whether anchored in a low-cost base or a differentiation base,
attempts to attend to the needs of a particular market .segment. Likely segments are
ihose that are ignored by marketing appeals to easily accessible markets, to the
"typical" customer, or to customers with common applications for the product. A firm
pursuing a focus strategy is willing to service isolated geographic areas; to satisfy the
needs of customers with special financing, inventory, or servicing problems: or to
tailor the product to the somewhat unique demands of the small- lo medium-sized
customer. The focusing firms profit from their willingness to serve otherwise ignored
or underappreciated customer segments. The classic example is cable television* An
entire industry was born because of a willingness of cubic firms to serve isolated rural
locutions that were ignored by traditional television services. Brick producers that
typically sen ice a radius of less than 100 miles and commuter airlines that serve
regional geographic areas arc other examples of industries where a fucus strategy
frequently yields above-average industry profits.
While each of the generic strategies enables a firm to maximize certain competitive
advantages, each one also exposes the firm to a number of competitive risks. For
example, a low-cost leader fears a new low-cost technology that is being developed
by a competitor, a differentiating firm fears imitators; and a focused firm fears
invasion by a firm that largely targets customers. As Exhibit 7.4 suggests, each
generic strategy presents the firm with a number of risks.
THE VALUE DISCIPLINES
International matiagement consultants Michael Trcacy and Fred Wicracma propose an
alternative approach to generic strategy that the) call the value disciplines/ They
believe that strategics must center on delivering superior customer value through one
of three value discipline*: operational excellence, customer intimacy, or product
leadership.
Operational excellence refers to providing customers with convenient and reliable
products or services at competitive prices Customer intimacy involves offerings
tailored to match the demands of identified niches. Product leadership, thc third
discipline, involves offering customers leading-edge products and service* lhat make
rivals' goods obsolete.
Companies that specialize in one of these disciplines, while simultaneously meeting
industry* standards in the other two. gain a sustainable lead in their markets. This lead
is derived from the firm's focus on one discipline, aligning all aspects of operations
with it. Having decided on thc value that must be conveyed to customers, firms
understand more clearly what must be done to attain the desired results. After
transforming their organizations to focus on one discipline, companies can
concentrate on smaller adjustments to produce in* erememal \aluc> To match this
advantage, less focused companies require larger changes than thc tweaking that
discipline leaders need.
Operational Excellence
Operational excellence is a specific strategic approach lo the production and delivery
of product.* and sen* ice* A company that follows this strategy attempt* to lead it*
industry in price and convenience by pursuing a focti* on lean and efficient
operations Companies thai employ operational excellence work to minimize cost* by
reducing overhead eliminating intermediate production steps, reducing transaction
cosis, and opti-mi/iii|! business processes across functional and organizational
boundaries. The focus is on delivering products or services to customers at
competitive prices with minimal inconvenience. Strategy in Action Exhibit 7.5
provides an example ol successful operational excellence at TVS Motor Company.
Through its locus on operational excellence. Dell Computer has shown PC buyers that
they do not have to sacrifice quality of siate-of-lhe art technology in order lo buy
personal computers easily and inexpensively. Dell i i » /cd the opportunity to cut
retail dealers out of the industry \ traditional distribution process. Through this
approach—which includes direct sales; building to order; and creating a disciplined,
extremely low-cost culture Ml has been able to undercut other PC makers m price yet
provide high-qualits products and service,
Operational excellence is also the W^IC^M; focus of General Llectnc\ large appliance
business Hisloncally. the disiiihuiiun strategy for huge appliances was based on
requiring thai dealers maintain large uivcnioncs.
Price breaks tor dealers were based on order quantities. However, as the marketplace
became more competitive, principally as a result of competition for mullibraud
dealers like Sears, GE recognized the need to adjust its production and distribution
plans.
The GE system addresses the delivery of products. As a step toward organizational
excellence. GE created a computer-based logistic system to replace us in-storc
inventories model Retailers use this software to access a 24-hour online order
processing system that guarantees GE's best price. This system allows dealers to
better meei customer needs, with instantaneous access to a warehouse of goods and
accurate shipping and production information, GE benefits from the deal as well.
Efficiency is incrca.sed since manufacturing now occurs in response to customer
sales. Additionally, warehousing and distribution systems have been streamlined to
create the capability of delivering to 90 percent of destinations in the continental
United States within one business day.
Firms that implement the strategy of operational excellence typically restructure their
delivery processes to focus on efficiency and reliability, and use state-of-the art
information systems that emphasize integration and low-cost transactions*
Customer Intimacy
Companies that implement a strategy of customer intimacy continually tailor and
shape products and services to fit an increasingly refined definition of the customer.
Companies excelling in customer intimacy combine detailed customer knowledge
with operational flexibility TUcy respond quickly to almost any noed, from cus-
tomizing a product to fulfilling special requests to create customer loyally.
Customer-intimate companies are willing to spend money now to build customer
loyalty for the long term, considering each customer's lifetime value to the company,
not the profit of any single transaction. Consequently, employees in customer-intimate
companies go to great lengths to ensure customer satisfaction with low regard for
initial cost.
Home Depot implements the discipline of customer intimacy. Home Depot clerks
spend the necessary time with customers to determine the product that best suits their
needs, because the company V business strategy is built around selling information
and service in addition to home-repair and improvement items. Consequently,
consumers concerned solely with price fall outside Home Depot's core market
Companies engaged in customer intimacy understand the difference between the
profitability of a single transaction and ihe profitability of a lifetime relationship with
a single customer. The company's profitability depends in pan on its maintaining a
system that differentiates quickly and accurately the degree of service that customers
require and the revenues their patronage is likely to generate, firms using this
approach recognize that not every customer is equally profitable. For example, a
financial sen ices company installed a telephone-computer system capable of
recognizing individual clients by their telephone numbers when they call. The system
routes customers with large accounts and frequent transactions to their own senior
account representative. Other customers may be routed to a trainee or junior
representative. In any case, the customer s file appears on *he representative's screen
before the phone is answered.
The new system allows the firm to segment its services with great efficiency. If the
company has clients who are interested in trading in a particular financial instrument,
il can group (hem under ihe one account representative who specializes in that
instrument. This saves the firm the expense of training every representative in every
facet of financial services. Additionally, the company can direct certain value-added
services or products to a specific group of clients thai would have interest in them.
Businesses that select a customer intimacy strategy have decided to stress flexibility
and responsiveness. They collect and analyze data from many sources. Their
organizational structure emphasizes empowerment of employees close to customers.
Additionally, hinng and training programs stress the creative decisionmaking skills
required to meet individual customer needs. Managemeni systems recognize and
utilize such concepts as customer lifetime value, and norms among employees are
consistent with a "have il your way" mind set.
Product Leadership
Companies that pursue the discipline of product leadership strive to produce a
continuous stream of state-of-the-art products and services. Three challenges must be
met to attain that goal Creativity is ihc first challenge. Creativity is recognizing and
embracing ideas usually originating outside the company. Second, innovative
companies must commercialize ideas quickly Thus, their business and management
processes need to be engineered for speed. Product leaders iclcntlcssly pursue new
solutions to problems. Finally, firms utilizing this discipline prefer to release their
own improvements rather than wait for competitors lo enter. Consequently, product
leaders do not stop for self-congratulation; they focus on continual improvement.
For example. Johnson & Johnson's organisational design brings good ideas in,
develops them quickly, and looks Tor ways to improve (hem. In 1983, thc president
of JAJs Vistakon Inc.. a maker of specialty contact lenses, received a tip concerning
an ophthalmologist who had conceived of a method to manufacture disposable contact
lenses inexpensively. Vistakon s president received this lip Ir-om a J&J employee
from a different subsidiary* whom he had never met. Rather ihan dismiss the tip, the
execut ives purchased the tights lo ihe technology, assembled a management team lo
oversee thc product s development team to oversee the product's development and
built a state-of-the-art facility in Florida to manufacture disposable contact lenses
called Acuvuc. Vistakon and its pment, J&J, were willing to incur high manufacturing
and inventory costs before a single lens was sold. A high-speed production facility
helped give VistaXon a six-month head start over the competition that, taken off
guard never caught up.
Like other product leaders, J&J creaies and maintains an environment thai encourages
employees to shaie ideas. Additionally; product leaders continually scan thc
environment for new-product or service possibilities and rush to capitalize them.
Product leaders also avoid bureaucracy because it slows conuncrcializalion of their
ideas. In a product leadership company, a wrong decision often is less damaging than
one made late. As a result, managers make decisions qurkly. their companies
encouraging them lo decide today and impiemeit tomorrow'. Product leaders
continually look for new methods to shorten their eye! J times.
The strength of product leaders lies in reacting to situations as they occur. Shorter
reaction limes serve as an advantage in dealings with the unknown. For example,
when competitors challenged the safety of Acuvuc lenses, the firm responded quickly
and distributed data combating the charges lu eye care professionals. This reaction
created goodw ill in thc marketplace.
Product leaders act as their own competition. These firms continually make the
products and scrv ices they have created obsolete. Product leaders believe that if they
do not develop a successor, a competitor will. So. although Acuvue is successful
in :he marketplace, Vistakon continues to imestigale new material lhat will ex-lend
the wearability of contact lenses and technologies that will make current lenses
obsolete. J&J and other innovators recognize thai the long-run profitability of an
existing product or service is less important to the company's future ihan maintaining
its product leadership edge and momentum.
GRAND STRATEGIES
While ihe need for firms to develop generic strategics remains an unresolved debale,
designers of planning systems agree about the critical role of grand strategies. Grand
strategies, often called master or business strategics, provide basic direction for strate-
gic actions They are the b?sis of coordinated and sustained efforts directed toward
achieving long-term business objectives.
Thc purpose of this section is twofold: (I) to list, describe, and discuss 15 grand
strategies that strategic managers should consider and (2) to present approaches to the
selection of an optimal grand strategy from the available alternatives*
Grand strategies indicate the time period over which long-range objectives are to be
achieved Thus, a grand strategy can be defined as a comprehensive general approach
that guides a firm's major actions.
The 15 principal grand strategies arc concentrated growth, market development,
product development, in* novation, horizontal integration, vertical integration,
concentric diversification, conglomerate diversification, turnaround, divestiture,
liquidation, bankruptcy, joint ventures, strategic alliances, and consortia. Any one of
these strategics could serve as the basis for achieving the major long-term objectives
of a single firm. But a firm involved w ith multiple industries, businesses, product
lines, or customer groups—as many firms are- -usually combines several grand
strategies. For clarity, however, each ofthe principal grand strategics is described
independently in this section, with examples to indicate some of its relative strengths
and weaknesses.
Concentrated Growth
Many ofthe firms that fell victim to merger mania were once mistakenly convinced
that thc best way to achieve their objectives was to pursue unrelated diversification in
the search for financial opportunity and synergy- By rejecting that "conventional
wisdom," such firms as Martin-Marietta, KFC, Compaq, Avon, Hyatt Legal Services,
and Tenant have demonstrated the advantages of what is increasingly proving to be
sound business strategy. A firm that has enjoyed special success through a strategic
emphasis on increasing market share through concentration is Chemlawn. With
headquarters in Columbus, Ohio, Chemlawn is thc North American leader in
professional lawn care. Like others in the lawn care industry, Chemlawn is
experiencing a steadily declining customer hasc Market analysis shows that the
decline is fueled by negative environmental publicity, perceptions of poor customer
service, and concern about thc price versus thc value ofthe company's services, given
thc wide array of do-it-yourself alternatives. Chemlawn s approach to increasing
market share hinges on addressing quality, price, and value issues; discontinuing
products that the public or environmental authorities perceive as unsafe; and
improving the quality of its workforce.
These firms are just a few ofthe majority of American firms that pursue a concen-
concentrated growth tratcd growth strategy by focusing on a specific product and
market combination. Con- ccntrated growth is the strategy of thc firm that directs its
resources to the profitable growth or a single product, in a single market, with a
single dominant technology Thc main rationale for this approach, sometimes called a
market penetration or concentra-tion strategy, is that the firm thoroughly develops and
exploits its expertise in a dclim-itcd competitive arena. For a surprising example of
successful concentration al IBM.
Rationale for Superior Performance
Concentrated growth strategics lead to enhanced performance. The ability to assess
market needs, knowledge of buyer behavior, customer price sensitivity, and
effectiveness of promotion are characteristics of a concentrated growth strategy. Such
core capabilities are a mote important determinant of competitive market sue* cess
than are thc environmental forces faced by the firm. Thc high success rates of new
products also arc tied to avoiding situations that require undeveloped skills, such as
serving new customers and markets, acquiring new technology, building new
channels, developing new promotional abilities, and facing new competition.
A major misconception about the concentrated growth strategy is that ihe firm
practicing it will settle Tor little or no growth. This is certainly not true for 3 firm that
correctly utilizes the strategy. A firm employ mg concentrated growth grows by
building on its competencies, and it achieves a competitive edge by concentrating in
the product-market segment it knows best. A firm employing this strategy is aiming
for the growth
Conditions That Fcifor Concentrated
Specific condilions in the firm's em ironment are favorable to ihe concentrated growth
strategy. The first is a condition in which the firm's industry is resistant to major
technological advancements. This is usually the case in ihe late growth and maturity
stages of the product life cycle and in product markets where product demand is stable
and industry barriers, such as capitalization, are high. Machinery for ihc paper
manufacturing industry, in which the basic technology has not changed for more than
a century, is a good example.
An especially favorable condition is one in which the firm s targeted markets arc not
product saturated. Markets with competitive gaps leave the firm with alternatives for
growth, other than taking market share away from competitors. The successful
introduction of traveler services by Allstate and Amoco demonstrates that even an
organization as entrenched and powerful as the AAA could not build a defensible
presence in all segments of ihe autonvobile club market.
A third condition that favors concentrated growth exists wtien the firm's product
market* are sufficiently distinctive to dissuade competitors in adjacent product
markets from trying to invade the firm's segment. Jnhn Deere scrapped its plans for
growth in Ihc construction machinery business when mighty Caterpillar threatened to
enter Deere *s mainstay, the farm machinery business, in retaliation. Rather than risk
a costly price war on its own turf, Deere scrapped these plans.
A founh favorable eondiiion exists when the firm's inputs are stable in price and
quantity and are available in the amounts and at the times needed. Maryland-based
Gianl Foods is able to concentrate in the grocery business largely due to its stable
long-term arrangements with suppliers of its private«label products. Most of these
suppliers arc makers ofthe national brands tliat compete against the Giant labels. With
a high market share and aggressive retail distribution. Giant controls the access of
these brands to the consumer. Consequently, its suppliers have considerable incentive
lo honor verbal agreements, called bookings, in which they commit themselves for a
one-year period with regard to the price, quality; and timing of their shipments to
Giant.

The pursuit of concentrated growth also is favored by a stable market—a market

without the seasonal or Cyclical swings that would encourage a firm to diversify.
Night Owl Security; thc District of Columbia market leader in home security sen ices,
commits its customers lo initial four-year contracts. In a city wliere affluent
consumers lend io be quite transient, the length of this relationship is remarkable.
Night Owl's concentrated growth strategy has been reinforced by its success in getting
subsequent owner*- of its customers* homes to extend and renew the security service
contracts. In a similar way. Lands' End reinforced its growth strategy by asking
customers for names and addresses of friends and relatives living overseas who would
like to receive Lands' End catalogs.

A firm also can grow while concentrating, if it enjoys competitive advantages based
on efficient production or distribution channels. These advantages enable the firm to
formulate advantageous pricing policies. More efficient production methods and
hetter handling of distribution also enable the firm to achieve greater eainomics of
scale or, in conjunction with marketing, result in a product that is differentiated in the
mind of the consumer. Granitcvillc Company, a large South Carolina textde
manufacturer, enjoyed decades of growth and profitability by adopting a "follower"
tactic as pan of us concentrated growth strategy. By producing fabrics only after
market demand had been well established, and by featuring products thai reflected its
expertise HI adopting manufacturing innovations and in maintaining highly efficient
long production runs, Craniteville prospered through concentrated growth.

Finally, thc success of market generalists creates conditions favorable to concentrated

growth. When gener-alists succeed by using universal appeals, they avoid making
special appeals to particular groups of customers. The net result is that many small
pockets arc left open in thc markets dominated by general! and thai specialists emerge
and thrive in these pockets. For example, hardware store chains, such as Home Depot,
focus primarily on routine household repair problems and offer solutions that can be
easily sold on a self-service, doit-yourself basis. This approach leaves gaps at both the
"semiprofessionar and "neophyte** ends ofthe market—in terms of the purchasers
skill at household repairs and the extern to which available merchandise matches the
requirements of individual homeowners.

Risk and Rewards of Concentrated Growth

Under stable conditions, concentrated growth poses lower risk than any other grand
strategy; but. in a changing environment, a firm committed to concentrated growth
faces high risks. 1 he greatest risk is that concentrating in a single product market
makes a firm particularly vulnerable to changes in that segment. Slowed growth in the
segment would jeopardize thc firm because its investment, competitive edge, and
technology are deeply entrenched in a specific offering. It is difficult for the firm to
attempt sudden changes if its product is threatened by near-term obsolescence, a
faltering market, new substitutes, or changes in technology or customer needs. For
example, the manufacturers of IBM clones faced such a problem when IBM adopted
the OS/2 operating system for its personal computer line. Thai change made existing
clones out of date.

The concentrating firms entrenchment in a specific industry* makes it particularly

susceptible to changes in the economic environment of that industry. For example.
Mack Truck, the second-largest truck maker in America, lost $20 million as a result of
an 13-month slump in the truck industry.

Kntrcnchmcm in a specific product market lends to make a concentrating firm more

adepi than compeii-lorsai detecting new trend*.. However any failure of such a firm
to properly forecast major changes in its industry can result in extraordinary losses.
Numerous makers of inexpensive digital watches were forced io declare bankruptcy
because they failed to anticipate the compeiiiion posed by Swatch. Guess, and other
trendy watches That emerged from ihe fashion industry.

A firm pursuing a concentrated growth strategy ts \ ulnerable also to the high

opportunity costs that result from remaining in a specific product market and ignoring
other options thai could employ the firm's resources more profitably Overcommitmeni
to a specific technology and product market can hinder a firm s ability* to enter a new
or growing producl maiket that offers more attractive cost-benefit trade-offs Had
Apple Computers maintained its policy of making equipment that did not interface
with IBM equipment, it would have missed out on wliat have proved lo be its most
profitable strategic options.

Concentrated Growth Is Often the Most Viable Option

Examples abound of firms that have enjoyed exceptional returns on the concentrated
growth strategy. Such firms as McDonald s. Goodyear, and Apple Computers have
used firsthand knowledge and deep imolveineni with specific product segments to
become powerful competitors in their markets. The strategy is associated even more
often with successfiil smaller firms thai have steadily and doggedly improved their
market position.

The limned additional resources necessary to implement vonccnimtcd growth,

coupled with the limited risk involved also make ihis strategy desirable for a firm w
ith limited funds. Kor example, through a carefully devised concentrated growth
strategy, mcdium-si/cd John Deere & Company was able to become a major force in
the agricultural machinery business even when competing with such firms as Ford
Motor Company While other firms were trying to cxii or diversify from the farm
machinery business. Deere spent S2 billion in upgrading its machinery, boosting its
efficiency and engaging in a program to strengthen its dealership system. This
concentrated growth strategy enabled it lo become the leader in the farm machinery
business despite the fact thai Ford was more than III times its size.

The firm that chooses a concentrated growth strategy directs its resources to the
profitable growth ol a narrowly defined product and market, focusing on a dominant
technology. Firms that remain wiihin their chosen product markel arc able to extract
the most from their technology and market knowledge and thus, arc able to minimize
the risk associated with unrelated diversification The success of a concentration
strategy is founded on the firms use of superior insights into its technology* product,
and customer to obtain I sustainable competitive advantage. Superior performance on
these aspects of corporate strategy has been shown to ha\c a substantial positive effect
on market success.

A grand strategy of concentrated growth allows for a considerable range of action.

Broadly speaking, the firm can attempt to capture a larger inatkel share by increasing
the usage rates of present customers, by attracting competitors' customers, or by
selling to nonuscrs. In turn, each of these options suggests inure specific options, some
of which are listed in the lop section of Exhibit 7.7.

When strategic managers forecast that their current products and their markets will
noi piovide (he basis for achieving the company mission, they have two options thai
involve moderate costs and risk: market development and product development.

Market development common^ ranks second only to coiKentraiion as the least cosily
and least risky of Ihe 15 grand strategies. It consists of marketing present products, of
nodli ten with only cosmetic modifications, to customers in related market aieas by
adding customers fa channels of distribution or by changing the content of advertising
or promotion. Several related muttering specific market developmeni approaches are
listed in Exhibit 7,7. Thus, as suggested by areas

Concentration (increasing use of prevent products In present markets):

1. Increasing present customers' rate of use:
a. increasing it«e s»re o* purchase
b. hcreasing the rate of product obsolescence
c Advertising other uses.
d Gnnng pnce incentives tor increased use.
2 Attracting compet.ton customers.
a establishing sharper brand differentiation
b. Increasing oronnotional effort
c initiating pnce cuts.
3 Attracting nonusers to buy the product:
a inducmg tnal use through sampling, pnce •ncentivev and so on. b Pricing
up or down C Advertising new uses. Market development (selling present
products tn new markets):
1 Opening add liortal olograph* markets a. RegonaJ expanson
b National expansion c International expansion.
2 Attractmg other market segments
a Developing product versions to appeal to otner segments, b Entering
other channels ol distribution c AcMrtrvng in other meduj
Product development (developing new products for present markets):
I Devrtocwng new product features, a. Adapt (toother ideas. developments)
b Modify (change color, motion, sound, odor. form, shape*
c. Magnify (stronger, longer thicker, extra value)
d. Minify (smaller, shorter, lighter)
e. Substitute (other ingredients, piocess, power).
t Rearrange (other patterns, layout, seouerxe, components) *} Reverse
(inside out).
h Combine (blend, alloy, assortment, ensemble, combine units, purposes,
appeals, ideas)
2. DMkxMng qudtty vanatiom
3. Developing additional models ana sues (product proliferation J
4. the figure, firm* that open hianch offices in new cities, slates, or countries
are practicins market development, likewise* firms are
practKiogrnarkciuVvctc?>ment i f the) switch :KTI advertising m mdc
publications lo advertising in newspapers or if they add jobbers to
supplement their mail-order salc\ eflbn* rhis point is exemplified in
Straieity in Action Fxhihit 7.8 <wi free newspapers used to altracl
younger readers.
5. Market development illow% firms io practice a form of concentrated growth
by identifying new use* for existing products and new* demographically.
psychogniphically. or geographically defined markets Frequently, change* in media
selection, promotional appeals, and distribution are used to initiate this approach
Du Pom used market development when it found a new application Tor
Kcvlar. an organic material that po lice, security, and military personnel
had used primarily for bulletproof, up Kcvlar now is being used to refit
and maintain wooden-hulled boats, since it is lighter and stronger than
glass libers and has 11 limes the strength of .sleet.
Thc medical industry provides other examples of new markets for
existing products. The National Insti tutes of Health's report of a study
showing that ihc use of aspirin may lower the incidence of heart attacks
was expected to boost sales in the $22 billion analgesic market. It was
predicted that thc expansion of this mar ket would lower thc market
share of nonaspinn brands, such as industry leaders Tylenol and Advil.
Product extensions currently planned include Bayer Calendar Pack. 28-
day packaging to Tit the once-a-day prescrip tion for the prevention of a
second heart attack.
Aivother example isChecscbrough-ronds. a major producer of health
and beauty aids, which decided sev eral years ago lo expand its market
hy repacking its Vaselme Petroleum Jelly in pocket-size squeeze tubes
as Vaseline "Lip Therapy" Thc corporation decided to place a >trategic
emphasis on market development.
became tt knew irom market studies that its petroleum-jelly customer* already were
using the product to prevent chapped lip*. Company leaders reasoned thai their
market could be expanded significantly if the product were repacked to lit
conveniently in CNRMV1 pocket* and purses
Product Development
Product development involves the substantial modification of evicting products or
theprvduct detriopmemf
creation of new Kin related products thai can be marketed io tum-rii aislonrcts
through *
eruvt ^nviegy that
established channels- Tlic product oevelopmMl strategy often is adopted cither to pro-
uct* brand name The idea i* to attract satisfied cumomers to new products as a result
ol marketed to their positive expenence with the firms initial offering. The bottom
section in rmatcustomer* EaJalM 7.7 fasti some of the options available to firm>
undertaking product develop i r A rev tscd edition of a college textbook, a new car
sr> k. and a second formula of shampoo for oily ha:r arc examples of ihe product
oVveioproem Similarly. Pepsi changed its strategy on beverage product* b>' creating
new products to follow1 the industry movement away from mass branding This new
movement was designed iu attract a younger hip-per customer segment. Pepsi s new
pioduct* include a version of Mountain Dew. called Code Red. and new Pepsi brands,
called Pepsi Twist and Pepsi bVue.
The product Jcwlopmeni strategy is based on the penetration of existing markets by
incorporating pent-uci modification* into cutting items «»c bv developing DCW
products with a clear connection io the exiling product line. Ihe telm-rnmumcat.ons
industry provide* an evamplc of product extension based on product modification To
increase its estimated K to 10 percent share oi ihc $5 To Sb billion corporate user
market, MCI Communication Corpnralion extended its direct-din) service lo I4n
countries, the same a* those serviced by AT&T, at low^r average rates than those of
AT&T M(Ts addition of 7M countries to its rwiwofk underscore* its belief in this
market, which it expects to grow 15 to 20 percent annually. Another example of
expansion* linked to exiting lines i* Gerbers decision to engage in general
merchandise mar* kciing CieTber's recent mtroduction included S 2 item* that ranged
from feeding accessories lo toys and children's wear Likewise, Nabisco Brands seek*
competitive advantage b> placing its strategic emphasis on product development With
headquarter* in Par vippanv. New Jersey, the company isnnc of three operating umis
of KJR Nabisco, It is the leading producer of biscuits, confections, snacks, slncdded
cereals, and processed fruit* and vegetable*:. To maintain its position as lender
Nabisco pursue* a strategy of develop* ing and introducing new products and
expanding its existing product line Spoon Si/e Shredded Wheal and Ril Bits crackers:
are two examples of new products that are variations on existing products For a final
example of product dcvclormcnt. read about M l \ search for a new slot machine
attraction.
Innovation
In many industries, ii hns become increasingly risky not to innovate Both consumer
ami industrial markets have come to expccl periodic changes and improvements in ihe
products ottered As a result, some firms find it profitable in make innovation their
grand straregy They seek to reap the initially high profits .is*ociaiod with cus- lomcr
acceptance of a new or greatly improved product. Then, rather than face stiff-
cning competition a* the basis of profitahilits shifts from innovation to production
marketing competence, they search for other original or novel ideas. The under
aervice. lying rationale of ihc grand strategy of innovation is tocreale a new product
life cycle and thereby make similar existing products obsolete, thus this strategy
differs from the product development strategy of extending an existing product's life
cycle For example. Intel, a leader in the
California, thc company is a designer and manufacturer of semiconductor components
and related computers, of microcomputer systems, and of software. Its Pentium
microprocessor gives a desktop computer thc capability of a mainframe. Strategy tn
Action Exhibit 7.10 makes an important related point— sometimes innovations can be
acquired.
While most growth-oncmcd firms appreciate thc need to be innovative* a few firms
use it as their fundamental way of relating to their markets. An outstanding example is
Polaroid which heavily promotes each of its new 1 cameras until competitors are able
to match its technological innovation; by this lime. Polaroid normally is prepared to
introduce a dramatically new or improved product. Kor example, it introduced
consumers in quick succession to the Sw ingcr. thc SX-70. the One Step, and the Sun
Camera 660.
Few innovative ideas pun profiiable because ihe research, development, and prc-
markcting costs of convening a promising idea into a profitable product arc extremely
high. A study by the Booz Allen & Hamilton management research department
provides some understanding ofthe risks. As shown in Exhibit 7.11, Booz Allen &
Hamilton found that less than 2 percent ofthe innovative projects initially considered
by 51 companies eventually reached the marketplace. Specifically, out of every 58
new product ideas, only 12 pass an initial screening test that finds them compatible
with the firms mission and long-term objectives, only 7 remain after an evaluation of
their potential, ami only 3 sumvc development attempts. Ofthe three survivors, two
appear to have profit potential alter lest marketing and only one is commercially
successful
Horizontal Integration
When a firm's long-term strategy is based on growth through the acquisition of one or
more similar firms
operating at thc same stage ofthe production-marketing chain, lis grand stralcg> is
called horizontal integration* Such acquisitions eliminate competitors and provide the
acquiring firm with access to new markets. One example is Warner-Lumbcniac-
quisition of Parke Davis, which reduced competition in thc ethical drugs field for
Chilcutt Laboratories, a firm that Warner-Lambert previously had acquired. Another
example is thc long-range acquisition pattern ot White ( onsohdated Industries,
operating at the same which expanded in the refrigerator and freezer market through a
grand strategy of .%tage ol the horizontal integration, by acquiring Kelvinator
Appliance, thc Refrigerator Products production-mari^iing Division of Bendix
Weslinghousc Automotive Air Brake, and Frigidairc Appliance from Genera)
Motors. Nike's acquisition in the dress shoes business and N. V. Homes s purchase of
Ryan Homes have vividly exemplified Ihe success that horizontal integration
strategies can bring.
Deutsche Telekom growth strategy of horizontal acquisition. Deutsche Telekom was a
dominant player in the Luropean wireless services market, but without a ptesence in
the fast-growing US market in 20(10. To correct this limitation. Deutsche Telekom
horizontally integrated by purchasing the American firm Voice* Stream Wireless, a
company that was growing faster than tnosi domestic rivals and that owned spectrum
licenses providing access to 220 million potential customers.
Vertical Integration
When a firm's grand strategy is to acquire firms that supply it with inputs {such as
raw

material*! or are customers for its outputs (such as warchouscrs for finished
products). vertical Integration is involved. To illustrate, if a shirt manufacturer
acquires a textile produccr -by purchasing its common Mock, buying its assets, or
exchanging ownership tionof funis thai interests—the strategy is vertical integration.
In this case, it is facb anl vertical inie- gration. since the acquired hrm operates at an
earlier stage m thepnKiuction-markcting process. If the shirt manufacturer had
merged with a clothing store, it would have been forMvnt vertical integration—thc
acquisition of a firm, nearer to the ultimate consumer.
Amoco emerged us North America s leader in natural gas reserves and products as a
result of its acquisition of Dome Petroleum. This backward integration by Amoco was
made in support of its downstream businesses in refining and in gas stations, whose
profits made the acquisition possible
Exhibit 7.12 depicts both honzontal and vertical integration. Thc principal attractions
of a horizontal integration grand strategy arc readily apparent. The acquiring firm is
able to greatly expand its operations, thereby achieving greater market share,
improving economies of scale, and increasing ihe efficiency of capital use. In
addition, these benefits are achieved with only moderately increased risk, since the
success ofthe expansion is principally dependent on proven abilities.
Thc reasons for choosing a vertical integration grand strategy are more varied and
sometimes less obvious. The main reason for backward integration is the desire to
increase thc dependability ofthe supply or quality ofthe rjw materials used as
production inputs Thai desire is particularly great when thc number of suppliers is
small and the number of competitors is large. In this situation, the vertically
integrating firm can better control its costs and, thereby, improve the profit margin
ofthe expanded production-marketing system. Forward integration is a preferred
grand strategy if great advantages accrue to stable production A firm can increase the
predictability of demand for its output through forward integration: that is. through
ownership of the next stage of its production-marketing chain.
An example of vertical integral ion is provided in Strategy in Action Exhibit 7.13.
Suzlon Energy decided to vertically integrate its operations to achieve advantage on
account of better bargaining power over buyers and suppliers, and also through better
coordination of internal activities. It could also capture downstream
concentric diversification, conglomerate diversification gives litilc concern to crating
product-market synergy with existing businesses. What such conglomerate
diversificrs as ITT, Textron. Atrcrican Brands. Litton. LS. Industries. Tuqua. and I. C.
Industries seek is financial synergy. For example, they may seek a balance in their
portfolio* between current businesses with cyclical sales and acquired businesses with
countercyclical sales, between high-cash hm-opportunity and
lowca-sh/high*opporlunity businesses, or between debt-free and highly leveraged
businesses.
The principal difference between the two type* of diversification ts thai concentric
diversification emphasizes some commonaliiy in markets, products, or technology,
whereas conglomerate diviTsificaiion is based principally on profit considerations.
Several of ihc grand strategics discussed above, including concentric and
conglomerate diversification and horizontal and vertical integration, often involve the
purchase or acquisition of one firm by another. Il is important to know that thc
majority of such acquisilions Tail to produce the desired results for thc com
Balance or fill out the product line.
'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.
 Balance or fill out the product line.
'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

Balance or fill out the product line.

'tiodficy Ucvlui and Mark BhttcUcy. Strjtcpc Allxancev-<iuiJetincs for Sua-enf L*m
Rtmgt* naming October IvhS. pp IS-23.

panics involved. Exhibit 7.15, Strategy in Action, provides seven guidelines that can
improve a company s chances of a successful acquisition.
Motivation /
Grand strategies involving cither concentric or conglomerate diversification represent
distinctive departures from a firms existing base of operations, typically ihe
acquisition or internal generation (spin-oil) of a separate business with synergistic
possibilities counterbalancing the strengths and weaknesses of the two businesses. For
example. Head Ski sought to diversify into summer sporting goods and clothing to
offset the seasonality of its "snow" business. Additionally, diversifications
occasionally Ut undertaken as unrclarcd investments, because of their high profil
potential and ihcir olheiwise minimal resource de* mands.

Regardless of the approach taken, the motivations of the acquiring firms are the same:

* Increase the firms slock value In the past, mergers often have led to increases in the
Mock price or ihe price-earnings ratio.

* Increase ihc growth rate of ihe firm.

* Make an investment that represents better use of funds than plow ing them into
internal growth.

* Improve the stability of earnings and sales by acquiring firms whose earnings and
sales complement the firm s peaks and valleys.
rrun> cases, strategic managers believe that such a firm can iunt\e and eventually
recover if a convened effort is made over a period of a few years lo fortify its dis-
tinctive competencies. This grand strategy is known .i\ turnaround. It typically is
begun through one of two forms of retrenchment, employed singly or in combination
1. COM nduction. Examples include decicnsing the workforce through employee
attrition, leasing rather than purchasing equipment, extending the life of machinery,
eliminating elaborate promotional activities, laying nfTemployees, dropping items
ham I pro-duct ion line, and discontinuing low-margin customers.
2. A&stt reduction. Lxamples include the sale of laiul buildings, and equipment
not essential to the basic activity of the firm ind the elimination of "pcrkC such as the
company airplane and executives' cars
Interestingly the turnaround most commonlv associated w ith thi> approach is in
management position* In a studv ol SH Urge firms, researchers ShenoVL Patton. and
Riggs found lhat turnaround almost always was associated with changes in lop
management * Bringing tn new managers believed to introduce needed new
neryKCtrves on the firm % situation. to raise cmpioyce morale, and to facilitate
drastic action*, such as deep budgetary cuts in established programs
Strategic management research provides es idencc that the firms that have Used a
ftirminwml %tnjhx* nave successful h contrnntcd decltnc. The research findings have
been assimilated and used as the building blocks for a model of the turnaround
procevs shown in Inhibit 7 In
The model begins with a depiction of external and internal factor?* as causes of a
firms performance dtmn-turn When these factors continue to detrimentally iinpuci ihc
firm, its financial health is threatened. Unchecked ttecline places the firm in a
turnanHind situation.
A turnaround situation represents absolute and rclativc-to-industry declining
performance of a sufficient magnitude to warrant explicit turnaround actions.
Turnaround situations may be thc result of years of gradual slowdown or months of
sharp decline. In either case, the recovery phase ofthe turnaround process is likely io
be more successful in accomplishing turnaround when it is preceded by planned
retrenchment thai results in the achievement of ncar-lcrrn financial stabilization. For a
declining firm, stabilizing operations and restoring profitability almost always entail
strict cost reduction followed by a shrinking back to those segments of thc husincss
that have the best prospects of attractive profit margin*. The need for retrenchment
was reflected in unempltiymem figures during the 2000 2003 recession. More layoffs
of American workers were announced in 2001 than in any ofthe previous eight years
when i s . companies announced nearly 2 million layoffs as the economy sunk into
its first recession in a decide.
The immediacy ofthe resulting threat to company survival posed by thc turnaround
situation is known as situation severity. Seventy is thc governing factor in estimating
the speed with which the retrenchment response will be formulated and activated.
When severity is low. a firm has some financial cushion. Stability may be achieved
through cost retrenchment alone. When turnaround situation severity is high, a firm
must immediately stabilize thc decline or bankruptcy is imminent. Cost reductions
must be supplemented with more drastic asset reduction measures. Assets targeted for
divestiture are those determined to be underpro-ductivc. In contrast, more productive
resources are protected from cuts and represent critical elements ofthe future core
business plan of the company (i.e., the intended recovery response).
Turnaround res/H>nse\ among successful firms typically include two stages of
strategic activities: retrenchment and the recovery response Retrenchment consists of
cost-cutiing and asset-reducing activities, Thc primary objective of the retrenchment
phase is to stabilize the firm's financial condition. Situation sever* ity has been
associated with retrenchmeni responses among successful turnaround firms. Firms in
danger of bankruptcy* or failure (i.e., severe situations) attempt to halt decline
through cost and asset reductions. Firms in less severe situations have achieved
stability merely through cost retrenchment. However, in either case, for firms facing
declining financial performance, thc key io successful turnaround rests in the effective
and efficient management of the retrenchment process.
The primary causesof the turnaround situation have been associated with the second
phase ofthe turnaround process, the recm-ery response. For firms lhat declined
primarily as a result of external problems, turnaround nvost often has been achieved
through creative new cntrcprcneunal strategies. For firms that declined prima-rily as a
result of internal problems, turnannind has been most frequently achieved through
efficiency7 strategies. Reconvy is achieved when economic measures indicate that thc
firm has regained its predowniurn levels of performance.
Divestiture
A divestiture strategy involves the sale of a firm or a major component of a firm,
divestiture strategy Sara Lee Corp. ISLE) provides ■ good example It sells everything
from Wonderbras A grand strategy that and Kiwi shoe polish to Fndust furniture
polish and Chock Full o'Nuts coffee. The solves the sale of a company used a
conglomerate diversification strategy to build Sara Lee into a huge ™^^™J"*^C
portfolio of disparate brands. A new president. C. Steven McMillan, faced stagnant
^^J*A*0MG revenues and earnings. So he consolidated streamlined, and focused thc
company on
its core categories food underwear, and household products. He divested 15
businesses, including Coach leather goods, which together equaled more than 20
percent of thc company's revenue, and laid off 13,200 employees, nearly 10 percent
ofthe w\)rkforce. McMillan used thc cash from asset sales to snap up brands lhat
enhanced Sara Lee's clout in key categories, like the $2.8 billion purchase of St.
Louis-based bread-maker Furthgrains Co, to quadruple Sara Lee's bakery operations.
When retrenchment fails to accomplish the desired njmarouTvi as tn the Goodyear
situation, i* when a nonintegntcd business activity achieves an unusually high market
value, strategic manager* often decide to sell the firm. However, because the intent is
to find a buyer willing to pav a premium above the value ol 4 point concern ** fixed
assets, the term marketing far %ale i* often more appropriate. Prospective buyers must
be convinced thai because of their skills and resources or because of the firms
synergy* with their existing bust* nesscs, ihey will be able lo profit from the
acquisition
Corning undertook a turnaround that followed retrenchment with divestitures. In
2(101. Corning found itself in a dcclinuiR maikci for its core product ul I iher-optie
cable Ihe company needed to develop a strategy that would ulltnv it to lurn around its
falling sales and begin to grow once more. It began with retrenchment. Corning laid
off 12,0110 workers In 2001 and another 4.000 in 2002. Corning also began the
divestiture of its noncore assets, such as its nontelecom businesses and it* money-
losing photonics operation, lo stabilize its financial situation so that it could begin its
recovery.
Ihc reasons for divestiture vary; They often arise because of partial mismatches
between the acquired firm and the parent corporation Some of the mismatched ports
cannot be integrated into the corporation* mainstream activities and thu>. must be
spun off. A second reason is corporate financial needs Sometimes ihc cash flow or
financial stability of the corporation as a whole can be greatly improved if businesses
w nh high market value can be sacrificed. The result can be a balancing of ex|uit>
with long-term nsks or of long*ierm debt payments to optimize the cost of capital A
third less- trequent reason for drvestmire is government antitrust action when J firm is
believed to monopolise or unfairly dominate a particular market.
Although examples ol the divestiture grand strategy arc numerous. CBS Inc. provides
an outstanding example. In a two-year period the once diverse entertainment and
publishing giant sold its Records Division lo Sony, its ma^a/inc publishing business to
Diamond is Communications, its book publishing operation* lo Hai-court llracc
Jovanovich. and its music publishing opctalums lu SI1K I nlertainmcnt World Other
firms thai have pursued this type of grand strategy include I M mirk, which divested
Swift & Company* and While Motors, which divested White hum
Liquid Junction
When liquidation is the grand strategy, the firm typically is sold in parts, only occa-
sionallv as a whole but for its tangible asset value and not as a going concern In
lecting liquidation, the owners and strategic managers of a firm are admitting failure
Knasew and recogni/e that this action is likely to result in great hardships to
themselves and for tar* talse«e vaaw their ctnpkwcvs KK these reasons, liquidation
usually is seen as the least attractive of the grand strategies As a long-term strategy,
however, it minimizes the losses of all the firm * stockholders I at cd with
bankruptcy, the liquidating firm usually tries to develop a planned and orderly system
that will rent in the grcalcst possible return and cash conversion a* ihc linn slowly
relinquishes its market share
Planned liquidation can be worthwhile, for example* Columbia Corporation, a SI30
million diversified firm, liquidated iis assets tor more cash per share than ihe inuikei
value of its Slock.
. Bankruptcy
Husmcss failures are playing an increasingly important role in Ihe American
economy.When a company U
loan jverattc week, more than 300 companies fail. More than 75 percent of these fit
runcuMv desperate firms tile for a ttquuhtum bankruptcy ihcy agree to a complete
distribution of their assets to creditors, most of whom reccise a small fraction of the
assets, amount they are owed Liquidation is what the lavpvrson views AS
bankruptcy': thc business cannot pay its debts, so it must close its doors. Investors
lose their money, employees lose their job*, and managers lose their credibility. In
owrvct-manajtcd firms, companv and personal bankruptcy commonK go hand in
hand.
The other 25 percent of these firms refuse to surrender until one final option is
exhausted- Choosing a strategy 1(1 recapture its viability, such a company asks the
courts for a reorganization bankruptcy. The firm attempts lo persuade its creditors to
temporarily freeze their claims while it undertakes lo reorganize and rebuild thc
company's operations more profitably. The appeal of a reorganization bankruptcy is
based on the company's ability lo convince creditor* that it can succeed in thc
marketplace by implementing a new strategic plan, and that when the plan produces
profits the firm will be able to repay its creditors, perhaps in full In other word*, the
company* offers its creditors a carefully designed alternative to forcing an immediate,
but fractional, repayment of its financial obligations. The option of reorganization
bankruptcy oilers maximum repayment of debt at some specified future time if a new
strategic plan is successful.
The Bankruptcy Situation
Imagine that your firm's financial reports have shown an unabated decline in revenue
for seven quarters. Expenses have increased rapidly, and it is becoming difficult, and
at times not possible, to pay bills as they become due. Suppliers are concerned about
shipping goods without first receiving payment, and some have refused to ship
without advanced payment in cash. Customers are requiring assurances that future
orders will be delivered and some are beginning to buy from competitors. Employees
are listening seriously to rumors of financial problems and a higher than normal
number have accepted other employment. What can be done? What strategy can be
initiated to protect thc company and resolve thc financial problems in thc short term?
Chapter 7: Thc Harshest Resolution
If the judgment ofthe owners of a business is that iis decline cannot he reversed, and
thc business cannot be sold as a going concern, then thc alternative that is in the best
interest of all may be a liquidation bankruptcy, also known as Chapter 7 of the
Bankruptcy Code. Thc court appoints a trustee, who collects thc properly of thc
company, reduces il to cash, and distributes the proceeds proportionally lo creditors
on a pro rala basis as expeditiously as possible Since all assets arc sold to pay
outstanding debt, a liquidation bankruptcy terminates a business. This type of filing is
critically important to sole proprietors or partnerships. Their owners are personally
liable for all business debts not covered by thc sale ofthe business assets unless they
can secure a Chapter 7 bankruptcy, which will allow them to cancel any debt in
excess of exempt assets. Although they will be left with little personal property, the
liquidated debtor is discharged from paying thc remaining debt.
The shareholders of corporations are not liable for corporate debt and any debt
existing after corporate assets are liquidated is absorbed hy creditors. Corporate
shareholders may simply terminate operations and walk away without liability to
remaining creditors. However, filing a Chapter 7 proceeding will provide for an or-
derly and fair distribution of assets to creditors and thereby may reduce the negative
impact of thc business failure.
Chapter I t : A Conditional Second Chance
A proactive alternative for the endangered company is reorganization bankruptcy
Chosen for thc right reasons, and implemented in thc right way, reorganization
bankruptcy can provide a financially, strategically, and ethically sound basis on which
to advance the interests of all ofthe firm's stakeholders.
A thorough and objective analysis of the company may support the idea of its
continuing operations if ex* cessivedebt can be reduced and new strategic initiatives
can be undertaken. If thc realistic possibility of long-term survival exists, a
reorganization under Chapter 11 of ihe Bankruptcy Code can provide the opportunity.
Reorganization allows a business debtor to restructure its debts and, with thc
agreement of creditors and ap-pmval ofthe court, to continue as a viable business.
Creditors invoked in Chapter 11 actions often receive less than Ihc total debt due to
them but far more than would he available from liquidation
A Chapter 11 bankruptcy can provide lime and protection to the debtor firm (which
we will call the Com pottyi to reorganize ;uul use future earnings to pay creditors. The
Company may restructure debts, close unprofitable divisions or stares, renegotiate
labor contracts, reduce its workforce, or propose other actions thai could cieate a
profitable business. If the plan is accepted by creditors, the Company will be given
another chance to avoid liquidation and emerge from the bankruptcy proceedings
rehabilitated.
Seeking Protection o f the Bankruptcy Court
If creditors file lawsuits or schedule judicial sales to enforce liens, the Company will
need to seek the protection of thc Bankruptcy Court. Filing a bankruptcy petition will
invoke the protection ofthe court to provide sufficient time to work out a
reorganization that was not achievable voluntarily. If reorganization is not possible, a
Chapter 7 proceeding will allow for the fair and orderly dissolution ofthe business.
If a Chapter 11 proceeding is ihc required course of action, thc Company must
determine what thc reorganized business will look like, if such a siiucture can be
achieved and how ii will be accomplished while maintaining operations during thc
bankruptcy proceeding. Will sufficient cash be available to pay for the pro* cccdings
and reorganization? Will customers continue to do business with the Company or seek
other more secure businesses with which to deal? Will key personnel slay on or look
for more secure employment? Which operations should be discontinued or reduced?
Emerging from Bankruptcy
Bankruptcy is only the first step toward recovery lor a firm. Many questions should
be answered; How did the business get to thc point at which thc extreme action of
bankruptcy was necessary? Were warning signs overlooked? Was the competitive
environment understood? Did pride or fear prevent objective analysis? Did the
business have thc people and resources to succecd?Was ihe strategic plan well
designed and implemented? Did financial problems result from unforeseen and
unforeseeable problems or from bad management decisions?
Commitments to "iry harder" "listen more carefully to ihc customer," and "be more
efficient" arc important but insufficient grounds to inspire stakeholder confidence A
recovery strategy must be developed to delineate how the company will compete
more successfully in thc future.
An assessment ofthe bankruptcy situation requires executives to consider the causes
of the Company's decline and ihe severity ofthe problem it now faces. Investors must
decide whether the management team lhat governed the company's operations during
thc downturn can return the firm to a position of success. Creditors must believe that
ihc company ks managers have learned how to prevent a recurrence ofthe observed
and similar problems. Alternatively, they must have faith that ihe company s
competencies can be sufficiently augmented by key substitutions to the management
team, with strong support in decision making from a board of directors and
consultants, to restore the firms competitive strength.
The 12 grand strategics discussed above, used singly and much more often in
combinations, represent the traditional alternatives used by firms in the United Slates.
Recently, three new grand types have gained in pop- ularity (ihus touihng the 15
grand strategics we said w«c would discuss); all fit under thc broad category of cor-
porate combinations. Although ihey do nol fil the criterion by which executives retain
a high degree of controlover their operations, these grand strategies deserve special
attention and consideration especially by companies that operate in global, dynamic,
and technologically driven industries., Than three newly popularized grand strategics
are joint ventures, strategic alliances, Occasionally twti or more capable firms lack a
necessary component for success in a particular competitive environment. For
example, no single petroleum firm controlled sufficient resources to construct the
Alaskan pipeline Nor was any single firm capable of processing and marketing all of
the oil that would flow through the pipeline. The solution was a set of joint ventures,
which arc commercial companies (children) created and operated for the benefit of the
co-owners (parents). These co* operative arrangements provided both the funds
needed to build the pipeline and the processing ami marketing capacities needed to
profitably handle the oil flow.
The particular form of joint ventures discussed above is Joins ownership. In recent
years, it ha** become increasingly appealing for domestic firms to join foreign firms
by means of this form. For example. Diamond* Star Motors is ihe result of a joint
venture between a US. company. Chrysler Corporation, and Japan s Mitsubishi
Motors corporation. Located in Normal, Illinois, Diamond-Star was launched because
ii offered Chrysler and Mitsubishi a chance to expand on their long-standing
relationship in which suhcompact cars (as well as Mitsubishi engines and other
automotive parts) are imported to the United Stales and sold under the Docile and
Plymouth names.
The joint venture extends the supplier-consumer relationship and has strategic
advantages for both partners. For Chrysler, it presents an opportunity to produce a
high-quality car using expertise brought to the venture by Mitsubishi. Il also gives
Chrysler the chance to try new production techniques and to realize efficiencies by
using the workforce thai was not included under Chrysler's collective bargaining
agreement wiih the United AutoWorkcrs. The agreement offers Mitsubishi the
opportunity to produce cars for sale in the United States without being subjected to
the tariffs and restrictions placed on Japanese imports.
As a second example. Bethlehem Steel acquired an interest in a Brazilian mining
venture to secure a raw material source. The stimulus for this joint ownership venture
was grand slralegy; but such is not always the case. Certain countries virtually
mandate that foreign firms entering ihcir markets do so on a joint ownership basis.
India and Mexico are good examples- The rationale of these countries is that joint
ventures minimize the threat of foreign domination and enhance the skills,
employment* growth, and profits of local firms.
Ii should be noted that strategic managers understandably are wary of joint ventures.
Admittedly, joint veiv tares present new opportunities with risks that can be shared.
On the other hand, joini ventures often limit the discretion, control, and profit
potential of partners, while demanding managerial attention and oihcr resources that
might be directed toward the firms mainstream activities. Nevertheless, increasing
globalization in many industries may require greater consideration of the joint venture
approach, if historically national firms are to remain viable.
Strategic Alliances
Strategic alliances an distinguished from joint ventures because ihe companies in-
strategic affiances volved do not take an equity position in one another. In many
instances, strategic al- Conuactual partner-liances arc partnerships that exist for a
defined period during which partners ship* because the contribute their skills and
expertise to a cooperative project. For example, one part under provides
manufacturing capabilities while a second partner provides marketing expertise. Many
limes, such alliances arc undertaken because the partners want to another develop in-
house capabilities to supplant Ihc partner when the contractual arrangement between
ihem reaches its termination date. Such relationships are tricky because, in a sense,
the partners are attempting to "steal" each other's know-how. hxhihit 7.17. Global
Strategy in Action, lists many important questions aboul ihcir learning intentions that
prospective partnets >hould ask themselves before entering into a strategic alliance.
In other instances, strategic alliances are synonymous with licensing agreements.
Licensing involves the transfer of some industrial property right from the U.S.
licensor to a motivated licensee in a foreign country. Most tend to he patents,
trademarks, or technical know-iiow thai are granted to the licensee for a specified
time in return for a royalty and for avoiding tariffs or import quotas. Bell South and
US. West, with various
marketing and scrs ice competitive advantages valuable lo l-lumpc. ha\ c extended a
number of license* toere-atc personal computer network* in Ihc United Kingdom
(U.K.).
Another licensing strategy open to U.S. firms is to contract the manufacturing of its
product line to a for* cign company to exploit local comparative advantages in
technology materials. < H labor lor example. MIPS Computer Systems has licensed
Digital Fquiprneni Corporation, Texas Instruments. C spros SemKonductof. and
Bipolar Integrated IcchmJogv in the United Stales, and Fujitsu. NEC and Kubota tn
Japan in market computers ha<cd on its designs in the partner s country'.
Service and franchise-based firm* including .Anheuser-Busch. Avis. Coca-Cola.
Hilton. Hyatt. Holiday Inns. Kentucky Fried [Tucket McDonald's, and Pepsi—base
long engaged in licencing arrangements Aiih foreign distributors as a way io enter
ncss markets with standardized products that can henern from marketing economies
Outsourcing is a rudimentary approach to strategic alliances that enables Firms to gain
a competitive advantage. Significant changes within many segments of American
business continue to encourage the use of outsourcing practices. Wiihin the health
care arena, an industry survey recorded 67 percent of hospitals using provider
outsourcing for at least one department within their organization. Services such as
information systems, reimbursement, and risk and physician practice management are
outsourced by 51 percent of the hospitals ihat use outsourcing.
Another successful application of outsourcing is found in human resources. A survey
of human resource executives revealed 85 percent have personal experience leading
an outsourcing effort within their organization. In addition, it was found that two-
thirds of pension departments have outsourced at least one human resource function.
For an interesting examples from Pakistan, see Exhibit 7.18. Strategy in Action.
Wiihin customer service and sales departments, outsourcing increased productivity in
such areas as product information, sales and order taking* sample fulfillment, and
complaint handling. Iixhibit 7.19 presents Ihe top five strategic and tactical reasons
for exploiting ihe benefits of outsourcing.
1. Improve Business Focus
For many companies, the single most compelling reason lor outsourcing rs That
several "how" issues are siphoning off huge amounts ot management's resources and
attention.
2. Access to World Class Capabilities
By the very nature ol their specialization, outsourcing providers bring extensive
worldwide, world-dass resources to meeting the needs of their customers. Partnering
with an organize tion with work)-class capacities can oiler access to new technology,
tools, and techniques that the organization may not currently possess, Better career
opportunities tor personnel who transition to the outsourong provider, more structured
melhootologies, procedures, and documentation, and competitive advantage through
expanded skills*
3. Accelerated Reengineering Benefits
Outsourong is often a byproduct ol another powerful management tool—business
process reengineering n allows an organization to immediately realize the anticipated
benefits of reengineering by having an outside organization—one that is already
reeng»-neered to world*class standards—take over the process.
4. Shared Risks
When companies outsource they become more flexible, more dynamic, and better
able to adapt to changing opportunities
5. Free Resources for Other Purposes
Outsourcing permits an organization to redirect its resources from noncore activities
toward activities that have the greater return in serving the customer
Consortia, Kcirctsus, and Chaebols
Consortia arc defined as large interlocking relationships between businesses of an in-
dustry. In Japan such consortia are known as keiretsus; in South Korea as chaebols*
In Europe, consortia projects are increasing in number and in success rates. Examples
include thc Junior Engineers* and Scientists" Summer Institute, which underwrites
cooperative learning and research; the European Strategic Program for Research and
Development in Information Technologies, which seeks to enhance European compet-
itiveness in fields related to computer electronics and component manufactunng; ami
EUREKA, which isa joint program involving scientists and engineers from several
European countries to coordinate joint research projects.
A Japanese keiretsu is an undertaking involving up to 50 different firms that arc
joined around a large trading company or bank and are coordinated through interlock-
ing directories and stock exchanges. It is designed to use industry coordination lo
minimize risks of competition, in part through cost sharing and increased economics
of scale. Examples include Sumitomo, Mitsubishi, Mitsui, and Sanwa. Exhibit 7.20,
Global Strategy in Action, presents a new side xokeiretsus, namely, that they are
adding global partners, including several from the United Siaies to increase cost
reductions. Their cooperative nature is growing in evidence as is their market success.
A South Korean chaebol resembles a consortium or keiretsu except thai they are
typically financed through government hanking groups and are largely run by
professional managers trained by participating firms expressly for the job.
SELECTION OF LONG-TERM OBJECTIVES AND GRAND STRATEGY
SETS
At first glance, the strategic management model which provides the framework for
study throughout this book, seems lo suggest that strategic choice decision making
leads to ihe sequential selection of long-term objectives and grand strategies. In fact,
however, strategic choice is the simultaneous selection of long-range objectives and
grand strategics. When strategic planners study their opportiinities, they try to
determine which are most likely to result in achieving various long-range objectives.
Almost simuluineousry. they try to forecast whether an available grand strategy can
take advantage of preferred opportunities so thc tentative objectives can be met. In
essence, then, three distinct but highly interdependent choices are being made at one
time. Several triads, or sets, of possible decisions arc usually considered.
A simplified example of this process is shown in Exhibit 7.21. In this example, thc
firm has determined thai su strategic choice options are available. These options stein
from three interactive opportunities (e.g.. West Coast markets lhat present little
competition \. ik-cau.se each of these interactive opportunities can be approached
through different grand strategies- for options 1 and 2. thc grand strategies are
horizontal integration and market development—each offers thc potential for
achieving long-range objectives to varying degrees. Thus, a firm rarely can make a
strategic choice only on the basis of its preferred opportunities, long-range objectives,
or grand strategy. Instead, these three elements must be considered simultaneously,
because only in combination do they constitute a strategic choice.
In an actual decision situation, thc strategic choice would be complicated by a wider
variety of interactive opportunities, feasible company objectives, promising grand
strategy options, and evaluative criteria. Nevertheless. Exhibit 7,21 docs partially
reflect the nature and complexity ofthe process by which long-term objectives and
grand strategies are selected.
In the next chapter, thc strategic choice process will be fully explained. Howc\cr,
know ledge of long-term objectives and grand strategies is essential to understanding
that process.
SEQUENCE OF OBJECTIVES AND STRATEGY SELECTION
Ihc selection of long-range objectives and grand strategies involves simultaneous,
rather than sequential, DEcisions White IT 11 true thai objectrves arc needed 10 present
thc firm** direction and progrcu from being determined bn random forces, it t>
equally true thai objective* can be achieved only if Mraiegic* arc implemented In
fact, long-term objective* and grand strategics are so interdependent that some
business con* HTILTANTSDONOI distinguish between them. Long-term objectives and
grand strategies arc still combined under the heading of company strategy in most
ofthe popular business literature and in the thinking of most practicing executive*
However, the distinction has mem Objectives indicate WHAT strategic managers want
BUT provide few in-Mphis about ho* they1 will be achieved Converse!), strategies
indicate whai tvpes of act TORN WILL be taken hut do not define what ends will be
pursued OR wliat criteria w ill serve as constraints m refining thc strategic plan
Does it matter whether strategic decisions are mode 10 achieve objectives or TO
satisfy constraints? No, he-cause constraints arc themselves objectives. The constraint
of increased inventory capacity in a desire (an OBjectives not a certainty Likewise, the
constraint of an increase in thc sales force does not ensure that the increase will be
achieved given such factors as other compam pnormcv labor market conditions, and
thc firm's profit performance.
SUMMARY
Before we learn hew strategic decision* are made, it is
impcTOnttoundWvund(lwtwopnncipalcr^POF>ents of any strategic choice, namely
long-terra objectives and the grand strategy Ihc purpose of this chapter was to comes
that understanding.
I ong-icrm objectives were defined as the result* a firm seeks to achieve over a
specified period typically five years- Seven common long-term objectives were
discussed: profitability, productivity, competitive position, employee development,
employee relations, technological leadership, and public responsibility. These, or any
other long-term objectives, should he acceptable, flexible, measurable over time,
motivating, suitable, understandable, and achievable.
Grand strategic* were defined at comprehensive approaches guiding Ihe major actions
designed to achieve long-term objective*, Fifteen grand straiegy options were
discussed: concentrated growth, market develop-meni. produci development,
innovation, horizontal integration, vertical integration, concentric diversification,
conglomerate diversification, itirnaiound divestiture, liquidation, bankruptcy, joint
ventures, strategic alliances, and consortia.
QUESTIONS FOR DISCUSSION
I Identify firms in the business community nearest to your college or university thai
you believe are using each of the 15 grand Miategies discussed in this chapter
2 . Idem: I;, firms tn your business community that appear to rely principally on I of
the 15 grand strategies. What kind of information did you use to clasMfy ihe
firms?
3. Write a hng-term obicctivc for your school of business that exhibits the seven
qualities of long-term objectives described in this chapter
4. Distinguish between the following pairs of grand strategies:
a Horizontal and vertical integration.
H Conglomerate and concentric diversification & Product development and
innovation.
d. Joint venture ami Mmtegic alliance
5. Rank each of the 15 grand strategy options di*cu%scd in tin* chapter on the
following ihrec scales:
Jim McNcrocy was one of those boys: up early in the morning climbing trees while
everybody else in the family was in bed rousing hi* three younger brothers to play
two-un-iwo hockey in their basement, running his hiph schools boys club, and
pitching on ihc varsity baseball team. And he grew up to be one of those men: For
three decades, Walter James McNcrncy Jr. has .limbed the corporate ladder without a
pause, uprooting his family every two to three yeans since earning his master s degree
from Harvard Business School tn 1975 He job-hopped from Procter A Gamble to and
then up through General Electric. On Jan. 1,2001, after losing a three-way race to
succeed John F Welch as chief executive he moved on ycl again to become chairman
and CFO of AC the first outsider to head the Saint Paul company in its century-long
history.
It has been a remarkably seamless transition. In many ways, 3M is a mini General
Electric Co. Both arc industrial conglomerates that seek to balance slowdowns in one
industry with upturns elsewhere, and both have strong tradition* of discipline, quality,
and an intense focus on measuring and rewarding performance While both companies
have a few world-famous brand names who doesn't know Gl light bulbs or J Ms
Scotch tape- at hear! they are bound up with producing the nuts and bolls—as welt as
Ihc duct tape, turbines, and electronic gear—that keep the industrial wwld humming.
But 3M Co. had begun to drift. Its vaunted research facilities were turning out fewer
and fewer commercial hits, and - .. .r \; results were iwderwhclming. While 3M still
draws many ofthe worlds best chemical pincers, (he company's labs haven i had a hit
like Post-it Notes since, well, Post-it Notes first came out almost a quarter-century
ago. Manager* at 3M seemed to know instinctively what ihcy needed, and ihey round
it in McNcrney: a IfcOflg outsider who could restore discipline and focus. It helped
that be started in thc midst of a recession, when nuking painful decisions was caster.
Alter round* of cost -cutting, lay-oils, and smart rcpo>i;inning of the company into
morc-promUing fields such as healthcare, 3M recently announced its best results ever.
Profits ha\c climbed 35% since McNcrney took over, toS2.4 billion in 2003 on sales
of SI 8,23 billion. 3M* stock price, mm worth just over SHI a share, is also up 35%
on McNcrney s watch, earning it a spot on our most recent BWSO li&t.
That's exactly wiiat you'd expect from a manager schooled in thcGE system of
rigorous discipline and accountability Hut m restore 3M lo lull health, McNcrney
need* to do something his til", background didn'i prepare him for: He needs to return
3M lo its historical role as one of Corporate Americas most inventive and innovative
companies. Over the decades, scientists and engineers in \u seven divisions have
come up with sandpaper, magnetic audiotape, molds and glue* for Orthodontal, lime-
yellow traffic signs, respirators, floppy disks, Scotch tape. Scot chgard, even a
prescription salve for genital warts. To this day, 3M draws it* identity from ns
research might. It devotes Sl.i billion to research every year and has 1,000 scientists
and engineers around the world searching for The Next Big Thing.
Going outside and buying innovative outfits, a* McNcmcy has already done, can
help, but for his tenure to truly be a success, he needs to coax more out of ihc
company labs. He** trying to do that by rcdirccring funds into more-promising
healih-carc and high-tech research and development, as well as by using Six Sigma,
the analytical system made famous at I il to home in on shortcomings. But it is not at
all certain that the creative process thai brought Scotchguard fabnc protector to thc
world can flourish under such exacting conditions. In his attempt to suss out the
commercial potential of ideas early on, McNcrney who has never worked in a lab
might just mis* ihe next Post-it Note.
The flip side to this concern about what McNcrney is doing to revitalize 3M is the
worry that he won't stay around long enough to finish thc job, McNcrney, 54, recently
celebrated his third anniversary with the company, which is about as long as he has
held any position in his life. The question H HOW* many more 3M anniversaries arc
there in McNcrney ** future? Given his nomadic past, 3Mcr* today whisper
anxiously about where their boss is headed next Nowhere, he swears McNcrney says
be has more work to do before 3M is firmly on a high-growth path. He has enrolled a
third of 3M s67,i00-pcrson wwkforce in Six Sigma training, but it ha* noi been
encoded yei in the company DNA, He also wants to make 3M much bigger,
particularly in fast-growing Asia, perhaps ihrough another acquisition or two. And
while he has made management training a priority, establishing 3M s own leadeiship-
development institute, McNcrney has no successor ready lo take over if he were to
leave now. A* he says about Ihe challenge of developing potential leaders: "I'm still
impressed with how much further wc have to go"
Then there are personal reasons for slaying put McNemcy, who grew up outside
Detroit and Chicago, relishes being back in the Midwest alter his globe-ironing at Ot.
say his family and friends With an extended family around them in the Twin Cities,
his three school-age children are feeling at hoinc. He plays ice hockey with one of his
brothers. Peter H. McNemcy, m a no-checking league on Sunday evening* And he
can scoot down to Chicago to visit his two adult daughters from his firsl marnagc as
well as his parents, who Mill maintain their home in Chicago's North Shore suburbs.
*Thi* is a golden period in Jinfs life," says Daniel M. McNcrney, anothei brother who
is now a Presbyterian minister and missionary and lives in vYinnctka. Ill, around the
corner from Iheir boyhood hemic. "He's am* bilious, but he's not blindly ambitious*
Maybe this is his last job
Loyalty Test
Or maybe not. During the race lo runGE, McNerney became known its one ofthe best
managers at one of ihc best-managed companies in the world. Although he lost the
race, his successes ai Gli and 3M have p*tf him on recruiters*
shottliM of most desirable CEO*. "People come to us and say. 'Go get us a Jim
McNcmey,'" says Gerard R, Roche, senior chairman of executive recrutlers lleidnck
& Struggles International IIK Indeed McNcrncy s name seems to surface whenever a
company has a high-profile opening in the offing, whether it's Coca-Cola, Walt
Disney, or Merck. As \\«lch says: "I could see him doing anything.**
McNcmey's commitment to 3M was severely* tested last fall When Chairman and
CEO Philip M. Condit abruptly resigned from Boeing Co., the board is said to have
asked McNcmey if he would consider the post. Me clearly has the credentials: A
Boeing director himself. MeNerney^ last job al GE was running its aircraft-engine
unit, one of the aerospace company \ main suppliers. Hie board elevated retired exec
Harry C Stonceiphcr to CFO instead Rut noting that Stonccipher already is 67. some
people close to Boeing's director* say it *s only a matter of time before McNcmey*
ends up there.
McNcrncy s secret to success is elementary. He sets high goals that can be measured.
Rati as business-unit sales or the rate of product introductions, and demands that his
managers meet them. Granted niany CEOs do that today. But like a dedicated teacher
or coach. McNcrncy also works with his team day in, day out, to help them make ibe
grade "Some people think you either have a demanding, command - and -control
management style or >ou have a nurturing, encouraging style" he says "I believe you
can't have one without the other"
Unusual in this age of celebnty CEOs, and especially for sorrvefcody who is so far
untouched by scandal or intrigue, McNcrncy is also one of Corporate Amenta's
lowest-profile execs. He has largely ducked the outside world since taking over at
3M. He usually dispatches Chief Financial Officer Patrick D. Campbell to speak for
the company* and you can count his national TV appearances on one hand
His shy-guy public persona is at odds with his image inside the company. There.
McNcrncy is praised as an inspirational leader comfortable speaking to big groups or
conversing one*on-one. "He s personable,*" says Charles Retch, executive vice-
president of 3M s health-care business. "He really engages people" Yet family and
fnends soy* McNcrncy genuinely thinks it would be unseemly to draw attention to
himself "It's all about me? No, it's all about my people," says Charles S, Lauer,
publisher of Modern Healthcare magazine and a neighbor who has known the
McNcrncy family since the 1960s. "That s Jimmy, the captain of the team. He's got
his head screwed on straight."

Emphasis on Humility
Siningal a conference table in his l4th-floor office suite. McNcrncy seems to be
enjoying himself He wears a sports >aeket and a polo shirt, his usual work attire. He
is quick to attribute -M - achievements to Ihc eniirc oigani/ation and praises 3Mcis for
ihcir wort, ethic "My expenence is that if people arc convinced they're gtwing as they
pursue company goals, thai s when you get ignition," he says. He is also disciplined
and direct: He makes his points and doesn't uticr a word more When the allotted time
for the appointmeni end*, he >iands up and retreats to his inner office. Back to work.
McNerncy inherited his character—and perhaps his wanderlust -from his dad say his
family and friends. After a stint in hospital management in Providence. R.I., where
Jim was born. Walter J. McNcrncy Sr. was a health-policy professor ai ihree
universities, as well as president of the Blue Cross & Blue Shield Assn. in Chicago.
Walter and Shirley, a homemakcr. pushed their daughter and four sons hard: All of
them, except r>anP hold graduate degrees in business Bui even as Walter gained
national recognition, he always maintained his humility* and insisted his children do
the same, "If any of us was ever tooting our own horn. Dad would let us havcnV
recalls Dan. *'Pride was a terrible thing**
Although academic achievement was always No. I in the McNcrncy 1 household sports
came a close second. Jim played baseball and hockey and lost a few teeth on the ice—
while getting his bachelor\ degree in American studies at Yak University, his fathers
alma mater. "He was certainly never a hot dog," says his brother Pete, managing
partner of Thomas. McNcrncy & Partners, a venture-capital firm in Minneapolis that
specializes in hcahh-care startups. "He was a guy you depended on. It's no surprise to
me that he's running something big"
At firsl, though, it was slow going. McNcmey s career started anonyitvously enough
in 1975 as a brand manager on the Downy fabric-softener accouniai Procter &
Gamble Co. He was assigned to two other accounts. Coast and Bounce, before he left
in 1978 to become a ser*or manager with consulting firm McKinsey in Chicago.
His ascent quickened after he was hired three years later at GE as a vice-president in
its information-services department. In less than a decade, he was promoted lour times
to reach the ranks of upper managemeni in I Wl as pees-
idcnt and CEO of GE's clccthcal distribution and control unit. He was 42. Welch
recalls M*■ v-rney catching his attention early on What made htm stand out? His
knack for numbers and his poise. Welch says. "He was just able to handle himself
perfectly, even though he was very young."
McNcrney really impressed the boss, though, when he was dispaiched to Hong Kong
as president ofGF/s Asia-Pacific business in 199} At the time, the Fairfield (Conn.)
giant had no operations of its own in China and was desperate to enter what has since
become a S3 billion market for thc company. McNcrney established its first wholly
owned unit within two years and then began staffing thc operation before leaving in
1995.
In the Running
But thc job that gave him a shot at taking over from Welch was . -: io come. In 1997.
after two years as chief of GE s lighting unit, based in Cleveland. McNcrney wa*
yanked back to Cincinnati to) head GE Aircraft Engines. Welch admits today that
even he had some doubts about how his protege would do. The aircraft industry* is
notoriously insular, distrustful of anyone who never wore "a scarf and goggles " as
Welch puts it Yd MeNerney bested the insiders. When he arrived at GE Aircraft
Engines, tt was a distant third-place supplier lo Boeing for its twin-engine 777 planes.
Hut in 1999. he cinched a deal making thc unit rhc exclusive engine supplier for
Boeings new long-range 777 aircraft* The 20-ycar contract was valued at more than
$25 billion.
McNcrney did it by oumusiling his rivals. He became a frequent flier u> Scuttle, then
Boeing s headquarters, to find out what would prevent Boeing fmm doing business
solely with GE Executives mere were concerned that airlines that had never serviced
GF. engines before wouldn't want to take on such a nsk So MeNerney called thc
heads of Singapore Airlines* Cathay Pacific Airways, and others and got them on
board by promising that GE would do everything it could to help maintain the
engines. He used GF\ leverage, too. The company's aircrafVleaMng unit pledged to
huy the planes fiom Boeing and ihen lease them to airlmcs if GE got an exclusive deal
And he enlisted Welch io personally lobby Hoe* ing'sCondil.
In the end of course, that success wasn't enough. On a rainy day in late November,
2000, Welch flew to Cincinnati and met privately with McNcrney in an airplane
hangar to deliver the news: He had picked Jeffrey R Immcli. the head of GE Medical
Systems and thc front-runner all along in ihc succession race, to be the next CEO.
Immcll's edge; He was iix years younger than etiher MeNerney or the other finalist,
Robert L. Nardelli, HOW chairman and CEO of Home Depot Inc. Immelf was also
judged to be more at case in thc spotlight. "You chose the wTong guy." a
disappointed McNcrney told Welch. But he didn't press Ihe point. He didn't need to.
Even as Welch was slill mulling his personnel options, McNcrney *s name had been
passed along to 3M directors by hcadhunier Roche at Hcidrick & Struggles. That
spring, * V > directors had decided to go outside for a chairman and CEO to replace
Livio "Desi" DeSimone. w ho had announced his plan to neiire by yearend. An
engineer and lifelong 3Mcr who took over as CEO in 1991. DcSimonc had been
unable to keep alive the company** storied history of innovation. Growth rates for
sales stalled while profits yo-yoed. The company's share price peaked in mid-1997,
then drifted lower even as ihe overall marici raced ahead "Wc needed to jump-slnn
the company*" recalls Edward A. liren* nan. a former chairman and CEO of Sears,
Roebuck & Co. who chaired Mhft CEO search committee "Wc sensed Jim would be a
perfect agent for change."
Given the chilly reception that some "change agents" face. McNcrney was braced for
a tough time especially since he was not only* the first CEO who hadn't come up
through the 3M ranks, he wasn't even an engineer. But he say* employees generally
encouraged htm to shake things up "1 found a company who thought they weren't
achieving all ihey could and they were willing to team up with s^nwbody to do more"
he says That was a surprise." It helped thai 1M and GE were so similar 11 also helped
that McNcrney was used to contending with different corporate cul lures.
Oddly, thc deepening manufacturing recession helped, too. In September. 2000.
hosting his last biennial conference for analysts and investors. DcSimone forecast an
11% increase in revenue in the year ahead and a 12% rise in operating income. 3M's
telecommunications business would do even better, he predicted with sales and profits
surging 25% as customers strung more and more fiber-optic lines Bui by 200Ts first
quarter, operating earnings were crumbling in every business except consumer and
office pmduch The abrupt downturn proved thai things had gone awry
Targeted Innovation
What McNcmey hopes will be his true legacy at 3M, though, ss to restore the
company to its glory days as one of A met-Itt s preeminent idea factories, a place
where cutting-edge research results in groundbreaking new products So borrowing
again from ihe GR way, McNcmey has acquired new products lo pump up 3M*s
growth rate. In late 2002,3M paid SS50 million for Coming Precision Lens Inc,
instantly giving it a big presence in the rear-projection TV market and complementing
its other TV componeni businesses
His real emphasis. however, \s on what the company can do for itself. McNcrncy now
has his scientists talking with the marketing and manufacturing folks right from the
sun to steer lab work to more profitable ends- For exampk. sales reps polled TV
makers to see what they wanted ncxl in flat-screen models. The response: a wider
viewing area, so people don't have to sit square in front of the screen, and a deeper
black in the background color. Now researchers arc tinkering with optk films to
achieve those attributes
The new way carries its own risks, however. In the past, 3M researchers had the
leeway to spend 15% of their time on pet projects This officially sanctioned
moonlighting has paid o f f for 3M big-time Its Aldara salve an immune-response
modifier jusi approved lo neat precancerous skin conditions was discovered by a
scientist who kept experimenting with the drug. Post-it Notes, too. were another
brainchild of scientists who tinkered for >ears, ignonng the naysa>ers in
manufacturing and marketing Now ihese researchers are being reined in. Won*! they
object? Not likely, says James B. Stake, executive vice-presideni of 3Ms display and
graphics business. As the inventor of a few gadgets that never amounted to anything,
he argues that todays setup will better the odds of success. We'll find many fewer
individuals going down blind alleys," he says. True, but some worry that by
micromanaging the labs. 3M could miss breakthrough ideas in unexpected places,
McNcrncy is also bringing more management rigor to 3M through Six Sigma.
Originally a form of statistical analysis used to reduce product error, at GE it morphed
into a companywide tool for cost-cutting in the 1990s. Specially trained "black belts"
are now doing the same thing at 3M, and then some. They're using Six Sigma for
everything from sharpening sales pitches to developing new kinds ol duet tape,
McNerney says Six Sigma also lums out to be a low-nsk way to sput up-and-coming
managers because it pros ides straightforward measurements of their performance So
far a quarter of the 1.000 3M employees who have completed Six Sigma have been
promoted two steps or more.
Today, McNcrncy figures he spends most of his lime on personnel. Every other week,
he addresses groups of employees at enmpany headquarters. He begins the two-hour
sessions with an update on 3M s numbers and a progress report on Si\ Sigma and his
oihcr initiatives. Then, for the last hour and a half, he takes questions. He does the
same thing while visiting 3Ms far-flung facilities around the world McNcmey abo is a
regular instructor al 3MV leadership-development insiirutc, another program he has
borrowed fromGE, In between, he monitors how members of his operating committee
—3Ms top 15 executives are doing, often swinging by their offices for a chat. If a
manager isn't measuring up, McNcmey probaNy won't raise hts voice. Bui he will
expect a solution, proruu "I think all of us arc working harder than we've ever worked
before I ) iid W ftwll, 3IA senior vicc-rmidcnt of'marketing.
Powell should know. Among ihe lop ranks, he is one of the few holdovers from the
DcSimone era. Only two of 3Ms seven business heads were at ihcir posts under the
previous CEO. But there was no purge Rather the departing execs left one by one as
they neared 3Ms mandatory retirement age of 65. only to be replaced by other 3 Mcrs.
Tberc are just two outsiders in McNcmey\ inner circle: CFO Campbell, who come
from General Motors Corp, and General Counsel Richard Zicgkr. a former partner at
Clearly. Gottlieb. Stccn & Hamilton in New York, who had been McNemeyfc
classmate at Yale.
When McNcrncy isn'l overseeing his managers, he is tending lo 3M s customers In
January. W W Grainger Inc., a £47 billion industrial-goods wholesaler that carries
1.300 3M rjcoducts, got the McNcmey treatment -honed needless lo say, at GE. A*
executives at the Lake ForcU(UI) company went over sales trend* wiih their top
suppliers, McNcrncy listened in Then he met separately with ihc company V chief
operating officer. In all. McNcrncy spent some three hours at Grainger. And while 3M
had regularly senr someone u> visit the company, rhat someone had never been the
CEO. "It was a significant event," says Michael A, PUIICJL vice-president for product
managemeni. ~*3M is truly trying to get to know our business."
Measures of Success
McNcmey arc clearly paying off In 2003, salc^- rose in every one of 3M * businesses
excepl telecom, while
upcraiing income was up in all but industrial. Cash flow swelled by 29%. to S3.79
billion, and Ihc company's operating margin widened by a full percentage point, to
20.9%. His goal is to boost sales by ai least 5% a vcar, excluding acquisitions, and
profits by 11% or more annually 3M will heal both targets m 2004. with sales up
6.5% and profits growing I63%i says McNcmey. Analyst John G. Inch of Merrill
Lynch A Co. predicts the company will be able to exceed its largeis again in 2005,
with earnings nearing $3.3 billion
Success seems to be agreeing with McNcrncy. Family and fnendssay that despite the
pressure of being boss, McNcrncy seems more relaxed today than he has been in
years. He and his wife. Haity—they met at a GE gym thai she had set up for the
company- both work out and run regularly McNerocy also occasionally skips business
dinner* to coach his son » tec hockey team. He skis, golfs, and every May sails on
Chesapeake Bay with his brothers and business chums. And he and the family like to
jet off to Montana, where he owns a home in a mountain resort.
So is this the last stop for McNcmey? If it were, he would be going out on top. In
charge of one of the nations most venerable companies. How many other jobs could
give him that satisfaction? Certainty McNcrncy doesn't need the money. He received
S4.9 million in salary and bonus in 2003 and options worth $5.8 million, raising ihe
value of his 3M options to S67.7 million. He also holds SI5 million in restricted stock.
"It feels like home here," he rays. "I'm a 3Mcr" Still, he won't rum 65 until 2014. And
recruiicrs are tempting him with job offers all the time "We're professional movers."
he acknowledges "1 could pilch a tent anywhere" He is still one of Ihose boys.
Source: rt<h**l Amdt and Dan* &r*o>. *JM» Rising Star: J»m McNerney Is Racking
Up Quito « Record at )M Mow. Can He ftev Up hv inoovitioo Machine'"*
ewn&sWeek. Apr! 12,2004. pp. 62fT
Appendix
Board for Industrial & Financial Reconstruction
In thc wake of sickness in ihe country* industrial climate prevailing in ihe eighties,
thc CiOAernmcnt of India sei up in 1981. a C ot run it lee of F Xpert* under IIK
Chairmanship of Shri T. hwari m examine the matter and recommend suitable
remedies therefore. Based on thc recommendation* of ihc Committee, ihe ■ n
emment ol India enacted a special legislation namely, thc Sick Industrial Companies
(Sixeial ProvistonslAct, 1985 <l of 198GKommonly known as the SIC A.
The main objective of SICA is to determine sickness and expedite ihc rev ival of
potentially viable units or closure of unviable units limit here in refers to a Sick Indus-
trial Company). It was expected thai h> revival, idle investments in sick units will
become productive and by closure, the locked up inveinmcnis in unviable unii*
IMKIII! get released for productive use elsewhere
The Sick Industrial Companies Act, 1985 was enacted with a view to securing the
timely detection of sick and potential sitk companies owning industrial undertakings,
the speedy determination by a body of experts of the preventive, ameliorative,
remedial and other measure which need lo he taken with respect to such companies
and the expeditious enforcement ofthe measures so determined and for milters
connected therewith or incidental thereto.
The Board of experts named thc Board for Industrial and Financial Reconstruction
jBIFR) was set up in January; 198? and functional with cflect from 15* May 1987.
Thc Appellate Authority for Industrial and Financial Rc-eotistruetion < AAIKFR)
w^s constituted in April 1987. Government companies were brought under the
purview ofSICAin 1991 when extensive changes were nude in ihc Ad including,
intcr-alia. changes in the criteria for determining industrial sickness.
SICA apphes to companies both in public and private sectors owning industrial
undertaking*.
i.n pertaining to industries specified in the First Schedule to the Industries
envelopment and Regulation) Act. 195 1 J l l >R Act) except the industries relating 10
ships and olhcr vessels drawn hy power and:
(hi not being "small scale industrial undertakings or ancillary industrial
undertakings4* as defined in Section 30)01 the IDR Act
i c ) The criteria to determine sickness in an industrial company are (ti the
accumulated losses of Ihe company to be equal to or moie than its net worth i.c its
paid up capital plus its free reserves (io the company should have completed five
years after incorporation under ihe Companies Act. I956{iii)h should have SO or
more wxirkerx on any day of thc 12 months preceding the end of ihc financial year
wuh reference to which sickness is claimed <iv> It should have a factory license.
The objectives of SICA einphavi/e the following points:
• The SICA had been enacted in the public interest lo deal with the problems of
industrial sickness with regard to thc crucial sectors where public money is locked up.
• It contains special provisions for timely detection of *ick and potentially sick
industrial companies, snecdy determination and enforcement of preventive, remedial
and other measure* with respect to such companies.
Those measures are to be taken by a body of experts. Thc measures are mainly*:
<a) legal
<bi Financial restructuring <c> Managerial