FIFTH EDITION

Strategic Management:
Theory and Practice
John A. Parnell
University of North Carolina at Pembroke

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 Dedication
To my students
—John Parnell

Cover photo: Oleksiy Mark/Shutterstock

Strategic Management: Theory and Practice, 5e, John A. Parnell

Paperback (black/white): ISBN-13: 978-1-942-04125-2

ISBN-10: 1-942041-25-X
Paperback (color): ISBN-13: 978-1-942-04127-6
ISBN-10: 1-942041-27-6
Loose-leaf version: ISBN-13: 978-1-942-04126-9
ISBN-10: 1-942041-26-8
Online version: ISBN-13: 978-1-942-04128-3
ISBN-10: 1-942041-28-4

Copyright © 2017 by Academic Media Solutions. All rights reserved. No part of this publication may
be reproduced, stored in an information retrieval system, or transmitted, in any form or by any means,
electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the
publisher.

Printed in the United States of America by Academic Media Solutions.

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Brief Contents

Preface   ix
About the Author   xi

1 Fundamentals of Strategic Management   1

2 Industry Competition   21

3 The External Environment: Political-Legal and Economic Forces   43

4 The External Environment: Social and Technological Forces   67

5 The Organization: Ethics and Corporate Social Responsibility   97

6 Corporate-Level Strategies   127

7 Business Unit Strategies   155

8 Functional Strategies   183

9 Strategy Formulation   209

10 Strategy Execution: Structure   229

11 Strategy Execution: Strategic Change, Culture, and Leadership   247

12 Strategic Control and Crisis Management   263

Appendix    A-1
Glossary   G-1
Index   I-1

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Contents

Preface   ix High Strategic Stakes   31

High Exit Barriers   31
About the Author   xi
Threat of Entry   31
Economies of Scale   32
1 Fundamentals of Brand Identity and Product
Strategic Management   1 Differentiation   32
Capital Requirements   33
What Is Strategic Management?   2 Switching Costs   33
Intended and Realized Strategies   6 Access to Distribution Channels   34
Scientific and Artistic Perspectives on Strategic Cost Advantages Independent of Size   34
Management   6 Government Policy   34
Theoretical Perspectives on Strategic Pressure from Substitute Products   35
Management   7
Bargaining Power of Buyers   35
Corporate Governance and Boards of
Bargaining Power of Suppliers   36
Directors   8
Limitations of Porter’s Five Forces Model   37
Strategic Decisions   10
The Global Imperative   13 Summary 38   Key Terms 38
Review Questions and Exercises 39
Summary 15   Key Terms 15
Chapter 2 Practice Quiz 39
Review Questions and Exercises 15
Case 2: Home Depot 39
Chapter 1 Practice Quiz 15
Simulation 101: Industry Fundamentals 40
Case 1: Costco 16
Notes 41
Simulation 101: Overview 17
Notes 17 3 The External Environment:
2 Industry Competition   21 Political-Legal and
Industry Life-Cycle Stages   24
Economic Forces   43
Industry Structure   27 Analysis of the External Environment   43
Intensity of Rivalry among Incumbent Political-Legal Forces   44
Firms   27 Case #1: Food Consumption   48
Concentration of Competitors   28 Case #2: Automobiles   50
High Fixed or Storage Costs   29 Global Considerations   52
Slow Industry Growth   29 Economic Forces   55
Lack of Differentiation or Low Gross Domestic Product   57
Switching Costs   30 Inflation Rates   58
Capacity Augmented in Large Interest Rates   59
Increments   31 Exchange Rates   60
Diversity of Competitors   31 Ecological Influences   60

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 Summary 62   Key Terms 62 Managerial Ethics   103
Review Questions and Exercises 62 Perspectives on Ethics   107
Chapter 3 Practice Quiz 62 Social Responsibility    109
Case 3: Autozone 63 CSR in Practical Terms    111
Simulation 101: Economic Indicators 64 Sustainable Strategic Management   114
Notes 64 Takeovers   115
Outsourcing and Offshoring   116
4 The External Environment: Linking Ethics and Social
Social and Technological Responsibility   119
Forces   67 Summary 120   Key Terms 120
Social Forces   67 Review Questions and Exercises 120
Case #1: Food Consumption   72 Chapter 5 Practice Quiz 121
Case #2: Automobiles   76 Case 5: Starbucks 121
Global Concerns   78 Simulation 101: Ethics and CSR 122
Technological Forces   80 Notes 122
The Internet   84
Strategic Dimensions of the Internet   86
6 Corporate-Level
Movement toward Information Strategies   127
Symmetry   86
The Corporate Profile   127
The Internet as Distribution Channel   88
Speed   88 Strategic Alternatives at the Corporate
Interactivity   88 Level   129
Potential for Cost Reductions and Cost Growth Strategies   129
Shifting   88 Horizontal (Related) Integration   133
Commoditization and Mass Horizontal Related Diversification   133
Customization   89 Conglomerate (Unrelated)
Diversification   134
Environmental Scanning   90
Vertical Integration   134
Summary 91 Key Terms 91 Strategic Alliances (Partnerships)   134
Review Questions and Exercises 91 Stability Strategy   136
Chapter 4 Practice Quiz 91 Retrenchment Strategies   138
Case 4: Amazon.com 92 Turnaround   138
Simulation 101: Buyer Behavior 93 Divestment   140
Notes 93 Liquidation   140
BCG Growth-Share Matrix   141
5 The Organization: Global Corporate Strategy   143
Ethics and Corporate Walmart Abroad   146
Global Orientation Assessment   147
Social Responsibility   97
Summary 148   Key Terms 148
Organizational Direction: Mission, Goals, and
Objectives   98 Review Questions and Exercises 148
Goals and Stakeholders   98 Chapter 6 Practice Quiz 148
The Agency Problem   99 Case 6: Papa John’s 149
Management Serves Its Own Interests   100 Simulation 101: Corporate Growth 150
Management and Stockholders Share the Notes 150
Same Interests   102

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 7 Business Unit Summary 203   Key Terms 203
Review Questions and Exercises 203
Strategies   155 Chapter 8 Practice Quiz 203
Porter’s Generic Strategies   156 Case 8: FedEx 204
Low-Cost (Cost Leadership) Strategy Simulation 101: Functional Integration 205
(without focus)   157
Notes 205
Focus–Low-Cost Strategy   159
Differentiation Strategy
(without focus)   161
9 Strategy Formulation   209
Focus-Differentiation Strategy   164 Strengths and Weaknesses   209
Low-Cost–Differentiation Strategy    165 Human Resources   211
Focus–Low-Cost-Differentiation Strategy   169 Boards of Directors   211
Multiple Strategies   169 Top Management   211
The Miles and Snow Strategy Middle Management, Supervisors,
Framework   170 and Employees   212
Business Size, Strategy, and Organizational Resources   212
Performance   171 Physical Resources   213
Assessing Strategies   172 Opportunities and Threats   216
Global Concerns   174 The SW/OT Matrix   216
Summary 177   Key Terms 178 Issues in Strategy Formulation   222
Review Questions and Exercises 178 Evaluating Strategic Change    222
Chapter 7 Practice Quiz 178 Strategy, CSR, and Managerial Ethics   224
Effects on Organizational Resources   224
Case 7: Cici’s Pizza 179
Anticipated Responses from Competitors
Simulation 101: Competitive Positioning 179 and Customers   224
Notes 180
Summary 225   Key Terms 225
8 Functional Strategies   183 Review Questions and Exercises 226
Chapter 9 Practice Quiz 226
Marketing   185
Pricing Strategies   185 Case 9: Nike 226
Promotion Strategies   186 Simulation 101: Developing Strategic
Product/Service Strategies   188 Capabilities 227
Place (Distribution) Strategies   190 Notes 228
Finance   191
Production/Service   192
10 Strategy Execution:
Quality Considerations   195 Structure   229
Research and Development   196 Organizational Structure   229
Purchasing   197 Vertical Growth   231
Human Resources   198 Horizontal Growth   233
Human Capital and Knowledge Structural Forms   233
Management   200 Functional Structure   233
Knowledge and Competitive Product Divisional Structure   234
Advantage   201 Geographic Divisional Structure   235
Information Systems Management   201 Matrix Structure   236
Assessing Organizational Structure   237
Functional Strategies and Industry
Life Cycle   202

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 Corporate Involvement in Business Unit
Operations   238
12 Strategic Control and
Corporate Restructuring   239
Crisis Management   263
Forms of Electronic Commerce   240 Step 1: The Focus of Strategic
Business-to-Business (B2B)   241 Control   265
Business-to-Consumer (B2C)   241 Step 2: Strategic Control Standards
Business-to-Government (B2G)   241 (Benchmarks)   265
Consumer-to-Consumer (C2C)   241 Published Information for Strategic
Consumer-to-Business (C2B)   242 Control   266
Product/Service Quality   266
Summary 242   Key Terms 242
Innovation   267
Review Questions and Exercises 242 Market Share and Relative Market Share   267
Chapter 10 Practice Quiz 243
Steps 3–5: Exerting Strategic Control   267
Case 10: Ford 243 Control through the Formal and Informal
Simulation 101: Brand Management 244 Organizations   268
Notes 245 Crisis Management   270
Prominent Crises in Recent History   273
11 Strategy Execution: Crisis Planning   276
Strategic Change, Culture, Trends in Strategic Management   278
and Leadership   247 Summary 279   Key Terms 279
Organizational Culture and Strategy   248 Review Questions and Exercises 279
Cultural Strength and Diversity   250 Chapter 12 Practice Quiz 279
Shaping the Culture   251 Case 12: Jack in the Box 280
Global Concerns   252 Simulation 101: Crisis Management 281
Strategic Leadership   252 Notes 281
Leadership Style   253
Transformational and Transactional Appendix    A-1
Leadership   255
Glossary   G-1
Executing Strategic Change   256
Index   I-1
Recognize the Need for Change   256
Create a Shared Vision   257
Institutionalize the Change   257

Summary 258   Key Terms 259

Review Questions and Exercises 259
Chapter 11 Practice Quiz 259
Case 11: Southwest Airlines 260
Simulation 101: Strategic Change 260
Notes 261

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Preface

Description of Text can be covered in a typical capstone business course,

The challenge to lead an organization has never been while retaining valuable course time for case projects,
more demanding. Executives and managers at all lev- a computer simulation, discussion of real-time strate-
els must think strategically and leverage firm resources gic issues, and other activities.
effectively. This fifth edition of Strategic Management:
Theory and Practice draws from all functional areas What’s New in This Edition
of business and presents a cohesive strategic manage- The strategic management model presented in the fifth
ment approach. It is most useful for students with back- edition of Strategic Management: Theory and Practice
grounds in related fields, such as management, market- remains relatively unchanged from that in the previous
ing, finance, accounting, and economics. edition with minor enhancements. New concepts have
Strategic Management: Theory and Practice, 5e, has been integrated and existing ones updated throughout
three distinguishing characteristics. First, it is organized the chapters, including a large number of global strategy
sequentially around the strategic management process: references and numerous examples from the Wall Street
Journal and other sources.
• Foundation (Chapter 1)—Overview A brief, real-time case has been added at the end of
• External environment (Chapters 2–4)—Step 1 each chapter. These cases can be used for daily discus-
• Internal environment (Chapter 5)—Step 2 sion or as springboards for term projects, creating a broad
• Fundamentals of strategy (Chapters 6–8)— range of assignment options.
Foundational content for Step 3
• Strategy formulation (Chapter 9)—Step 3 Online and in Print
• Strategy execution (Chapters 10–11)—Step 4 Student Options: Print and Online Versions
• Strategic control (Chapter 12)—Step 5 This fifth edition of Strategic Management: Theory and
Global issues are addressed in the various chapters, not Practice is available in multiple versions: online, in PDF,
as separate concerns. Numerous examples—many from and in print as either a paperback or loose-leaf text. The
the Wall Street Journal—are integrated as well. This pro- content of each version is identical.
cess orientation is augmented with a strong chapter on The most affordable version is the online book,
ethics and social responsibility before strategy content is with upgrade options including the online version
discussed. bundled with a print version. What’s nice about the
A second distinguishing characteristic of Strate- print version is that it offers you the freedom of being
gic Management: Theory and Practice is that the stra- unplugged—away from your computer. The people at
tegic analysis of a firm is viewed as inseparable from Academic Media Solutions recognize that it’s diffi-
the concepts presented in the chapters. Case Analysis cult to read from a screen at length and that most of us
boxes throughout the text address the twenty-five key read much faster from a piece of paper. The print op-
questions that should be answered as part of a strategic tions are particularly useful when you have extended
analysis (i.e., case project). For students participating print passages to read.
in Capstone or another competitive strategy simulation, The online edition allows you to take full advan-
each chapter includes a Simulation 101 section that ex- tage of embedded digital features, including search
amines the key concepts affecting the types of decisions and notes. Use the search feature to locate and jump
students will be making. to discussions anywhere in the book. Use the notes
Finally, the third distinguishing characteristic of feature to add personal comments or annotations. You
Strategic Management: Theory and Practice is that it can move out of the book to follow web links. You can
presents modern strategic management concepts and navigate within and between chapters using a clickable
ideas in a clear and succinct manner. The entire book table of contents. These features allow you to work at

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your own pace and in your own style, as you read and • PowerPoint Presentations—Key points in each
surf your way through the material. (See “Harnessing chapter that are illustrated in a set of PowerPoint files
the Online Version” for more tips on working with the designed to assist with instruction.
online version.)
Student Supplements and Upgrades
Harnessing the Online Version
(Additional Purchase Required)
The online version of Strategic Management: Theory • Lecture Guide─This printable lecture guide is
and Practice, 5e, offers the following features to facili- designed for student use and is available as an in-
tate learning and to make using the book an easy, enjoy- class resource or study tool. Note: Instructors can
able experience: request the PowerPoint version of these slides to use
• Easy-to-navigate/clickable table of contents—You as developed or to customize.
can surf through the book quickly by clicking on • StudyUpGrade (Interactive Online Study
chapter headings, or first- or second-level section Guide)─Students can turbo-charge their online
headings. And the Table of Contents can be accessed version of Strategic Management: Theory and
from anywhere in the book. Practice, 5e, with a unique study tool designed
• Key terms search—Type in a term, and a search to “up your grade.” StudyUpGrade is a software
engine will return every instance of that term in the package that layers self-scoring quizzes and flash
book; then jump directly to the selection of your cards into the online version. This inexpensive
choice with one click. upgrade helps you improve your grades through
• Notes and highlighting—The online version includes the use of interactive content that’s built into each
study apps such as notes and highlighting. Each of chapter. Features include self-scoring multiple-
these apps can be found in the tools icon embedded choice quizzes, key concept reviews with fill-in-
in the Academic Media Solutions/Textbook Media’s the-blank prompts, and e-flash cards comprised
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Instructor Supplements
In addition to its student-friendly features and pedagogy,
the variety of student formats available, and the uniquely Acknowledgments
affordable pricing options that are designed to provide stu- I would like to express my sincere appreciation to Dan
dents with a flexibility that fits any budget and/or learning Luciano, Victoria Putman, and the entire team at Aca-
style, Strategic Management: Theory and Practice, 5e, demic Media Solutions for their commitment to this proj-
comes with the following teaching and learning aids: ect. I also wish to thank numerous colleagues who have
• Test Item File—An extensive set of multiple-choice, reviewed earlier editions of the text, offered invaluable
short-answer, and essay questions for every chapter suggestions, and adopted it for their classes.
for creating original quizzes and exams.
• Instructor’s Manual—An enhanced version of
the book offering assistance in preparing lectures,
identifying learning objectives, developing essay exams
and assignments, and constructing course syllabi.

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About the Author

John A. Parnell currently serves as the Belk Chair of Management at the

University of North Carolina at Pembroke (UNCP). He completed the
BSBA, MBA, and MAEd degrees from East Carolina University, the EdD
from Campbell University, and the PhD from the University of Memphis.
During his academic career, Dr. Parnell has served as professor and head of
the Department of Marketing and Management at Texas A&M University–
Commerce. He has received numerous awards for teaching, scholarship, and
service, including the H. M. Lafferty Distinguished Faculty Award at Texas
A&M–Commerce in 2002, the Adolph Dial Award for Scholarly and Creative
Activity at UNCP in 2005, and the Spirit of Inquiry Award from the John
William Pope Center for Higher Education Policy in 2011. In 2014–2015,
Dr. Parnell served as interim dean of the UNCP School of Business.
Dr. Parnell is a recognized authority in the strategic management field, hav-
ing published more than 200 articles, cases, proceedings, books, and book
chapters on strategic management and related fields. His work has appeared
in a number of leading journals, including Academy of Management Learn-
ing and Education, British Journal of Management, Journal of Contingencies
and Crisis Management, Journal of Business Ethics, Journal of Small Busi-
ness Management, and Management Decision. Dr. Parnell is a coauthor of
Crisis Management: Leading in the New Management Landscape, 2e (SAGE
Publications, 2014). He also serves on a number of academic journal editorial
boards and consults with select firms in the area of strategic planning. He fre-
quently has been invited to discuss issues related to business and competitive-
ness on SiriusXM’s The Wilkow Majority.
Dr. Parnell has lectured at a number of institutions abroad, including the
EGADE Business School in Mexico, Chung Yuan Christian University in Tai-
wan, Yangtze Normal University, and China University of Geosciences in Bei-
jing. He also served as a Fulbright Scholar in Cairo, Egypt, in 1995.

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Fundamentals of Strategic
Management CHAPTER

1
Chapter Outline
What Is Strategic
Management?
Theoretical Perspectives on
Strategic Management
Corporate Governance and
Boards of Directors
Strategic Decisions
The Global Imperative

Source: iQoncept/Shutterstock.com.

What do Circuit City, Washington Mutual, Saab, Blockbuster, General Motors,

Radio Shack, and Borders have in common? All of these recognized compa-
nies filed for bankruptcy within the past decade. While the situation surround-
ing each firm is different—and some of them have since recovered—each
one made important strategic mistakes.Perhaps luck plays a role in company
downturns, but those with strong, competent strategic leadership usually fare
the best.
This text is about developing a systematic, strategic perspective for manag-
ing an organization. It is applicable for leaders of manufacturing and service
firms, and the concepts presented herein are useful in nonprofit and govern-
ment organizations as well. These ideas vary in complexity, but understanding
and applying them can enhance the odds of success. Mission statements
Strategic management is more important than ever. Today’s business world vary widely. Compare
and contrast many
is global, Internet-driven, and obsessed with speed, and the challenges it cre-
of the mission
ates for top managers are often complex, ambiguous, and unstructured. Add statements of Fortune
to this the incessant allegations of top management wrongdoings, economic 500 firms at www.
stagnation, and increasing executive compensation, and it is easy to see why missionstatements.com/
leaders are under great pressure to respond to strategic problems quickly, deci- fortune_500_mission_
sively, and responsibly. Indeed, the need for effective strategic management statements.html.
has never been more pronounced.

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 This chapter introduces the notion of strategic management, highlights its impor-
tance, and presents a five-step process for strategically analyzing an organization.
The remaining chapters expand on the five steps in the process, with special emphasis
on their application to ongoing enterprises.

What Is Strategic Management?

mission The reason for an Each organization exists for a purpose. Its mission is articulated in a broadly defined
organization’s existence. but enduring statement of purpose that identifies the scope of an organization’s opera-
The mission statement is a tions and its offerings to affected groups and entities. Most established organizations
broadly defined but enduring
have developed a formal mission statement, a concept discussed in greater detail in
statement of purpose that
identifies the scope of an Chapter 5.
organization’s operations and Strategy refers to top management’s plans to develop and sustain competitive
its offerings to affected groups advantage—a situation whereby a firm’s successful strategies cannot be easily dupli-
(i.e., stakeholders, as defined cated by its competitors1—so that the organization’s mission is fulfilled.2 Following
later in the book). this definition, it is assumed that an organization has a plan, its source of competitive
strategy Top management’s advantage is understood, and that its members understand the reason for its exis-
plans to attain outcomes tence. These assumptions may appear self-evident, but many strategic problems can
consistent with the be traced to fundamental misunderstandings associated with defining the strategy.
organization’s mission and Debates over the nature of the organization’s competitive advantage, its mission, and
goals. whether or not a strategic plan is really needed can be widespread.3 As such, com-
competitive advantage ments such as “We’re too busy to focus on developing a strategy” or “I’m not exactly
A situation whereby a business sure what my company is really trying to accomplish” can be overheard in many
unit’s successful strategies organizations.
cannot be easily duplicated by Strategic management is a broader term than strategy and is a process that includes
its competitors. top management’s analysis of the organization’s environment prior to formulating
strategic management a strategy, as well as the plan for implementation and control of the strategy. Put
The continuous process of another way, the difference between a strategy and the strategic management pro-
determining the mission and cess is that the latter includes considering what must be done before a strategy is
goals of an organization within formulated through assessing whether or not the success of an implemented strat-
the context of its external
environment and its internal
egy was successful. The strategic management process can be summarized in five
strengths and weaknesses, steps, each of which is discussed in greater detail in subsequent chapters of the book
formulating and implementing (see Figure 1-1):4
strategies, and exerting
strategic control to ensure that 1. External analysis: Analyze the opportunities and threats or constraints that exist
the organization’s strategies in the organization’s external environment, including industry and forces in the
are successful in attaining its external environment.
goals.
2. Internal analysis: Analyze the organization’s strengths and weaknesses in its
internal environment. Consider the context of managerial ethics and corporate social
responsibility.
3. Strategy formulation: Formulate strategies that build and sustain competitive
advantage by matching the organization’s strengths and weaknesses with the
environment’s opportunities and threats.
4. Strategy execution: Implement the strategies that have been developed.
5. Strategic control: Measure success and make corrections when the strategies are
not producing the desired outcomes.

The sequential order of the steps is logical. A thorough understanding of the organiza-
tion and its environment is essential if the appropriate strategy is to be developed, put into
action, and controlled. One could transpose the first two steps and analyze the internal
environment before the external environment, the logic being that comprehending the
organization informs the strategic assessment of factors outside of the firm. The external
environment is analyzed before the internal environment in Figure 1-1, however, because
internal goals, resources, and competencies are viewed vis-à-vis rivals and are understood

2 Chapter 1 Fundamentals of Strategic Management

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 FIGURE 1-1
Foundation Organization of the Book
Chapter 1: Fundamentals of Strategic Management

Step 1: External Analysis

Chapter 2: Industry Competition
Chapter 3: The External Environment: Political-Legal and Economic Forces
Chapter 4: The External Environment: Social and Technological Forces

Step 2: Internal Analysis

Chapter 5: The Organization: Ethics and Corporate Social Responsibility

Step 3: Strategy Formulation

Chapter 6: Corporate-Level Strategies (also called Firm Strategies)
Chapter 7: Business Unit Strategies (also called Competitive Strategies)
Chapter 8: Functional Strategies (also called Tactics)
Chapter 9: Strategy Formulation

Step 4: Strategy Implementation

Chapter 10: Strategy Execution: Structure
Chapter 11: Strategy Execution: Strategic Change, Culture, and Leadership

Step 5: Strategic Control

Chapter 12: Strategic Control and Crisis Management

within the context of the industry and the factors that drive it. This dilemma resembles the
“chicken and egg” argument; in reality, analysis of the external and internal environments
occurs simultaneously.
The notion of strategic management can be linked to two key economic concepts. The
first is what economists and investors call the efficient market hypothesis, or the idea efficient market hypothesis
that all individuals or firms in a market earn the same returns in the long run. For inves- The idea that all individuals or
tors, this means that everyone has access to the same information, so it is impossible to firms in a market earn the same
returns in the long run.
consistently “buy low and sell high.” For firms, this means that special benefits or high
profits result from either randomness or strategic resources that can be copied by other
rivals as well. While there is some rationale to the efficient market hypothesis—and a
thorough review of extant research is beyond the scope of this book—completely accept-
ing it minimizes the value of strategic planning. If the hypothesis is not entirely accurate,
then firms whose managers plan effectively can enjoy higher-than-average profits over a subjective value The idea
that a resource’s value is
period of time. determined by the individual or
The second concept is that of subjective value, or the idea that a resource’s value is organization possessing it; not
determined by the individual or organization possessing it, not an objective measure that an objective measure that would
would be the same for all firms. For example, having a highly trained workforce with strong be the same for all firms.

Chapter 1 Fundamentals of Strategic Management 3

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 technical skills is of greater value to an organization that emphasizes technology in produc-
tion than to one whose approach is labor intensive. The notion of subjective value explains
why one firm is willing to pay a premium (i.e., more than the value based on the current
stock price) to acquire another firm; its managers believe that the firm offers greater value
if it is possessed by the acquiring firm. The efficient market hypothesis explains why com-
panies with similar resources tend to perform at similar levels, but the notion of subjective
value explains why substantial performance variation can exist among similar firms.
A distinction between outside and inside perspectives on strategy is also relevant. Out-
siders analyzing a firm should apply a systematic approach that progresses through these
steps in order. Doing so develops to a holistic understanding of the firm, its industry, and
its strategic challenges.
Inside organizations, strategies are being formulated, implemented, and controlled
simultaneously while external and internal factors are continually reassessed. In addition,
changes in one stage of the strategic management process will inevitably affect other
stages as well. After a planned strategy is implemented it often requires modification as
conditions change. Hence, because these steps are so tightly intertwined, insiders tend to
treat all of the steps as a single integrated, ongoing process.5
Consider the strategic management process at a fast-food restaurant chain. At any given
time, top managers are likely assessing changes in consumer taste preferences and food
preparation, analyzing the activities of competitors, working to overcome firm weak-
nesses, controlling remnants of a strategy implemented several years ago, implementing
a strategy crafted months earlier, and formulating strategic plans for the future. Although
each of these activities can be linked to a distinct stage in the strategic management pro-
cess, they occur simultaneously.
business model The economic An effective strategy is built on the foundation of the organization’s business model,
mechanism by which a business the mechanism whereby the organization seeks to earn a profit by selling its goods or ser-
hopes to sell its goods or vices. While all firms seek to produce a product or service and sell it at a price higher than
services and generate a profit.
its production and overhead costs, a business model is stated in greater detail. For exam-
ple, a magazine publisher might adopt a “subscription model,” an “advertising model,” or
perhaps some combination of the two. Profits would be generated primarily from readers
under the subscription model but from advertisers under the advertising model. As we can
see, identifying a firm’s business model can become more complex when intricate details
are considered. Progressive firms often devise innovative business models that extract
revenue—and ultimately profits—from sources not identified by competitors.
Consider the razor and blades business model invented by Gillette. A company gives
away or deeply discounts a product—the razor—while planning to profit from future
sales of required replacement or complementary products—the blades. Customers willing
to sign a two-year service contract might receive a deeply discounted cell phone. Com-
puter printers are typically sold below production cost, but customers must periodically
replace the ink cartridges—high margin items. This model is not foolproof, however. In a
competitive marketplace, customers may be able to purchase the required complementary
products at lower prices from rivals not under pressure to recoup initial losses. Interest-
ingly, online companies like Harry’s and Dollar Shave Club are challenging the razor and
blades business model with a new way to purchase shaving supplies.
Successful business models can change over time, and many of the changes are Internet
driven. For example, since early 2000, a number of authors have strayed from the traditional
business model whereby book publishers offer contracts and pay royalties of 10–15 percent.
Leveraging advances in publishing software, social media, and a strong online retail book
market, they have opted for a “self-publishing” model. Enterprising authors who publish
their own work also shoulder the initial risk, but can net as much as a 70 percent return on
e-book sales from companies like Amazon.com. The total print book and e-book output
of self-publishers in the UNITED STATES rose from about 50,000 titles in 2006 to over
125,000 in 2010 and over 450,000 in 2013.6 Smashwords’ Mark Coker contends that self-
published e-books will capture 50 percent of the market by 2020.7
Consider the auto industry. Tesla sells its electric vehicles to consumers in the United States
directly through the Internet. Tesla is pursuing this approach both out of necessity—the small

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carmaker lacks a nationwide dealer network—and a desire to improve efficiency. Industry
groups have attempted to block the move, arguing that carmakers should not be allowed to
“bypass” franchised auto retailers. In some states, laws restricting direct sales have been in
place for years to protect the territorial rights of local franchises. Tesla has no franchisees and
its leadership has argued that such laws violate the company’s right to sell products in the way
it deems appropriate.8
South Africa’s SMD (www.smd.co.za) sells vehicles on behalf of insurance companies
direct to the public. These vehicles are often damaged—some substantially—and require
repair. SMD’s customers may be willing to do some of the work themselves or to toler-
ate a few dents. Hence, SMD is making vehicle ownership affordable to an underserved
lower-income category of South Africans.
The emergence of new Internet-based business models has created a number of seri-
ous challenges, however. Many websites do not receive revenue directly from patrons but
instead from advertisers, based on traffic generated through the site. “Paying for clicks”
has its merits because advertisers are only required to compensate sites when prospective
customers actually respond to an ad. However, tens of thousands of dubious websites have
emerged in the last few years, each supported by “botnets,” armies of hijacked computers
from unknown locations across the globe. The botnets create phony web traffic to adver-
tisers, enabling the proprietors of these illegitimate sites to collect payments. The most
sophisticated botnets appear to be real online consumers, pausing to view advertisements,
clicking from site to site, watching videos, and even putting items in shopping carts. Hence,
advertisers are paying for faux web traffic. Given the technological complexity and global
nature of the problem, prosecuting perpetrators of this crime has been elusive.9
Business models can also include the concept of social entrepreneurship. Superior per-
formance can be defined in a number of ways beyond profitability. Indeed, a number
of entrepreneurs define success in part by examining the effects that their products and
services have on individuals or specific groups, such as the poor—the “bottom of the
pyramid.” TOMS donates a pair of shoes to the poor for each one purchased, a pair of
glasses for each pair of TOMS eyewear purchased, and a week of clean water for each bag
of coffee purchased. From a social perspective, this business model can be judged on both
profitability and alleviation of poverty. From a marketing standpoint, this business model
targets consumers who wish to purchase from firms that embody a social orientation.
While a successful strategy is built on the firm’s business model, crafting one can be
a challenge. Realistically, a number of factors are typically associated with successful
strategies. Some of these factors including the following:

1. The organization’s competitive environment is well understood, in detail.

2. Strengths and weaknesses are assessed in a thorough and realistic manner.
3. The strategy is consistent with the mission and goals of the organization.
4. Plans for putting the strategy into action are designed with specificity before it is
implemented.
5. Possible future changes in the proposed strategy—a process called strategic
control—are evaluated before the strategy is adopted.

Careful consideration of these factors reinforces the interrelatedness of the steps in the
strategic management process. Each factor is most closely associated with one of the five
steps, yet they fit together like pieces of a puzzle. The details associated with the success
factors—and others—will be discussed in greater detail in subsequent chapters.
While some of these success factors are associated with the competitive enviroment in
profit-seeking firms, strategic management is not limited to for-profit organizations. Top
managers of any organization, regardless of profit or nonprofit status, must understand
the organization’s environment and its capabilities and develop strategies to assist the
enterprise in attaining its goals. Former Drexel University President Constantine Papada-
kis, for example, was widely considered to be leading strategic thinker among university

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 top executives. The innovative Greek immigrant promoted Drexel through aggressive
marketing, while campaigning for an all-digital library without books. In many respects,
he managed the university in the same way that other executives manage profit-seeking
enterprises. His annual salary was close to $1,000,000 in the years preceding his death in
2009, making him one of the highest paid university presidents in the country.10

Intended and Realized Strategies

A critical challenge facing organizations is the reality that strategies are not always imple-
mented as originally planned. Sometimes, strategic decisions seem to evolve incrementally.
In this respect, strategy formulation can be seen as an iterative process where decision makers
take actions, make sense of those actions afterwards, and then decide how to proceed.
Henry Mintzberg introduced two terms to help clarify the shift that often occurs between
intended strategy the time a strategy is formulated and the time it is implemented. An intended strategy
The original strategy top (i.e., what management originally planned) may be realized just as it was planned, in
management plans and intends a modified form, or even in an entirely different form. Occasionally, the strategy that
to implement.
management intends is actually realized, but the intended strategy and the realized
realized strategy The strategy strategy—what management actually implements—usually differ.11 Hence, the original
that top management actually strategy may be realized with desirable or undesirable results, or it may be modified as
implements. changes in the firm or the environment become known.
The gap between the intended and realized strategies usually results from unforeseen
environmental or organizational events, better information that was not available when
the strategy was formulated, or an improvement in top management’s ability to assess
Henry Mintzberg has its environment. Although it is important for managers to formulate responsible strate-
contributed greatly to our gies based on a realistic and thorough assessment of the firm and its environment, things
current understanding invariably change along the way. Hence, it is common for such a gap to exist, creating the
of strategic thinking. His need for constant strategic action if a firm is to stay on course. Instead of resisting modest
views often challenge
the conventional
strategic changes when new information is discovered, managers should search for new
wisdom. Consider his information and be willing to make such changes when necessary. This activity is part of
five Ps for strategy at strategic control, the final step in the strategic management process.
www.mindtools.com/
pages/article/mintzberg- Scientific and Artistic Perspectives on Strategic Management
5ps.htm.
There are two different perspectives on the approach that top executives should take
to strategic management. Most strategy scholars have endorsed a scientific perspec-
tive, whereby strategic managers systematically assess the firm’s external environment
and evaluate the pros and cons of myriad alternatives before formulating strategy. The
business environment is seen as largely objective, analyzable, and predictable. As such,
strategic managers should follow an orderly process of environmental, competitive, and
internal analysis, and build the organization’s strategy accordingly.
According to the scientific perspective, strategic managers should be trained, highly
skilled analytical thinkers capable of digesting data from a multitude of sources and render-
ing it into a desired direction for the firm. “Strategy scientists” tend to minimize the role of
imagination and creativity in the strategy process, and are not generally receptive to alterna-
tives that emerge from any process other than a comprehensive, analytical approach.
Others have a different view. According to the artistic perspective on strategy, the lack
of environmental predictability and the fast pace of change render elaborate strategy plan-
ning as suspect at best. Instead, strategists should incorporate large doses of creativity and
intuition in order to design a comprehensive strategy for the firm.12 Henry Mintzberg’s
notion of a craftsman—encompassing individual skill, dedication, and perfection through
mastery of detail—embodies the artistic model. The strategy artist senses the state of the
organization, interprets its subtleties, and seeks to mold its strategy like a potter molds
clay. The artist visualizes the outcomes associated with various alternatives and ulti-
mately charts a course based on holistic thinking, intuition, and imagination.13 “Strategy
artists” may even view strategic planning exercises as time poorly spent and may not be
as likely as those in the science school to make the effort necessary to maximize the value
of a formal planning process.14

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 This text acknowledges the artistic perspective but emphasizes the science view. Cre-
ativity and innovation are important and encouraged, but are most likely to translate into
organizational success when they occur as part of a comprehensive, systematic approach
to strategic management. Nonetheless, the type of formal strategic planning proposed in
this text is not without its critics. Some charge that such models are too complex, or that
they apply only to businesses in highly certain environments.15 Others emphasize that the
stages in the process are so closely interrelated and that considering them as independent
steps may be counterproductive. Still others, such as Mintzberg, argue that planning mod-
els stifle the creativity and imagination that is central to formulating an effective strat-
egy.16 Although these views have merit, the comprehensive, systematic model proposed
herein is presented as a proper foundation for understanding the strategic management
process. It does not, however, preclude the application of other approaches.

Theoretical Perspectives on Strategic Management

Strategic managers must understand the technical dimensions of their own organizations
as well as the functional areas of business, such as marketing, production, finance, and
human resources. Because strategic management is an interdisciplinary field, however,
managers must also be familiar with contributions from related areas, such as econom-
ics, psychology, and sociology. The required breadth of knowledge contributes to the
complexity of the field. Answers to strategic problems are often unclear and depend on
one’s perspective, but not every alternative is equally viable. A closer look at the strategic
management discipline sheds light on this dilemma.
The roots of the strategic management field can be traced to the 1950s when the disci-
pline was originally called “business policy.” Today, strategic management is an eclectic
field, drawing upon a variety of theoretical frameworks. Three prominent perspectives
are summarized in Table 1-1. There are a number of other influences as well, but these
three illustrate how competing viewpoints have coalesced into an overarching discipline.
Industrial organization (IO), a branch of microeconomics, emphasizes the influence of industrial organization (IO)
the industry environment upon the firm. The central tenet of industrial organization theory is A view based in microeconomic
the notion that a firm must adapt to influences in its industry to survive and prosper; thus, its theory that states that firm
profitability is most closely
financial performance is primarily determined by the success of the industry in which it com-
associated with industry
petes. Industries with favorable structures offer the greatest opportunity for firm profitability.17 structure.
Following this perspective, it is more important for a firm to choose the correct industry within
which to compete than to determine how to compete within a given industry. Recent research
has supported the notion that industry factors tend to play a dominant role in the performance
of most firms, except for those that are the notable industry leaders or losers.18
IO assumes that an organization’s performance and ultimate survival depend on its
ability to adapt to industry forces over which it has little or no control. According to IO,
strategic managers should seek to understand the nature of the industry and formulate

TABLE 1-1 Theoretical Perspectives on Firm Performance

Primary Influence How Perspective Is Applied

Theoretical Perspective on Firm Performance to the Case Analysis

Industrial organization (IO) theory Structure of the industry Industry analysis portion of the external
environment

Resource-based theory Firm’s unique combination Analysis of internal strengths and

of strategic resources weaknesses
Fit between the firm and
Contingency theory SWOT (strengths, weaknesses,
its external environment opportunities, and threats) analysis and
SW/OT matrix

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 strategies that feed off the industry’s characteristics.19 Because IO focuses on industry
forces, strategies, resources, and competencies are assumed to be fairly similar among
competitors within a given industry. If one firm deviates from the industry norm and
implements a new, successful strategy, other firms will rapidly mimic the higher-perform-
ing firm by purchasing the resources, competencies, or management talent that have made
the leading firm so profitable. Hence, although the IO perspective emphasizes the indus-
try’s influence on individual firms, it is also possible for firms to influence the strategy of
rivals, and in some cases even modify the structure of the industry.20
resource-based theory Perhaps the opposite of the IO perspective, resource-based theory views performance
The perspective that views primarily as a function of a firm’s ability to utilize its resources.21 Although environmen-
performance primarily as a tal opportunities and threats are important, a firm’s unique resources comprise the key
function of a firm’s ability to
variables that allow it to develop a distinctive competence, enabling the firm to distin-
utilize its resources.
guish itself from its rivals and create competitive advantage. “Resources” include all of
distinctive competence a firm’s tangible and intangible assets, such as capital, equipment, employees, knowl-
Unique resources, skills, and edge, and information.22 An organization’s resources are directly linked to its capabilities,
capabilities that enable a firm
which can create value and ultimately lead to profitability for the firm.23 Resource-based
to distinguish itself from
its competitors and create theory focuses primarily on individual firms rather than on the competitive environment.
competitive advantage. If resources are to be used for sustained competitive advantage—a firm’s ability to
enjoy strategic benefits over an extended period of time—those resources must be valu-
sustained competitive
able, rare, not subject to perfect imitation, and without strategically relevant substitutes.24
advantage A firm’s ability to
enjoy strategic benefits over an Valuable resources are those that contribute significantly to the firm’s effectiveness and
extended period of time. efficiency. Rare resources are possessed by only a few competitors, and imperfectly imi-
table resources cannot be fully duplicated by rivals. Resources that have no strategically
relevant substitutes enable the firm to operate in a manner that cannot be effectively imi-
tated by others, and thereby sustain high performance.
contingency theory The view According to the third perspective, contingency theory, the most profitable firms
that the most profitable firms develop beneficial fits with their environments. In other words, a strategy is most likely to
are likely to be the ones that be successful when it is consistent with the organization’s mission, its competitive envi-
develop the best fit with their
ronment, and its resources. Contingency theory represents a middle ground perspective
environment.
that views organizational performance as the joint outcome of environmental forces and
the firm’s strategic actions. Firms can become proactive by choosing to operate in envi-
ronments where opportunities and threats match the firms’ strengths and weaknesses.25
Should the industry environment change in a way that is unfavorable to the firm, its top
managers should consider leaving that industry and reallocating its resources to other,
more favorable industries.
Which perspective is most accurate? Each has its own intuitive appeal. Several promi-
nent studies have attempted to unravel this quandary. Overall, organization-specific
effects account for about half of a firm’s performance variation relative to its rivals, with
the remainder split between industry effects and other factors. Hence, while the numbers
vary across industries, individual firm performance is best understood from multiple per-
spectives. Luck can even play a role.26
Differences aside, each perspective has merit and has been incorporated into the stra-
tegic management process laid out in this text. The industrial organization view is seen
in the industry analysis phase, most directly in Michael Porter’s “five forces” model.
Resource-based theory is applied directly to the internal analysis phase and the effort to
identify an organization’s resources that could lead to sustained competitive advantage.
Contingency theory is seen in the strategic alternative generation phase, where alterna-
tives are developed to improve the organization’s fit with its environment. Hence, mul-
tiple perspectives are critical to a holistic understanding of strategic management.27

Corporate Governance and Boards of Directors

Small businesses are often governed by one or several individuals well known to everyone
in the organization. Ownership is often privately held and may rest with a single person,
a family, or a few business partners. Because more resources are needed, many mid-size
and large organizations are publicly held, with shares of stock available for purchase

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on exchanges such as the New York Stock Exchange. Shareholders in public organiza-
tions—the owners of the firm—are represented by an elected board of directors legally
authorized to monitor firm activities, as well as the selection, evaluation, and compensa-
tion of top managers. Strategic decision-making in these firms is more complex because
the ownership is widely dispersed and often changes frequently.
Corporate governance refers to the board of directors, institutional investors (e.g., pension corporate governance
and retirement funds, mutual funds, banks, insurance companies, among other money manag- The board of directors,
ers), and large shareholders known as blockholders who monitor firm strategies to ensure institutional investors, and
blockholders who monitor firm
effective management. Boards of directors and institutional investors—representatives of pen-
strategies to ensure managerial
sion and retirement funds, mutual funds, and financial institutions—are generally the most responsiveness.
influential in the governance systems. Because institutional investors own more than half of
all shares of publicly traded firms, they tend to wield substantial influence. Blockholders tend blockholders Large share-
holders who monitor firm
to hold less than 20 percent of the shares, so their influence is proportionally less than that of
strategies to ensure effective
institutional investors.28 management.
Boards of directors often include both inside (i.e., firm executives) and outside directors.
Insiders bring company-specific knowledge to the board, whereas outsiders bring indepen-
dence and an external perspective. Over the past several decades, the composition of the
typical board has shifted from one controlled by insiders to one controlled by outsiders. This
increase in outside influence often allows board members to oversee managerial decisions
more effectively.29 Moreover, when additional outsiders are added to insider-dominated
boards, dismissal of the chief executive officer (CEO) is more likely when corporate per-
formance declines30 and outsiders are more likely to pressure for corporate restructuring.31
Many companies became concerned about both potential conflicts of interest and the
amount of time a board member who sits on multiple boards can spend with the affairs
of each company. As a result, many companies have begun to limit the number of board
memberships their own board members may hold. Approximately two-thirds of corporate
board members at the largest 1,500 U.S. companies do not hold seats on other boards.
The average director’s direct compensation ranged from $90,775 at firms with revenues
between $50 and $500 million to $228,058 at the 200 largest firms in the Standard &
Poors 500 based on revenue.32
The Sarbanes-Oxley Act passed in 2002 requires firms to include more independent Sarbanes-Oxley Act
directors on their boards and to make disclosures on internal controls, ethics codes, and Legislation passed in 2002 that
the composition of their audit committees on annual reports. The act requires that both created more-detailed reporting
requirements for boards and
the CEO and the chief financial officer (CFO) certify every report that contains company
executives in public U.S.
financial statements. It restricts membership of the firm’s audit committee—the formal companies and accounting
group charged with reporting oversight—to outsiders (i.e., board members who are not firms.
managers). Sarbanes-Oxley also prohibits firms from extending personal loans to board
members or executives.
Even with new disclosure regulations, however, it can be difficult to determine pre-
cisely what top executives earn at public companies. A number of analysts have noted Sarbanes-Oxley has
positive changes among boards as a result of this legislation in terms of both indepen- been both hailed and
dence and expertise, while others contend that government regulations like Sarbanes- criticized since its
Oxley have merely added more costly paperwork.33 A record number of public firms went passage in 2002. Its
costs and benefits are
private in the mid-2000s, primarily due to investor and management frustration with the explained in Forbes at
legislation. Evidence also suggests that many CEOs have become more reluctant to sit on www.forbes.com/sites/
boards of publicly held companies. Increased liability on the part of board members and hbsworkingknowledge/
recent policy changes that often restrict the number of outside boards on which a CEO 2014/03/10/the-costs-
may serve have also contributed to this change.34 and-benefits-of-
Boards of directors are responsible for monitoring activities in the organization, evalu- sarbanes-oxley/.
ating top management’s strategic proposals, and establishing the broad strategic direction
for the firm. As such, boards select and terminate the CEO, establishing his or her com-
pensation package, advising top management on strategic issues, and monitoring mana-
gerial and company performance as representatives of the shareholders. Critics charge
that board members do not always fulfill their legal roles.35 One reason is that they are
nominated by a CEO who expects support in return. The generous compensation they
often receive can create a conflict of interest as well.36

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 When insiders control a board, a “rubber stamp” mentality can develop, whereby directors
do not aggressively challenge executive decisions as they should. This is particularly true
CEO duality A situation in when the CEO also serves as chair of the board, a phenomenon known as CEO duality.37
which the CEO also serves as Insider board members may be less willing to exert control when the CEO is also the chair
the chair of the board. of the board because present rewards and future career prospects within the firm are largely
determined by the CEO. In the absence of CEO duality, however, insiders may be more likely
to contribute to board control, often in subtle and indirect ways so as not to document any
opposition to the decisions of the CEO. For example, the insiders may ostensibly present both
sides of various issues, while carefully framing the alternatives in favor of one that may be in
opposition to the wishes of the CEO.
Activist shareholders can significantly influence a firm’s operations. Target, for example,
suffered the effects of the recession and experienced sluggish sales in the late 2000s and early
2010s. Investor activist William Ackman challenged Target to address the recession more
hedge fund An investment aggressively. Ackman’s Pershing Square Capital Management hedge fund—an investment
fund open to only a small fund open to only a small number of investors but permitted by regulators to undertake risk-
number of investors but ier and more speculative investments—is Target’s sixth largest shareholder and has actively
permitted by regulators to
supported dissident nominees for board slots. In response to Ackman, Target expanded its
undertake riskier and more
speculative investments. fresh foods and other “recession-proof” offerings in many of its stores.38
Pressure on directors to acknowledge shareholder concerns has continued well into the
2010s. The major source of pressure in recent years has come from institutional investors,
owners of large chunks of most publicly traded companies via retirement or mutual funds.
By virtue of the size of their investments, they wield considerable power and are more
willing to use it than ever before (see Strategy at Work 1-1). Some challenge companies
they believe are underperforming, while others seek to institute social change by influ-
encing product and human resource policies in companies like Walmart and McDonald’s.
Criticism notwithstanding, some board members have played effective stewardship
roles. Many directors vigorously promote the best interests of the firm’s shareholders
and other stakeholders. Board members are often invaluable sources of environmental
and competitive information.39 By conscientiously carrying out their duties, directors can
ensure that management remains focused on company performance.40
A number of recommendations have been made on how to promote an effective governance
system. For example, it has been suggested that outside directors be the only ones to evaluate
the performance of top managers against established mission and goals, that all outside board
members should meet alone at least once annually, and that boards of directors should estab-
lish appropriate qualifications for board membership and communicate these qualifications
to shareholders. For institutional shareholders, it is recommended that institutions and other
shareholders act as owners and not just investors,41 that they not interfere with day-to-day
managerial decisions, that they evaluate the performance of the board of directors regularly,42
and that they should recognize that the prosperity of the firm benefits all shareholders.

Strategic Decisions
How does one think and act strategically, and who makes the strategic decisions? The
answers to these questions vary across firms and may also be influenced by ownership and
other issues related to corporate governance. It is also important to distinguish between
strategic decisions and common management decisions. In general, strategic decisions
are marked by five key distinctions:

1. Strategic decisions have a wide impact on the organization. They involve input from
and affect multiple functional areas. As a result, they require a multi-perspective,
integrated approach. Decisions that address only part of the organization—perhaps a
single functional area—are usually not considered to be strategic decisions.
2. Strategic decisions are long term and future oriented, but are built on knowledge
about the past and present. Scholars and managers do not always agree on what
constitutes the “long term,” but most agree that it can range anywhere from several
years in duration to more than a decade.
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 Strategy at Work 1-1

The Growing Responsiveness of Corporate Boards43

There is an adage on Wall Street: “If you don’t like the ues that appear to be underperforming. After identifying a
stock, sell it.” Over the past decade, however, a number target, Minow purchases a substantial number of shares
of dismayed investors have decided to challenge the in the company and then advises the CEO of her owner-
board instead. Many corporate boards have historically ship position. She requests a meeting with the CEO and/
functioned as rubber stamps for top executives. None- or the board to discuss changes that could improve the
theless, the directors of many prominent corporations performance of the firm. Activist owners like Minow have
have become increasingly responsible to shareholder sent a message to both top executives and boards that
interests, thanks in part to the increased influence of poor performance is not unlikely to go unchallenged.
institutional shareholders. These large investment firms However, a number of analysts and executives
control substantial numbers of shares in widely held believe that further change to the system is needed.
firms and have the clout necessary to pressure board According to David Leighton, former chairman of the
members for change when needed. board at Nabisco Brands, Ltd., companies should seek
Consider the case of Nell Minow. A principal at activ- out more independent and qualified board members
ist money-management firm Lens Inc., Minow searches who will consider the strategic direction of the firm more
for companies with strong products and underlying val- aggressively.

3. Strategic decisions seek to capitalize on favorable situations outside the organization.

In general, this means taking advantage of opportunities that exist for the firm, but it
also includes taking measures to minimize the effects of external threats as well.
4. Strategic decisions are nonrepetitive and may not remotely resemble situations
addressed in the past. Because organizations and their environments are constantly
changing, such decisions often lack precedence and require a fresh look at all of the
options. When made, however, their influence cascades throughout the organization
as department managers seek to make functional decisions in ways that reflect the
broader direction of the firm.
5. Strategic decisions involve choices. Although making “win-win” strategic decisions
may be possible, most involve some degree of trade-off between alternatives, at
least in the short run. For example, raising salaries to retain a skilled workforce can
increase wages, and adding product features or enhancing quality can increase the
cost of production. However, such trade-offs may diminish in the long run, as a more
skilled, higher paid workforce may be more productive than a typical workforce, and
sales of a higher quality product may increase, thereby raising sales and potentially
profits. Decision-makers must understand these complex relationships across the
business spectrum. Hence, strategic decisions should be based on a systematic,
comprehensive analysis of internal attributes and factors external to the organization.

The ongoing Walmart-Amazon.com battle illustrates the strategic choice imperative.

As the world’s largest retailer, Walmart is heavily invested in brick-and-mortar stores.
Online behemoth Amazon.com has no stores, but has invested in over 135 warehouses
stocked with inventory. Walmart chose a traditional retail model, whereas Amazon.com
chose an online model. Both companies have been successful, but both struggle to com-
pete directly with each other. Lacking the sophisticated online distribution center, Walmart
promotes shipment of merchandise to local stores for customer pick-up. Walmart attempts
to utilize its own inventory system to fulfill online orders, but doing this has been a chal-
lenge. Amazon.com has avoided the brick-and-mortar option altogether.44 top management team
A team of top-level executives—
Because of these distinctions, strategic decision-making is generally reserved for the
headed by the CEO—all of
top executive and members of his or her top management team. The chief executive whom play instrumental roles
is the individual ultimately responsible (and generally held responsible) for the orga- in the strategic management
nization’s strategic management, but he or she rarely acts alone. Except in the smallest process.

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 companies, he or she relies on a team of top-level executives—including members of
the board of directors, vice presidents, and even various line and staff managers in some
instances—all of whom play instrumental roles in strategically managing the firm. Gen-
erally speaking, the quality of strategic decisions improves dramatically when more than
one capable executive participates in the process.45
The size of the team on which the top executive relies for strategic input and support can
vary across firms. Companies organized around functions such as marketing and production
generally involve the heads of the functional departments in strategic decisions. Very large
organizations often employ corporate-level strategic-planning staffs and outside consultants
to assist top executives in the process. The degree of involvement of top and middle man-
agers in the strategic management process also depends on the personal philosophy of the
CEO.46 Some chief executives are known for making quick decisions, whereas others have
a reputation for involving a large number of top managers and others in the process.
Input to strategic decisions, however, need not be limited to members of the top man-
agement team. To the contrary, obtaining input from others throughout the organization,
either directly or indirectly, can be quite beneficial. In fact, most strategic decisions result
from the streams of inputs, decisions, and actions of many people. The top management
team might create the context for strategic decisions by establishing rules and proce-
dures, and by influencing the informal means through which things are accomplished in
the organization. Strategic decisions do not necessary start with top management action,
however, but instead can “bubble up” from a series of lower level decisions throughout
the firm. For example, an employee in a company’s research and development department
may attend a trade show where a new product or production process idea that seems rele-
vant to the company is discussed. The employee may relate the idea to his or her manager,
who, in turn, may modify and pass it along to his or her manager. Eventually, a version
of the idea may be discussed with the organization’s marketing and production managers,
and later presented to top management. Ultimately, the CEO will decide whether or not to
incorporate the idea into the ongoing strategic planning process. This example illustrates
the indirect involvement of individuals throughout the organization in the strategic man-
agement process. Top management is ultimately responsible for the final decision, but its

Top Management Team

The CEO leads the top management team, but others in the organization play important roles.
Source: OPOLJA/Shutterstock.com.

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decision is based on a culmination of the ideas, creativity, information, and analyses of
others47 (See Strategy at Work 1-1).
While participation can be healthy, most firms place significant limits of the say that
their managers have in strategic decisions. There are a few exceptions, however. At Ternary
Software, for example, all of its thirteen employees must agree before a strategic deci-
sion can be implemented. Such democracy is easier to implement in larger organizations,
but even large companies like Google have taken steps to create an egalitarian culture for
decision-making.48
The corporate boardroom is often a place where decisions that have already been made
in a less formal setting are confirmed. A formal, systematic decision-making process is
often applied as a means of confirming what top executives already see as the appro-
priate course of action. A danger associated with this type of approach is that it tends
to jump straight to a proposed solution without considering how a decision should be
made. Although there are no guarantees, top management teams that circumvent a logical
decision-making approach are more susceptible to mistakes. For example, when a systematic
cost-benefit analysis is not employed, leaders may confuse actual costs of a decision with
sunk costs—those already expended—a common error that distorts decision-making and
can lead to an escalation of commitment to a failed strategy.49

The Global Imperative

Most business organizations buy, sell, or trade across borders, whether they have a
physical presence in other countries or sell a significant amount of imported merchan-
dise. Although firms typically concentrate on serving local or domestic markets before
expanding internationally, many must interact with entities in other nations as a means of
survival. For example, virtually all of Japan’s industries would grind to a halt if imports
of raw materials from other nations ceased because Japan is small and isolated, and its
natural resources are quite limited. In larger nations like the United States, manufactur-
ers typically utilize components from abroad in their production processes, while most
retailers sell products that were produced abroad. Hence, strategic management is—by
definition—a global undertaking. For this reason, examples related to concepts, indus-
tries, and firms throughout the world are integrated into each of the chapters.

Global Business
International considerations are an integral part of business today.
Source: Ferbies/Shutterstock.com.

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